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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, 1998
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
incorporation) Identification No.)
835 Mason Street, Suite 200, Dearborn, MI 48124
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (313) 277-2277
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 [X] No [ ]
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, 1999 was approximately $86,800,000.
The number of shares outstanding of the issuer's common stock as of March 19,
1999 was 13,360,566.
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 III.
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
GENERAL
National TechTeam, Inc. ("TechTeam" or "Company") is a leading provider of
information technology ("IT") outsourcing support services to large national and
multinational corporations, government agencies and service organizations. The
Company offers its services through three global units: (i) CORPORATE SERVICES,
which provides corporations with help desk support, technical staffing, systems
integration, and custom training; (ii) OEM CALL CENTER SERVICES, which provides
end user customers of its clients with inbound telephone support for their
computer products; and (iii) TECHTEAM CAPITAL GROUP, which consists primarily of
leasing computer-related hardware and integrated services to corporate
customers. National TechTeam is traded under the symbol "TEAM". TechTeam's
client base includes Ford, DaimlerChrysler, Bank One, an international provider
of shipping services, Liberty Mutual Insurance Company and GE TechTeam, L.P. a
joint venture between the Company and an operating unit of GE Appliances (the
"GE Joint Venture"). Many of TechTeam's clients utilize services offered by all
TechTeam business units.
The Company was incorporated on September 14, 1987 in connection with
reincorporation in Delaware of the Company's predecessor, National TechTeam,
Inc., a Nevada corporation, which was completed on November 17, 1987. The
Company maintains its executive and principal offices at 835 Mason Street, Suite
200, Dearborn, MI 48124. Its telephone number is (313) 277-2277.
During 1997 and 1998, the Company engaged in several transactions that form the
basis for a substantial portion of the Company's current operations. These
included: the acquisition of Compuflex Systems, Inc. ("Compuflex"), currently
known as National TechTeam of New Jersey, Inc.; the formation of the GE Joint
Venture; and the acquisition of Capricorn Capital Group, Inc., currently known
as TechTeam Capital Group. Compuflex, which has an office in New Jersey and
affiliated operations in India, provides SAP consulting services, including
customized design, installation and training, as well as contract programming
and software development for Fortune 500 companies. The GE Joint Venture was
formed in October 1997 to market and service extended warranty contracts for the
personal computer industry. The GE Joint Venture, headquartered in Dallas,
Texas, is operated by TechTeam and GE Service Management, an operating unit of
GE Appliances. GE Service Management is a leading provider of extended service
plans and warranty administration for products ranging from major appliances and
consumer electronics to personal computers. GE Service Management offers
extended service plans that cover numerous manufacturers, makes and models, and
it provides comprehensive service coverage for post-warranty products and
service needs. In March 1998 TechTeam transferred its OEM call center contracts
to the GE Joint Venture. In August 1998 the GE Joint Venture commenced telephone
and computer support for a major manufacturer of personal computers.
INDUSTRY BACKGROUND
The IT services industry has been evolving rapidly in the past several years in
response to the emergence of a number of fundamental trends. Among these trends
are the following:
- The development and implementation of new technology on a large scale,
requiring large expenditures in purchasing, integration and training.
- An emphasis on core strengths, leading many businesses to outsource
non-core functions. For example, according to Gartner Group, an
information technology advisory firm, the desktop management services
market is the fastest growing phenomenon for the IT services industry.
This market includes desktop outsourcing and is $8 billion in the U.S.
alone, growing at a compounded annual rate of 22 percent for the next
four years.
- Change in the price/performance ratio of technology, which has
dramatically reduced the cost of computers and related communications
equipment.
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- Migration by businesses from IT systems consisting of a mixture of
network operating systems, desktop systems and applications to
integrated and standardized network-based systems.
- Rapid growth of the Internet and World Wide Web as a means of
communicating information and knowledge.
- Increased use by businesses of Enterprise Resource Planning products,
such as PeopleSoft and SAP, that require significant investment and
ongoing support.
- An increasing focus on productivity, which demands that IT service
providers deliver high-quality services with increasing efficiencies
in delivery and pricing.
- Increased standardization of IT services in certain areas,
particularly desktop management and help desk services, creating
greater competitive pressures.
These factors, along with others, are creating challenges for corporations to
assimilate new technology and to implement new IT systems containing many more
hardware and software components than those of even a short time ago. The
Company believes that these challenges will continue to create great opportunity
for IT service providers in general and for the Company in particular, by reason
of the Company's ability to provide a wide range of services intended to offer a
complete IT solution to its clients and its emphasis on customized and more
complex IT assignments.
SERVICES
National TechTeam originally commenced operations as a value-added reseller of
computer hardware and software that also provided training for its computer
products. During the late 1980's the Company added IT staffing and systems
integration services as a complement to its existing training business. In 1993,
as a result of the Company's growing expertise in providing IT staffing of
on-site help desks, TechTeam entered the help desk/call center industry. Today,
the Company's outsourcing services are intended to cover a broad range of
desktop management and desk-side support services, including planning, design,
implementation and support. Although the Company's services are complementary,
they are divided into the following business units-- Corporate Services, OEM
Call Center Services, and TechTeam Capital Group.
CORPORATE SERVICES
As a provider of Single Point of Contact (SPOC) help desk and desktop management
programs, TechTeam provides centralized delivery of IT technical support
services. TechTeam's Corporate Services consists of corporate help desk
services, technical staffing, systems integration and training programs.
Corporate Help Desk Services
TechTeam provides help desk services to assist major companies in managing their
internal IT systems. The Company's technical staff uses its experience and
knowledge in launching and delivering corporate help desk programs, to define
and execute corporate IT support solutions to meet its clients' specific needs.
The Company's help desk solutions include numerous options for call tracking,
Internet-based callback support, telecommunications systems, product knowledge
bases, statistical reporting, real-time scheduling and forecasting. The
Company's proprietary Global Call Center software (the "GCC") enables TechTeam
to provide its clients with a turn key call tracking solution.
These customized help desk solutions provide the corporate end users with
around-the-clock technical support provided either from the client's facilities
or from TechTeam's help desk sites. TechTeam provides help desk services for the
full range of a client's IT infrastructure, from network environments to
computing systems, and shrink wrap to advanced applications. TechTeam's
technicians are specially trained in the applicable product or application and
act as a transparent extension of the client company in diagnosing problems and
answering 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.
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The 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.
Corporate help desk services accounted for approximately 26% of TechTeam's total
revenues in 1998.
Systems Integration
Today's corporate systems are a complicated web of interrelated technology
components that work together to form the information lifeblood of the
corporation. IT managers are challenged with making sure all these components
perform reliably and efficiently to service the employee base of the
corporation. Through relationships with many Fortune 500 companies, TechTeam has
hands-on expertise in leading-edge network and desktop design, integration and
management services. TechTeam's systems integration team performs all phases of
network implementations, from project planning and management, to full-scale
network server and workstation installations. After the implementation, the
systems integration team performs a wide range of maintenance services to the
client ranging from deskside support to network monitoring.
Key services provided by TechTeam as part of its systems integration services
include: LAN/WAN design; Rollout Planning; Server Integration, PC & Workstation
Migrations, Workstation Installations/Moves/Upgrades; Procurement; Desktop
Break/fix; Asset Management; and ISO 9000 Software design, analysis, and
implementation.
By combining its help desk and systems integration expertise, TechTeam provides
a complete network and desktop management solution for a growing number of
clients. The ability to analyze the information collected from the desktop
enables the systems integration staff to be proactive in solving the problems of
the local and wide area network down to the desktop.
Systems integration accounted for approximately 12% of TechTeam's total revenues
in 1998.
Technical Staffing
TechTeam maintains a staff of trained technical personnel to provide computer
and technical support to its clients at the clients' facilities. Services most
often provided are on-site help desk, programming, consulting and systems
implementation and maintenance. TechTeam's adaptive management and proactive
methodology enables its staff to work closely with its clients, understand their
computing environments and work together to design and install technology to
meet their business needs.
TechTeam recruits a technically proficient employee base. The Company is also
able to grow and enhance the employees proficiency by providing them with access
to its extensive technical training programs. By providing training in new
Internet technology, advanced operating systems like Windows NT and Unix, and
sophisticated applications such as SAP and PeopleSoft, the Company can provide
its clients with highly skilled resources trained and certified in the latest
technology.
Additionally, the Company's clients benefit due to its ability to rotate
internal help desk employees to client on site assignments. TechTeam's employees
develop skills and best-in-class processes as they rotate through internal
assignments. In this way, by adding and integrating expertise, TechTeam is able
to provide a total solution for its clients.
Technical staffing services accounted for approximately 22% of TechTeam's total
revenues in 1998.
Training Programs
Training is a critical success factor in the introduction and application of new
technology. Return on investment in this technology is dependent on an
organization's ability to effectively educate its workforce and integrate new
processes. The Company's flexible and cost effective training programs are
developed to meet the ongoing needs of its clients.
TechTeam's training programs include a wide array of applications within the
office automation, network and client-server marketplace. Clients are offered a
full spectrum of delivery options including course catalogs,
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registration services, computer equipment, networks, course materials, certified
trainers, evaluation options, desk-side tutorials, testing, feedback to help
desks and reporting. The Company's certified instructors and project managers
work closely with its clients in the collaborative design of customized training
programs. Training offerings range from general end-user modules to complex
technical courses for Information Technology professionals.
Training programs are also integrated into the Company's other service offerings
to provide a total solution for clients. The analysis of the data collected
through TechTeam's in-house and client site help desks, provides information to
"target train" end users, providing a more productive client specific training,
leading to an immediate return on training investments.
National TechTeam also staffs an experienced in-house design and writing team
that produces professional, customized reference and marketing communications.
These printed materials include complete systems manuals, newsletters, training
materials, quick reference cards and product information fliers. Translation
services are also offered.
TechTeam is a manufacturer-authorized training provider for many products
produced by Novell, Microsoft, Sun Microsystems and Lotus Development
Corporation. TechTeam has recently expanded its offerings to include SAP, JAVA
and new Internet applications that are in high demand by today's major
corporations and large government entities.
Training programs accounted for approximately 6% of the Company's total revenues
in 1998.
OEM CALL CENTER SERVICES
TechTeam provides OEM call center services through the GE Joint Venture. The GE
Joint Venture started in the Fall of 1997, with TechTeam providing the
technicians to answer support calls on the Consumer Support Program (CSP), a
computer and peripheral warranty program sold by GE at Circuit City. The GE
Joint Venture provides CSP with troubleshooting, support and dispatch services
on personal computers, peripheral hardware and software. In April 1998, TechTeam
sold its existing OEM call center business with Hewlett-Packard and 3Com to the
GE Joint Venture. Accordingly, TechTeam provides OEM technical support through
the GE Joint Venture.
TechTeam provides the GE Joint Venture with the call center technology,
expertise and personnel. TechTeam is compensated by the GE Joint Venture for the
personnel expenses. The management of the GE Joint Venture is divided between GE
and TechTeam. Ownership of the GE Joint Venture is divided 50.55% for GE and
49.45% for TechTeam. The profit and loss of the GE Joint Venture depends upon
the business performed by the GE Joint Venture. For CSP, any loss is borne by
GE, and profit is divided along ownership lines until the profit margin exceeds
25%. For margins above 25%, GE receives 75% of the profit. For OEM support, any
profit or loss is shared based upon ownership percentages.
In 1998, GE TechTeam expanded the base of OEM business by securing additional
OEM contracts. Responding to industry demands to reduce the cost of end user
support without sacrificing client satisfaction, the GE Joint Venture
re-engineered a support model to secure one of the largest OEM outsourcing
opportunities of 1998. In order to perform this work, the GE Joint Venture added
a new call center in Sault Sainte Marie, MI and expanded its Dallas and Fort
Worth call center facilities. As a result of the expansion, the number of active
TechTeam employees assigned to the GE Joint Venture increased to 1,271, and
revenues grew 130%.
OEM Call Center Services accounted for approximately 22% of the Company's total
revenues in 1998.
TECHTEAM CAPITAL GROUP
In January 1998, TechTeam acquired TechTeam Capital Group in order to provide
lease financing to its client base. Since 1980, TechTeam Capital Group has
arranged over half a billion dollars in leases at Fortune 500 accounts. TechTeam
Capital Group writes leases for computer, telecommunications, and many forms of
capital equipment ranging in lease terms from 2 - 5 years. Project financing is
also available for roll-in or build-out periods from 6 - 12 months. Lease
options include operating leases, direct financing leases, technology refreshes,
and sale/leasebacks.
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Very often, fixed lease payments can be structured to include the costs of other
TechTeam service lines such as training, systems integration and hardware
procurement. In this way, the Company's clients can spread startup costs over
the term of the hardware lease. TechTeam Capital's strategy is based upon
building long-term relationships by providing creative leasing solutions and
focusing on clients' continuing needs.
TechTeam Capital Group accounted for approximately 12% of the Company's total
revenues in 1998.
STRATEGY
The Company intends to continue its growth and maintain its status as a leading
provider of desktop management, help desk, and corporate computer services by
being responsive to, and providing skilled personnel and successful knowledge
practices for its clients to meet their demand for long-term outsourcing
services. The Company firmly believes that its established relationships,
creative solutions and solid performance record positions itself for expanded
growth in existing clients and referral potential for new clients. The principal
strategies for achieving these objectives are as follows:
DESKTOP MANAGEMENT SERVICES:
The Company intends to expand its service offerings around its knowledge and
experience in managing corporate desktop environments. This includes network and
PC installation and maintenance, help desk support and training. With its
experience in help desk operations, TechTeam is able to provide value-added
services to its clients by leveraging the data collected, and offering services
focused on cost reduction, call avoidance and root cause analysis. As companies
today struggle with the increasing need to integrate and update sophisticated
technologies and complex systems, these proactive value-added services provide
new revenue opportunities. Additionally, the Company will continue to utilize
its innovative GCC call management and tracking tool to provide its clients with
virtual help desk capabilities.
FURTHER PENETRATE EXISTING CLIENTS, ATTRACT NEW CLIENTS AND EXTEND SERVICE
LINES:
The Company intends to solidify its position as a preferred vendor of
outsourcing services by continuing to market its desktop management, help desk,
and OEM call center services through further penetration within existing
accounts, pursuing new clients, and the addition of new service offerings.
Historically, many of TechTeam's clients have initially engaged the Company to
provide specific services to a single division or business unit. By working
closely with its clients throughout the life cycle of their IT systems and
products, TechTeam has been able to achieve growth by providing additional
complementary services to its existing clients. The Company believes that it
will continue to capitalize upon these marketing advantages by providing a full
range of services from network design and systems integration to end-user
technical support and documentation.
In 1999, TechTeam will continue to expand its service offerings to satisfy
current market demands. TechTeam envisions growing its client base for its ISO
quality services expertise proven through the successful implementation of
quality software in a major automotive company. TechTeam will market its quality
support offering to the automotive suppliers who must meet quality standards.
TechTeam has a trained, experienced staff that provides high level Microsoft
Windows NT support from consulting through actual implementation. The Company
will begin marketing its NT consulting group in April 1999. A third source of
new product demand is for Enterprise Resource Planning (ERP) support services.
According to the Gartner Group, "the rapidly increasing number of ERP
implementations has created a high demand for ERP outsourcing. While ERPs are
commonly used at package implementation, outsourcing of ERP operation is still
in its early stages." TechTeam plans to capitalize on this market by utilizing
its in-house developed functional and programming experts to provide ERP
consulting services to its clients.
The Company also looks to expand geographically into new markets with its help
desk and desktop management services. The location of new facilities is based on
client request, the labor market and low facility cost. In October 1998,
TechTeam opened an office in Davenport, Iowa.
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CAPITALIZE ON TECHNOLOGY AND TRAINING:
The Company seeks to leverage its investment in sophisticated and specialized
desktop management, help desk, and call center technologies. TechTeam believes
its investment in high-capacity advanced-function PBX phone switches, automated
call distributors, call tracking software, computer-telephone integration,
interactive voice response technology, back-up generators, technician training
programs and facilities are fixed costs that can be spread across a larger
revenue base resulting in increased profit margins. TechTeam's strategy is to
upgrade its existing technologies and acquire or develop other technologies that
complement its technical support functions. For example, TechTeam's Global Call
Center software is continually customized to meet the call tracking needs of its
clients.
The Company believes that its training assets provide three distinct benefits to
TechTeam, each of which offer career pathing and development, improve
productivity and reduce operating costs: (i) staff retention is improved by
continuing to challenge employees and preparing them for advancement; (ii)
professional training is an affordable way to keep employees current on emerging
technologies and business practices; and (iii) cross-trained employees can be
moved between projects to meet client needs and to increase utilization.
PURSUE STRATEGIC ALLIANCES:
TechTeam continually monitors the marketplace for appropriate opportunities to
increase the Company's resources and capabilities. TechTeam intends, where
appropriate, to enter into strategic partnerships with complementary businesses
to increase market share, enlarge its geographic presence, and expand and
complement its existing services. In October 1997, TechTeam entered into the GE
Joint Venture to expand its current service offerings to the OEM and retail
marketplace.
TECHNOLOGY
As a desktop management services outsourcing company, TechTeam relies upon
technology to offer its clients efficient, high quality services. TechTeam has
invested in high performance, scaleable, manageable telecommunications and data
networks and infrastructure. TechTeam's help desks and call centers are equipped
with Aspect ACD's, Dialogic IVR's and other leading call processing technologies
including enhancements to allow innovative and cost effective advanced call
processing capabilities. The Company's help desk and call center sites are
equipped with fault-tolerant fiber-based telecommunication equipment and
networks from leading carriers assuring its clients reliable help desk services.
The Company's web based Global Call Center (GCC) call management system allows a
help desk technician located anywhere in the world (from their home, their
office, while traveling, etc.) to process service tickets quickly through the
World Wide Web or a corporate Intranet via a browser. The GCC utilizes EDI /
E-mail / FTP electronic dispatching. TechTeam continues to invest in its
state-of-the-art technology that features sophisticated telephony, efficient
networks, call distribution software, and productivity management tools.
Accordingly, TechTeam can connect its clients and its clients' customers with a
help desk technician that is an expert in nearly any language and in virtually
any location. The GCC's common back-end, and highly configurable front-end
allows rapid startup of new projects and sites. The Company expects that its
Global Call Center, along with additional investments in knowledge base tools
and technology, will reduce its cost of service by improving the productivity of
its agents.
MARKETING, SALES AND CLIENTS
Beginning in the second half of 1998 and into 1999, TechTeam has placed a
renewed focus on sales and marketing. A new Vice President of Sales was named at
the end of 1998. Along with this change, the Company has hired two high level
Sales Directors to lead our automotive and Enterprise Resource Planning
divisions. In addition to the new sales management team, TechTeam currently
employs 20 sales professionals trained to sell all of its services.
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TechTeam's sales strategy continues to concentrate on understanding and meeting
the business objectives of new and existing clients. To meet these objectives,
the Company has divided the sales and delivery cycle into three key phases.
First, the sales professionals generate new business opportunities; second,
technical sales engineers analyze the client's system requirements and recommend
the best solutions; and third, engagement managers whose responsibilities are to
manage the account and provide a continuous interface between the client and
TechTeam operations. Together, the team works to ensure client satisfaction as
well as look for new opportunities in the Company's existing client base.
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. Until 1996, Ford Motor Company ("Ford") was
TechTeam's largest client. Ford accounted for 22.6%, 21.3% and 13.2% of the
Company's revenues for the years ended December 31, 1996, 1997, and 1998,
respectively. Ford represented significantly higher portions of TechTeam's
revenues in earlier years. In 1996, Hewlett-Packard became TechTeam's largest
client, representing 26.7% of TechTeam's revenues in that year. In 1997 and
1998, Hewlett-Packard accounted for 21.3% and 1.1%, respectively, of the
Company's revenues. In the past several years, DaimlerChrysler Corporation
("DaimlerChrysler") had also become a major client, representing between 5 and
10% of the Company's total revenues in years prior to 1997. The percentage of
total revenues derived from DaimlerChrysler increased to 14.6% and 23.1% in 1997
and 1998, respectively. Additionally, an international provider of shipping
services became a significant client generating 6.5% and 5.8% of total revenues
in 1997 and 1998, respectively. Ford, DaimlerChrysler and the international
provider of shipping services are expected to continue to constitute a high
percentage of TechTeam's revenues for the foreseeable future. In 1997 the GE
Joint Venture represented 1.5% of the Company's revenues; in 1998 that
percentage grew to 20.6% as a result of: (1) A full year's services for the GE
Joint Venture; (2) The sale of the OEM call center product support business to
the GE Joint Venture in March 1998; and (3) The commencement in August 1998 of
OEM call center support by the GE Joint Venture for a major manufacturer of
personal computers.
Management recognizes the need 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. TechTeam's services are not
specific to any single industry and can be beneficial to most large
corporations. TechTeam's technical staffing and training programs cover most of
the popular software applications and can be customized to improve the
productivity of microcomputer users in most companies. TechTeam provided
services to approximately 524 customers in 1998.
The following is a selected list of TechTeam's clients:
- 3Com - Hewlett-Packard Company
- Automobile Club of Michigan - Liberty Mutual Insurance Company
- Bank One - Meritor Automotive
- Blue Cross/Blue Shield of Michigan - Rockwell International
- DaimlerChrysler - Sun Microsystems
- Ford Motor Company - Wayne County, Michigan
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INTELLECTUAL PROPERTY RIGHTS
TechTeam's success is dependent upon certain methodologies it utilizes in
designing and delivering its Corporate Services and OEM Call Center Services.
The Company's business includes the development of custom software in connection
with specific client engagements. Ownership of such software is generally
assigned to the client. The Company also develops certain foundation and
application software products, or software tools, which remain the property of
the Company. Applications for patents have been submitted for certain components
of its proprietary software and end systems.
TechTeam 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
TechTeam 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 TechTeam in this
regard will be adequate to deter misappropriation of proprietary information or
that TechTeam will be able to detect unauthorized use and take appropriate steps
to enforce its intellectual property rights.
Although the Company believes that its services 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, TechTeam 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 are the subject of asserted
infringement.
TechTeam(R) is a service mark that is registered with the United States Patent
and Trademark Office. Support CentralSM is a service mark that has been approved
for registration with the United States Patent and Trademark Office. Federal
servicemark registrations may be renewed indefinitely as long as the underlying
servicemark remains in use. Aside from the foregoing, the Company holds no other
trademarks, servicemarks or patents.
COMPETITION
The Company is engaged in one of the fastest growing Information Technology (IT)
Services Markets. According to Gartner Group projections, the worldwide desktop
outsourcing market is estimated to be $65 billion by 2002, with more than $30
billion inside the U.S. borders alone. The Company's focus in desktop management
services with its corporate help desk division faces high levels of competition.
There are many companies that provide desktop management services or similar
services. Management believes no one company is dominant, however some of these
companies have greater financial resources, more geographic locations, a larger
client base and greater name recognition. In the highly fragmented IT services
markets, the Company competes with several larger competitors, as well as
smaller computer services companies, systems integration firms, temporary
staffing and personnel placement companies, major professional services firms,
computer consulting firms, and divisions of large hardware and software
companies. Historically, many of the Company's clients have provided the
services through their own internal resources. Competition for contracts for a
significant portion of TechTeam's services takes the form of competitive bidding
in response to proposal requests. The Company competes principally on the basis
of quality service, being able to provide a broad range of IT support services,
price, experience and reputation in the industry, technological capabilities,
quality practices, rapid response to client needs and referrals from existing
clients.
The Company believes the following factors give it competitive advantages over
the significant competition that it faces.
- Strong Internationally Recognized Client Base: TechTeam provides services
to large national and multinational clients who have a reputation for
excellence in their market segments. Through these clients, TechTeam has
developed an expertise in solving many of the challenges facing companies
today in their desktop management operations.
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- Qualified Technical Staff: TechTeam understands that the quality of its
professional staff is what ultimately defines it to existing and
potential clients. Accordingly, the Company continues to focus on
developing and retaining high quality talent internally and for its
clients. Because TechTeam employs over 1,700 agents that work with a wide
range of complexity, TechTeam has a solid core of employees to train and
career path to better paying positions. This career path provides a
motivation to remain at TechTeam. The company's clients also benefit from
the skills its technicians develop as they rotate through internal
assignments.
- Multiple Service Offerings: TechTeam has long been recognized for its help
desk capabilities, systems integration, technical staffing, consulting, and
training service offerings. These capabilities provide the foundation for
network and desktop management services TechTeam offers to its clients.
Armed with intelligence derived from the client's help desk and desk-side
support operations, TechTeam is able to offer clients flexible and proactive
solutions to their desktop management outsourcing needs.
- Quality Client-Driven Metrics and Service Excellence: TechTeam's focus is on
the most important part of its business - its clients. As an ISO 9001:1994
certified company, TechTeam follows a well-defined quality system. TechTeam
employs a comprehensive performance tracking system that measures objective
and subjective attributes of service delivery. This process often results in
process improvement and additional cost savings for TechTeam's clients.
- State-of-The-Art Technology: The Company believes that its technology
enables it to maintain its position as a leading provider of IT support
services. As an IT outsourcing company, TechTeam relies upon advanced
technology to offer its clients efficient, high quality desktop management
services. TechTeam's help desk solutions include numerous options for call
management, telecommunication, statistical reporting, knowledgebases, and
real-time Internet accessibility.
While these competitive advantages do not guarantee success, the Company
believes they provide a solid foundation upon which profitability to grow its
business.
HUMAN RESOURCES
As of December 31, 1998, TechTeam had a total of 2,612 employees of which 198
were part-time. The functional responsibilities of these employees are as
follows:
Corporate Services: 643 client support agents and related employees in
corporate help desk/call center services; 245 professionals in technical
staffing; 207 professionals in systems integration; 113 instructors and
related employees in training.
OEM Call Center Services: 1,271 client support agents and related
employees.
TechTeam Capital Group: 33 employees.
Sales and Marketing: 20 employees.
Management and Administration: 80 employees.
TechTeam has experienced no work stoppages and believes its relationship with
its employees is excellent.
EUROPEAN OPERATIONS
TechTeam provides its clients with corporate services in Europe through its two
wholly owned subsidiaries, TechTeam Europe Ltd., located in the United Kingdom,
and National TechTeam Europe, NV, located in Belgium. TechTeam Europe Ltd.
provides its clients with a full range of systems integration services ranging
from Windows NT roll outs to desktop support. It also started to provide a
Central Help Desk for a major automotive manufacturer. In 1998, TechTeam Europe
Ltd. increased its staff size from 18 to 65 employees and developed important
new business with new and existing clients.
National TechTeam Europe, NV provides TechTeam's clients with multi-lingual
corporate services. The Company's multi-lingual help desks provide support for
approximately 16 countries in 11 languages. The technicians provide support for
numerous proprietary applications and standard software. National TechTeam
Europe, NV also provides multi-lingual technical training programs, technical
staffing and systems integration services.
10
11
The Company's net revenue originating from Europe, as a percentage of the
Company's total net revenue, was approximately 3.6 percent in 1998 and 3.2
percent in 1997, the majority of which was from customers other than foreign
governments. Most of the Company's sales in international markets are sales with
clients from the United States. However, the Company makes sales in the European
markets directly from Europe.
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, as well as interest rate risk inherent in
the Company's debt, investment and finance receivable portfolios. The profit
from European operations are being used to fund further expansion. Accordingly,
these risks are manageable.
11
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ITEM 2. PROPERTIES
TechTeam's World Headquarters and executive offices are located in Dearborn,
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 World Headquarters and North American Training 04/01/97 - 03/31/06 62,931
Center Headquarters
Southfield, MI World Call Center Headquarters 11/01/93 - 12/31/00 57,403
and Training Center
Dallas, TX Regional Office and Call Center 02/01/98 - 09/30/03 52,012
Fort Worth, TX Call Center 08/01/97 - 07/30/02 20,400
Harper Woods, MI Call Center 06/15/96 - 06/15/03 17,775
Rochester Hills, MI TechTeam Capital Group Operations 02/01/90 - 05/31/99 16,260
Chicago, IL Regional Office and Call Center 03/01/97 - 02/28/00 13,195
Farmington Hills, MI TechTeam Capital Group Operations 08/01/96 - 07/31/99 6,595
Brussels, Belgium Call Center 08/01/97 - 07/31/06 6,300
Davenport, IA Call Center 10/26/98 - 05/01/99 5,510
Boston, MA Training Center 04/29/98 - 04/30/03 5,308
Chicago, IL Training Center 02/01/98 - 01/31/02 4,287
Edison, NJ Regional Office 03/01/96 - 03/31/01 3,300
Troy, MI Training Center 12/12/98 - 12/31/01 2,526
Omaha, NE WebCentric Operations 01/01/97 - 12/31/01 2,173
Indianapolis, IN Training Center 01/01/96 - 12/31/00 1,881
Chelmsford, England European Headquarters 08/01/97 - 07/31/00 1,645
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 21 well-equipped computer-training
classrooms. However, the Company anticipates that additional call centers or
training centers may be needed in the future due to growth and expansion.
Because some TechTeam services are performed at client sites, the cost of
maintaining multiple offices is minimized.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation incidental to its
business.
The Company and two of its officers, William F. Coyro Jr. and Lawrence A. Mills,
have been named as defendants in a putative consolidated class action filed in
the United States District Court for the Eastern District of Michigan. On
January 22, 1998 four original actions, all filed between August 27 and October
24, 1997, were consolidated into a single action. Plaintiffs in the underlying
actions purport to represent various classes consisting of all persons who
purchased shares of the Company's common stock during certain class periods, the
longest of which was from September 27, 1996 through July 18, 1997. Plaintiffs
allege in their complaints that the Company and the individual defendants
engaged in a scheme to artificially inflate the price of the Company's common
stock by improperly accelerating the recognition of revenue from the licensing
of the Company's proprietary software. Plaintiffs assert claims against all
defendants for alleged violation of Section 10(b) of the Securities Exchange Act
12
13
of 1934 and Rule 10b-5 promulgated thereunder, as well as claims against the
individual defendants for alleged "controlling person" liability under Section
20(a) of the Securities Exchange Act. In December 1998, the Company and the
individual defendants reached an agreement in principle to settle the
consolidated class action lawsuits for the payment of $11 million to the
plaintiffs. The agreement is subject to the completion by the plaintiffs of
confirmatory discovery, the final approval of the Court, and the possibility of
appeal.
In addition, the Company is the subject of a related investigation initiated on
September 9, 1997 by the United States Securities and Exchange Commission
("SEC"). The SEC has stated that the purpose of investigation is to determine
whether the Company may have violated certain provisions of the Securities Act
of 1933 and the Securities Exchange Act of 1934 in connection with its
recognition of revenue from the licensing of its proprietary software. This
investigation is ongoing and the outcome cannot be predicted at this time,
although the Company believes it has complied fully with all applicable
provisions of the federal securities laws.
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 1998.
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
- ------------------------------------------------------------------------ -------------- --------------
1997
First Quarter...................................................... $ 27.625 $ 15.500
Second Quarter..................................................... 25.000 13.250
Third Quarter...................................................... 22.875 9.750
Fourth Quarter..................................................... 9.500 8.000
1998
First Quarter...................................................... 12.000 8.125
Second Quarter..................................................... 10.500 8.500
Third Quarter...................................................... 10.375 5.500
Fourth Quarter .................................................... 8.000 5.313
The Company has never paid any dividends on its common stock and expects for the
foreseeable future to retain all of its earnings from operations for use in
expanding and developing its business. 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 786 shareholders of record as of March 19, 1999.
Since the beginning of 1997, TechTeam made several acquisitions, including
WebCentric Communications, Inc., Compuflex Systems, Inc. and Capricorn Capital
Group, Inc. (Notes I, J and K to the Consolidated Financial Statements). In
connection with these acquisitions, shares of the Company's common stock were
issued without registration under the Securities Act of 1933 (the "Securities
Act") in reliance on Section 4(2) thereof. A further description of the
transactions is contained in the notes accompanying the consolidated financial
statements.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth certain selected consolidated financial data and
is qualified by the more detailed Consolidated Financial Statements and notes
thereto included in Item 8 in this Form 10-K Report. The Statement of Financial
Position Data as of December 31, 1994, 1995, 1996, 1997 and 1998 and the
Statement of Operations Data for each of the five years in the period ended
December 31, 1998 have been derived from the Company's consolidated financial
statements for such years, which have been audited by Ernst & Young LLP,
independent auditors.
- -------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: 1998 1997 1996 1995 1994
----------------------------- ---------- --------- --------- --------- ---------
(In thousands, except per share data)
Revenues
Corporate Services
Corporate help desk services ............. $ 30,672 $ 17,650 $ 9,381 $ 3,534 $ 1,017
Technical staffing ....................... 25,716 25,011 20,907 20,095 16,935
Systems integration ...................... 14,436 12,537 12,819 7,841 5,530
Training programs ........................ 6,622 7,005 7,026 4,018 4,613
--------- --------- --------- --------- ---------
Total Corporate Services .................... 77,446 62,203 50,133 35,488 28,095
OEM Call Center Services .................... 25,376 19,124 22,053 11,589 6,156
TechTeam Capital Group ...................... 14,099 -- -- -- --
--------- --------- --------- --------- ---------
Total revenues .................................. 116,921 81,327 72,186 47,077 34,251
Cost of services delivered ...................... 102,222 72,807 57,176 36,476 26,129
--------- --------- --------- --------- ---------
Gross profit .................................... 14,699 8,520 15,010 10,601 8,122
--------- --------- --------- --------- ---------
Other expenses
Selling, general and administrative ......... 15,909 13,821 10,112 6,080 4,603
Class action litigation and related matters . 3,439 499 -- -- --
Interest expense ............................ 1,484 69 205 79 59
--------- --------- --------- --------- ---------
Total other expenses ............................ 20,832 14,389 10,317 6,159 4,662
--------- --------- --------- --------- ---------
Income/(loss) before interest income ............ (6,133) (5,869) 4,693 4,442 3,460
Interest income (includes $152 gain on sale of
investments in 1994) ........................ 1,845 3,038 937 74 223
--------- --------- --------- --------- ---------
Income/(loss) before tax provisions ............. (4,288) (2,831) 5,630 4,516 3,683
Tax provisions .................................. (540) (873) 2,584 1,892 1,524
--------- --------- --------- --------- ---------
Net income/(loss) ............................... $ (3,748) $ (1,958) $ 3,046 $ 2,624 $ 2,159
========= ========= ========= ========= =========
Basic earnings/(loss) per share ................. $ (0.24) $ (0.12) $ 0.24 $ 0.23 $ 0.21
========= ========= ========= ========= =========
Diluted earnings/(loss) per share ............... $ (0.24) $ (0.12) $ 0.23 $ 0.23 $ 0.20
========= ========= ========= ========= =========
Weighted average number of common shares and common share equivalents outstanding
Basic........................................ 15,913 15,664 12,535 11,362 10,395
Diluted...................................... 15,913 15,664 13,031 11,607 11,053
14
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-----------------------------------------------------------------
DECEMBER 31,
-----------------------------------------------------------------
STATEMENT OF FINANCIAL POSITION DATA: 1998 1997 1996 1995 1994
- ------------------------------------------------ ---------- ---------- --------- --------- ---------
(In thousands)
Current assets................................... $ 52,669 $ 96,307 $ 100,612 $ 17,344 $ 14,286
Current liabilities.............................. 19,632 10,560 9,995 4,981 2,559
Total assets..................................... 118,942 121,289 116,998 26,266 20,260
Long-term liabilities............................ 14,977 1,129 2,483 866 147
Total shareholders' equity....................... 84,334 109,600 104,520 20,419 17,554
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains trend analysis and a number of forward-looking statements.
These statements are based on current expectations and actual results may differ
materially. 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
OVERVIEW
The Company originally commenced operations as a value added reseller of
computer hardware and software that also provided training for its computer
products. During the late 1980's the Company added IT staffing and systems
integration services as a complement to its existing training business. In 1993,
as a result of the Company's growing expertise in providing IT staffing of
on-site help desks, TechTeam entered the call center industry. Today, the
Company's IT outsourcing services cover a broad range of IT, including planning,
design, implementation and support. Although the Company's services are
complementary, TechTeam has divided its service offerings into three divisions,
Corporate Services (corporate help desk services, technical staffing, systems
integration and training programs), OEM Call Center Services, and TechTeam
Capital Group. Revenues from all service offerings are recognized as services
are performed.
Corporate help desk services consist of telephone support for corporate users of
computer hardware, software products and services. TechTeam provides these
services from both its own call centers and at client sites through on-site help
desks to support end-user applications. Corporate help desk services are billed
on a fee per call, fee per time spent on calls or per agent basis, each as
negotiated with clients. The Company licenses clients to use its Global Call
Center, a software product developed by the Company's wholly-owned subsidiary,
WebCentric Communications, Inc. Revenues from these licenses are recognized
either: (1) on a usage basis, when the licenses are granted in connection with
on-going services; (2) as the expenses of the transaction are recognized in
those instances where the license was granted in connection with a
contemporaneous purchase; or (3) 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 services obligation by the Company. Technical staffing includes a
variety of technical services, selected programming and consulting services.
Systems integration consists of desk-side support and network services.
Contracts for technical staffing and systems integration are generally
negotiated on a hourly rate basis or are priced on a project basis. Training
programs consist of instructor-led, computer-based training and distance
learning for a wide range of standard and proprietary applications ranging from
office automation to network products. For training programs, clients pay a fee
per student trained or a fee for classes offered, in some cases with an advance
payment for the cost of the necessary training materials.
15
16
OEM Call Center Services consist of domestic and international telephone support
for the end-user customers of TechTeam's clients. Through the end of the First
Quarter 1998, TechTeam provided OEM Call Center Services which were billed on a
fee per call, fee per time spent on calls or per agent basis, each as negotiated
with clients. Commencing in the Fourth Quarter 1997. TechTeam also provided OEM
Call Center Services on a per agent basis to a joint venture formed with General
Electric Appliances Division ("GEA"). Effective March 31, 1998, the OEM Call
Center business conducted directly by TechTeam was terminated as a result of: 1)
The scheduled expiration of the two largest of the Company's contacts with
Hewlett-Packard; and 2) The sale to GEA of the remaining unexpired contracts
with Hewlett-Packard and a contract with 3Com Corporation. The Company's
decision to sell these OEM call center contacts was consistent with its
strategic direction to concentrate on corporate help desk solutions. As a
result, commencing in the Second Quarter 1998, revenues consist of billings to
the GE TechTeam joint venture and revenues recognized from the sale of the
contacts to GEA in March 1998.
TechTeam Capital Group, acquired in 1998, includes services offered by Capricorn
Capital Group, Inc. (now TechTeam Capital Group, Inc.) and its affiliate,
Capricorn Integrated Technologies Group ("CITG"). Since 1980, TechTeam Capital
Group, Inc. has been providing financing for high technology and capital
equipment in the United States. CITG provides all major brands of computers,
peripherals, and components for the corporate environment, as well as custom
configurations, installation, component level repair, monitor repair, and
remarketing services.
Cost of services delivered consists of direct personnel compensation, statutory
and other benefits associated with such personnel, facility and computer
equipment costs, and other direct costs associated with providing services to
clients. Selling, general and administrative costs consist of sales, marketing
and administrative personnel compensation, statutory and other benefits
associated with such personnel, facility and equipment costs and other indirect
costs associated with the sales, marketing and administrative functions of the
Company.
The following table sets forth the percentage relationship to revenues of
certain items in the Company's Consolidated Statements of Operations:
- --------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
Revenues
Corporate Services
Corporate help desk services........................................ 26.2% 21.7% 13.0%
Technical staffing.................................................. 22.0 30.8 29.0
Systems integration................................................. 12.4 15.4 17.8
Training programs................................................... 5.7 8.6 9.7
-------- -------- ---------
Total Corporate Services............................................... 66.3 76.5 69.5
OEM Call Center Services............................................... 21.7 23.5 30.5
TechTeam Capital Group................................................. 12.0 -- --
-------- -------- ---------
Total revenues............................................................. 100.0 100.0 100.0
Cost of services delivered................................................. 87.4 89.5 79.2
-------- -------- ---------
Gross profit............................................................... 12.6 10.5 20.8
-------- -------- ---------
Other expenses
Selling, general and administrative.................................... 13.6 17.0 14.0
Class action litigation and related matters............................ 2.9 .6 --
Interest expense....................................................... 1.3 .1 .3
-------- -------- ---------
Total other expenses....................................................... 17.8 17.7 14.3
-------- -------- ---------
Income/(loss) before interest income....................................... (5.2) (7.2) 6.5
Interest income............................................................ 1.5 3.7 1.3
-------- -------- ---------
Income/(loss) before tax provision......................................... (3.7) (3.5) 7.8
Tax provision.............................................................. (.5) (1.1) 3.6
-------- -------- ---------
Net income/(loss).......................................................... (3.2)% (2.4)% 4.2%
======== ======== =========
16
17
The Company believes that its growth has benefited from the trend among large
corporations to outsource much of their information technology needs and
TechTeam's ability to provide services that address a broad range of those
needs. The Company believes that the outsourcing trend will continue and will
provide continuing opportunities for all of its service offerings. TechTeam
further believes that its service offerings are influenced substantially by its
clients' desires to focus on their core businesses and to leave information
technology needs to the Company for which information technology is its core
business. TechTeam's training programs have encountered cyclical enrollment
trends, influenced by the timing and extent to which clients are upgrading desk
top software.
TechTeam's business is based on client relationships with major corporations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors Affecting Future Results -- Impact of Business with Major
Clients."
COMPARATIVE PERFORMANCE -- 1998 VERSUS 1997
TechTeam earned a net loss of ($3,747,820) or ($0.24) per share, for 1998 as
compared to a net loss of ($1,957,843), or ($0.12) per share, for 1997.
REVENUES
TechTeam's total revenues increased by $35,594,259 in 1998 to $116,921,194, a
43.8% increase over revenues in 1997. Changes in revenues resulted from the
following:
Corporate Services
Corporate help desk services
Revenues from corporate help desk services increased by $13,022,238 in
1998. This was a 73.8% increase over corporate help desk services
revenues in 1997. The increase was due to new business with both existing
and new customers, primarily DaimlerChrysler and Liberty Mutual Insurance
Company.
Technical Staffing
Revenues from technical staffing increased by $705,040 in 1998. This was
a 2.9% increase over technical staffing revenues in 1997.
Systems Integration
Revenues from systems integration increased by $1,899,020 in 1998. This
was a 15.2% increase from systems integration revenues in 1997. This
increase was due to increased hardware sales and related services.
Training Programs
Revenues from training programs decreased by $383,229 in 1998. This was a
5.5% decrease from training revenues in 1997. This decrease was due to
decreased enrollments in the Company's training programs.
OEM CALL CENTER SERVICES
Revenues from OEM Call Center Services increased by $6,252,333 in 1998. This
was a 32.7% increase over OEM Call Center Services revenues in 1997. The
increase was primarily driven by revenues for services provided to the Company's
joint venture with GEA which aggregated $24,033,185 for 1998 and $1,236,843 for
1997. On March 31, 1998, the Company sold its OEM call center contracts,
consisting of its remaining unexpired contracts with Hewlett-Packard Corporation
and a contract with 3Com Corporation, to GEA for $1.4 million. GEA then
contributed those contacts to the GE Joint Venture for an agreed value of $1.4
million and an agreement that GEA shall receive all the joint venture's earnings
from these contracts until GEA has recovered the $1.4 million. TechTeam is
recognizing the gain related to this sale as the joint venture records earnings
on the contracts. Such earnings amounted to $944,932 for 1998.
17
18
TechTeam Capital Group
In January 1998, TechTeam acquired TechTeam Capital Group, Inc. The revenues
since acquisition are reported in this category.
COST OF SERVICES DELIVERED
The cost of services delivered increased by $29,415,515 in 1998. This was a
40.4% increase over the cost of services delivered in 1997. The increase was due
principally to compensation costs for an increased number of technical
personnel, statutory and other benefits associated with such personnel, facility
and computer equipment costs, and other direct costs associated with providing
an increased volume of services to clients. These costs were 87.4% and 89.5% of
revenues in 1998 and 1997, respectively. The decrease was due primarily to costs
incurred in 1997 for the start-up of new projects for which the costs did not
recur in 1998.
OTHER EXPENSES
Selling, general and administrative
Selling, general and administrative expenses increased by $2,087,380 in
1998. This was a 15.1% increase from selling, general and administrative
expenses in 1997. These expenses were 13.6% of revenues in 1998 compared
with 17.0% of revenues in 1997. This decrease was due primarily to growth
in revenues without a corresponding expansion of TechTeam's
administrative infrastructure.
Class action litigation and related matters
In late December 1998, TechTeam announced that it had reached an
agreement in principle to settle all of the consolidated class action
lawsuits that were brought against the Company and certain of its current
and former officers and directors. In connection with this settlement,
the Company recorded a charge in 1998 of $3,282,049 for legal and
settlement expenses. The settlement is subject to certain contingencies,
including, but not necessarily limited to, final court approval. See
Notes to the Consolidated Financial Statements, Legal Proceedings.
Interest expense
In January 1998, TechTeam acquired TechTeam Capital Group, Inc. which had
financed its leasing activities through use of various forms of long-term
debt. The interest costs of this debt are reported in this category.
INTEREST INCOME
Commencing in October 1996, TechTeam began earning significant amounts of
interest income on cash generated by the September 1996 public stock offering.
For 1998, interest income was $1,845,014 compared to $3,038,555 in 1997. The
decline in interest income between 1997 and 1998 results from increased use of
cash for operations and repurchase of Company shares. (See Liquidity and Capital
Resources.)
TAX PROVISION
TechTeam recognized ($1,233,247) of Federal income tax credit in 1998, resulting
in an effective tax rate of 34.3% compared to an effective tax rate of 39.7% for
1997. The 1998 and 1997 effective tax rates differ due to changing amounts of
permanent book/tax differences, primarily goodwill and tax-exempt interest. The
Michigan single business tax and other state taxes in 1998 were $692,934, with
an effective tax rate of (16.2)% compared to an effective rate of (7.6)% in
1997. These taxes are tied more closely to factors other than pre-tax income
which inflates the effective tax rate when income is lower and reduce the tax
benefit when income is negative as in 1997 and 1998.
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COMPARATIVE PERFORMANCE -- 1997 VERSUS 1996
TechTeam reported a net loss of ($1,957,843), or ($0.12) per share, for 1997 as
compared to net income of $3,046,190, or $0.24 per share, for 1996.
REVENUES
TechTeam's total revenues increased by $9,140,779 in 1997 to $81,326,935, a
12.7% increase over revenues in 1996. Changes in revenues resulted from the
following:
Corporate Services
Corporate help desk services
Revenues from corporate help desk services increased by $8,269,547 in
1997. This was a 88.2% increase over corporate help desk services
revenues in 1996. This increase was due to new business with both
existing and new customers, primarily with DaimlerChrysler and an
international provider of shipping services.
Technical Staffing
Revenues from technical staffing increased by $4,103,607 in 1997. This
was a 19.6% increase over technical staffing revenues in 1996. The
increase was due to continued client demand for TechTeam's computer
services personnel at major accounts.
Systems Integration
Revenues from systems integration decreased by $281,832 in 1997. This was
a 2.2% decrease in systems integration revenues in 1996.
Training Programs
Revenues from training programs decreased by $21,794 in 1997. This was a
.3% decrease in training revenues in 1996.
OEM Call Center Services
Revenues from OEM Call Center Services decreased by $2,928,749 in 1997. This
was a 13.3% decrease in OEM Call Center Services revenues in 1997. The decrease
was primarily driven by a reduction in the volume of services provided to
Hewlett-Packard.
COST OF SERVICES DELIVERED
The cost of services delivered increased by $15,630,598 in 1997. This was a
27.3% increase over the cost of services delivered in 1996. The increase was due
principally to compensation costs for an increased number of technical
personnel, statutory and other benefits associated with such personnel, facility
and computer equipment costs, and other direct costs associated with providing
an increased volume of services to clients. These costs were 89.5% and 79.2% of
revenues in 1997 and 1996, respectively. The increase in these ratios is
attributable to reduced revenues per call, costs incurred for the ongoing
customization of the Company's Global Call Center and those costs related to the
start-up of several new projects during the year for which revenues did not grow
as rapidly as expected, and, for one project, which the Company terminated
shortly after it commenced due to it not being profitable.
19
20
OTHER EXPENSES
Selling, general and administrative
Selling, general and administrative expenses increased by $3,708,731 in
1997. This was a 36.7% increase over selling, general and administrative
expenses in 1996. The increase was due principally to compensation costs
for an increased number of sales and administrative personnel, statutory
and other benefits associated with such personnel, facility and equipment
costs, and other indirect costs needed to support the growth of the
Company. These expenses were 17.0% of revenues in 1997 compared with
14.0% of revenues in 1996. This increase was due primarily to expansion
of TechTeam's administrative infrastructure to support anticipated growth
of the Company.
Class action litigation and related matters
In the fourth quarter 1997, TechTeam incurred legal and accounting fees
in connection with civil litigation and an investigation by the
Securities and Exchange Commission. Both of these matters commenced in
the third quarter of 1997.
INTEREST INCOME
Commencing in October 1996, TechTeam began earning significant amounts of
interest income on cash generated by the September 1996 public stock offering.
For 1997, interest income was $3,038,555 compared to $937,234 in 1996 reflecting
a full year's availability of cash from the 1996 public stock offering.
TAX PROVISION
TechTeam recognized $(1,053,042) of Federal income tax credit in 1997, resulting
in an effective tax rate of 39.7% compared to an effective tax rate of 38.1% for
1996. The 1997 and 1996 effective tax rates differ due to changing amounts of
permanent book/tax differences, primarily goodwill and tax-exempt interest. The
Michigan single business tax and other state taxes in 1997 were $179,800 with an
effective tax rate of (7.6)% compared to an effective rate of 12.6% in 1996.
These taxes are tied more closely to factors other than pre-tax income which
inflate the effective tax rate when income is lower and reduce the tax benefit
when income is negative as in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Over the three year period commencing January 1, 1996, the Company's business
has been financed by cash provided by operations, shares issued throughout the
period under stock option plans and $77,851,500 from a public offering in 1996.
Indicators of the Company's financial strength are summarized below:
- ---------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------ --------------------
Working capital.................................................... $ 33,037,505 $ 85,747,934
Current ratio...................................................... 2.7 9.1
Debt as a percentage of total capitalization....................... 15.4% 0.1%
Shareholders' equity............................................... $ 84,333,958 $ 109,600,197
The Company's working capital was $33,037,505 at December 31, 1998, a decrease
of 61.5% from December 31, 1997; the decrease primarily resulting from the
repurchase of Company common stock -- see below and the impact of the
acquisition of leasing operations. Available cash will be used for general
corporate purposes, including domestic and international call center expansion,
capital expenditures, working capital, acquisitions and stock repurchases under
the Company's stock repurchase program.
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Early in 1998, TechTeam acquired TechTeam Capital Group, Inc. Currently, the
Company has no arrangements or understandings with respect to any material
acquisitions, although it continually monitors acquisition opportunities.
As a result of the acquisition of TechTeam Capital Group, debt aggregating
$15,335,496 at December 31, 1998 is now included in the consolidated financial
statements. TechTeam Capital Group had financed its leasing activities through
use of various forms of long-term debt, primarily non-recourse debt. Since its
acquisition by TechTeam, TechTeam has provided the financing. Prior to this
acquisition TechTeam had no significant debt outstanding.
In February 1998, the Board of Directors of the Company authorized a stock
repurchase program. The program provided for the open market and other purchase
of up to 1,500,000 shares of the Company's stock. The Company repurchased
1,500,000 shares under this program for $14,863,799 in 1998.
In May 1998, the Board of Directors of the Company authorized another stock
repurchase program. The program provided for the open market and other purchase
of up to 1,000,000 shares of the Company's stock. The Company repurchased
1,000,100 shares under this program for $9,075,000 in 1998.
In August 1998, the Company announced a third stock repurchase program to
purchase up to an additional 2,000,000 shares of common stock during the period
ending August 26, 1999, unless extended. By December 31, 1998, the Company had
repurchased 641,800 shares for $4,256,382.
TechTeam has line-of-credit agreements with NBD Bank which provide for
short-term borrowings of up to $25,000,000; the line-of-credit is unsecured. NBD
Bank borrowings are at the prime rate. There were no borrowings under this line
during the year ended December 31, 1998.
POTENTIALLY UNREALIZABLE ASSETS
The Company's statement of financial position includes amounts related to
certain assets created by Compuflex prior to its acquisition by TechTeam; the
net book value of these assets at December 31, 1998 is $1,474,235. The assets
consist of:
- A contractual right to obtain from Compuflex's affiliate in India,
personnel trained in personal computer skills. This right was originally
recorded by Compuflex at the discounted present value of salary cost
savings expected to be realized because of the availability of these
personnel. The capitalized value is being amortized over the term of the
contract which expires on July 31, 2004.
- Software tools used by Compuflex in the delivery of its services to
clients. These tools were purchased by Compuflex at an agreed upon price
for development by a related party. The capitalized value is being
amortized over 7 years ending March 31, 2003.
The realizability of these assets is dependent upon the Company continuing to
utilize the Indian subsidiary as a source of personnel and to use the software
tools in the delivery of its services. It is management's opinion that the
Company will continue to realize the value of these assets.
At December 31, 1998, the Company had recorded a net deferred tax asset of
$1,761,923, which includes $1,432,043 related to net operating loss
carryforwards which expire in 2018 and $494,733 related to alternative minimum
tax credit carryforwards which do not expire. The realizability of the deferred
tax assets is dependent upon the Company returning to profitability and
generating regular taxable income in amounts sufficient to utilize the
carryforwards.
Over the past two years, the Company has generated tax losses of approximately
$8,300,000. It is management's opinion that the Company will generate taxable
income in 1999. Management's opinion is based on the following factors:
- From the second quarter 1991 through the third quarter 1996, the Company
had consistently been profitable. From 1991 through 1996, taxable income
aggregated approximately $14,500,000.
- The losses incurred in 1997 were primarily attributable to a temporary
decline in the growth rate in business activity. The Company spent
substantial amounts diversifying its client base so that growth could
continue on a basis consistent with prior years and the Company would be
better positioned to deliver more profitable business due to concentrating
on corporate business that historically has provided better profit margins.
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- The losses incurred in 1998 resulted substantially from the settlement
costs associated with the class action suit initiated against the Company
in the third quarter 1997 and the write-off of non-performing assets due to
merger related activities.
For 1999, the Company is forecasting a return to profitability as a result of
new contracts put in place and efforts that have been, and continue to be,
underway to reduce costs.
YEAR 2000 DISCLOSURE
TechTeam has a Year 2000 ("Y2K") Steering Committee reporting directly to the
CEO and the Board of Directors. The Steering Committee is charged with
evaluating TechTeam's risks, recommending solutions and implementing the
solution to the various problems that exist, and monitoring the remediation
efforts. The entire management of TechTeam is responsible to assure that the
changes necessary are made to achieve readiness for the Year 2000. TechTeam is
engaged in a comprehensive effort to meet the Year 2000 problems.
In order to evaluate its progress, TechTeam has established four phases
necessary to assure readiness: 1) inventory - identify key business areas
potentially affected by Y2K concerns; 2) analysis - determine the impact and
preparation of a plan to address the issue; 3) remediation - making the
necessary changes to bring the system into compliance; and 4) validation -
testing to ensure compliance.
TechTeam began the inventory process of its worldwide business systems in 1997
to determine their compliance. This process was conducted by a team of internal
employees in cooperation with OEM hardware and software manufacturers. In 1998,
the scope of the inventory was expanded to include facilities and
non-information technology related systems and equipment. As of December 31,
1998, TechTeam has identified substantially all internal systems having
potential Year 2000 issues.
Analysis of systems critical to the delivery of TechTeam's services, which are
within TechTeam control, to address Y2K issues has been completed on 90% of
critical systems. Of these critical systems, about 70% have been remedied.
TechTeam expects to complete the analysis, remediation and validation of its
critical systems by June 30, 1999. Analysis of non-critical systems has been
completed on 90 % of these systems. TechTeam expects to complete the analysis,
remediation and validation of its non-critical systems by August 31, 1999.
TechTeam has replaced its non-compliant financial system. It spent $2.3 million,
which was capitalized to be amortized over 7 years, to replace the financial
system. TechTeam estimates that it will spend an additional $250,000 to $500,000
in 1999 to complete its Y2K project. As necessary, the Company will refine these
estimates in the future. These expenses may not include all of the cost of
implementing contingency plans, which are in the process of being developed.
These estimates also do not include any litigation or warranty costs related to
Y2K issues because they cannot be reasonably estimated.
Use of independent verification and validation processes consistent with
industry standards will be utilized to insure complete uninterrupted operability
on critical systems.
The most likely IT "worst case scenario" would be the failure of a telephone
switch at one of TechTeam's support centers. The most likely non-IT "worst case
scenario" would be loss of operation at one of TechTeam's support centers due to
environmental or security considerations. The recovery procedure in either
scenario would be to divert traffic to another center, which could take 2 to 4
hours. It is worth noting that less than 1 percent of TechTeam's weekly support
center traffic occurs on weekends, such as the first two days of January 2000.
Significant impact to TechTeam, and its clients for such a failure would not
occur until 08:00 EST, Monday, January 3, 2000, which gives TechTeam additional
time to react on behalf of itself and its' clients. In all other lines of
business, the service can continue, without interruption, for several weeks
without interface to TechTeam's IT or non-IT systems.
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FACTORS AFFECTING FUTURE RESULTS
LITIGATION:
As noted in Item 3, the Company has been sued for alleged violations of Section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder, as well as claims against the individual defendants for alleged
"controlling person" liability under Section 20(a) of the Securities Exchange
Act. The Company has reached an agreement in principle to resolve these suits.
It is possible that these lawsuits will not be resolved on the terms proposed by
the parties. The failure of the completion of the settlement could have material
adverse effect on the Company's financial condition, results of operations and
cash flows.
RISKS INHERENT IN LEASING:
The acquisition of TechTeam Capital Group has introduced the Company to a new
type of risk: the uncertainty of the residual value of equipment leased to
clients. Given the rapid pace of technological change, it is difficult to
determine, at the time of the lease, the value of the equipment after the
expiration of the lease because the value of the equipment often depends upon
the use of the equipment after the expiration of the lease. For example,
computer equipment is leased for two years. Following the completion of the
lease term, the client can either 1) return the equipment, 2) purchase the
equipment from the Company, or 3) re-lease the equipment for varying lengths of
time. Depending on the decision of the client, the Company could be faced with
the possibility of having over or under valued the residual value of the
equipment. Accordingly, this uncertainty could result in fluctuations in the
performance of TechTeam Capital Group.
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. Until 1996, Ford Motor Company ("Ford") was
TechTeam's largest client. Ford accounted for 22.6%, 21.3% and 13.2% of the
Company's revenues for the years ended December 31, 1996, 1997, and 1998,
respectively. In 1996, Hewlett-Packard became TechTeam's largest client,
representing 26.7% of TechTeam's revenues in that year. In 1997 and 1998,
Hewlett-Packard accounted for 21.3% and 1.1%, respectively, of the Company's
revenues. In the past several years, DaimlerChrysler Corporation
("DaimlerChrysler") had also become a major client, representing between 5 and
10% of the Company's total revenues in years prior to 1997. The percentage of
total revenues derived from DaimlerChrysler increased to 14.6% and 23.1% in 1997
and 1998, respectively. Additionally, an international provider of shipping
services became a significant client generating 6.5% and 5.8% of total revenues
in 1997 and 1998, respectively. Ford, DaimlerChrysler and the international
provider of shipping services are expected to continue to constitute a high
percentage of TechTeam's revenues for the foreseeable future. In 1997 the GE
Joint Venture represented 1.5% of the Company's revenues; in 1998 that
percentage grew to 20.6 % as a result of: (1) A full year's services for the GE
Joint Venture; (2) The sale of the OEM call center product support business to
the GE Joint Venture in March 1998; and (3) The commencement in August 1998 of
OEM call center support by the GE Joint Venture for a major manufacturer of
personal computers.
Management recognizes the need 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. TechTeam's services are not
specific to any single industry and can be beneficial to most large
corporations. TechTeam's technical staffing and training programs cover most of
the popular software applications and can be customized to improve the
productivity of microcomputer users in most companies. TechTeam provided
services to approximately 524 customers in 1998.
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The following table sets forth certain information relating to TechTeam's
customers accounting for more than 5% of revenues in any of the past three
years.
- -----------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996
------------- -------------- -------------
DaimlerChrysler
Revenues for the year.............................. $ 27,058,728 $ 11,890,335 $ 5,485,038
Percentage increase from prior year................ 127.6% 116.8% 31.8%
Percentage of total revenues....................... 23.1% 14.6% 7.6%
GE TechTeam, L.P.
Revenues for the year.............................. $ 24,033,185 $ 1,236,843 $ --
Percentage increase from prior year................ 1,843.1% --* --
Percentage of total revenues....................... 20.6% 1.5% --
Ford Motor Company
Revenues for the year.............................. $ 15,448,011 $ 17,336,957 $ 16,311,769
Percentage increase/(decrease) from prior year..... (10.9%) 6.3% 4.7%
Percentage of total revenues....................... 13.2% 21.3% 22.6%
International provider of shipping services
Revenues for the year.............................. $ 6,749,456 $ 5,265,504 $ 2,423,552
Percentage increase from prior year................ 28.2% 117.3% --*
Percentage of total revenues....................... 5.8% 6.5% 3.4%
Wayne County, Michigan
Revenues for the year.............................. $ 5,792,696 $ 4,899,148 --
Percentage increase from prior year................ 18.2% --* --
Percentage of total revenues....................... 5.0% 6.2% --
Hewlett-Packard Company
Revenues for the year.............................. $ 1,343,205 $ 17,361,703 $ 19,266,318
Percentage increase/(decrease) from prior year..... (92.3%) (9.9%) 165.0%
Percentage of total revenues....................... 1.1% 21.3% 26.7%
* First year of business relationship
Services provided to Ford and DaimlerChrysler consist of contract computer
end-user support including on-site help desks and call center services,
programming services, documentation services and classroom training programs.
TechTeam provides these services to virtually all Ford divisions and two
finance-related Ford subsidiaries. Services provided to Hewlett-Packard and the
international provider of shipping services were technical product post-sales
support provided from TechTeam call center sites.
Revenues from Hewlett-Packard first commenced in mid-1995 with the award of the
first contract for call center services. The first full year of services under
that contract was 1996. Additional contracts were awarded in 1996. The contracts
terminated in 1998.
ABILITY TO MANAGE GROWTH:
The Company has experienced significant growth in the past several years and
anticipates continued growth from industry trends toward increases in
information technology and in the outsourcing of services provided by the
Company. TechTeam expects this continued growth to place a significant strain on
the Company's resources. These resources could be further strained from the
necessity to attract and retain qualified management personnel to manage the
growth and operations of the Company's business. TechTeam cannot give any
assurance that the Company will have sufficient resources to be able to continue
its historic growth rate or that it will be able adequately to manage that
growth. The failure to do so could have a material adverse effect on operating
results.
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YEAR 2000 COMPLIANCE:
Date sensitive computer applications that currently record years in a two-digit,
rather than a four-digit, format may be unable to properly categorize and
process dates occurring after December 31, 1999 (the "Year 2000" problem). The
Company does not expect to incur significant additional costs to make its
software programs and operating systems Year 2000 compliant. However, if Year
2000 related failures were to occur in the Company's computer and information
systems the Company could incur significant, unanticipated liabilities and
expenses. In addition, the Company is in the process of determining whether
other companies with whom the Company does business are Year 2000 compliant. The
failure of any such company to be Year 2000 compliant could have a material
adverse effect on the Company.
COMPETITION:
The Company faces intense competition in both the help desk and call center
markets. In the call center market, the Company competes with other call center
companies, some of which have substantially greater resources including more
call center locations, greater financial resources, a larger client base and
more name recognition. In the corporate computer services market, the Company
competes with many entities including systems implementation firms, application
software firms, staffing firms, large professional services firms, facilities
management firms and computer consulting firms. Many of these firms have far
greater resources, clients and name recognition than the Company. Many of the
Company's customers purchase information technology services primarily from a
limited number of preferred vendors. In addition, many of the Company's
customers use a competitive bidding process in selecting their vendors. As a
result, the Company has experienced and continues to anticipate significant
pricing pressure from these customers in order to remain a preferred vendor.
The Company also faces significant competition in both markets from its own
clients and potential clients whose internal resources represent a fixed cost to
the client. Such competition may impose additional pricing pressures on the
Company. There can be no assurance that the Company will compete successfully
with its existing competitors or with any new competitors.
JOINT VENTURE OPERATIONS:
The Company is a party to a joint venture with General Electric Appliance. The
Company provides personnel and services to the joint venture as a vendor and
also participates as a joint venture partner in the operating results of the
joint venture. The operations of the joint venture are subject to a number of
risks, uncertainties and general economic and market conditions, many of which
parallel those faced by the Company. In addition, the Company is dependent upon
its co-venturer for many facets of the joint venture's operations, particularly
those relating to administrative and financial accounting functions. Each of the
foregoing factors has a significant impact upon the ultimate results realized by
the Company from the joint venture's operations and its business relationship
with the joint venture.
CONTRACT RISKS:
The great majority of the Company's contracts are terminable without cause on
short notice, often upon 90 days notice. Other of the Company's contracts expire
on set dates and may not be renewed or replaced. 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. Although the Company has entered into
employment and noncompetition agreements with certain of its executive officers,
the Company's continued growth and success also depends in part on its ability
to attract and retain qualified managers and on the ability of its executive
officers and key employees to manage its operations successfully. 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. TechTeam cannot assure
that it will be able to attract and retain sufficient numbers of qualified
employees in the future. The failure to do so could have a material, adverse
effect on the Company's business, operating results and financial condition.
PROJECT RISKS:
Many of the Company's engagements involve projects that are critical to the
operations of its clients' businesses and provide benefits that may be difficult
to quantify. The Company's failure or inability to meet a client's expectations
in the performance of its services could result in a material adverse change to
the client's operations and therefore could give rise to claims against the
Company or damage the Company's reputation, adversely affecting its relationship
with its client, its business, operating results and financial condition.
VARIABILITY OF QUARTERLY OPERATING RESULTS:
Variations in the Company's revenue and operating results occur from time to
time as a result of a number of factors, such as the significance of client
engagements commenced and completed during a quarter, the number of business
days in a quarter and employee hiring and utilization rates. The timing of
revenues is difficult to forecast because the Company's sales cycle can be
relatively long and may depend on factors such as the size and scope of
assignments and general economic conditions. Because a high percentage of the
Company's expenses are relatively fixed, a variation in the number of clients,
assignments or the timing of the initiation or the completion of client
assignments, can cause significant variations in operating results from quarter
to quarter and could result in losses to the Company. In addition, the Company's
engagements generally are terminable by the client without penalty.
CYCLICALITY:
Certain of the Company's clients and potential clients are in industries, such
as the automobile and financial services industries, that experience cyclical
variations in profitability, which may in turn affect their willingness or
ability to fund systems projects such as those for which the Company may be
engaged. The Company's experience indicates, however, that competitive pressures
in cyclical industries could compel businesses to undertake projects even during
periods of losses or reduced profitability.
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
similar event. The Company has taken precautions to protect itself from events
that could interrupt its operations, including off-site storage of back-up data,
contractual arrangements for back-up facilities with a leading disaster recovery
services company and Halon fire suppression systems in the data centers (which
are designed to extinguish a fire without damaging computer equipment). No
assurance can be given that such precautions will be adequate, and operations
may still be interrupted, even for extended periods. In addition, the on-line
services provided by the Company are dependent on telecommunications links to
the regional Bell operating companies for which the Company currently has no
back-up. 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 with current limits of $2 million may not be adequate to compensate
the Company for all losses that may occur.
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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. The
Company has acquired several significantly smaller companies in the past and
believes that it has been successful in integrating the acquired assets and
businesses into the Company's operations. There can be no assurance, however,
that future acquisitions will be consummated on acceptable terms or that any
acquired assets or business will be successfully integrated into the Company's
operations. Further, 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. In addition, there can be no assurance that products or
technologies developed by others will not render the Company's services
uncompetitive or obsolete. The Company's failure to address these developments
could have a material adverse effect on the Company's business, operating
results and financial condition.
INTELLECTUAL PROPERTY RIGHTS:
The Company's success is dependent upon certain methodologies it utilizes in
designing, installing and integrating computer software and information systems
and other proprietary intellectual property rights. The Company's business
includes the development of custom software in connection with specific client
engagements. Ownership of such software is generally assigned to the client. The
Company also develops certain foundation and application software products, or
software "tools," which remain the property of the Company.
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 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 which is the subject
of asserted infringement.
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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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of National TechTeam, Inc. and
Subsidiaries are included in Item 8:
- ---------------------------------------------------------------------------------------------------------------------
PAGE
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Report of Ernst & Young LLP, Independent Auditors........................................................... 30
Consolidated Statements of Operations-- Years Ended December 31, 1998, 1997 and 1996........................ 31
Consolidated Statements of Comprehensive Income / (Loss) -- Years Ended December 31,
1998, 1997 and 1996......................................................................................... 31
Consolidated Statements of Financial Position-- December 31, 1998 and December 31, 1997..................... 32-33
Consolidated Statements of Shareholders' Equity-- Years Ended December 31, 1998, 1997 and 1996.............. 34
Consolidated Statements of Cash Flows-- Years Ended December 31, 1998, 1997 and 1996........................ 35
Notes to the Consolidated Financial Statements.............................................................. 36-54
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.
Financial statements of GE TechTeam, L.P. are included pursuant to the requirements of Item 14(d)........... 55-65
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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, 1998 and 1997 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, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on those
financial statements based on our audits. The financial statements of GE
TechTeam, L.P. (an entity in which the Company has a 49% interest), 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, L.P., it is based solely on their report.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits 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, 1998 and 1997, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Detroit, Michigan
February 23, 1999
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NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1998 1997 1996
------------- ------------- -------------
REVENUES
Corporate Services
Corporate help desk services ................................. $ 30,672,583 $ 17,650,345 $ 9,380,798
Technical staffing ........................................... 25,715,884 25,010,844 20,907,237
Systems integration .......................................... 14,435,733 12,536,713 12,818,545
Training programs ............................................ 6,621,747 7,004,976 7,026,770
------------- ------------- -------------
Total Corporate Services ........................................ 77,445,947 62,202,878 50,133,350
OEM Call Center Services ........................................ 25,376,390 19,124,057 22,052,806
TechTeam Capital Group .......................................... 14,098,857 -- --
------------- ------------- -------------
TOTAL REVENUES ...................................................... 116,921,194 81,326,935 72,186,156
COST OF SERVICES DELIVERED .......................................... 102,222,133 72,806,618 57,176,020
------------- ------------- -------------
GROSS PROFIT ........................................................ 14,699,061 8,520,317 15,010,136
------------- ------------- -------------
OTHER EXPENSES
Selling, general and administrative ............................. 15,908,879 13,821,499 10,112,768
Class action litigation and related matters ..................... 3,438,886 498,966 --
Interest expense ................................................ 1,484,443 69,492 204,813
------------- ------------- -------------
TOTAL OTHER EXPENSES ................................................ 20,832,208 14,389,957 10,317,581
------------- ------------- -------------
INCOME/(LOSS) BEFORE INTEREST INCOME ................................ (6,133,147) (5,869,640) 4,692,555
INTEREST INCOME ..................................................... 1,845,014 3,038,555 937,234
------------- ------------- -------------
INCOME/(LOSS) BEFORE TAX PROVISION .................................. (4,288,133) (2,831,085) 5,629,789
TAX PROVISION/(CREDIT) .............................................. (540,313) (873,242) 2,583,599
------------- ------------- -------------
NET INCOME/(LOSS) ................................................... $ (3,747,820) $ (1,957,843) $ 3,046,190
============= ============= =============
BASIC EARNINGS/(LOSS) PER SHARE ..................................... $ (0.24) $ (0.12) $ 0.24
============= ============= =============
DILUTED EARNINGS/(LOSS) PER SHARE ................................... $ (0.24) $ (0.12) $ 0.23
============= ============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON SHARE EQUIVALENTS
OUTSTANDING:
Basic ........................................................... 15,913,226 15,663,716 12,534,564
Net effect of dilutive stock options ............................ -- -- 326,735
------------- ------------- -------------
Diluted ......................................................... 15,913,226 15,663,716 12,861,299
============= ============= =============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME / (LOSS)
- ------------------------------------------------------------------------------------------------------
NET INCOME / (LOSS), AS SET FORTH ABOVE ............ $(3,747,820) $(1,957,843) $ 3,046,190
OTHER COMPREHENSIVE INCOME, NET OF TAX
Reclassification adjustment .................... 61,822 -- --
Unrealized loss on securities available for sale -- (61,822) --
Foreign currency transaction adjustments ....... 78,666 (22,830) --
----------- ----------- -----------
TOTAL OTHER COMPREHENSIVE INCOME / (LOSS) .......... 140,488 (84,652) --
----------- ----------- -----------
COMPREHENSIVE INCOME / (LOSS) ...................... $(3,607,382) $(2,042,495) $ 3,046,190
=========== =========== ===========
See accompanying notes.
31
32
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
- --------------------------------------------------------------------------------------
DECEMBER 31,
-----------------------------
ASSETS 1998 1997
- ---------------------------------------------------- ------------ ------------
CURRENT ASSETS
Cash and cash equivalents ...................... $ 22,696,221 $ 24,927,348
Securities available-for-sale .................. -- 39,094,615
Accounts receivable ............................ 23,803,577 26,479,816
Refundable income tax .......................... 3,152,754 2,466,777
Inventories .................................... 811,563 218,622
Prepaid expenses and other ..................... 1,704,217 2,781,777
Deferred income tax ............................ 500,751 338,532
------------ ------------
52,669,083 96,307,487
------------ ------------
PROPERTY, EQUIPMENT AND PURCHASED SOFTWARE
Office furniture and equipment ................. 20,713,594 18,428,968
Purchased software ............................. 4,923,651 2,997,919
Leasehold improvements ......................... 2,081,149 1,600,133
Transportation equipment ....................... 291,566 297,154
------------ ------------
28,009,960 23,324,174
Less-- Accumulated depreciation and amortization 15,690,879 9,599,982
------------ ------------
12,319,081 13,724,192
------------ ------------
OTHER ASSETS
Assets of leasing operations ................... 29,765,374 --
Intangibles .................................... 13,268,037 7,324,064
Advance to TechTeam Capital Group, Inc. ........ -- 604,002
Investment in GE Joint Venture ................. 883,125 --
Deferred income tax ............................ 8,585,065 1,689,334
Other .......................................... 1,452,338 1,639,582
------------ ------------
53,953,939 11,256,982
------------ ------------
TOTAL ASSETS ....................................... $118,942,103 $121,288,661
============ ============
See accompanying notes.
32
33
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
- --------------------------------------------------------------------------------------------------
DECEMBER 31,
-------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
- -------------------------------------------------------------- ------------- -------------
CURRENT LIABILITIES
Accounts payable ......................................... $ 4,107,175 $ 3,707,985
Accrued payroll, related taxes and withholdings .......... 4,269,473 4,350,863
Deferred income tax ...................................... 62,920 466,880
Deferred revenues and unapplied receipts ................. 1,625,031 1,353,398
Accrued expenses and taxes ............................... 1,145,125 533,391
Current portion of notes payable ......................... 8,023,606 --
Other .................................................... 398,248 147,036
------------- -------------
19,631,578 10,559,553
------------- -------------
LONG-TERM LIABILITIES
Notes payable ............................................ 7,244,855 --
Deferred Global Call Center license fees ................. 403,707 813,205
Deferred income tax ...................................... 7,260,973 195,941
Other long-term liabilities .............................. 67,032 119,765
------------- -------------
14,976,567 1,128,911
------------- -------------
SHAREHOLDERS' EQUITY
Preferred stock, par value $.01
Authorized -- 5,000,000 shares
None issued
Common stock, par value $.01
Authorized -- 45,000,000 shares
Issued:
16,703,800 shares at December 31, 1998 ............. 167,038
16,037,700 shares at December 31, 1997 ............. 160,377
Additional paid-in capital ............................... 111,414,245 105,586,223
Retained earnings ........................................ 761,199 4,509,019
Accumulated other comprehensive income / (loss) .......... 55,836 (84,652)
------------- -------------
Total .................................................... 112,398,318 110,170,967
Less-- Treasury stock (124,474 shares at December 31, 1997
and 3,179,226 shares at December 31, 1998) ............ 28,064,360 570,770
------------- -------------
Total shareholders' equity ............................... 84,333,958 109,600,197
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................... $ 118,942,103 $ 121,288,661
============= =============
See accompanying notes.
33
34
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
OTHER
ADDITIONAL RETAINED COMPREHENSIVE
PAID-IN EARNINGS INCOME / (LOSS) TREASURY
COMMON STOCK CAPITAL STOCK
------------ ------------- ----------- --------------- -------------
Balance at January 1, 1996 ................ $ 118,399 $ 17,823,203 $ 3,384,872 $ -- $ (907,008)
Proceeds from public offering of
3,225,000 shares of common
stock @ $24.14, net of
underwriters discount .............. 32,250 77,819,250 -- -- --
Proceeds from issuance of 289,100
shares under stock option plans .... 2,891 778,469 -- -- --
Shares issued to acquire:
Coup, Inc. ......................... 800 259,200 -- -- --
U.S.A. Computer Training
Centers, Inc. ................... 65 76,277 -- -- --
Tax benefit from exercise of employee
stock options and other ............ -- 1,654,579 -- -- --
Contribution to 401(k) plan and other . -- 225,702 -- -- 169,260
Adjustment to retained earnings to
align year-ends of pooled entities . -- -- 35,800 -- --
Net income for 1996 ................... -- -- 3,046,190 -- --
------------ ------------- ----------- ------------ ------------
Balance at December 31, 1996 .............. 154,405 98,636,680 6,466,862 -- (737,748)
Proceeds from issuance of 328,542
shares under stock option plans .... 3,285 1,320,431 -- -- --
Shares issued to acquire:
WebCentric Communications, Inc. .... 2,708 3,992,475 -- -- --
Drake Technologies, Inc. ........... 23 49,980 -- -- --
Remaining 25% interest in National
TechTeam Europe, N.V ............ 40 51,212 -- -- --
Purchase of minority shares of
Compuflex Systems, Inc. ............ (84) (146,250) -- -- --
Tax benefit from exercise of employee
stock options and other ............ -- 1,241,562 -- -- --
Contribution to 401(k) plan and other . -- 440,133 -- -- 166,978
Net loss for 1997 ..................... -- -- (1,957,843) -- --
Other comprehensive loss for 1997 ..... -- -- -- (84,652) --
------------ ------------- ----------- ------------ ------------
Balance at December 31, 1997 .............. 160,377 105,586,223 4,509,019 (84,652) (570,770)
Proceeds from issuance of 166,100
shares under stock option plans .... 1,661 633,074 -- -- --
Shares issued to acquire Capricorn
Capital Group, Inc. ................ 5,000 4,870,000 -- -- --
Tax benefit from exercise of employee
stock options and other ............ -- 309,721 -- -- --
Contribution to 401(k) plan and other . -- 15,227 -- -- 702,317
Purchase of common stock .............. -- -- -- -- (28,195,907)
Net loss for 1998 ..................... -- -- (3,747,820) -- --
Other comprehensive income for 1998 ... -- -- -- 140,488 --
------------ ------------- ----------- ------------ ------------
Balance at December 31, 1998 .............. $ 167,038 $ 111,414,245 $ 761,199 $ 55,836 $(28,064,360)
============ ============= =========== ============ ============
See accompanying notes.
34
35
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996
----------- ----------- -------------
OPERATING ACTIVITIES
Net income/(loss) ....................................... $(3,747,820) $(1,957,843) $ 3,046,190
Adjustments to reconcile net income/(loss) to net cash
provided by/(used in) operating activities:
Depreciation ...................................... 6,090,897 4,346,452 2,736,975
Amortization ...................................... 11,110,803 2,201,456 205,569
Provision for uncollectible accounts receivable ... 437,798 445,900 265,500
Treasury stock contributed to 401(k) plan ......... 717,544 607,111 394,962
Provision for deferred income tax ................. (807,588) (1,081,501) (603,624)
Deferred Global Call Center license fees .......... (409,501) (1,236,795) 2,050,000
(Gain)/loss on sales of equipment and other ....... -- 409,389 (17,860)
Net undistributed earnings of affiliates .......... (57,563) -- --
Changes in current assets and liabilities:
Accounts receivable ........................... 3,936,459 (3,692,464) (9,447,815)
Inventories ................................... 268,377 428,943 121,980
Prepaid expenses and other current assets ..... 2,146,661 (1,555,534) (735,115)
Accounts payable .............................. (7,895,528) (593,088) 3,185,398
Accrued payroll, related taxes and withholdings (81,390) 769,253 1,571,508
Federal income tax ............................ (685,977) (1,053,316) (1,573,577)
Deferred revenues and unapplied receipts ...... (1,680,331) 1,097,458 182,157
Accrued expenses and taxes .................... (124,113) (340,938) 874,329
Other current liabilities ..................... (383,619) (172,736) (689,866)
------------- ------------- -------------
Net cash provided by/(used in) operating activities 8,835,109 (1,378,253) 1,571,711
------------- ------------- -------------
INVESTING ACTIVITIES
Purchases of property, equipment and software ........... (819,485) (6,757,654) (9,567,746)
Purchase of leased equipment ............................ (16,345,157) -- --
Net decrease investment in direct financing leases and
residuals ............................................. 1,095,686 -- --
Purchases of securities available-for-sale .............. (103,541,639) (34,751,823) (27,169,703)
Proceeds from sales of securities available-for-sale .... 142,636,254 22,826,911 --
Investment in affiliates ................................ (739,275) -- (804,516)
Purchase of subsidiaries, net of cash acquired .......... 278,667 (2,865,483) --
Advance to TechTeam Capital Group, Inc. ................. -- (604,002) --
Collection of note receivable ........................... -- -- 155,555
Proceeds from sales of property and equipment ........... -- 46,885 11,000
Other-- net ............................................. 43,015 (216,949) 59,359
------------- ------------- -------------
Net cash provided by/(used in) investing activities .. 22,608,066 (22,322,115) (37,316,051)
------------- ------------- -------------
FINANCING ACTIVITIES
Proceeds from short-term borrowings ..................... -- -- 8,116,575
Proceeds from long-term borrowings ...................... 8,150,977 -- 480,212
Proceeds from issuance of common stock .................. 634,735 1,323,716 79,210,360
Tax benefit from exercise of employee stock options ..... 309,721 1,241,562 1,654,579
Purchase of Company common stock ........................ (28,195,907) (146,334) --
Payments on short-term borrowings ....................... -- (299,400) (8,024,359)
Payments on long-term borrowings ........................ (14,652,493) (258,000) (919,174)
Other ................................................... 78,665 (46,225) --
------------- ------------- -------------
Net cash provided by/(used in) financing activities .. (33,674,302) 1,815,319 80,518,193
------------- ------------- -------------
Increase/(decrease) in cash and cash equivalents ..... (2,231,127) (21,885,049) 44,773,853
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .............. 24,927,348 46,812,397 2,038,544
============= ============= =============
CASH AND CASH EQUIVALENTS AT END OF YEAR .................... $ 22,696,221 $ 24,927,348 $ 46,812,397
============= ============= =============
See accompanying notes.
35
36
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., its wholly-owned subsidiaries and the Company's interest in National
TechTeam Europe, N.V., a 75%-owned joint venture for 1996 and a wholly-owned
subsidiary for 1997 and 1998. Collectively, these companies are referred to as
the "Company" or "TechTeam." Intercompany accounts and transactions have been
eliminated. Certain reclassifications have been made to the 1997 and 1996
financial statements in order to conform to the 1998 financial statement
presentation.
CASH AND CASH EQUIVALENTS:
Cash includes both interest bearing and non-interest bearing deposits which are
available on demand. Cash equivalents include all liquid investments with a
maturity of three months or less when purchased, including money market funds
held at banks.
SECURITIES AVAILABLE-FOR-SALE:
The Company's management determines the appropriate classification of securities
at the time of purchase and re-evaluates such designation as of each balance
sheet date. Securities available-for-sale are stated at fair value with the
unrealized gains and losses, net of tax, reported as a separate component of
shareholders' equity. Unrealized losses, net of tax, at December 31, 1997 were
$61,822. Securities available-for-sale were invested primarily in obligations of
states and other political subdivisions.
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.
36
37
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,
---------------------------
AMORTIZATION PERIOD
1998 1997 (STRAIGHT LINE BASIS)
----------- ----------- ---------------------
Intangible lease asset ........ $ 7,310,616 $ -- 3 years
Global Call Center-- see Note I 5,408,081 5,408,081 7 years
Goodwill ...................... 6,497,542 3,280,915 5 to 10 years
Other software tools .......... 1,714,819 1,670,139 7 years
----------- -----------
20,931,058 10,359,135
Less: Accumulated amortization 7,663,021 3,035,071
----------- -----------
$13,268,037 $ 7,324,064
=========== ===========
In the allocation of the purchase price of TechTeam Capital Group (See Note K),
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 will be
amortized over the related lease terms.
Goodwill represents the excess cost over the fair value of net assets acquired.
The carrying value of goodwill will be reviewed if the facts and circumstances
suggest that it may be impaired. In 1998, the unamortized amounts that the
Company had recorded as goodwill related to its acquisition of WebCentric
Communications, Inc. and Drake Technologies, Inc. were written off when
determined to be impaired. The write-offs aggregated $710,000 and were recorded
in the fourth quarter 1998. The impairment resulted from the loss of certain
employees, the loss of certain contracts and the inability of the Company to
realize the benefits expected to be created between the employees of the
acquired companies and the other assets acquired. The amount of the write off is
included in "Cost of services delivered' in the Consolidated Statement of
Operations and in the "Amortization of goodwill" in Note O - Segment Reporting.
Certain costs are incurred by the Company to develop software tools. These tools
are utilized in providing information technology support services to customers.
37
38
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. Under the terms of certain OEM Call Center
Services contracts, clients are required to pay certain amounts at the
commencement of the contract, which payments are non-refundable and as to which
the Company has no further service obligation. Amounts billed under this
provision of such contracts aggregated $618,100 in 1996; these amounts were
recognized as revenues when billed. No such amounts were billed in 1997 and
1998. The Company has also licensed customers to use its Global Call Center, a
software product developed by the Company's wholly-owned subsidiary, WebCentric
Communications, Inc. Revenues from these licenses are recognized either: (1) on
a usage basis, when the licenses are granted in connection with on-going
services; (2) as the expenses of the transaction are recognized in those
instances where the license was granted in connection with a contemporaneous
purchase; or (3) 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. The adoption of AICPA Statement of Position 97-2,
"Software Revenue Recognition," had no effect on the Company.
DEFERRED REVENUE:
TechTeam receives advance payments from clients under certain lease and
maintenance agreements. These payments are recognized as revenues when earned.
At December 31 these amounts are expected to be earned in the subsequent year.
See "Revenue recognition" regarding deferred Global Call Center license fees.
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 used. 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.
38
39
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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.
39
40
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE B -- DESCRIPTION OF THE BUSINESS
The Company provides corporate services, OEM call center services, and financing
for high technology and capital equipment for major companies on an
international scale. Revenues and accounts receivable from clients for which
revenues exceeded 5% of total revenues for any of the periods presented are
summarized as follows.
- -------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996
-------------- ------------- --------------
DaimlerChrysler
Revenues for the year..................................... $ 27,058,728 $ 11,890,335 $ 5,485,038
Accounts receivable at end of year........................ 4,358,767 3,362,522 1,843,888
GE TechTeam, L. P.
Revenues for the year..................................... 24,033,185 1,236,848 --
Accounts receivable at end of year........................ 1,525,220 1,733,542 --
Ford Motor Company
Revenues for the year..................................... 15,448,011 17,336,957 16,311,769
Accounts receivable at end of year........................ 3,628,430 3,438,586 5,052,263
International Provider of Shipping Services
Revenues for the year..................................... 6,749,456 5,265,504 2,423,552
Accounts receivable at end of year........................ 476,863 664,465 1,017,502
Wayne County, Michigan
Revenues for the year..................................... 5,792,696 4,899,148 --
Accounts receivable at end of year........................ 2,145,204 2,392,531 --
Hewlett-Packard Company
Revenues for the year..................................... 1,343,205 17,361,703 19,266,318
Accounts receivable at end of year........................ -- 2,612,113 3,104,422
Allowances for potentially uncollectible accounts receivable were as follows:
December 31, 1998 -- $952,935; December 31, 1997 -- $787,175. The Company
generally does not require collateral from its clients.
40
41
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,
1998
---------------------------------
Equipment leased to others under operating leases:
Cost...................................................... $ 35,389,965
Less--Accumulated depreciation............................ 13,488,862 $ 21,901,103
---------------
Net investment in direct financing leases, consisting of:
Total minimum lease payments receivable................... 6,596,637
Estimated residual values of leased property
(unguaranteed)......................................... 863,707
Unearned income........................................... (890,885)
Initial direct costs...................................... 40,734 6,610,193
---------------
Net investment in lease residuals............................. 1,254,078
--------------
$ 29,765,374
==============
Future lease revenues anticipated under noncancelable operating leases at
December 31, 1998 are:
- --------------------------------------------------------------------------------
YEAR AMOUNT
- -------------------------------------------------------------- --------------
1999.......................................................... $ 9,514,722
2000.......................................................... 6,981,234
2001.......................................................... 2,815,886
2002.......................................................... 173,591
2003 ......................................................... 45,651
2004.......................................................... 706
--------------
Total......................................................... $ 19,531,790
==============
Minimum lease payments receivable under direct financing leases at December 31,
1998 are:
- --------------------------------------------------------------------------------
YEAR AMOUNT
- --------------------------------------------------------------- --------------
1999.......................................................... $ 3,187,883
2000.......................................................... 1,962,125
2001.......................................................... 1,003,159
2002.......................................................... 289,747
2003 ......................................................... 92,093
2004 and thereafter, through 2007............................. 61,630
==============
$ 6,596,637
==============
41
42
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 $2,842,220 in
1998, $2,440,544 in 1997, and $2,028,618 in 1996.
Minimum future payments under noncancelable operating leases with initial terms
of one year or more at December 31, 1998 were:
- --------------------------------------------------------------------------------
YEAR AMOUNT
- -------------------------------------------------------------- ------------
1999.......................................................... $ 3,500,914
2000.......................................................... 3,202,845
2001.......................................................... 2,299,854
2002.......................................................... 2,110,866
2003 ......................................................... 1,755,615
2004 and thereafter, through 2007............................. 2,562,698
------------
$ 15,432,792
============
NOTE E -- SHORT-TERM FINANCING ARRANGEMENTS
The Company has agreements with NBD Bank which provide for short-term borrowings
of up to $25,000,000; the line-of-credit is unsecured. NBD Bank borrowings are
at the prime rate. There were no borrowings under this line at December 31, 1998
or 1997.
Interest expense and paid on short-term borrowings was $-0- in 1998, $69,492 in
1997, and $204,813 in 1996.
42
43
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE F -- NOTES PAYABLE
Notes payable at December 31, 1998 consist of:
INTEREST AMOUNT
RATES PAYABLE
------------- -------------
Nonrecourse debt to financial institutions 6.0% - 12.0 % $ 12,311,579
Nonrecourse debt to others 2,496,941
Other 7.0 - 9.2 459,941
-------------
$ 15,268,461
=============
The Company finances a portion of its lease transactions by assigning the
noncancellable 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, 1998, the carrying value of the pledged assets is approximately
$12,000,000. The notes mature from 1999 through 2003.
Future minimum payments of notes payable debt are as follows:
- ------------------------------------------------------------------------------
YEAR AMOUNT
- -------------------------------------------------------------- -------------
1999 ........................................................ $ 8,023,606
2000 ........................................................ 4,589,393
2001 ........................................................ 2,107,147
2002 ........................................................ 363,730
2003 ........................................................ 184,585
Total ........................................................ =============
$ 15,268,461
=============
Interest paid on notes payable was approximately $1,700,000 in 1998.
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 $697,151 in 1998, $623,839 in 1997, and $350,425
in 1996. The Company's matching contributions are credited only to the National
TechTeam Stock Fund for the benefit of each participant.
43
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NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE H -- TAX PROVISIONS
Tax provisions are as follows:
- ----------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
----------- ----------- ------------
Federal income tax:
Currently payable / (recoverable) $ (905,274) $ 109,158 $ 2,555,823
Deferred (credit) ............... (327,973) (1,162,200) (681,224)
----------- ----------- -----------
Total ........................... (1,233,247) (1,053,042) 1,874,599
Michigan single business tax ........ 496,102 155,600 709,000
Other state taxes ................... 196,832 24,200 --
=========== =========== ===========
Total provision / (credit) .......... $ (540,313) $ (873,242) $ 2,583,599
=========== =========== ===========
Tax payments ........................ $ 2,346,237 $ 727,641 $ 2,310,000
=========== =========== ===========
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,
---------------------------------------------
1998 1997 1996
----------- ----------- -----------
Income tax at Federal statutory rate of 34% ......... $(1,693,561) $(1,023,701) $ 1,673,068
Goodwill, intangibles and other permanent differences 328,669 20,912 225,721
Other ............................................... 131,646 (50,253) (24,190)
----------- ----------- -----------
$(1,233,247) $(1,053,042) $ 1,874,599
=========== =========== ===========
The principal components of deferred income tax balances are as follows:
- -------------------------------------------------------------------------------------------------------------
DECEMBER 31,
-------------------------------------------------------
1998 1997
------------------------- ---------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
Net operating loss carryforward ................. $1,432,043 $ -- $ -- $ --
Alternative minimum tax credit carryforward ..... 494,733 -- -- --
Allowance for uncollectible accounts receivable . 346,579 -- 282,246 --
Global Call Center software ..................... 730,753 141,366 1,689,334 --
Leasing accounting .............................. 5,674,426 1,831,497 -- --
Prepaid expenses ................................ -- 31,971 -- 102,480
Accelerated tax depreciation .................... -- 5,008,781 -- 184,215
Other ........................................... 407,282 310,278 56,286 376,126
---------- ---------- ---------- ----------
$9,085,816 $7,323,893 $2,027,866 $ 662,821
========== ========== ========== ==========
At December 31, 1998, for federal income tax purposes, the Company had a
$4,211,892 net operating loss carryforward which expires in 2018 and a $494,733
alternative minimum tax credit carryforward which does not expire.
44
45
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE I -- ACQUISITION OF WEBCENTRIC COMMUNICATIONS, INC.
TechTeam acquired 15% of the shares of WebCentric Communications, Inc.
("WebCentric") in September 1996 and the remaining 85% of the shares on January
3, 1997. The transaction was structured as a cash and stock for stock exchange.
Cash totaling $2,330,449 and 270,848 shares (valued at $3,995,183) of TechTeam's
unrestricted and restricted common stock were issued. The purchase method of
accounting was used to record the acquisition and $1,000,000 was recorded as
goodwill and $5,408,081 was allocated to the software tool known as the Global
Call Center -- see Note A, Intangibles.
NOTE J -- ACQUISITION OF COMPUFLEX SYSTEMS, INC.
On July 30, 1997, the Company acquired Compuflex Systems, Inc. ("Compuflex"),
currently known as National TechTeam of New Jersey, Inc. The Company acquired
98% of the issued and outstanding shares of Compuflex's common stock in exchange
for 509,034 shares of common stock of the Company at the ratio of one Company
share for each 7.01 shares of Compuflex. The remaining 2% of the issued and
outstanding shares of Compuflex were acquired for cash of $146,334. The market
value of the common stock and cash used in the acquisition approximated $8.5
million. Outstanding Compuflex stock options were converted into options to
purchase 170,470 shares of the Company's common stock.
This acquisition has been accounted for as a pooling of interests and,
accordingly, the consolidated financial statements include the accounts of
Compuflex for all periods presented.
Prior to the combination, Compuflex's fiscal year ended July 31. In recording
the pooling of interests combination, Compuflex's financial statements for the
twelve months ended January 31, 1997 were combined with National TechTeam's
financial statements for the year ended December 31, 1996.
NOTE K-- ACQUISITION OF TECHTEAM CAPITAL GROUP, INC.
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. The accompanying December 31, 1998 balance
sheet reflects an allocation of the purchase price. Goodwill resulting from the
transaction is being amortized using the straight-line method over a period of
10 years.
Unaudited pro forma results of operations for the year ended December 31, 1997,
assuming the transaction took place on January 1, 1997 are as follows:
1997
-------------
Net revenues............................... $ 103,373,087
Gross profit............................... 7,887,441
Net loss................................... (2,214,822)
Net loss per common share.................. (0.14)
The pro forma results are not necessarily indicative of the actual results if
the transactions had been in effect in 1997. In addition, they are not intended
to be a projection of future results and do not reflect, among other things, any
synergies that might have been achieved from combined operations.
45
46
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE L -- RELATED PARTY TRANSACTIONS
TechTeam was involved in the following related party transactions:
a) Paid legal fees of $233,570 in 1997 and $306,641 in 1996 to law firms
whose members included directors, officers or shareholders of TechTeam
in those respective years.
b) Paid $245,979 in 1997 and $480,488 in 1996 for employee travel expenses
to a travel agency owned 50% by an individual who was a TechTeam
director in those respective years.
c) Paid $147,819 in 1998, $122,660 in 1997 and $59,626 in 1996 for rental
expense for an office building leased from a former Executive Officer.
d) The Company leases space and certain property and equipment to the GE
Joint Venture. At December 31, 1998, the gross amount of property and
equipment under capital leases was $2,168,767. Rental income from
operating leases was $466,878 and $265,513 in 1998 and 1997,
respectively. Future minimum cash receipts under noncancelable
operating leases (with initial or remaining lease terms in excess of
one year) and capital leases as of December 31, 1998 are:
----------------------------------------------------------------------------------------------------
CAPITAL OPERATING
YEAR LEASES LEASES
------------------------------------------------------------ ------------ -------------
1999 ...................................................... $ 1,304,842 $ 267,513
2000 ...................................................... 1,304,842 267,513
2001 ...................................................... 1,087,884 267,513
2002 ...................................................... 698,265 267,513
2003 ...................................................... 541,059 267,513
------------ -------------
Total minimum cash receipts................................ $ 4,936,892 $ 1,337,565
============ =============
46
47
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE M -- 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 1996 through 1998: 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
.776; and a weighted-average expected life of the option of three years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
--------------- -------------- --------------
Pro forma net income/(loss)................................... $ (5,737,181) $ (3,979,297) $ 2,328,090
Pro forma earnings/(loss) per share
Basic..................................................... $ (0.39) $ (0.25) $ 0.19
Diluted................................................... $ (0.39) $ (0.25) $ 0.18
The pro forma effect on net income 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 effects will not be fully
reflected until 2000.
47
48
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE M-- STOCK OPTIONS (continued)
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, 1996 . 821,765 668,912 $ 4.22 150,000 $ 6.27 2,853 $ 35.05
Granted ............ 759,707 606,165 20.09 139,275 11.02 14,267 4.94
Exercised .......... (289,100) (259,100) 2.71 (30,000) 5.55 -- --
Canceled ........... (117,500) (57,500) 19.37 (60,000) 5.00 -- --
Outstanding at
December 31, 1996 1,174,872 958,477 13.76 199,275 10.10 17,120 9.96
Granted ............ 502,496 462,496 12.27 40,000 23.00 -- --
Exercised .......... (328,542) (204,275) 3.06 (110,000) 6.24 (14,267) 4.94
Canceled ........... (108,500) (108,500) 21.11 -- --
Outstanding at
December 31, 1997 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(1) 846,466 $ 10.39 159,275 $ 9.21 2.853 $ 35.05
(1) The following table summarizes certain information about stock options
outstanding at December 31, 1998:
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
- ------------------ ------------------ ----------------- ------------------ ----------------- -----------------
$ 2.00 - $ 7.71 154,252 2.1 $ 5.19 86,856 $ 5.62
9.00 - 13.75 459,500 4.0 10.16 89,650 10.33
20.00 - 25.75 391,996 3.0 25.06 195,374 25.00
35.05 2,853 2.0 35.05 2,853 35.05
48
49
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE N -- STOCK BUY-BACK PROGRAMS
In February 1998, the Company announced a stock repurchase program to purchase
up to 1,500,000 shares of common stock during the period ending August 15, 1998,
unless extended. The Company repurchased 1,500,000 shares under this program for
$14,863,799 in 1998.
In May 1998, the Company announced a second stock repurchase program to purchase
up to an additional 1,000,000 shares of common stock during the period ending
November 26, 1998, unless extended. The Company repurchased 1,000,100 shares
under this program for $9,075,726 in 1998.
In August 1998, the Company announced a third stock repurchase program to
purchase up to an additional 2,000,000 shares of common stock during the period
ending August 26, 1999, unless extended. By December 31, 1998, the Company had
repurchased 641,800 shares for $4,256,382.
NOTE O -- SEGMENT REPORTING
The Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information, during the fourth quarter of 1998. SFAS No. 131
established standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
established standards for related disclosures about products and services, and
geographic areas. 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 Chairman, 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 TechTeam
Capital Group. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Overview" for a description of each business
segment.
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.
49
50
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE O -- SEGMENT REPORTING (continued)
- ------------------------------------------------------------------------------------------------------------------------
CORPORATE SERVICES
----------------------------------------------------------------
CORPORATE OEM CALL TECHTEAM
HELP DESK TECHNICAL SYSTEMS TRAINING CENTER CAPITAL
SERVICES STAFFING INTEGRATION PROGRAMS TOTAL SERVICES GROUP TOTAL
----------- ----------- ----------- ----------- ----------- ----------- ------------ ------------
1998
Revenues..........$30,672,583 $25,715,884 $14,435,733 $ 6,621,747 $77,445,947 $25,376,390 $ 14,098,857 $116,921,194
Gross profit...... 2,088,087 4,070,938 3,539,946 353,995 10,052,966 2,300,965 5,663,915 18,017,846
Depreciation and
amortization... 1,649,966 1,383,496 776,678 356,135 4,166,275 1,376,551 9,488,278 15,031,104
Segment assets.... 16,070,102 6,895,028 6,119,084 2,126,195 31,210,409 8,660,881 41,388,447 81,259,737
Expenditures for
property....... 643,371 539,467 302,850 138,868 1,624,556 536,758 300,880 2,462,194
1997
Revenues..........$17,650,345 $25,010,844 $12,536,713 $ 7,004,976 $62,202,878 $19,124,057 $ -- $ 81,326,935
Gross
profit/(loss)..... (2,920,073) 6,892,220 626,565 417,710 6,932,827 6,932,827 -- 11,949,249
Depreciation and
amortization... 1,397,707 1,358,821 681,399 380,470 3,818,397 600,532 -- 4,418,929
Segment assets.... 19,652,994 10,934,022 8,410,443 3,136,557 42,134,016 10,284,759 -- 52,418,775
Expenditures for
property....... 1,947,666 1,893,479 949,510 530,174 5,320,829 836,825 -- 6,157,654
1996
Revenues..........$ 9,380,798 $20,907,237 $12,818,545 $ 7,026,770 $50,133,350 $22,052,806 $ -- $ 72,186,156
Gross
profit/(loss)..... (1,708,614) 5,897,084 465,559 931,118 5,585,147 9,621,558 -- 15,206,705
Depreciation and
amortization... 350,718 781,291 479,134 262,498 1,873,641 824,186 -- 2,697,827
Segment assets.... 10,242,255 8,503,452 7,512,403 4,446,312 30,704,422 9,960,783 -- 40,665,205
Expenditures for
property....... 1,224,307 2,727,379 1,672,592 916,347 6,540,625 2,877,121 -- 9,417,746
50
51
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE O -- 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:
1998 1997 1996
--------------- ---------------- ---------------
Gross Profit
Total gross profit for reportable segments............. $ 18,017,816 $ 11,949,249 $ 15,206,705
Less: Amortization of goodwill......................... 1,995,989 1,882,259 196,569
Cost of Global Call Center development........... 1,322,766 1,546,673 --
-------------- --------------- --------------
Total gross profit................................... $ 14,699,061 $ 8,520,317 $ 15,010,136
============== =============== ==============
Depreciation and amortization (other than goodwill)
Total for reportable segments.......................... $ 15,031,104 $ 4,418,929 $ 2,697,827
Depreciation of Corporate assets....................... 174,607 246,720 48,148
-------------- --------------- --------------
Total depreciation and amortization................. $ 15,205,711 $ 4,665,649 $ 2,745,975
============== =============== ==============
Assets
Total assets for reportable segments................... $ 81,259,737 $ 52,418,775 $ 40,665,205
Corporate assets....................................... 37,682,366 68,869,886 76,333,113
-------------- --------------- --------------
Total assets........................................ $ 118,942,103 $ 121,288,661 $ 116,998,318
============== =============== ==============
NOTE P -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly consolidated results of operations are summarized as follows:
- -------------------------------------------------------------------------------------------------------------------
QUARTER ENDED
--------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------------- ---------------- ---------------- ---------------
1996
Revenues................................ $ 15,573,611 $ 17,494,127 $ 19,687,472 $ 19,460,846
Income before tax provision............. 1,619,731 1,649,456 1,887,692 472,910
Net income.............................. 941,331 932,756 1,095,692 76,411
Earnings per share...................... 0.08 0.08 0.09 0.00
1997
Revenues................................ $ 18,576,592 $ 19,433,198 $ 20,019,438 $ 23,297,707
Loss before tax provision............... (330,863) (333,697) (1,873,492) (293,033)
Net loss................................ (364,353) (226,397) (1,201,228) (165,865)
Loss per share.......................... (0.02) (0.01) (0.08) (0.01)
1998
Revenues................................ $ 26,457,007 $ 27,496,103 $ 30,431,544 $ 32,536,460
Income/(loss) before tax provision...... 444,459 1,212,455 (139,332) (5,660,590)
Net income/(loss)....................... 141,059 521,390 (167,303) (4,147,183)
Earnings/(loss) per share............... 0.01 0.04 (0.01) (0.30)
Quarterly earnings per share may not add to annual earnings per share because of
rounding and new shares issued during the year.
51
52
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE P -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (continued)
Amounts previously reported have been revised as described below:
- ------------------------------------------------------------------------------------------------------------------------------
FOR THE PERIODS ENDED
------------------------------------------------------------------
JUNE 30, 1998 SEPTEMBER 30, 1998
------------------------------ ------------------------------
QUARTER SIX MONTHS QUARTER NINE MONTHS
------------ ------------ ------------ ------------
Revenues
As previously reported ............................ $ 27,666,174 $ 54,123,261 $ 31,306,544 $ 85,429,805
Decrease to recorded revenues primarily related to
earnings of and billings to the GE Joint Venture (170,071) (170,071) (875,000) (1,045,071)
------------ ------------ ------------ ------------
As revised ........................................ $ 27,496,103 $ 53,953,190 $ 30,431,544 $ 84,384,734
============ ============ ============ ============
Cost of services delivered
As previously reported ............................ $ 22,251,403 $ 44,795,397 $ 26,301,063 $ 71,096,460
Increase to recorded expenses primarily related to
health care costs and earnings of the GE Joint
Venture......................................... 302,091 302,091 894,497 1,196,588
------------ ------------ ------------ ------------
As revised ........................................ $ 22,553,494 $ 45,097,488 $ 27,195,560 $ 72,293,048
============ ============ ============ ============
Income/(loss) before tax provisions
As previously reported ............................ $ 1,684,617 $ 2,129,076 $ 1,630,165 $ 3,759,242
Impact of amounts described above ................. (472,162) (472,162) (1,769,497) (2,241,659)
------------ ------------ ------------ ------------
As revised ........................................ $ 1,212,455 $ 1,656,914 $ (139,332) $ 1,517,583
============ ============ ============ ============
Tax provisions
As previously reported ............................ $ 851,600 $ 1,155,000 $ 629,600 $ 1,784,600
Impact of amounts described above ................. (160,535) (160,535) (601,629) (762,164)
------------ ------------ ------------ ------------
As revised ........................................ $ 691,065 $ 994,465 $ 27,971 $ 1,022,436
============ ============ ============ ============
Net income / (loss)
As previously reported ............................ $ 833,017 $ 974,076 $ 1,000,565 $ 1,974,642
Impact of amounts described above ................. (311,627) (311,627) (1,167,868) (1,479,495)
------------ ------------ ------------ ------------
As revised ........................................ $ 521,390 $ 662,449 $ (167,303) $ 495,147
============ ============ ============ ============
Earnings / (loss) per share
As previously reported ............................ $ 0.06 $ 0.06 $ 0.07 $ 0.13
Impact of amounts described above ................. (0.02) (0.02) (0.08) (0.10)
------------ ------------ ------------ ------------
As revised ........................................ $ 0.04 $ 0.04 $ (0.01) $ 0.03
============ ============ ============ ============
52
53
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE Q -- LEGAL PROCEEDINGS
The Company and two of its officers, William F. Coyro Jr. and Lawrence A. Mills,
have been named as defendants in a putative consolidated class action filed in
the United States District Court for the Eastern District of Michigan. On
January 22, 1998 four original actions, all filed between August 27 and October
24, 1997, were consolidated into a single action. Plaintiffs in the underlying
actions purport to represent various classes consisting of all persons who
purchased shares of the Company's common stock during certain class periods, the
longest of which was from September 27, 1996 through July 18, 1997. Plaintiffs
allege in their complaints that the Company and the individual defendants
engaged in a scheme to artificially inflate the price of the Company's common
stock by improperly accelerating the recognition of revenue from the licensing
of the Company's proprietary software. Plaintiffs assert claims against all
defendants for alleged violation of Section 10(b) of the Securities Exchange Act
of 1934 and Rule 10b-5 promulgated thereunder, as well as claims against the
individual defendants for alleged "controlling person" liability under Section
20(a) of the Securities Exchange Act. In December 1998, the Company and the
individual defendants reached an agreement in principle to settle the
consolidated class action lawsuits for the payment of $11 million to the
plaintiffs. The agreement is subject to the completion by the plaintiffs of
confirmatory discovery, the final approval of the Court, and the possibility of
appeal.
In addition, the Company is the subject of a related investigation initiated on
September 9, 1997 by the United States Securities and Exchange Commission
("SEC"). The SEC has stated that the purpose of investigation is to determine
whether the Company may have violated certain provisions of the Securities Act
of 1933 and the Securities Exchange Act of 1934 in connection with its
recognition of revenue from the licensing of its proprietary software. This
investigation is ongoing and the outcome cannot be predicted at this time,
although the Company believes it has complied fully with all applicable
provisions of the federal securities laws.
NOTE R -- 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, which became effective May 7, 1997. 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: (i) 10 days after any person or
group of persons acquires 15% or more of the Company's Common Stock, (ii) 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 (iii) 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.
53
54
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE S -- GE TECHTEAM, L.P.
During 1997, the Company formed GE TechTeam, L.P. (the "GE Joint Venture"), a
joint venture between TechTeam and a unit of General Electric Appliances
Division ("GEA"). The GE Joint Venture was formed to market and service extended
warranty contracts for the personal computer industry. The GE Joint Venture,
headquartered in Dallas, Texas, is operated by TechTeam and by GE Service
Management, an operating unit of GEA. GE Service Management is a leading
provider of extended service plans and warranty administration for products
ranging from major appliances and consumer electronics to personal computers. GE
Service Management offers extended service plans that cover numerous
manufacturers, makes and models, and it provides comprehensive service coverage
for post-warranty products and service needs. TechTeam shares in the profits, if
any, (up to an agreed upon limit) of this portion of the GE Joint Venture's
business pro rata based on its partnership interest, 49.45%. Losses, if any, are
reimbursed to the GE Joint Venture by GEA. Operations for this portion of the
business were not profitable in 1997 and 1998.
On March 31, 1998, the Company sold its OEM call center contracts, consisting of
its remaining unexpired contracts with Hewlett-Packard Corporation and a
contract with 3Com Corporation, to GEA for $1.4 million. GEA then contributed
those contracts to the GE Joint Venture for an agreed value of $1.4 million and
an agreement that GEA shall receive all the joint venture's earnings from these
contracts until GEA has recovered the $1.4 million. TechTeam is recognizing the
gain related to this sale as the GE Joint Venture records earnings related to
these contracts. Such earnings amounted to $944,932 for 1998.
In September 1998, the GE Joint Venture began providing telephone and computer
support for a major manufacturer of personal computers. TechTeam shares in the
profits and losses of this portion of the GE Joint Venture's business pro rata
based on its partnership interest. In 1998, TechTeam recognized $143,849 of
earnings related to this contract; this amount was recorded by TechTeam as a
reduction in its cost of services for the OEM Call Center Services line of
business.
Summarized financial data for the GE Joint Venture follows:
- ----------------------------------------------------------------------------------------------------------
DECEMBER 31,
Balance Sheet 1998 1997
----------- -----------
Assets
Current assets....................................................... $11,946,973 $10,347,677
Property, plant and equipment........................................ 3,227,342 251,007
Other assets......................................................... 11,421,853 6,696,929
Total assets......................................................... $26,596,168 $17,295,613
Liabilities and Joint Venture Partners' Capital
Current liabilities.................................................. $11,322,336 $10,085,154
Other liabilities.................................................... 13,018,328 7,210,459
Joint Venture Partners' Capital
General Electric affiliated company............................... 1,357,077 --
National TechTeam, Inc............................................ 883,124 --
Support Central LLC............................................... 15,303 --
----------- -----------
Total Liabilities and Joint Venture Partners' Capital................ $26,596,168 $17,295,613
=========== ===========
YEAR ENDED DECEMBER 31,
----------------------------
Statement of Operations 1998 1997
----------- -----------
Revenues....................................................................... $19,647,758 $ 1,037,536
Expenses....................................................................... 19,341,697 1,037,536
----------- -----------
Pre-tax income................................................................. $ 306,061 $ --
=========== ===========
54
55
INDEPENDENT AUDITORS' REPORT
The Partners
GE TechTeam LP:
We have audited the accompanying balance sheets of GE TechTeam LP as of
December 31, 1998 and 1997, and the related statements of operations, changes
in partners' capital and cash flows for the year ended December 31, 1998 and
the period from inception (October 1, 1997) through December 31, 1997. These
financial statements are responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GE TechTeam LP as of December
31, 1998 and 1997, and the results of its operations and its cash flows for the
year ended December 31, 1998 and the period from inception (October 1, 1997)
through December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Dallas, Texas
February 9, 1999
- 55 -
56
GE TECHTEAM LP
Balance Sheets
December 31, 1998 and 1997
ASSETS 1998 1997
---------- ----------
Current assets:
Cash and cash equivalents $ 185,378 --
Accounts receivable 2,312,790 --
Receivables from related parties (note 2) 9,307,387 10,347,677
Prepaid expenses and other 141,418 --
----------- ----------
Total current assets 11,946,973 10,347,677
Receivables from related parties (note 2) 9,791,785 6,221,929
Property and equipment, net (note 3) 3,227,342 251,007
Capitalized software 1,175,000 475,000
Customer contracts 455,068 --
----------- ----------
Total assets $26,596,168 17,295,613
=========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 246,227
Accrued expenses 63,622 --
Obligations under related party capital leases
(note 4) 637,630 --
Deferred revenue (note 2) 8,376,710 8,321,612
Due to related parties (note 2) 1,998,147 1,763,542
----------- ----------
Total current liabilities 11,322,336 10,085,154
Deferred revenue (note 2) 10,727,657 7,210,459
Obligations under related party capital leases
(note 4) 2,290,671
Partners' capital 2,255,504 --
----------- ----------
Total liabilities and partners' capital $26,596,168 17,295,613
=========== ==========
See accompanying notes to financial statements.
- 56 -
57
GE TECHTEAM LP
Statements of Operations
Year ended December 31, 1998 and Period
from Inception (October 1, 1997) through December 31, 1997
1998 1997
---- ----
REVENUES $19,647,758 1,037,536
Cost of revenues:
Cost of services 20,941,444 628,012
Cost reimbursement (note 2) (7,613,531) --
----------- ---------
Total cost of revenues: 13,327,913 628,012
----------- ---------
Gross margin 6,319,845 409,524
----------- ---------
Operating expenses:
Selling, general and administrative 4,417,448 365,591
Depreciation and amortization 1,386,020 43,933
----------- ---------
Total operating expenses 5,803,468 409,524
Operating income 516,377 --
Interest income (19,637) --
Interest expense 229,953 --
----------- ---------
Other expense, net 210,316 --
----------- ---------
Net income $ 306,061 --
=========== =========
See accompanying notes to financial statements.
- 57 -
58
GE TECHTEAM LP
Statements of Changes in Partners' Capital
Year ended December 31, 1998 and Period
from Inception (October 1, 1997) through December 31, 1997
SUPPORT NATIONAL GE
CENTRAL LLC TECH TEAM APPLIANCES TOTAL
----------- --------- ---------- --------
Balances at October 1, 1997 $ -- -- -- --
Contributions from partners -- -- -- --
Distributions to partners -- -- -- --
Net income -- -- -- --
----------- --------- ---------- ---------
Balances at December 31, 1997 -- -- -- --
Contributions from partners -- 739,275 755,100 1,494,375
Contributed customer contracts -- -- 1,400,000 1,400,000
Distributions to partner -- -- (944,932) (944,932)
Net income 15,303 143,849 146,909 306,061
----------- --------- ---------- ---------
Balances at December 31, 1998 $ 15,303 883,124 1,357,077 2,255,504
=========== ========= ========== =========
See accompanying notes to financial statements.
- 58 -
59
GE TECHTEAM LP
Statements of Cash Flows
Year ended December 31, 1998 and Period
from Inception (October 1, 1997) through December 31, 1997
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 306,061 --
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 1,386,020 43,933
Changes in operating assets and
liabilities:
Accounts receivable and receivables
from related parties (4,842,356) (16,569,606)
Prepaid expenses and other (141,418) --
Accounts payable and accrued
expenses 309,849 --
Due to related parties 234,605 1,763,542
Deferred revenues 3,572,296 15,532,071
----------- -----------
Cash provided by operating
activities 825,057 769,940
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (148,656) (269,940)
Capitalization of internally developed
software (800,000) (500,000)
----------- -----------
Cash used by investing activities (948,656) (769,940)
----------- -----------
Cash flows from financing activities:
Initial capital contribution from
shareholders 1,494,375 --
Distributions to partners (944,932) --
Repayments on capital leases (240,466) --
----------- -----------
Cash provided by financing
activities 308,977 --
----------- -----------
Increase in cash and cash equivalents 185,378 --
Cash and cash equivalents at beginning
of year -- --
----------- -----------
Cash and cash equivalents at end of year $ 185,378 --
=========== ===========
Supplemental disclosure of cash flow
information - cash paid during the year
for interest expense $ 420,732 --
=========== ===========
Noncash investing and financing
activities:
Assets acquired under capital leases $ 3,168,767 --
=========== ===========
Customer contracts contributed by
partner $ 1,400,000 --
=========== ===========
See accompanying notes to financial statements.
- 59 -
60
GE TECHTEAM LP
Notes to Financial Statements
December 31, 1998 and 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) FORMATION OF PARTNERSHIP AND BASIS OF PRESENTATION
GE TechTeam LP (the "Partnership") provides call center product
support services related to extended warranty contracts for the
personal computer industry. The Partnership was formed in September
of 1997 as a joint venture between National TechTeam, Inc. (National
TechTeam) and GE Appliances, a subsidiary of General Electric
Company, in the state of Kentucky. The Partnership, headquartered in
Dallas, Texas is operated by National Tech Team and GE Service
Management, an operating unit of GE Appliances.
The general partner of the Partnership is Support Central, LLC, a
limited liability corporation. The limited partners are National
TechTeam, and GE Appliances. Partnership interests as of December 31,
1998 and 1997 are as follows:
Support Central, LLC 5%
National Tech Team 47%
GE Appliances 48%
National TechTeam and GE Appliances have ownership interests in
Support Central, LLC of 49% and 51%, respectively.
(B) PARTNERS' CAPITAL
INITIAL CAPITAL CONTRIBUTION
Based on terms agreed to at the time of the formation of the
Partnership, National TechTeam and GE Appliances contributed $739,275
and $755,100, respectively.
ADDITIONAL CAPITAL CONTRIBUTIONS
The Partners shall made additional capital contributions as may be
unanimously agreed by the Board of Directors of the Partnership.
During 1998, GE Appliances purchased customer contracts from National
TechTeam for $1,400,000 and contributed such contracts to the
Partnership.
(Continued)
- 60 -
61
GE TECHTEAM LP
Notes to Financial Statements
December 31, 1998 and 1997
CASH FLOW DISTRIBUTIONS
Except as specifically provided in the Income (Loss) Allocations section
below, net cash flow may be distributed to the Partners in accordance with
their respective capital contributions.
INCOME (LOSS) ALLOCATIONS
Net income (loss) is allocated to the limited partners in proportion to
their partnership interests, except as noted below:
GE Appliances shall accept all losses on the Customer Service Provider
(CSP) program contracts and shall adjust payments made under the Joint
Venture Agreement in loss years such that revenues on the CPS contracts
equal expenses. Net income on these contracts is to be divided 50.55% to
GE Appliances and 49.45% to National Tech Team up to an agreed upon
limit; thereafter net income is to be divided 75% to GE Appliances and
25% to National Tech Team.
Income before taxes and amortization of the cost of the purchased
contracts contributed to the Partnership by GE Appliances realized from
the servicing of these contracts shall be assigned and allocated to GE
Appliances until such time as GE Appliances has been allocated $1,400,000.
Net income or net losses of all other OEM contracts are allocated 50.55%
to GE Appliances and 49.45% to National Tech Team.
(C) CASH EQUIVALENTS
Cash equivalents consist of overnight repurchase agreements with the
Company's depository institution.
(D) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated
depreciation. Depreciation on property and equipment is calculated on the
straight-line method over the estimated useful lives of the assets.
Property and equipment held under capital leases and leasehold
improvements are amortized straight line over the estimated useful life of
the asset.
(E) REVENUE RECOGNITION
The Partnership has two types of contract agreements that it services. Its
CSP program, which is contracted through GE Appliances (see footnote 2)
and its Original Equipment Manufacturers (OEM) program.
(Continued)
- 61 -
62
GE TECHTEAM LP
Notes to Financial Statements
December 31, 1998 and 1997
CSP extended warranty contracts typically have four year terms. The
Partnership recognizes revenue earned on service contracts in accordance
with FASB Technical Bulletin No 90-1, "Accounting for Separately Priced
Extended Warranty and Product Maintenance Contracts" (FTB 90-1).
Accordingly, revenue on service contracts is recognized on a straight-line
basis over the contract period. Amounts received in advance of recognition
are recorded as deferred revenue on the accompanying balance sheet.
Revenues from the OEM program are recognized as services are performed
based on various factors such as number of calls received or call time.
(F) CAPITALIZED SOFTWARE
In accordance with the AICPA Statement of Position 98-1 the Partnership has
capitalized certain costs associated with the development of its
proprietary call center software. Capitalization commences when the
preliminary project stage is completed and it is probable that the project
will be completed and the software will be used to perform the function
intended. The capitalized cost reflected in the accompanying financial
statements includes payments aggregating $1,300,000, for software licenses
from National TechTeam by the Partnership costs incurred by the Partnership
during 1998 to customize the software.
The Partnership evaluates the recoverability of its internally developed
software and other intangibles whenever significant events or changes occur
which might impair recovery of recorded costs, net of amortization. Such
evaluation methodology is described in the Partnership's impairment policy
note (J).
(G) INCOME TAXES
No provision or credit for income taxes has been made since income taxes
are the responsibility of the individual partners.
(H) INTANGIBLE ASSETS
On March 31, 1998 GE Appliances purchased the rights to various contracts
for call center product support related to extended warranty contracts from
National TechTeam for $1,400,000 GE Appliances contributed the rights to
these assets to the Partnership. The $1,400,000 contract value is being
amortized over one year from the date of the purchase in proportion to
income earned on a pre-tax, pre-amortization basis. Total amortization
expense for 1998 was $944,932.
Pursuant to the Joint Venture Agreement, income before taxes and
amortization of the cost of the purchased assets realized from the
servicing of these contracts through March 31, 1999 shall be assigned and
allocated to GE Appliances until such time as GE Appliances has been
allocated $1,400,000. During 1998, $944,932 was allocated to GE Appliances.
(Continued)
-62-
63
GE TECHTEAM LP
Notes to Financial Statements
December 31, 1998 and 1997
(I) USE OF ESTIMATES
Management of the Partnership has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(J) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED
OF
The Partnership reviews its long-lived assets and identifiable
intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such
assets are considered to the impairment be impaired to be recognized
is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less
costs to sell.
(2) RELATED PARTY TRANSACTIONS
The Partnership, in the normal course of business, has several
transactions with its two limited partners. National Tech Team and GE
Service Management, an operating unit of GE Appliances, operate the
Partnership. Prior to March 31, 1998, the two partners processed all
accounting functions and cash disbursements. The Partnership has no
employees and its personnel are provided by the Partners under cost
reimbursement arrangements. National Tech Team charges the partnership a
14% benefits charge per employee approximately $2,345,000 and $67,000 in
1998 and 1997, respectively, and a 4% general and administrative fee based
on the bi-weekly payroll of approximately $630,000 and $40,000 in 1998 and
1997, respectively. Other expenses incurred by the Partnership and paid
for by the respective partners are included in the accompanying financial
statements.
The Partnership receives advance payments from GE Service Management
annually under its CSP agreements. The Partnership recognizes revenue
earned on the CSP service contracts in accordance with FTB 90-1.
Accordingly, revenue on CSP service contracts is recognized on a straight-
line basis over the contract period. Amounts received in advance of
recognition and future annual payments on existing contracts are recorded
as deferred revenue on the accompanying balance sheet. Amounts to be
received subsequent to 1999 from GE Service Management are included as
receivables from related parties, noncurrent.
(Continued)
- 63 -
64
GE TECHTEAM LP
Notes to Financial Statements
December 31, 1998 and 1997
Additionally, GE Appliances accepts all losses on the CSP contracts and
adjusts payments made under the Joint Venture Agreement such that revenues
on the CSP contracts equal expenses. During the current year the
Partnership received an additional $7,613,531 from GE Appliances in
adjustment payments to offset the losses experienced by the Partnership on
the CSP contracts. This amount is included as an offset to cost of
services on the accompanying statement of operations.
(3) PROPERTY AND EQUIPMENT, NET
Property and equipment at December 31, 1998 and 1997 consists of the
following:
1998 1997
---- ----
Computer hardware and software $3,046,141 $269,940
Furniture and equipment 462,763 --
Leasehold improvements 78,459 --
---------- --------
3,587,363 269,940
Less accumulated amortization (360,021) (18,933)
---------- --------
Total property and equipment $3,227,342 $251,007
========== ========
(4) LEASES
The Partnership is obligated under various capital leases for a leasehold
and certain property and equipment that expire at various dates during the
next three to five years. The leasing company is a subsidiary of National
TechTeam. At December 31, 1998, the gross amount of property and equipment
under capital leases was $2,168,767. The Partnership did not have any
capital leases at December 31, 1997. Amortization of assets held under
capital leases is included with depreciation and amortization expense and
was $261,606 during 1998.
The Partnership also has certain noncancelable operating leases with
National Tech Team, several of which remain in force until the dissolution
of the Partnership. Rental expense for all operating leases during 1998
and 1997 was $466,878 and $104,340, respectively.
- 64 - (Continued)
65
GE TECHTEAM LP
Notes to Financial Statements
December 31, 1998 and 1997
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of December 31, 1998 are:
CAPITAL OPERATING
YEAR ENDING DECEMBER 31 LEASES
------------ ------------
1999 $ 1,304,842 $ 267,513
2000 1,304,842 267,513
2001 1,087,884 267,513
2002 698,265 267,513
2003 541,059 267,513
----------- ------------
Total minimum lease payments 4,936,892 1,337,565
============
Less amount representing interest
(at rates ranging from 14.40%
to 15.96% 2,008,591
-----------
Present value of net minimum
capital lease payments: 2,928,301
Less current installments of
obligations under capital leases (637,630)
-----------
Obligations under capital leases,
excluding current installments $ 2,290,671
===========
(5) BUSINESS AND CREDIT CONCENTRATION RISK
During 1998, the Partnership has four customers accounting for 100% of its
revenues. The CSP contracts from GE Appliances accounted for approximately
38% and 100% of its revenues in 1998 and 1997, respectively, before giving
effect to the cost reimbursement for losses on the contracts. The
Partnership has contracts with three other unrelated third parties,
accounting for 30%, 19% and 13% of revenue in 1998. Accounts receivable
related to these three contracts accounted for 58%, 23% and 19% of
accounts receivable.
- 65 -
66
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 1999 Annual
Meeting of Shareholders to be held on May 26, 1999, 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 1999 Annual Meeting of Shareholders to be held on May 26, 1999, 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 1999 Annual Meeting of
Shareholders to be held on May 26, 1999, 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 1999 Annual Meeting of
Shareholders to be held on May 26, 1999, 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 1999 Annual Meeting of Shareholders to be held on May
26, 1999, which is incorporated herein by reference.
66
67
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.
Reports on Form 8-K filed by the Company during the last quarter of
the year ended December 31, 1998:
December 24, 1998 -- TechTeam announced agreement to settle class
action lawsuit.
October 30, 1998 -- TechTeam announces revenues and earnings for
the third quarter and first nine months of 1998.
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 statements 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.
67
68
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 31, 1999 By: /s/Lawrence A. Mills Lawrence A. Mills
Vice President 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
31, 1999.
/s/Harry A. Lewis Director, President and
- -------------------------------------------- Chief Executive Officer
Harry A. Lewis
/s/William F. Coyro Jr. Director and Chairman of the Board
- --------------------------------------------
William F. Coyro Jr.
/s/Kim A. Cooper Director
- --------------------------------------------
Kim A. Cooper
/s/Wallace D. Riley Director
- --------------------------------------------
Wallace D. Riley
/s/Richard G. Somerlott Director
- --------------------------------------------
Richard G. Somerlott
/s/Jeffrey R. Pigott Controller
- --------------------------------------------
Jeffrey R. Pigott (Chief Accounting Officer)
68
69
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.
- ---------------------------------------------------------------------------------------------------------------------
EXHIBIT PAGE
NUMBER EXHIBIT NUMBER
------- --------------------------------------------------------------------------------------- ------
2.1 Agreement and Plan of Merger dated December 23, 1996 between National TechTeam, Inc., *10
TechTeam Training Inc., WebCentric Communications, Inc. and Daniel L. Kemp.
2.2 Stock Exchange Agreement and Agreement and Plan of Merger dated July 30, 1997 between *12
National TechTeam, Inc., TechTeam Acquisition No. 1, Inc., Compuflex Systems, Inc. and
Srini Vasan.
2.3 Agreement and Plan of Merger dated January 19, 1998 by and between David M. Sachs, *13
Capricorn Capital Group, Inc., BM Woodbridge Place 104, Inc. and National TechTeam, Inc.
2.4 Limited Partnership Agreement of GE TechTeam, L.P. (formerly Support Central, L.P.) *14
dated as of October 1, 1997.
2.4 (a) Amendment No. 1 to Limited Partnership Agreement of Support Central, L.P. *15
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. *16
4.1 1990 Nonqualified Stock Option Plan. *3
4.2 Form of Stock Option Agreement used for grant of options to employees under the 1990 *4
Nonqualified Stock Option Plan.
4.3 1996 Nonemployee Directors Stock Plan. *8
4.4 Rights Agreement dated as of May 6, 1997, between National TechTeam, Inc. and U.S. Stock *11
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 as the Cumberland Tech *5
Center between the Company and Eleven Inkster Associates dated September 29, 1993.
10.2 Lease Amendment for office space in Southfield, Michigan known as the Cumberland Tech *5
Center between the Company and Eleven Inkster Associates dated December 7, 1993.
10.3 Lease Amendment for office space in Southfield, Michigan known as the Cumberland Tech *6
Center between the Company and Eleven Inkster Associates dated January 23, 1995.
10.4 Lease for office space in Dallas, Texas known as Lyndon Plaza between the Company and *7
Dallas Lyndon Corporation dated August 17, 1995.
10.5 Lease for office space in Troy, Michigan known as Troy Officenter B between the Company
and WRC Properties, Inc. dated November 16, 1995. *7
69
70
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.
EXHIBIT PAGE
NUMBER EXHIBIT NUMBER
------- ----------------------------------------------------------------------------------- ------
10.6 Office Space Lease for office space in Indianapolis, Indiana known as Market Square *7
Center Building between the Company and MET Life International
Real Estate Partners Limited Partnership dated November 27,
1995.
10.7 Third Amendment Lease Agreement dated March 29, 1996 for office space in Southfield, *8
Michigan between Eleven Inkster Associates and the Company.
10.8 Lease for office space in Dearborn, Michigan between the Company and Dearborn Atrium *9
Associates Limited Partnership dated November 18, 1996.
10.9 Amendment No. 2 to the Lease Agreement between Dallas Lyndon Corporation, as Landlord, *14
and National TechTeam, Inc., as Tenant, dated January 16, 1998.
10.10 Asset Purchase Agreement between General Electric Company and National TechTeam, Inc. *15
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.
10.11 Credit Authorization Agreement in the principal amount of $25,000,000 between the --
Company and NBD Bank dated May 29, 1998.
10.12 Employment Agreement dated as of January 1, 1999 between National TechTeam, Inc. and --
Harry A. Lewis.
10.13 Employment Agreement dated as of January 1, 1999 between National TechTeam, Inc. and --
William F. Coyro Jr.
21 List of subsidiaries of National TechTeam, Inc. 71
23.1 Consent of Ernst & Young LLP --
23.2 Consent of KPMG LLP --
27 Financial Data Schedule (for SEC use only) (filed herewith).
70
71
INDEX OF EXHIBITS (continued)
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*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 Registration Statement on Form S-2 (Registration No.
33-67904.)
*5 Incorporated by reference to the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1993.
*6 Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994.
*7 Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
*8 Incorporated by reference to the Company's Registration Statement on Form S-3 (Registration No.
333-10687.)
*9 Incorporated by reference to the Company's Annual Report on Form 10-K dated December 31, 1996.
*10 Incorporated by reference to the Company's Report on Form 8-K dated January 3, 1997.
*11 Incorporated by reference to the Company's Registration Statement on Form 8-A dated May 9, 1997.
*12 Incorporated by reference to the Company's Report on Form 8-K dated July 30, 1997.
*13 Incorporated by reference to the Company's Report on Form 8-K dated February 13, 1998.
*14 Incorporated by reference to the Company's Annual Report on Form 10-K dated December 31, 1997.
*15 Incorporated by reference to the Company's Report on Form 10-Q dated March 31, 1998.
*16 Incorporated by reference to the Company's Report on Form 10-Q dated June 30, 1998.
EXHIBIT 21 -- LIST OF SUBSIDIARIES
TechTeam Europe Ltd.
National TechTeam Europe, NV
WebCentric Communications, Inc.
National TechTeam of New Jersey, Inc. (formerly "Compuflex Systems, Inc.")
TechTeam Capital Group, Inc.
Capricorn Integrated Technologies Group
GE TechTeam, L.P. (formerly "Support Central, L.P.")
71