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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
NATIONAL TECHTEAM, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-16284 38-2774613
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer Identification No.)
incorporation)
27335 West 11 Mile Road, Southfield, MI 48034
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 357-2866
Securities registered pursuant
to Section 12(b) of the Act: None
Securities registered pursuant
to Section 12(g) of the Act: Common Stock, $.01 par value
(Title of Class)
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. Yes / / No /X/
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 19, 2001 was approximately $ 33,400,000.
The number of shares outstanding of the registrant's common stock as of March
19, 2001 was 10,687,880.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of National TechTeam, Inc.'s definitive Proxy Statement, which are to
be filed no later than 120 days after the end of the year covered by this
report, are incorporated by reference into Part.
This Annual 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 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.
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PART I
ITEM 1. BUSINESS
OVERVIEW
NATIONAL TECHTEAM, INC. ("TechTeam" or "Company") is a provider of technology
and knowledge management support solutions and services to Fortune 1000,
multinational companies and governments worldwide. The core services provided by
TechTeam are its integrated help desk support services. TechTeam also provides
technical staffing, systems integration, and training services. TechTeam
provides these support services in Europe through its subsidiaries, TechTeam
Europe, NV/Sa, TechTeam Europe, Ltd., and TechTeam Europe, GmbH.
National TechTeam is traded under the symbol "TEAM". TechTeam's client base
includes Ford Motor Company, DaimlerChrysler, Visteon Automotive Systems, Deere
& Company, Liberty Mutual Insurance Company, and other companies in the office
equipment, insurance, logistics, and pharmaceutical industries, among others.
The Company had total employees of 1,296 and 2,011 at December 31, 2000 and
1999, respectively.
INDUSTRY BACKGROUND
The IT services industry continues to rapidly evolve in response to the
increasingly interconnected business community. With the increasing delivery of
enterprise critical business systems via the Internet, many companies are now
maintaining mainframe, client/server, and Internet infrastructure and
applications. The result is highly complex information systems that, for
example, manage whole supply chains, provide instant access to government
regulations, or permit the monitoring and repair of industrial equipment. These
complex business systems require reliable support of the infrastructure, and the
ability to respond quickly to the issues, questions, and training requirements
of the individuals using the systems.
Further, organizations are constantly seeking to reduce their costs and improve
productivity of their IT investments. Improvements in knowledge management and
data mining technologies are increasing the value of centralized help desk
solutions, which enable the information gathered from the entire organization to
be used across the entire organization, rather than just in isolated pockets. In
light of these trends, organizations often choose to focus on their core
strengths by outsourcing non-core functions, such as technical support
operations.
SERVICES
National TechTeam originally commenced operations as a value-added reseller of
computer hardware and software that also provided training for its customers.
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 technology support (help desk/call center) industry.
CORPORATE SERVICES
TechTeam's Corporate Services primarily consist of corporate help desk services,
technical staffing, systems integration, and training programs.
Help Desk Services
TechTeam provides customized help desk solutions, which provide corporate
end users with around-the-clock technical support provided either from the
client's facilities or from TechTeam's help desk sites. TechTeam supports
the full range of a client's IT infrastructure, from network environments
to computing systems, and shrink-wrap to advanced proprietary and acquired
application systems.
TechTeam follows a "single point of contact" (SPOC) model to enable
corporations to consolidate their
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incident resolution support functions into one centralized help desk.
TechTeam's technicians are specially trained in the customer's products and
applications to diagnose problems and answer technical questions. The
Company's technicians answer questions and diagnose technical problems
ranging from simple error messages to wide area network failures. If the
technician is not able to resolve the problem with the end user over the
phone, the call is escalated to the appropriate resource to solve the
problem. Data collected by TechTeam technicians show trends in IT usage and
trouble spots. TechTeam implements root cause analysis on the data to
identify the cause(s) of problem areas. From this analysis, TechTeam can
recommend to its clients other solutions to reduce the cost of operating
their IT infrastructure.
In line with its focus on help desk solutions, the Company has developed an
integrated, Internet-based, help desk technology tool, called TechTeam's
Support Portal. From the Support Portal web site, an individual seeking
support may access a knowledgebase to obtain a solution to their problem,
use self-healing software to solve the problem, submit a problem for
resolution to a support technician, or check the status of their help desk
incident. TechTeam's proprietary call tracking tool, the Global Call
Center, has been integrated with robust knowledge management and solution
products licensed from Broadbase Software, Inc. and Motive Communications,
Inc. TechTeam's customer management is able to access detailed performance
reports and other management tools. The Company believes that the Support
Portal's knowledge management, data analytics, computer diagnostics and
tracking technology will help to increase the Company's efficiency in
providing support, improve the end user's experience with the help desk,
and enable TechTeam's customers to benefit from lower cost and improved
efficiency of their users.
The Company has deployed the technology internally, and is currently in the
process of deploying the Support Portal to certain of its existing
customers. The Support Portal is an important part of its help desk
solutions provided to new customers, and in its sales efforts.
The Company operates major help desks in the United States from its
Southfield, Michigan and Davenport, Iowa locations. From its facility in
Brussels, Belgium, TechTeam provides multi-lingual help desk support for
its customers in as many as 12 languages. TechTeam also provides these
service from its customer's sites.
Technical Staffing
The Company maintains a staff of trained technical personnel to provide
computer and technical support to its clients at the clients' facilities.
The Company recruits a technically proficient employee base. TechTeam
enhances its employees' proficiency by providing access to its extensive
technical training programs. Training in new Internet technology, in
advanced operating systems like Windows NT and Unix, and sophisticated
applications such as SAP and PeopleSoft, allows TechTeam to provide its
clients with highly skilled professionals trained and certified in the
latest technology.
Systems Integration
TechTeam provides systems integration and implementation services from
project planning and management, to full-scale network server and
workstation installations. TechTeam performs a wide range of maintenance
services to the client ranging from desk-side support to network
monitoring.
Training
The Company provides custom training and documentation solutions that
include a wide spectrum of options including computer based (CBT), distance
learning, course catalogs, registration, mobile classrooms, instructional
design consultants, customized course materials, certified trainers,
evaluation options, desk-side tutorials, and custom reports. The Company
provides customized training programs.
TechTeam is a manufacturer-authorized training provider for many products
including Sun Microsystems. The Company also offers training on other
industry leading software such as Microsoft, Novell and others. A large
portion of the Company's training revenues are generated from the SUN
certification program.
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OEM SERVICES AND EQUIPMENT LEASING
In August 2000, TechTeam sold its stake in GE TechTeam, L.P. to GE Warranty
Management, Inc. As a result of this sale, TechTeam provided personnel to the
new ownership through December 31, 2000, when TechTeam's employees providing OEM
support through GE TechTeam, L.P. were transitioned to the new owner. See Note Q
of Item 8, Consolidated Financial Statements. TechTeam continues to look in the
OEM industry for business opportunities.
TechTeam Capital Group, L.L.C. (Capital Group) previously wrote leases for
computer, telecommunications, and other types of capital equipment, with initial
lease terms ranging from 2 to 5 years. Effective March 31, 2000, TechTeam
restructured Capital Group. At that time, the majority of the Capital Group
staff was terminated, and Capital Group ceased looking for new leasing
opportunities. Capital Group is currently running out its lease portfolio. With
the exception of renewals, the portfolio will run off in approximately three
years.
IMPACT OF BUSINESS WITH MAJOR CLIENTS
Historically, TechTeam has been heavily dependent upon major clients for a
substantial portion of its revenues. Any loss of (or failure to retain a
significant amount of business with) its key clients could have a material
adverse impact on the Company. The Company's major clients include
DaimlerChrysler, Ford Motor Company ("Ford") and GE TechTeam LP. For the years
ended December 31, 2000, 1999 and 1998 respectively, DaimlerChrysler accounted
for 18.2%, 19.3% and 23.1% of revenues, Ford accounted for 32.3%, 19.2% and
16.6%, and GE TechTeam LP accounted for 13.0%, 20.6% and 20.6%. As discussed
above, the Company ceased to provide staffing to the GE TechTeam, L.P. as of
December 31, 2000. Therefore, the Company will no longer generate staffing
revenues from GE TechTeam, L.P. as described; however, management believes that
this loss of revenues will not adversely affect the future earnings potential of
the Company.
Management continues to diversify its client base from both a client and
industry perspective. However, because TechTeam believes that its existing
client base presents opportunities for the cross marketing of its services, the
Company will continue to seek additional business from its largest clients. The
Company anticipates that its major clients will continue to account for a high
percentage of TechTeam's revenues in the future.
COMPETITION
The Company is engaged in a highly competitive business. While there are many
companies that provide similar services, no one company is dominant. Competition
for many of TechTeam's services is often in the form of competitive bidding in
response to requests for proposals. The Company competes principally on the
basis of service excellence, the ability to provide a best in breed help desk
services, price, experience and reputation in the industry, technological
capabilities, ISO quality practices, responsiveness to client needs, and
referrals from existing clients.
The Company believes the following factors give it significant competitive
advantages over the competition:
- Strong Internationally Recognized Client Base-- TechTeam's existing
multinational clients provide TechTeam with a strong foundation for the
development of new business.
- Qualified Technical Staff-- TechTeam focuses on developing and retaining
high quality talent. Its large employee pool is trained and provided a
career path to higher level positions.
- Quality Client-Driven Metrics and Service Excellence-- As an ISO
9001:1994 certified company, TechTeam follows a well-defined quality
system with a focus on continuous improvement.
- Technology-- The Company believes that its proprietary and
industry-leading technology enables it to maintain its position as a
leading provider of IT support services.
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While these competitive advantages do not guarantee success, the Company
believes they provide a solid foundation upon which it can profitably grow its
business.
EUROPEAN OPERATIONS
TechTeam services its clients in Europe through three wholly owned subsidiaries:
TechTeam Europe, Ltd., in Chelmsford, England; TechTeam Europe, NV, in Brussels,
Belgium; and TechTeam Europe, Gmbh, in Cologne, Germany.
TechTeam Europe Ltd. and TechTeam Europe, Gmbh provide clients with systems
integration and help desk services. TechTeam Europe, NV primarily provides
TechTeam's clients with multi-lingual help desk support. A significant
proportion of the Company's business in Europe is driven by its client base in
the United States.
The Company's international business is subject to risks customarily encountered
in foreign operations, including changes in a specific country's or region's
political or economic conditions, trade protection measures, import or export
licensing requirements, the overlap of different tax structures, unexpected
changes in regulatory requirements, and natural disasters. The Company is also
exposed to foreign currency exchange rate risk, inherent in its sales
commitments, anticipated sales, and assets and liabilities denominated in
currencies other than the U.S. dollar. Accordingly, these risks are believed to
be manageable.
ITEM 2. PROPERTIES
TechTeam's World Headquarters and executive offices are located in Southfield,
Michigan. The following table sets forth the primary real properties, which
TechTeam leases and occupies:
- ------------------------------------------------------------------------------------------------------------------------
LEASE TERM BEGINNING SQUARE
LOCATION FUNCTION AND EXPIRING FOOTAGE
- ----------------------- ------------------------------------------------- -------------------------- ------------
Dearborn, MI Training Center 04/01/97 - 03/31/06 62,931
Southfield, MI World Headquarters and Call Center 11/01/93 - 12/31/05 100,657
Harper Woods, MI Call Center 06/15/96 - 06/15/03 17,775
Farmington Hills, MI TechTeam Capital Group Operations 08/01/99 - 07/31/04 6,595
Brussels, Belgium Call Center 08/01/97 - 07/31/06 10,217
Davenport, IA Call Center 10/15/99 - 10/14/04 22,263
Troy, MI Training Center 12/12/98 - 12/31/01 2,526
Chelmsford, England European Headquarters 11/01/00 - 11/01/03 3,340
Cologne, Germany Sales Office 06/01/99 - 06/01/01 1,000
TechTeam believes that the facilities it occupies are well maintained and in
good operating condition, and are adequate for its current needs. These
facilities include general office space and computer-training classrooms.
Because some TechTeam services are performed at client sites, the cost of
maintaining multiple offices is minimized.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to legal proceedings which are routine and incidental to
its business. Although the consequences of these proceedings are not presently
determinable, in the opinion of management, they will not have a material
adverse affect on the Company's liquidity, financial position or results of
operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S SECURITIES AND RELATED STOCKHOLDER MATTERS
The following table sets forth the reported high and low sales prices of the
Company's common stock for the quarters indicated as reported by The Nasdaq
Stock Market(R). The Company's common stock trades on The Nasdaq Stock Market(R)
under the symbol "TEAM".
- -----------------------------------------------------------------------------------------------------------
YEAR AND QUARTER HIGH LOW
- ------------------------------------------------------------------------ -------------- --------------
2000
First Quarter...................................................... 7.500 4.438
Second Quarter..................................................... 5.875 3.188
Third Quarter...................................................... 4.375 3.000
Fourth Quarter..................................................... 3.563 1.875
1999
First Quarter...................................................... 7.813 5.688
Second Quarter..................................................... 6.500 5.000
Third Quarter...................................................... 7.625 4.250
Fourth Quarter .................................................... 6.875 3.625
The Company has never paid any dividends on its common stock. Any future
decision as to payment of dividends will be at the discretion of the Company's
Board of Directors and will depend upon the Company's earnings, financial
position, capital requirements, and such other factors as the Board of Directors
deems relevant.
TechTeam had 554 shareholders of record as of March 7, 2001. Management
estimates there are an additional 4,000 beneficial owners of the Company's stock
held in street name.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents information from the Company's consolidated
financial statements for the five years ended December 31, 2000. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operation," and the "Financial
Statements and Supplementary Data."
- -------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: 2000 1999 1998 1997 1996
- -------------------------------------------------- ---------- ---------- --------- ---------- ----------
(In thousands, except per share data)
Revenues
Corporate Services
Corporate help desk services.............. $ 45,706 $ 37,013 $ 30,672 $ 17,650 $ 9,381
Technical staffing........................ 17,305 21,763 25,716 25,011 20,907
Systems integration....................... 14,161 21,358 14,436 12,537 12,819
Training programs......................... 3,485 4,888 6,622 7,005 7,026
---------- ---------- --------- --------- ----------
Total Corporate Services..................... 80,657 85,022 77,446 62,203 50,133
OEM Call Center Services..................... 16,150 27,306 25,376 19,124 22,053
Leasing Operations........................... 27,349 20,477 14,099 -- --
---------- ---------- --------- --------- ----------
Total revenues................................... 124,156 132,805 116,921 81,327 72,186
Cost of services delivered....................... 95,860 109,417 97,523 70,925 57,176
---------- ---------- --------- --------- ----------
Gross profit..................................... 28,296 23,388 19,398 10,402 15,010
---------- ---------- --------- --------- ----------
Other expenses
Selling, general, and administrative......... 21,969 19,349 20,805 15,704 10,112
Class action litigation and related matters.. -- 92 3,439 499 --
Michigan Single Business Tax................. 1,710 450 496 180 709
---------- ---------- --------- --------- ----------
Total other expenses............................. 23,679 19,891 24,740 16,383 10,821
---------- ---------- --------- --------- ----------
Operating income (loss).......................... 4,617 3,497 (5,342) (5,981) 4,189
Gain on sale of GE Joint Venture................. 322 -- -- -- --
Interest income.................................. 887 644 1,845 3,039 937
Interest expense................................. 1,435 914 1,484 69 205
---------- ---------- --------- --------- ----------
Net interest expense (income).................... 548 270 (361) (2,970) (732)
Income (loss) before income taxes................ 4,391 3,227 (4,981) (3,011) 4,921
Income tax expense (credit)...................... 2,245 1,717 (1,233) (1,053) 1,875
---------- ---------- --------- --------- ----------
Net income (loss)................................ $ 2,146 $ 1,510 $ (3,748) $ (1,958) $ 3,046
========== ========== ========= ========= ==========
Basic earnings (loss) per share.................. $ 0.17 $ 0.11 $ (0.24) $ (0.12) $ 0.24
========== ========== ========= ========= ==========
Diluted earnings (loss) per share................ $ 0.17 $ 0.11 $ (0.24) $ (0.12) $ 0.23
========== ========== ========= ========= ==========
Weighted average number of common shares
Basic........................................ 12,554 13,280 14,758 15,664 12,535
Diluted...................................... 12,554 13,303 14,758 15,664 13,031
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DECEMBER 31,
------------------------------------------------------------------
STATEMENT OF FINANCIAL POSITION DATA: 2000 1999 1998 1997 1996
- -------------------------------------------------- ----------- ----------- ---------- ---------- ----------
(In thousands)
Current assets................................... $ 40,985 $ 40,463 $ 52,606 $ 96,307 $ 100,612
Current liabilities.............................. 17,840 18,069 19,972 10,560 9,995
Total assets..................................... 100,774 112,307 111,618 121,289 116,998
Long-term liabilities............................ 4,817 10,030 7,312 1,129 2,483
Total shareholders' equity....................... 78,117 84,208 84,334 109,600 104,520
ITEM 7. 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. 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. Forward-looking
statements may involve known and unknown risks, uncertainties and other factors,
which may cause the actual results, performance or achievements of National
TechTeam to differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements. Among the
factors that could cause actual results to vary are those described in the
subsection of this Item 7 entitled "Factors Affecting Future Results."
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
Revenues decreased 6.5% to $124.2 million from $132.8 million. The decrease
resulted primarily from revenue decreases in OEM Call Center Services of $11.2
million, System Integration Services of $7.2 million, and Technical Staffing of
$4.5 million offset by increases in corporate help desk services of $8.7 million
and leasing operations of $6.9 million. The decrease in OEM call center services
is due to discontinuing business with several low margin original equipment
manufacturers in the computer industry during 2000 through the GE Joint Venture.
Systems integration revenues decreased due to non-recurring revenue related to
year 2000 remediation services which were provided to a local government in
1999. Technical staffing revenues decreased due to non-recurring revenues
related to the implementation of a quality system program for a major client
which took place in 1999 combined with other various non-recurring staffing
projects ending with the Company's two major customers. The increase in
corporate help desk services is due mostly to a major customer expanding its
help desk to other business units within its organization and in Europe as well
as a new help desk project with the European Commission that provides
information and assistance to European citizens. Leasing revenues increased due
to new lease sales of telecom and computer equipment to existing customers.
Gross profit increased as a percentage of sales to 22.7% from 17.6%. The
increase was primarily due to improved margins on existing corporate help desk
projects through expansion, while concurrently containing any related
incremental costs. Other contributing factors included the discontinuance of
certain low margin projects within the GE Joint Venture as discussed above,
along with the completion of non-recurring year 2000 remediation services
provided in 1999 to a local government agency. The remediation services included
an equipment replacement component which was provided at lower margins than
those normally realized by the Company. Gross margins are positively impacted by
a net gain from sales of equipment which came off lease of $0.9 million in 2000
and $1.1 million in 1999. There can be no assurance that similar gains will
occur in future years.
Selling, General and Administration expenses increased to $22.0 million from
$19.3 million. The increase resulted from costs related to the development of
the Company's call center Support Portal technology, additional
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administration overhead costs required in at the Company's European offices,
settlement costs related to a dispute with former employees of the Company's
leasing operations and costs to retain investor relations consultants. The
increased administrative costs were required in Europe to support revenue
increases at the three European offices (Belgium, England and Germany) of
approximately 60% in total from 1999 revenues.
The Michigan Single Business Tax increased because the Company did not qualify
for certain credits that it previously expected.
Interest income increased to $0.9 million from $0.6 million. The increase
resulted from having a higher average cash and cash equivalent balance during
2000. The increase in cash is explained in the Liquidity and Capital Resources
section below.
Interest expense increased due to additional debt related to leasing operations.
TechTeam recognized $2.2 million of income tax in 2000, resulting in an
effective tax rate of 51.1% compared to an effective tax rate of 53.2 % for
1999. The difference between the statutory tax rate of 34% and the effective tax
rates in 2000 and 1999 is mainly due to the tax effect of amortization expense
of purchased goodwill, which is not deductible for tax purposes
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Revenues increased 13.6% to $132.8 million from $116.9 million. The increase
resulted primarily from revenue increases in corporate help desk services of
$6.3 million, systems integration services of $6.9 million and leasing
operations of $6.4 million combined with a decrease in technical staffing of
$4.0 million. Corporate help desk revenues increased due to expanding global
help desk services to a large client in the automotive industry. Systems
integration revenues increased due to a large contract with a local government
agency to replace workstations, upgrade internal networks and provide certain
year 2000 remediation services. Leasing revenues increased mainly from sales to
a new customer in the telecom industry.
Gross profit increased as a percentage of sales to 17.6% from 16.6%. The
increase was primarily due to realizing better margins on existing corporate
help desk revenues through expansion of ongoing projects while containing the
related incremental costs.
Selling, General and Administrative expense decreased from $20.8 million to
$19.3 million, due primarily to the Company's cost containment initiatives.
Interest income decreased to $0.6 million from $1.8 million. The decrease
resulted from having a lower average cash and cash equivalent balance during
1999. The decrease in cash is explained in the Liquidity and Capital Resources
section on the following page.
TechTeam recognized $1.7 million of Federal income tax in 1999, resulting in an
effective tax rate of 53.2% compared to an effective tax rate of 24.8 % for
1998. The difference between the statutory tax rate of 34% and the effective tax
rates in 1999 and 1998 is mainly due to the tax effect amortization expense of
purchased goodwill which is not deductible for tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Provided from Operations
Cash flow provided from operating activities was $33.2 million for the year
ended December 31, 2000. Cash flow provided was primarily due to earnings,
combined with $26.2 million of non-cash depreciation and amortization expense
mainly related to the leasing operations, and $4.9 million due to changes in
operating assets and liabilities of which $2.5 million was for net decreases of
accounts receivable.
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Cash Flow Used by Investing Activities
Cash flow used by investing activities was $16.3 million, principally to
purchase equipment to be leased to customers for the leasing operations.
Cash Flow Used in Financing Activities
Cash flow used by financing activities was $15.1 million. The Company reduced
debt by $6.0 million during 2000 and used $9.1 million to repurchase Company
stock in accordance with the stock repurchase program.
The Company's working capital position at December 31, 2000 was $23.1 million
compared to $22.4 million at December 31, 1999.
The Company has a line-of-credit agreement with Bank One which provides for
short-term borrowings of up to $25 million at the prime rate. The line of credit
is unsecured. There were no borrowings under this line at December 31, 2000.
The Company believes that cash flows from operations will continue to be
sufficient to meet its ongoing working capital needs.
FACTORS AFFECTING FUTURE RESULTS
The Company believes the following factors, among others, could have a
significant impact on the Company's business and profitability.
IMPACT OF BUSINESS WITH MAJOR CLIENTS:
As set forth in Item 1, TechTeam depends upon major clients for a substantial
portion of its revenues. The loss of any significant customer could have a
material adverse impact on the Company.
RISKS INHERENT IN LEASING:
In leasing of computer equipment, it is often difficult to determine, at the
time of the lease, the expected value of the equipment after the expiration of
the lease. Accordingly, variation in the residual value of equipment leased to
clients and the sale price of the equipment can lead to fluctuation in the
performance of TechTeam Capital Group.
COMPETITION:
The Company faces intense competition for all of its services, including the
help desk and call center markets. Some competitors have substantially greater
resources, including more locations, greater financial resources, a larger
client base, and more name recognition. As a result, the Company has experienced
and continues to anticipate significant pricing pressure from its customers in
order to remain a preferred vendor.
CONTRACT RISKS:
The great majority of the Company's contracts are terminable without cause on
short notice, often upon 90 days notice. Terminations and non-renewals of major
contracts can have a significant impact upon the Company's revenues and
operating results.
RELIANCE ON SENIOR MANAGEMENT:
The success of the Company is highly dependent upon the efforts, direction, and
guidance of its senior management. We do not have employment agreements with all
members of our senior management. The loss of any of these senior executives or
the Company's inability to attract, retain, or replace key management personnel
in the future, could have a material adverse effect on it.
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ATTRACTION AND RETENTION OF EMPLOYEES:
The Company's business involves the delivery of professional services and is
labor intensive. The Company's success depends in large part upon its ability to
attract, develop, motivate, and retain highly skilled technical, clerical, and
administrative employees. Qualified personnel are in great demand and are likely
to remain a limited resource for the foreseeable future. Accordingly, the
Company expects to experience increased compensation costs that may not be
offset through either increased productivity or higher pricing. TechTeam cannot
assure that it will be able to attract and retain sufficient numbers of
qualified employees in the future.
INTERRUPTION OF TELECOMMUNICATIONS SERVICES:
The Company's operations are dependent on its ability to protect its call
centers against damage from fire, power loss, telecommunications failure or a
similar event. The Company has taken precautions to protect itself from events
that could interrupt its operations, but no assurance can be given that such
precautions will be adequate, and operations may still be interrupted, even for
extended periods. Any damage to call centers or any failure of the Company's
telecommunication links that cause interruptions in the Company's operations
could have a material adverse effect on the Company's business, operating
results, or financial condition. The Company's property and business
interruption insurance may not be adequate to compensate the Company for all
losses that may occur.
GROWTH THROUGH ACQUISITIONS AND NEW PRODUCTS:
The Company's business strategy includes growth through acquisitions of
businesses and technology sources complementary to the Company's business.
Acquisitions may involve special risks such as diversion of management's
attention, unanticipated events, legal liabilities, and amortization of
intangibles, any of which could have an adverse effect on the Company's
operations and earnings.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS:
Certain risks are inherent in the Company's business strategy which includes
plans for the global expansion of its operations. Among other things, the
Company may encounter difficulties in marketing, selling, and delivering its
services due to differences in cultures, languages, labor and employment
policies, and differing political and social systems. In addition, the Company
may encounter significant effects on its operations and financial condition as a
result of currency fluctuations and differing tax laws.
RAPID TECHNOLOGICAL CHANGES; DEPENDENCE ON NEW SOLUTIONS:
The Company's success will depend in part on its ability to develop IT solutions
that keep pace with continuing changes in IT, evolving industry standards, and
changing client preferences. There can be no assurance that the Company will be
successful in adequately addressing these developments on a timely basis or
that, if these developments are addressed, the Company will be successful in the
marketplace.
INTELLECTUAL PROPERTY RIGHTS:
The Company relies upon a combination of nondisclosure and other contractual
arrangements and trade secret, copyright, and trademark laws to protect its
proprietary rights and the proprietary rights of third parties from whom the
Company licenses intellectual property. The Company enters into confidentiality
agreements with its employees and limits distribution of proprietary
information. There can be no assurance that the steps taken by the Company in
this regard will be adequate to deter misappropriation of proprietary
information or that the Company will be able to detect unauthorized use and take
appropriate steps to enforce its intellectual property rights.
Although the Company believes that its services and/or software do not infringe
on the intellectual property rights of others and that it has all rights
necessary to utilize the intellectual property employed in its business, the
Company is subject to the risk of litigation alleging infringement of
third-party intellectual property rights. Any such claims could require the
Company to spend significant sums in litigation, pay damages, develop
non-infringing intellectual property, or acquire licenses of the intellectual
property that is the subject of asserted infringement.
11
12
VOLATILITY OF STOCK PRICE:
The market price of the Company's stock has fluctuated over a wide range during
the past several years and may continue to do so in the future. (See "Market for
Registrant's Common Stock and Related Stockholder Matters.") The market price of
the common stock could be subject to significant fluctuations in response to
various factors or events, including among other things, the depth and liquidity
of the trading market of the common stock, quarterly variations and actual
anticipated operating results, growth rates, changes in estimates by analysts,
market conditions in the industry in which the Company competes, announcements
by competitors, regulatory actions, litigation including class action
litigation, and general economic conditions. In addition, the stock market has
from time to time experienced significant price and volume fluctuations, which
have particularly affected the market prices of the stocks of high technology
companies. As a result of the foregoing, the Company's operating results and
prospects from time to time may be below the expectations of public market
analysts and investors. Any such event would likely result in a material adverse
effect on the price of the common stock.
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no material market risk sensitive instruments nor material
market risk exposures. Substantially all of the Company's operations are in the
United States. The Company's debt obligations have fixed interest rates and
relatively short lives. The Company is exposed to foreign currency exchange rate
risk, inherent in its sales commitments, anticipated sales, and assets and
liabilities denominated in currencies other than the U.S. dollar.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of National TechTeam, Inc. and
Subsidiaries are included in Item 8:
- ------------------------------------------------------------------------------------------------------------------------
PAGE
----------
Report of Ernst & Young LLP, Independent Auditors .......................................................... 13
Consolidated Statements of Operations-- Years Ended December 31, 2000, 1999, and 1998 ...................... 14
Consolidated Statements of Comprehensive Income / (Loss)-- Years Ended December 31,
2000, 1999, and 1998 ....................................................................................... 14
Consolidated Statements of Financial Position-- December 31, 2000 and December 31, 1999 .................... 15-16
Consolidated Statements of Shareholders' Equity-- Years Ended December 31, 2000, 1999, and 1998 ............ 17
Consolidated Statements of Cash Flows-- Years Ended December 31, 2000, 1999, and 1998 ...................... 18
Notes to the Consolidated Financial Statements ............................................................. 19-32
The following financial statement schedules of National TechTeam, Inc. and
Subsidiaries are included pursuant to the requirements of Item 14(d): None.
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission and for which the
information is not already included in the financial statements are not required
under the related instructions or are not applicable and, therefore, have been
omitted.
12
13
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
BOARD OF DIRECTORS
NATIONAL TECHTEAM, INC.
We have audited the accompanying consolidated statements of financial position
of National TechTeam, Inc. and subsidiaries as of December 31, 2000 and 1999 and
the related consolidated statements of operations, comprehensive income/(loss),
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The financial statements of GE
TechTeam LP (an entity in which the Company had a 49% interest) as of December
31, 1999 and for the two years in the period then ended, have been audited by
other auditors whose report has been furnished to us; insofar as our opinion on
the consolidated financial statements relates to data included for GE TechTeam
LP, it is based solely on their report.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of National TechTeam, Inc. and subsidiaries
at December 31, 2000 and 1999, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States.
Detroit, Michigan /s/ Ernst & Young LLP
February 23, 2001
13
14
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2000 1999 1998
--------------- -------------- ---------------
(In thousands, except per share data)
REVENUES
Corporate Services
Corporate help desk services........................... $ 45,706 $ 37,013 $ 30,672
Technical staffing..................................... 17,305 21,763 25,716
Systems integration.................................... 14,161 21,358 14,436
Training programs...................................... 3,485 4,888 6,622
--------------- -------------- ---------------
Total Corporate Services.................................. 80,657 85,022 77,446
OEM Call Center Services.................................. 16,150 27,306 25,376
Leasing Operations........................................ 27,349 20,477 14,099
--------------- -------------- ---------------
TOTAL REVENUES................................................ 124,156 132,805 116,921
COST OF SERVICES DELIVERED.................................... 95,860 109,417 97,523
--------------- -------------- ---------------
GROSS PROFIT.................................................. 28,296 23,388 19,398
--------------- -------------- ---------------
OTHER EXPENSES
Selling, general, and administrative...................... 21,969 19,349 20,805
Class action litigation and related matters............... -- 92 3,439
Michigan Single Business Tax.............................. 1,710 450 496
--------------- -------------- ---------------
TOTAL OTHER EXPENSES.......................................... 23,679 19,891 24,740
--------------- -------------- ---------------
OPERATING INCOME (LOSS)....................................... 4,617 3,497 (5,342)
GAIN ON SALE OF GE JOINT VENTURE.............................. 322 -- --
INTEREST INCOME .............................................. 887 644 1,845
INTEREST EXPENSE.............................................. 1,435 914 1,484
--------------- -------------- ---------------
NET INTEREST EXPENSE (INCOME) ................................ 548 270 (361)
INCOME (LOSS) BEFORE INCOME TAXES............................. 4,391 3,227 (4,981)
INCOME TAX EXPENSE (CREDIT)................................... 2,245 1,717 (1,233)
--------------- -------------- ---------------
NET INCOME (LOSS)............................................. $ 2,146 $ 1,510 $ (3,748)
=============== ============== ===============
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE................... $ 0.17 $ 0.11 $ (0.24)
=============== ============== ===============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND COMMON SHARE EQUIVALENTS OUTSTANDING
Basic..................................................... 12,554 13,280 14,758
Net effect of dilutive stock options...................... -- 23 --
--------------- -------------- ---------------
Diluted................................................... 12,554 13,303 14,758
=============== ============== ===============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS), AS SET FORTH ABOVE......................... $ 2,146 $ 1,510 $ (3,748)
--------------- ------------- --------------
OTHER COMPREHENSIVE INCOME, NET OF TAX
Reclassification adjustment............................... -- -- 62
Foreign currency translation adjustments.................. (69) (105) 79
--------------- ------------- --------------
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)....................... (69) (105) 141
--------------- ------------- --------------
COMPREHENSIVE INCOME (LOSS)................................... $ 2,077 $ 1,405 $ (3,607)
=============== ============= ==============
See accompanying notes.
14
15
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
- ---------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
-----------------------------------
ASSETS 2000 1999
- ------------------------------------------------------------------------------- --------------- ----------------
(In thousands)
CURRENT ASSETS
Cash and cash equivalents................................................ $ 15,995 $ 14,192
Securities available for sale............................................ 2,725 --
Accounts receivable (less allowances of $313,000 and $225,000 at
December 31, 2000 and 1999, respectively)............................. 18,937 21,701
Refundable taxes......................................................... 859 1,039
Inventories.............................................................. 238 1,388
Prepaid expenses and other............................................... 1,883 1,816
Deferred income tax ..................................................... 348 327
---------------- ----------------
40,985 40,463
---------------- ----------------
PROPERTY, EQUIPMENT AND PURCHASED SOFTWARE
Computer equipment and office furniture.................................. 16,528 19,572
Purchased software....................................................... 8,035 5,340
Leasehold improvements................................................... 2,668 1,870
Transportation equipment................................................. 240 286
---------------- ----------------
27,471 27,068
Less-- Accumulated depreciation and amortization......................... 18,151 19,249
---------------- ----------------
9,320 7,819
---------------- ----------------
OTHER ASSETS
Assets of leasing operations, net of amortization........................ 41,209 49,500
Intangibles, net of amortization......................................... 5,297 9,287
Investment in GE Joint Venture........................................... -- 568
Deferred income tax...................................................... 1,689 1,263
Loans receivable......................................................... 1,008 1,948
Other.................................................................... 1,266 1,459
---------------- ----------------
50,469 64,025
---------------- ----------------
TOTAL ASSETS................................................................. $ 100,774 $ 112,307
================ ================
See accompanying notes.
15
16
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
- --------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
----------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
- ------------------------------------------------------------------------------- --------------- ---------------
(In thousands)
CURRENT LIABILITIES
Accounts payable......................................................... $ 3,417 $ 2,442
Accrued payroll, related taxes, and withholdings......................... 3,217 3,285
Deferred revenues and unapplied receipts................................. 264 838
Accrued expenses and taxes............................................... 681 784
Current portion of notes payable......................................... 9,790 10,568
Other.................................................................... 471 152
---------------- ---------------
17,840 18,069
---------------- ---------------
LONG TERM-DEBT............................................................... 4,817 10,030
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, 16,723,000 and 16,717,400 shares at December 31, 2000
and 1999, respectively................................................ 167 167
Additional paid-in capital............................................... 110,011 111,092
Retained earnings........................................................ 4,417 2,271
Accumulated other comprehensive income/(loss)-- foreign currency
translation adjustment................................................ (118) (49)
---------------- ---------------
Total.................................................................... 114,477 113,481
Less-- treasury stock (6,041,755 and 3,451,323 shares at
December 31, 2000 and 1999, respectively)........................... 36,360 29,273
---------------- ---------------
Total shareholders' equity............................................... 78,117 84,208
---------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................... $ 100,774 $ 112,307
================ ===============
See accompanying notes.
16
17
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
OTHER
ADDITIONAL RETAINED COMPREHENSIVE TREASURY
COMMON STOCK PAID-IN CAPITAL EARNINGS INCOME / (LOSS) STOCK
------------ --------------- ----------- --------------- ------------
(In thousands)
Balance at January 1, 1998................ $ 160 $ 105,586 $ 4,509 $ (85) $ (571)
Proceeds from issuance of 166,100
shares under stock option plans.... 2 633 -- -- --
Shares issued to acquire Capricorn
Capital Group, Inc................. 5 4,870 -- -- --
Tax benefit from exercise of employee
stock options and other.......... -- 310 -- -- --
Contribution to 401(k) plan and other. -- 15 -- -- 703
Purchase of common stock.............. -- -- -- -- (28,196)
Net loss for 1998..................... -- -- (3,748) -- --
Other comprehensive income for 1998... -- -- -- 141 --
------------ ----------- ----------- ------------ ------------
Balance at December 31, 1998.............. 167 111,414 761 56 (28,064)
Proceeds from issuance of 13,600
shares under stock option plans.... -- 61 -- -- --
Tax benefit from exercise of employer
stock options and other............ -- 44 -- -- --
Contribution to 401(k) plan and other. -- (427) -- -- 1,288
Purchase of common stock.............. -- -- -- -- (2,497)
Net income for 1999................... -- -- 1,510 -- --
Other comprehensive loss for 1999..... -- -- -- (105) --
------------ ----------- ----------- ------------ ------------
Balance at December 31, 1999.............. 167 111,092 2,271 (49) (29,273)
Proceeds from issuance of 5,600
shares under stock option plans.... -- 26 -- -- --
Tax benefit from exercise of employer
stock options and other............ -- 33 -- -- --
Contribution to 401(k) plan and other. -- (1,140) -- -- 1,982
Purchase of common stock.............. -- -- -- -- (9,069)
Net income for 2000................... -- -- 2,146 -- --
Other comprehensive loss for 2000..... -- -- -- (69) --
------------ ----------- ----------- ------------ ------------
Balance at December 31, 2000.............. $ 167 $ 110,011 $ 4,417 $ (118) $ (36,360)
============ =========== =========== ============ ============
See accompanying notes.
17
18
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------
2000 1999 1998
------------- ------------- --------------
(In thousands)
OPERATING ACTIVITIES
Net income (loss)................................................. $ 2,146 $ 1,510 $ (3,748)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation................................................ 22,091 17,633 12,574
Amortization................................................ 4,063 3,761 4,628
Treasury stock contributed to 401(k) plan................... 842 861 718
Sale and equity earnings of GE Joint Venture................ (653) -- --
(Gain) Loss on sales of equipment and other................. 500 (1,213) --
Provision for deferred income tax........................... (447) 172 (808)
Provision for uncollectible accounts receivable............. 280 748 438
Net undistributed (earnings) loss of affiliates............. 100 390 (58)
Deferred Global Call Center license fees.................... -- -- (410)
Changes in current assets and liabilities:
Accounts receivable..................................... 2,484 (612) 3,937
Inventories............................................. 1,150 (577) 268
Prepaid expenses and other current assets............... (67) (93) 2,147
Accounts payable........................................ 975 (1,660) (7,896)
Accrued payroll, related taxes, and withholdings........ (68) (985) (81)
Federal income tax...................................... 180 2,114 (686)
Deferred revenues and unapplied receipts................ (574) (1,191) (1,680)
Accrued expenses and taxes.............................. (103) (361) (124)
Other current liabilities............................... 319 (246) (384)
------------- ------------- --------------
Net cash provided by operating activities................... 33,218 20,251 8,835
------------- ------------- --------------
INVESTING ACTIVITIES
Purchase of leased equipment...................................... (12,469) (53,366) (16,345)
Purchases of property, equipment, and software.................... (6,682) (1,328) (820)
Purchases of securities available-for-sale........................ (2,725) (2,071) (11,103)
Net change in investment in direct financing leases and
residuals...................................................... 2,328 (121) 1,096
Proceeds from sale of GE Joint Venture and related assets......... 1,750 -- --
Proceeds from sales of property and equipment..................... 480 23,375 --
Proceeds from sales of securities available-for-sale.............. -- 2,071 50,197
Other-- net....................................................... 975 (81) (417)
------------- ------------- --------------
Net cash provided by (used in) investing activities............ (16,343) (31,521) 22,608
------------- ------------- --------------
FINANCING ACTIVITIES
Payments on long-term borrowings.................................. (12,167) (11,063) (14,653)
Purchase of Company common stock.................................. (9,069) (2,497) (28,196)
Proceeds from long-term borrowings................................ 6,174 16,326 8,151
Other-Net......................................................... (10) -- 1,024
------------- ------------- --------------
Net cash provided by (used in) financing activities............ (15,072) 2,766 (33,674)
------------- ------------- --------------
Increase (decrease) in cash and cash equivalents............... 1,803 (8,504) (2,231)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........................ 14,192 22,696 24,927
------------- ------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR.............................. $ 15,995 $ 14,192 $ 22,696
============= ============= ==============
See accompanying notes.
18
19
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of National TechTeam,
Inc. and its wholly-owned subsidiaries. Collectively, these companies are
referred to as the "Company" or "TechTeam." Intercompany accounts and
transactions have been eliminated.
CASH AND CASH EQUIVALENTS:
Cash includes both interest bearing and non-interest bearing deposits which are
available on demand. Cash equivalents include all liquid investments with a
maturity of three months or less when purchased, including money market funds
held at banks.
SECURITIES AVAILABLE-FOR-SALE:
The Company's management determines the appropriate classification of securities
at the time of purchase and re-evaluates such designation as of each balance
sheet date. Securities available-for-sale are stated at fair value with the
unrealized gains and losses, net of tax, reported as a component of accumulated
other comprehensive income (loss). Securities available-for-sale were invested
primarily in corporate and United States government agency debt securities.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of certain financial instruments such as cash and cash
equivalents, securities available for sale, accounts receivable, accounts
payable and notes payable approximate their fair values.
INVENTORIES:
Purchased inventories are stated at the lower of cost (determined by the
first-in, first-out method) or market and consist principally of computer
equipment and software. Certain inventories consist of equipment retained by the
Company subsequent to the end of the lease term to be resold. Such off-lease
equipment is valued at the lower of estimated market value at lease termination
or current market value.
PROPERTY, EQUIPMENT AND PURCHASED SOFTWARE:
Property, equipment, and purchased software for internal use are stated at cost.
Property and equipment are depreciated on the straight-line method over their
estimated useful lives, ranging from 3 to 10 years. Leasehold improvements are
amortized on a straight-line basis over the lesser of the lease term or the
estimated useful lives of the improvements. Purchased software is amortized over
3 to 7 years.
19
20
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INTANGIBLES:
Intangibles include the following:
- ------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
------------------------------
(In thousands)
------------------------------- --------------------------
AMORTIZATION PERIOD
2000 1999 (STRAIGHT LINE BASIS)
-------------- -------------- --------------------------
Intangible lease asset................................ $ 7,311 $ 7,311 3 years
Global Call Center -- see Note I...................... 5,408 5,408 7 years
Goodwill.............................................. 6,306 6,233 5 to 10 years
Other software tools.................................. 1,166 1,166 7 years
-------------- --------------
20,191 20,118
Less: Accumulated amortization........................ 14,894 10,831
-------------- --------------
$ 5,297 $ 9,287
============== ==============
In the allocation of the purchase price of TechTeam Capital Group (see Note I),
the Company evaluated the lease contracts of TechTeam Capital Group and the
related equipment, including estimated residual values at the end of the
contractual lease terms. The excess of the discounted cash flows from the lease
contracts, including the estimated cash flows from estimated residual values,
over the appraised fair value of the underlying equipment, was recorded by the
Company as intangible lease asset in the purchase allocation and is being
amortized over the related lease terms.
Goodwill represents the excess cost over the fair value of net assets acquired.
The Company re-evaluates goodwill and other intangibles based on undiscounted
operating cash flows whenever significant events or changes occur which might
indicate impairment of recorded costs. If undiscounted cash flows are
insufficient to recover recorded costs, the Company writes down recorded costs
of the assets to fair value (based on discounted cash flows or market values).
Goodwill was adjusted in the first quarter of 1999 to reflect the final purchase
price allocation of TechTeam Capital Group. In the fourth quarter of 1998,
$710,000 of impairment expense was recorded to write off the unamortized portion
of goodwill related to the acquisitions of WebCentric Communications, Inc. and
Drake Technologies, Inc. These assets were deemed impaired due to the loss of
certain employees, the loss of certain contracts and the inability of the
Company to recognize the expected synergies from the acquisitions.
20
21
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
REVENUE RECOGNITION:
Revenues from Corporate Services and OEM Call Center Services are recognized as
services are performed. Revenues from TechTeam Capital Group are recognized as
described in "Lease Accounting Policies" below. Revenues from product sales are
recognized when title is transferred. The Company has also licensed customers to
use its Support Portal, which includes the Company's Global Call Center, a call
tracking software product. Revenues from these licenses are recognized in one of
two ways: on a usage basis, when the licenses are granted in connection with
on-going services; or as lump sum fees when the client acquires the rights to
use and is allowed access to the Global Call Center without any on-going service
obligation by the Company.
DEFERRED INCOME TAXES:
Deferred tax assets and liabilities are determined based on temporary
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that are
expected to be in effect when the differences are expected to reverse.
LEASE ACCOUNTING POLICIES:
As a lessor of equipment, the Company, through TechTeam Capital Group, accounts
for leases under Statement of Financial Accounting Standards No. 13, "Accounting
for Leases," principally as either direct financing or operating leases. Each of
these types of leases, and its impact on the financial statements of TechTeam,
is as follows:
Operating Leases
Equipment leased to others under operating leases is recorded at cost, less
accumulated depreciation. In estimating depreciation, a residual amount is
assumed. Residual is the estimated fair market value of the leased assets at the
termination of the lease. In estimating residual, the Company relies largely on
historical experience by equipment type and manufacturer, adjusted for known
trends. The Company's estimates of residual are reviewed continuously to ensure
realization; however, the amount the Company will ultimately realize could
differ from these estimates.
Revenues from operating leases are recognized on a straight-line basis over the
lease term.
Depreciation is recognized on a straight-line basis over the lease term.
Direct Financing Leases
Net investment in direct financing leases consists of the present value of the
future minimum lease payments, the present value of the estimated residual, and
initial direct costs.
Revenues consist of interest earned on the net investment. Revenues are
recognized over the lease term as a constant percentage return on the net
investment.
Initial direct financing costs are capitalized and amortized over the lease
term.
21
22
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Other
Additionally, the Company acts as a broker in arranging certain lease
transactions and recognizes fees for such services as earned. In connection with
certain transactions, the Company receives a share in the proceeds from the sale
or re-lease of the equipment at lease termination. In certain of such cases,
estimated residual values, referred to as "net investment in lease residuals,"
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.
STOCK OPTIONS:
TechTeam accounts for employee stock options under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations.
USE OF ESTIMATES:
Preparation of financial statements in conformity with generally accepted
accounting principles requires the Company's management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from the estimates and
assumptions made.
NEW ACCOUNTING STANDARDS
There are no recently issued accounting standards which have not been adopted by
the Company and which are expected to have a significant effect on the Company.
NOTE B -- DESCRIPTION OF THE BUSINESS
The Company provides corporate services, call center services, and lease
financing for high technology and capital equipment for major companies on an
international scale. Revenues from clients which exceeded 10% of total revenues
for any of the periods presented are summarized as follows.
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------
(In thousands)
--------------------------------------------------
2000 1999 1998
--------------- -------------- ---------------
Ford Motor Company............................................ $ 40,062 $ 25,500 $ 19,396
DaimlerChrysler .............................................. 22,573 25,598 27,059
GE TechTeam, L.P.............................................. 16,150 27,306 24,033
22
23
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE C -- ASSETS OF LEASING OPERATIONS
The assets of the Company's leasing operations consist of:
DECEMBER 31,
---------------------------------
(In thousands)
---------------------------------
2000 1999
Equipment leased to others under operating leases:
Cost...................................................... $ 61,089 $ 56,123
Less -- Accumulated depreciation.......................... 25,514 14,604
--------------- ---------------
$ 35,575 $ 41,519
Net investment in direct financing leases, consisting of:
Total minimum lease payments receivable................... 3,952 6,201
Estimated residual values of leased property
(unguaranteed)......................................... 690 703
Unearned income........................................... (434) (804)
Initial direct costs...................................... 18 37
--------------- ---------------
4,226 6,137
--------------- ---------------
Net investment in lease residuals............................. 1,408 1,844
--------------- ---------------
Total ........................................................ $ 41,209 $ 49,500
=============== ===============
Future lease revenues anticipated under noncancelable operating leases at
December 31, 2000 are:
- --------------------------------------------------------------------------------
YEAR AMOUNT
- ------------------------------------------------------------- ---------------
(In thousands)
2001......................................................... $ 17,896
2002......................................................... 7,067
2003......................................................... 364
2004 ........................................................ 64
---------------
Total........................................................ $ 25,391
===============
Minimum lease payments receivable under direct financing leases at December 31,
2000 are:
- --------------------------------------------------------------------------------
YEAR AMOUNT
- ------------------------------------------------------------- ----------------
(In thousands)
2001......................................................... $ 2,287
2002......................................................... 1,037
2003......................................................... 411
2004 ........................................................ 206
2005 ........................................................ 11
---------------
Total........................................................ $ 3,952
===============
23
24
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE D -- LEASES
The Company leases its call center facilities, corporate and other offices and
certain office equipment under noncancelable operating leases. These leases are
renewable with various options and terms. Total rental expense was $2,911,000 in
2000, $2,829,000 in 1999 and $2,842,000 in 1998.
Minimum future payments under noncancelable operating leases with initial terms
of one year or more at December 31, 2000 were:
- --------------------------------------------------------------------------------
YEAR AMOUNT
- --------------------------------------------------------------- ---------------
(In thousands)
2001.......................................................... $ 2,814
2002.......................................................... 2,723
2003.......................................................... 2,524
2004 ......................................................... 2,128
2005 and thereafter........................................... 2,345
---------------
Total......................................................... $ 12,534
===============
NOTE E -- SHORT-TERM FINANCING ARRANGEMENTS
The Company has agreements with Bank One which provide for unsecured short-term
borrowings of up to $25,000,000 at the bank's prime rate. There were no
borrowings under this line at December 31, 2000 or 1999.
NOTE F -- NOTES PAYABLE
Notes payable at December 31, consists of:
- ---------------------------------------------------------------------------------------------------
2000 1999
------------ ------------
(In thousands)
Nonrecourse debt to financial institutions -- 6.0% - 12%...... $ 12,416 $ 17,805
Nonrecourse debt to others -- 7.0% - 9.2%..................... 2,191 2,681
Other......................................................... -- 112
------------ ------------
Total ........................................................ $ 14,607 $ 20,598
============ ============
The Company finances a portion of its lease transactions by assigning the
noncancelable rentals to various financial institutions and others on a
nonrecourse basis. In the event of a default by the lessee under a lease which
has been assigned on a nonrecourse basis, the holder has a first lien against
the underlying equipment but has no further recourse against the Company.
At December 31, 2000 and 1999, the carrying value of the pledged assets was
approximately $19,000,000 and $22,000,000, respectively.
24
25
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE F -- NOTES PAYABLE (continued)
Future minimum payments of notes payable are as follows:
YEAR AMOUNT
- ----------------------------------------------------------- ---------------
(In thousands)
2001 ..................................................... $ 9,790
2002 ..................................................... 4,248
2003 ..................................................... 363
2004 ..................................................... 195
2005 ..................................................... 11
---------------
Total ..................................................... $ 14,607
===============
Interest paid on notes payable was $1,429,000, $880,000, and $1,770,000 in 2000,
1999, and 1998 respectively.
NOTE G -- EMPLOYEE RETIREMENT PLAN
The Company has a 401(k) Retirement Savings Plan which covers substantially all
employees. Under the provisions of the Plan, the Company will match employee
contributions in amounts up to 3% of gross compensation subject to statutory
limitations; contributions were $723,000 in 2000, $718,000 in 1999, and $697,000
in 1998. The Company's matching contributions are credited only to the National
TechTeam Stock Fund for the benefit of each participant.
NOTE H -- TAX PROVISIONS
The provision (benefit) for income taxes consists of the following:
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2000 1999 1998
--------------- -------------- ---------------
(In thousands)
Current:
U.S. Federal.............................................. $ 2,087 $ 1,319 $ (1,102)
State..................................................... 226 121 50
Foreign................................................... 379 105 147
-------------- ------------- --------------
$ 2,692 $ 1,545 $ (905)
Deferred (credit) - U.S. Federal.............................. (447) 172 (328)
--------------- -------------- ---------------
Total provision/(credit)...................................... $ 2,245 $ 1,717 $ (1,233)
=============== ============== ===============
Tax payments.................................................. $ 2,586 $ 1,050 $ 500
=============== ============== ===============
25
26
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE H -- TAX PROVISIONS (continued)
A reconciliation of the Federal income tax provision and the amount computed by
applying the Federal statutory income tax rate to income before Federal income
tax follows:
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2000 1999 1998
--------------- -------------- --------------
(In thousands)
Income tax (credit) at Federal statutory rate of 34%......... $ 1,492 $ 1,097 $ (1,694)
Goodwill, intangibles, and other permanent differences....... 323 498 329
Foreign tax credit........................................... 140 -- --
State taxes net of federal benefit........................... 149 80 --
Other........................................................ 141 42 132
--------------- -------------- --------------
$ 2,245 $ 1,717 $ (1,233)
=============== ============== ==============
The provision for income taxes was calculated based on the following components
of earnings before income taxes:
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2000 1999 1998
--------------- -------------- --------------
(In thousands)
Domestic..................................................... $ 3,020 $ 2,944 $ (5,457)
Foreign...................................................... 1,371 283 476
--------------- -------------- --------------
$ 4,391 $ 3,227 $ (4,981)
=============== ============== ==============
The principal components of deferred income tax balances are as follows:
- -------------------------------------------------------------------------------------------------------------------
DECEMBER 31,
-------------------------------------------------------------
2000 1999
----------------------------- -----------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------------ ------------- ------------ -------------
(In thousands)
Net operating loss carryforward ................. $ -- $ -- $ 742 $ --
Alternative minimum tax credit carryforward ..... 2,341 -- 1,757 --
Allowance for uncollectible accounts receivable.. 80 -- 103 --
Global Call Center software...................... 731 -- 263 --
Leasing accounting............................... 6,688 1,060 5,078 816
Prepaid expenses................................. 82 39 200 19
Accelerated tax depreciation..................... -- 6,540 -- 6,084
Other............................................ 122 368 614 248
------------- ------------- ------------- -------------
$ 10,044 $ 8,007 $ 8,757 $ 7,167
============= ============= ============= =============
At December 31, 2000, for federal income tax purposes, the Company had a
$2,341,000 alternative minimum tax credit carryforward which does not expire.
26
27
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE H -- TAX PROVISIONS (continued)
No provision was made with respect to approximately $500,000 of undistributed
earnings of foreign subsidiaries at December 31, 2000, since these earnings are
considered by the Company to be permanently reinvested. Upon distribution of
these earnings, the Company would be subject to United States income taxes and
foreign withholding taxes. Determining the unrecognized deferred tax liability
on the distribution of these earnings is not practicable as such liability, if
any, is dependent on circumstances existing when remittance occurs.
NOTE I -- ACQUISITIONS
In January 1998, TechTeam acquired all of the capital stock of Capricorn Capital
Group, Inc. (now TechTeam Capital Group, Inc.) in exchange for a base
consideration consisting of 350,000 unrestricted and 150,000 restricted shares
of TechTeam common stock plus a contingent payment based upon TechTeam Capital
Group, Inc.'s earnings performance in the three-year period following the
acquisition. The base consideration was valued at $4,875,000. The transaction
has been accounted for as a purchase. Goodwill of $3,186,000 resulting from the
transaction is being amortized using the straight-line method.
NOTE J -- RELATED PARTY TRANSACTIONS
TechTeam was involved in the following related party transactions:
a) Paid $93,000 in 2000 for broker fees to a securities brokerage firm
that employs a director of the Company.
b) Paid $103,000 in 2000 for consulting fees to a director of the Company.
c) Paid legal fees of $45,000 in 2000 to a law firm whose members include
a director of the Company.
d) The Company leased space and certain property and equipment to the GE
Joint Venture in 1998. Rental income from these operating leases were
$467,000 in 1998. Effective January 1, 1999 all lease agreements for
property and equipment used by the GE Joint Venture were transferred to
the joint venture.
NOTE K -- STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, when the exercise price of the Company's employee stock options equals
or exceeds the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
The Company's 1990 Nonqualified Stock Option Plan has authorized the grant of
options to management personnel and others for up to 3,800,000 shares of the
Company's common stock. Generally, options granted have six year terms and vest
and become exercisable ratably over the first five years of their term.
Pro forma information regarding net income/(loss) and earnings/(loss) per share
is required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated as of the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1998 through 2000: a range of risk-free
interest rates of 5% to 7% based on the expected life of the options; a
volatility factor of the expected market price of the Company's common stock of
.464, .774, and .776 in 2000, 1999, and 1998, respectively; and a weighted
average expected life of three years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options
27
28
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE K -- STOCK OPTIONS (continued)
which have no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's employee
stock options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
- --------------------------------------------------------------------------------------------------------------------
2000 1999 1998
--------------- -------------- ---------------
(In thousands)
Pro forma net income/(loss)................................... $ 1,031 $ 20 $ (5,737)
Pro forma earnings/(loss) per share
Basic..................................................... $ 0.08 $ 0.00 $ (0.39)
Diluted................................................... $ 0.08 $ 0.00 $ (0.39)
The pro forma effect on net income in 1999 and 1998 is not representative of the
pro forma effect on net income in future years because it does not take into
consideration pro forma compensation expense related to stock option grants made
prior to 1995. Assuming similar grants in future years, the pro forma effect is
fully reflected in 2000.
A summary of the Company's stock option activity, and related information,
follows:
- ------------------------------------------------------------------------------------------------------------------------------------
EMPLOYEES DIRECTORS OTHERS
--------------------------- -------------------------- ---------------------------
TOTAL AVERAGE AVERAGE AVERAGE
SHARES SHARES PRICE SHARES PRICE SHARES PRICE
------------ ----------- ------------ ----------- ----------- ------------ ------------
Outstanding at
January 1, 1998....... 1,240,326 1,108,198 $ 14.44 129,275 $19.55 2,853 $ 35.05
Granted.................. 154,000 114,000 9.83 40,000 10.31 -- --
Exercised................ (166,100) (156,100) 4.95 (10,000) 4.82 -- --
Canceled................. (219,625) (219,625) 15.40 -- -- -- --
------------ ----------- ----------- ------------
Outstanding at
December 31, 1998..... 1,008,601 846,473 $ 10.39 159,275 $ 9.21 2,853 $ 35.05
Granted.................. 519,800 414,800 5.51 30,000 6.44 75,000 5.65
Exercised................ (13,600) (13,600) 4.50 -- -- -- --
Canceled................. (357,587) (303,312) 14.39 (54,275) 14.61 -- --
------------ ----------- ----------- ------------
Outstanding at
December 31, 1999..... 1,157,214 944,361 $ 11.09 135,000 $15.11 77,853 $ 6.72
Granted.................. 337,000 187,000 5.50 60,000 5.75 90,000 7.43
Exercised................ (5,600) (5,600) 4.63 -- -- -- --
Canceled................. (135,427) (135,427) 8.82 -- -- -- --
------------ ----------- ----------- ------------
Outstanding at
December 31, 2000..... 1,353,187 (1) 990,334 $ 10.43 195,000 $12.23 167,853 $ 7.10
============ =========== =========== ============
28
29
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE K -- STOCK OPTIONS (continued)
(1) The following table summarizes certain information about stock options
outstanding at December 31, 2000:
- ------------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------ --------------------------------------
WEIGHTED - WEIGHTED - WEIGHTED -
RANGE OF NUMBER OF AVERAGE AVERAGE PER NUMBER OF AVERAGE PER
PER SHARE OPTIONS REMAINING SHARE EXERCISE OPTIONS SHARE EXERCISE
EXERCISE PRICES OUTSTANDING EXERCISE PERIOD PRICE EXERCISABLE PRICE
- ------------------ ------------------ ----------------- ------------------ ----------------- -----------------
$ 3.51 - $ 7.71 797,508 3.2 $ 5.62 212,649 $ 6.08
8.25 - 13.75 304,000 2.6 9.88 100,983 10.05
22.63 - 25.75 248,826 1.7 25.38 169,203 25.33
35.05 2,853 0.5 35.05 2,496 35.05
The Company granted options to purchase 90,000 and 75,000 shares of common stock
to consultants in 2000 and 1999 respectively. The estimated fair value of such
options was expensed over the contract benefit period.
NOTE L -- STOCK REPURCHASE PROGRAMS
The company has acquired shares of its common stock in connection with stock
repurchase programs. In 1998, the Company repurchased 3,142,000 shares for
$28,195,000. During 1999, the Company repurchased 402,100 shares for $2,497,000.
In May of 2000, the Company announced a stock repurchase program to repurchase
up to 2,000,000 shares of common stock. In October of 2000, the Company extended
this program to repurchase an additional 2,000,000 shares. During 2000 the
Company repurchased 2,790,450 shares for $9,069,000 under this program.
NOTE M -- SEGMENT REPORTING
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance. TechTeam's chief operating
decision making group is the Policy Committee, which is comprised of the
President and the lead executives of each of TechTeam's operating segments. The
operating segments are managed separately because each operating segment
represents a strategic business unit that offers different products.
The Company's reportable operating segments include Corporate Service
(consisting of corporate help desk services, technical staffing, systems
integration, and training programs), OEM Call Center Services and leasing
operations . (See Item 1. Business Overview for a description of each business
segment.)
29
30
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE M -- SEGMENT REPORTING (continued)
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. TechTeam evaluates
performance based on stand alone operating segment gross profit.
- ---------------------------------------------------------------------------------------------------------------------------------
CORPORATE SERVICES
-------------------------------------------------------------------
CORPORATE OEM CALL
HELP DESK TECHNICAL SYSTEMS TRAINING CENTER LEASING
SERVICES STAFFING INTEGRATION PROGRAMS TOTAL SERVICES OPERATIONS TOTAL
---------- ---------- ----------- ----------- ---------- ---------- ----------- -----------
(In thousands)
2000
Revenues.......... $ 45,706 $ 17,305 $ 14,161 $ 3,485 $ 80,657 $ 16,150 $ 27,349 $ 124,156
Gross profit...... 14,227 2,629 4,194 400 21,450 1,729 5,117 28,296
Depreciation and
amortization... 1,095 582 70 138 1,885 179 20,294 22,358
Segment assets.... 12,090 4,439 2,501 1,049 20,079 1,049 45,732 66,860
Expenditures for
property....... 1,853 985 119 234 3,191 -- -- 3,191
1999
Revenues.......... $ 37,013 $ 21,763 $ 21,358 $ 4,888 $ 85,022 $ 27,306 $ 20,477 $ 132,805
Gross profit...... 7,909 4,598 3,720 201 16,428 2,091 4,869 23,388
Depreciation and
amortization... 3,339 181 143 541 4,204 89 14,779 19,072
Segment assets.... 9,023 4,735 6,142 948 20,848 4,841 58,943 84,632
Expenditures for
property....... 251 137 13 60 461 -- 74 535
1998
Revenues.......... $ 30,672 $ 25,716 $ 14,436 $ 6,622 $ 77,446 $ 25,376 $ 14,099 $ 116,921
Gross profit...... 3,720 5,040 2,920 305 11,985 1,876 5,537 19,398
Depreciation and
amortization... 3,013 467 175 594 4,249 424 10,358 15,031
Segment assets.... 16,070 6,895 6,119 2,126 31,210 8,661 41,388 81,260
Expenditures for
property....... 643 539 303 139 1,625 537 301 2,462
30
31
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE M -- 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:
2000 1999 1998
--------------- ---------------- ---------------
(In thousands)
Depreciation and amortization
Total for reportable segments.......................... $ 22,358 $ 19,072 $ 15,031
Total of Corporate assets.............................. 3,796 2,322 2,171
--------------- ---------------- ---------------
Total depreciation and amortization................. $ 26,154 $ 21,394 $ 17,202
Assets
Total assets for reportable segments................... $ 66,860 $ 84,632 $ 81,260
Corporate assets....................................... 33,914 27,675 30,358
--------------- ---------------- ---------------
Total assets........................................ $ 100,774 $ 112,307 $ 111,618
=============== =============== ===============
Revenues in Europe were $10,216,000, $6,404,000 and $3,053,000 in 2000, 1999,
and 1998, respectively. At December 31, 2000 and 1999 assets located in Europe
were $4,705,000 and $2,914,000 which includes long-lived assets of $867,000 and
$372,000, respectively.
NOTE N -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly consolidated results of operations are summarized as follows:
- --------------------------------------------------------------------------------------------------------------------
QUARTER ENDED
---------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
---------------- ----------------- ----------------- ----------------
(In thousands, except per share data)
2000
Revenues................................ $ 31,977 $ 32,959 $ 30,003 $ 29,217
Gross profit............................ 6,233 7,955 6,896 7,212
Income before tax provision............. 638 2,072 1,121 560
Net income.............................. 341 1,111 605 89
Earnings per share...................... 0.03 0.08 0.05 0.01
1999
Revenues................................ $ 34,087 $ 34,268 $ 33,955 $ 30,495
Gross profit............................ 5,683 6,662 5,896 5,147
Income before tax provision............. 342 1,001 778 1,106
Net income.............................. 226 660 488 136
Earnings per share...................... 0.02 0.05 0.04 0.01
Quarterly earnings per share may not add to annual earnings per share because of
rounding and shares issued or repurchased during the year.
Changes in the effective tax rate had the effect of decreasing fourth quarter
1999 net income by approximately $291,000.
31
32
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE O -- LEGAL PROCEEDINGS
The Company is a party to legal proceedings which are routine and incidental to
its business. Although the consequences of these proceedings are not presently
determinable, in the opinion of management, they will not have a material
adverse affect on the Company's liquidity, financial position or results of
operations.
NOTE P -- PREFERRED SHARE PURCHASE RIGHTS
On April 29, 1997, the Company's Board of Directors authorized the distribution
of one Preferred Share Purchase Right ("Right") for each outstanding share of
Common Stock of the Company. The terms of the rights plan are described in the
Rights Agreement between the Company and U.S. Stock Transfer Corporation, dated
May 6, 1997, as amended August 24, 1999. Each Right entitles shareholders to buy
one one-hundredth of a share of a new series of preferred stock at a price of
$80.
As distributed, the Rights trade together with the Common Stock of the Company
and do not have any separate voting powers. They may be exercised or traded
separately only after the earlier to occur of the following: (1) 10 days after
any person or group of persons acquires 15% or more of the Company's Common
Stock, (2) 10 business days after a person or group of persons announces an
offer which, if completed, would result in its owning 15% or more of the
Company's Common Stock, or (3) promptly after a declaration by the Board that a
person who acquires 15% or more of the Company's Common Stock is an "Adverse
Person" as defined by the Rights Agreement. Additionally, if the Company is
acquired in a merger or other business combination, each Right will entitle its
holder to purchase, at the Right's exercise price, shares of the acquiring
Company's Common Stock (or stock of the Company if it is the surviving
corporation) having a market value of twice the Right's exercise price.
The Rights may be redeemed at the option of the Board of Directors for $.01 per
Right at any time before a person or group of persons accumulates 15% or more of
the Company's Common Stock. At any time after a person or group of persons
acquires 15% but before the person or group of persons has acquired 50% of
outstanding shares of Common Stock, the Board may exchange each Right for one
share of Common Stock. The Board may amend the Rights at any time without
shareholder approval. The Rights will expire by their terms on May 6, 2007.
NOTE Q -- SALE OF INTEREST IN GE TECHTEAM, L.P.
On August 22, 2000, the Company sold its 47% interest in the GE TechTeam, LP and
its 49% membership interest in Support Central, LLC to the majority partner, GE
Warranty Management, Inc. (GEWM). The Company recorded a pre-tax gain of
$322,000 on this transaction. The Company will no longer provide staffing
services to GEWM. The Company has entered into an arrangement with GEWM to
provide call center technology services, which include ongoing call center
software maintenance, upgrades and customization.
Until the date of sale, TechTeam shared in profits and losses of the GE Joint
Venture OEM call center services business based on its partnership interest.
Such revenue sharing amounted to earnings of $331,000 for the year ended
December 31, 2000, losses of $315,000 for the year ended December 31, 1999 and
earnings of $144,000 for the year ended December 31, 1998. In 1999, the GE Joint
Venture changed its overhead allocation method, but such change was not agreed
to by the Company. The change in 1999 resulted in an additional $531,000 of
costs to National TechTeam previously borne by GE Appliances. In the quarter
ended September 30, 2000 the change in the allocation method was reversed. The
effect of the reversal increased National TechTeam's share in partnership
revenue by $531,000.
32
33
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
There were no changes in accountants, disagreements, or other events requiring
reporting under this Item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required is set forth under the caption "Election of Directors and
Management Information" in the Proxy Statement relating to the 2000 Annual
Meeting of Shareholders to be held on May 9, 2001, which is incorporated herein
by reference.
Information required pertaining to compliance with Section 16(a) of the
Securities and Exchange Act of 1934 is set forth under the caption "Section
16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement relating
to the 2000 Annual Meeting of Shareholders to be held on May 9, 2001, which is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required is set forth under the caption "Compensation of Executive
Officers" in the Proxy Statement relating to the 2000 Annual Meeting of
Shareholders to be held on May 9, 2001, which is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required is set forth under the caption "Election of Directors and
Management Information -- Security Ownership of Certain Beneficial Holders and
Management" in the Proxy Statement relating to the 2000 Annual Meeting of
Shareholders to be held on May 9, 2001, which is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required is set forth under the caption "Compensation of Executive
Officers -- Certain Relationships and Related Transactions" in the Proxy
Statement relating to the 2000 Annual Meeting of Shareholders to be held on May
9, 2001, which is incorporated herein by reference.
33
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a) Certain documents filed as part of the Form 10-K.
See Item 8. Financial Statements and Supplementary Data and (d) below.
b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the last quarter of
year ended December 31, 2000.
c) Exhibits required by Item 601 of Regulation S-K.
The response to this portion of Item 14 is submitted as a separate
section of this Report under the caption, Index of Exhibits.
d) Financial statement schedules required by Regulation S-X.
The response to this portion of Item 14 is submitted as a separate
section of this Report under the caption, Item 8. Financial Statements
and Supplementary Data.
34
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
NATIONAL TECHTEAM, INC.
Date: March 26, 2001 By: /s/M. Anthony Tam M. Anthony Tam
-------------- ------------------ President, Chief Executive
Officer and Chief Financial
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities indicated on March
26, 2001.
/s/M. Anthony Tam Director, President, Chief
- --------------------------- Executive Officer and Chief Financial
M. Anthony Tam Officer
/s/Kim A. Cooper Director
- ---------------------------
Kim A. Cooper
/s/Peter T. Kross Director
- ---------------------------
Peter T. Kross
/s/Wallace D. Riley Director
- ---------------------------
Wallace D. Riley
/s/Richard G. Somerlott Director
- ---------------------------
Richard G. Somerlott
/s/Jerome B. York Director
- ---------------------------
Jerome B. York
/s/Ronald T. Wong Director
- ---------------------------
Ronald T. Wong
35
36
INDEX OF EXHIBITS
All exhibits listed below that include a * indicate exhibits that are
incorporated by reference. See the footnotes following the list of exhibits to
locate those exhibits. All other exhibits are filed as part of this Form 10-K
Report.
- ------------------------------------------------------------------------------------------------------------------------
REFERENCE *
EXHIBIT OR PAGE
NUMBER EXHIBIT NUMBER
- --------------- --------------------------------------------------------------------------------------- --------------
2.1 Agreement and Plan of Merger dated January 19, 1998 by and between David M. Sachs, *10
Capricorn Capital Group, Inc., BM Woodbridge Place 104, Inc. and National TechTeam,
Inc.
2.1(a) Sale of Certain Assets of TechTeam Capital Group, LLC to Newco Consultants, LLC, *14
effective March 31, 2000
2.2 Limited Partnership Agreement of GE TechTeam, L.P. (formerly Support Central, L.P.) *11
dated as of October 1, 1997.
2.2(a) Amendment No. 1 to Limited Partnership Agreement of Support Central, L.P. *12
2.2(b) Global Agreement By and Among National TechTeam Inc., GE TechTeam, L.P., Support
Central, L.L.C. , and GE Warranty Management, Inc. dated August 22, 2000.
3.1 Certification of Incorporation of National TechTeam, Inc. filed with the Delaware *1
Secretary of State on September 14, 1987.
3.2 Certificate of Amendment dated November 27, 1987 to the Company's Certification of *2
Incorporation to change the par value from $.001 to $.01 per share.
3.3 Bylaws of National TechTeam, Inc. as Amended and Restated May 26, 1998. *13
4.1 Rights Agreement dated as of May 6, 1997, between National TechTeam, Inc. and U.S. *9
Stock Transfer Corporation, as Rights Agent, which includes as
Exhibit A thereto the Form of Certificate of Designations, as
Exhibit B thereto the Form of Right Certificate, and as Exhibit
C thereto the Summary of Rights to Purchase Preferred Stock.
10.1 Lease Agreement for office space in Southfield, Michigan known *4
as the Cumberland Tech Center between the Company and Eleven
Inkster Associates dated September 29, 1993.
10.2 Lease Amendment for office space in Southfield, Michigan known *4
as the Cumberland Tech Center between the Company and Eleven
Inkster Associates dated December 7, 1993.
10.3 Lease Amendment for office space in Southfield, Michigan known *5
as the Cumberland Tech Center between the Company and Eleven
Inkster Associates dated January 23, 1995.
10.4 Lease for office space in Troy, Michigan known as Troy Officenter B between the *6
Company and WRC Properties, Inc. dated November 16, 1995.
10.5 Third Amendment Lease Agreement dated March 29,1996 for office space in Southfield, *7
Michigan between Eleven Inkster Associates and the Company.
10.6 Fourth Lease Amendment for office space in Southfield, Michigan
between Eleven Inkster Associates and the Company dated March
13, 2000.
36
37
INDEX OF EXHIBITS (continued)
- --------------------------------------------------------------------------------
All exhibits listed below that include a * indicate exhibits that are
incorporated by reference. See the footnotes following the list of exhibits to
locate those exhibits. All other exhibits are filed as part of this Form 10-K
Report.
- ------------------------------------------------------------------------------------------------------------------------
REFERENCE *
EXHIBIT OR PAGE
NUMBER EXHIBIT NUMBER
- --------------- --------------------------------------------------------------------------------------- --------------
10.7 Sublease for office space in Southfield, Michigan known as the
Cumberland Tech Center between Dura Operating Corporation and
the Company dated August 13, 2000.
10.9 Lease for office space in Dearborn, Michigan between the Company and Dearborn Atrium *8
Associates Limited Partnership dated November 18, 1996.
10.10 Lease Agreement for office space in Davenport, Iowa known as
the 1010 Shopping Center between the Company and Partnership
1010, LLP dated August 28, 1999.
10.11 Asset Purchase Agreement between General Electric Company and National TechTeam, Inc. *12
dated March 31, 1998 relating to the sale and transfer by TechTeam of its OEM call
center contracts with Hewlett-Packard Corporation and 3Com Corporation.
10.12 Credit Authorization Agreement in the principal amount of $25,000,000 between the *13
Company and NBD Bank dated May 29, 1998.
10.13 Employment Agreement dated as of January 1, 1999 between National TechTeam, Inc. and *13
Harry A. Lewis.
10.14 Employment Agreement dated as of January 1, 1999 between National TechTeam, Inc. and *13
William F. Coyro Jr.
10.15 1990 Nonqualified Stock Option Plan. *3
10.16 1996 Nonemployee Directors Stock Plan. *7
10.17 Supplemental Retirement Plan dated October 1, 2000.
10.18 Senior Management bonus Plan dated June 14, 2000.
21 List of subsidiaries of National TechTeam, Inc. 38
23.1 Consent of Ernst & Young LLP 39
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37
38
INDEX OF EXHIBITS (continued)
*1 Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1987.
*2 Incorporated by reference to the Company's Registration Statement on
Form S-4 (Registration No. 33-26689), filed as Exhibit 3.2 thereto.
*3 Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1990, filed as Exhibit 4.14 thereto.
*4 Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1993.
*5 Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1994.
*6 Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995.
*7 Incorporated by reference to the Company's Registration Statement on
Form S-3 (Registration No. 333-10687.)
*8 Incorporated by reference to the Company's Annual Report on Form 10-K
dated December 31, 1996.
*9 Incorporated by reference to the Company's Registration Statement on
Form 8-A dated May 9, 1997.
*10 Incorporated by reference to the Company's Report on Form 8-K dated
February 13, 1998.
*11 Incorporated by reference to the Company's Annual Report on Form 10-K
dated December 31, 1997.
*12 Incorporated by reference to the Company's Report on Form 10-K dated
March 31, 1998.
*13 Incorporated by reference to the Company's Report on Form 10-K dated
March 31, 1999.
*14 Incorporated by reference to the Company's Report on Form 10-Q dated
May 15, 2000.
38