UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2005
Commission File Number: 0-16284
TECHTEAM GLOBAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 38-2774613
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation)
27335 WEST 11 MILE ROAD, SOUTHFIELD, MI 48034
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 357-2866
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 whether the registrant is an accelerated filer. Yes [ ]
No [X]
The number of shares of the registrant's common stock outstanding at May 6, 2005
was 9,188,653.
1
TECHTEAM GLOBAL, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
NUMBER
------
PART I - FINANCIAL INFORMATION
Item 1 Condensed Consolidated Statements of Operations - Three Months Ended March 31, 3
2005 and 2004
Condensed Consolidated Balance Sheets - March 31, 2005 and December 31, 2004 4-5
Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 6
2005 and 2004
Notes to Condensed Consolidated Financial Statements 7-16
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 17-23
Item 3 Quantitative and Qualitative Disclosures About Market Risk 24
Item 4 Controls and Procedures 24
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 25
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 6 Exhibits 25
SIGNATURES 26
2
PART 1 -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
THREE MONTHS ENDED
MARCH 31,
------------------
2005 2004
-------- --------
REVENUE
Diversified IT outsourcing services .................................. $ 19,099 $ 18,438
Government technology services ....................................... 14,962 6,556
IT consulting and systems integration ................................ 5,852 3,006
Technical staffing ................................................... 2,015 2,029
Learning services .................................................... 110 136
-------- --------
TOTAL REVENUE ............................................................ 42,038 30,165
Cost of revenue ...................................................... 31,330 23,008
-------- --------
GROSS PROFIT ............................................................. 10,708 7,157
Selling, general, and administrative expense ......................... 8,290 5,905
-------- --------
OPERATING INCOME ......................................................... 2,418 1,252
Interest income, net ................................................. 83 167
Foreign currency transaction loss .................................... (24) (199)
-------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES .................... 2,477 1,220
Income tax provision ................................................. 782 592
-------- --------
INCOME FROM CONTINUING OPERATIONS ........................................ 1,695 628
Income (loss) from discontinued operations, net of tax provision
(credit) of $29 in 2005 and $(2) in 2004 .......................... 55 (4)
-------- --------
NET INCOME ............................................................... $ 1,750 $ 624
======== ========
BASIC EARNINGS PER COMMON SHARE
Income from continuing operations .................................... $ 0.18 $ 0.07
Income from discontinued operations .................................. 0.01 0.00
-------- --------
Total basic earnings per common share ................................ $ 0.18 $ 0.07
======== ========
BASIC EARNINGS PER PREFERRED SHARE
Income from continuing operations .................................... $ 0.18 $ 0.07
Income from discontinued operations .................................. 0.01 0.00
-------- --------
Total basic earnings per preferred share ............................. $ 0.18 $ 0.07
======== ========
DILUTED EARNINGS PER COMMON SHARE
Income from continuing operations .................................... $ 0.17 $ 0.07
Income from discontinued operations .................................. 0.01 0.00
-------- --------
Total diluted earnings per common share .............................. $ 0.18 $ 0.07
======== ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING
Basic - common ....................................................... 8,785 8,735
Basic - preferred .................................................... 690 690
Diluted - common ..................................................... 9,105 8,890
See accompanying notes.
3
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
MARCH 31, DECEMBER 31,
ASSETS 2005 2004
------------------------------------------------------------- ---------- -----------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents ............................... $ 37,456 $ 40,436
Accounts receivable (less allowance of $1,210 at
March 31, 2005 and $912 at December 31, 2004) ........ 42,198 28,888
Prepaid expenses and other .............................. 2,469 2,288
Deferred income taxes ................................... 427 --
Net current assets of discontinued operations ........... 86 97
---------- -----------
TOTAL CURRENT ASSETS .................................... 82,636 71,709
---------- -----------
PROPERTY, EQUIPMENT, AND PURCHASED SOFTWARE
Computer equipment and office furniture ................. 23,020 22,768
Purchased software ...................................... 11,643 11,545
Leasehold improvements .................................. 4,870 4,822
Transportation equipment ................................ 319 321
---------- -----------
39,852 39,456
Less -- accumulated depreciation and amortization........ (31,744) (31,074)
---------- -----------
NET PROPERTY, EQUIPMENT, AND PURCHASED SOFTWARE ......... 8,108 8,382
---------- -----------
OTHER ASSETS
Goodwill ................................................ 19,556 4,768
Intangible assets, net .................................. 11,063 3,672
Net noncurrent assets of discontinued operations ........ -- 15
Other ................................................... 383 441
---------- -----------
TOTAL OTHER ASSETS ...................................... 31,002 8,896
---------- -----------
TOTAL ASSETS ................................................ $ 121,746 $ 88,987
========== ===========
See accompanying notes.
4
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(In thousands, except share amounts)
MARCH 31, DECEMBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2005 2004
----------------------------------------------------------------------------------- ----------- ------------
(Unaudited)
CURRENT LIABILITIES
Notes payable ................................................................. $ 15 $ 27
Accounts payable .............................................................. 11,770 3,707
Accrued payroll, related taxes, and withholdings .............................. 9,805 7,485
Accrued expenses .............................................................. 7,041 2,217
Accrued income taxes .......................................................... 158 644
Deferred revenue .............................................................. 1,023 1,380
Deferred income taxes ......................................................... -- 156
Current liabilities of discontinued operations ................................ 7 12
----------- ------------
TOTAL CURRENT LIABILITIES ..................................................... 29,819 15,628
LONG-TERM LIABILITIES
Long-term debt ................................................................ 13,712 --
Deferred income taxes ......................................................... 4,345 1,285
Other long-term liabilities ................................................... 612 414
----------- ------------
TOTAL LONG-TERM LIABILITIES ................................................... 18,669 1,699
----------- ------------
REDEEMABLE CONVERTIBLE PREFERRED STOCK, 5,000,000 shares authorized, 689,656
shares issued and outstanding; liquidation preference of
$5,000 at March 31, 2005 and December 31, 2004 ................................ 5,000 5,000
SHAREHOLDERS' EQUITY
Common stock, $0.01 par value, 45,000,000 shares authorized, 8,847,929 and
8,767,037 shares issued and outstanding at
March 31, 2005 and December 31, 2004, respectively ......................... 88 88
Additional paid-in capital .................................................... 60,328 59,437
Unamortized deferred compensation ............................................. (509) (533)
Retained earnings ............................................................. 6,543 4,793
Accumulated other comprehensive income ........................................ 1,808 2,875
----------- ------------
TOTAL SHAREHOLDERS' EQUITY .................................................... 68,258 66,660
----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........................................ $ 121,746 $ 88,987
=========== ============
See accompanying notes.
5
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
THREE MONTHS ENDED
MARCH 31,
------------------
2005 2004
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................................................... $ 1,750 $ 624
(Income) loss from discontinued operations .................................... (55) 4
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ........................................... 1,470 987
Non-cash expense related to stock options, restricted stock awards,
and common stock issued to 401(k) plan and directors ................ 76 73
Other ................................................................... (85) 44
Changes in current assets and liabilities ............................... 2,151 2,930
Changes in long-term assets and liabilities ............................. 315 (141)
Net operating cash flow from discontinued operations .................... 35 502
-------- --------
Net cash provided by operating activities .................................. 5,657 5,023
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, equipment, and software ................................. (809) (564)
Cash paid for acquisitions, net of cash acquired .............................. (21,260) (201)
-------- --------
Net cash used in investing activities ...................................... (22,069) (765)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt ...................................... 15,000 --
Proceeds from issuance of common stock ........................................ 227 144
Payments on long-term borrowings .............................................. (1,299) (657)
Purchase of Company common stock .............................................. -- (2,744)
Net financing cash flow from discontinued operations .......................... (11) (57)
-------- --------
Net cash provided by (used in) financing activities ........................ 13,917 (3,314)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ...................... (485) 6
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................................. (2,980) 950
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................................. 40,436 35,195
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................................ $ 37,456 $ 36,145
======== ========
See accompanying notes.
6
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared by TechTeam Global, Inc. ("TechTeam" or the "Company" or "we") in
accordance with United States generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by United States generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included, and such
adjustments are of a normal recurring nature. Operating results for the three
months ended March 31, 2005 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2005. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 2004.
Certain reclassifications have been made to the 2004 financial statements in
order to conform to the 2005 financial statement presentation.
NOTE 2 -- COMPREHENSIVE INCOME
Comprehensive income consists of net income and foreign currency translation
adjustments. A summary of comprehensive income is as follows:
THREE MONTHS ENDED
MARCH 31,
------------------
2005 2004
------- --------
(In thousands)
COMPREHENSIVE INCOME
Net income ......................................... $ 1,750 $ 624
Other comprehensive income (loss) --
Foreign currency translation adjustment......... (1,067) (137)
------- --------
Comprehensive income ............................... $ 683 $ 487
======= ========
NOTE 3 -- EARNINGS PER SHARE
Earnings per share is computed using the two-class method as required by
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." The two-class method is an earnings allocation formula that determines
earnings per share separately for common stock and participating securities
according to dividends declared (or accumulated) and participation rights in
undistributed earnings. The Company's redeemable convertible preferred stock,
which was issued in April 2003, is a participating security under SFAS 128. The
redeemable convertible preferred stock has rights to undistributed earnings, but
is not required to participate in net losses of the Company.
Earnings per share for common stock is computed using the weighted average
number of common shares and common share equivalents outstanding. Common share
equivalents consist of stock options. Earnings per share for preferred stock is
computed using the weighted average number of preferred shares outstanding.
7
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
NOTE 3 -- EARNINGS PER SHARE (continued)
The following table reconciles the numerators and denominators of the basic and
diluted earnings per common share computations for income from continuing
operations:
THREE MONTHS ENDED MARCH 31,
-------------------------------------
2005 2004
---------- ----------
(In thousands, except per share data)
Income from continuing operations ............................ $ 1,695 $ 628
Less - Income from continuing operations allocated to
preferred shareholders ................................... 123 46
---------- ----------
Income from continuing operations available to common
shareholders ............................................. $ 1,572 $ 582
========== ==========
Basic weighted average common shares ......................... 8,785 8,735
Common stock equivalents from stock options .................. 320 155
---------- ----------
Diluted weighted average common shares ....................... 9,105 8,890
========== ==========
Weighted average preferred shares ............................ 690 690
========== ==========
Earnings per share from continuing operations:
Basic earnings per common share .......................... $ 0.18 $ 0.07
Basic earnings per preferred share ....................... $ 0.18 $ 0.07
Diluted earnings per common share ........................ $ 0.17 $ 0.07
During the three months ended March 31, 2005 and 2004, 64,000 and 360,000 stock
options, respectively, were excluded from the computation of diluted earnings
per common share because the exercise prices of the options were higher than the
average market price of the Company's common stock for the respective period.
NOTE 4 -- NOTES PAYABLE AND LINE OF CREDIT
In August 2004, we entered into a business loan agreement with Standard Federal
Bank, N.A. whereby the Company may borrow up to $5,000,000 under a line of
credit. Outstanding borrowings bear interest at 0.5% per annum and are
collateralized by a compensating balance cash deposit required to be held at the
bank equal to the amount of any outstanding borrowings. The Company has not
borrowed any amounts under this agreement, but the bank has issued approximately
$279,000 of letters of credit under the agreement at March 31, 2005. The
agreement expires on January 2, 2006, as amended on January 3, 2005, as noted
below.
On January 3, 2005, we amended the agreement to allow for additional borrowings
of $15,000,000 under a term loan due January 3, 2010. We used the proceeds from
the term loan to partially finance the acquisition of Sytel, Inc. (see Note 11).
The term loan bears interest at 0.5% per annum and is collateralized by a
compensating balance cash deposit required to be held at the bank equal to the
amount of the outstanding principal.
8
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
NOTE 5 -- GOODWILL AND OTHER INTANGIBLE ASSETS
On January 3, 2005, we acquired all of the outstanding capital stock of Sytel,
Inc. ("Sytel," see "Note 11 -- Acquisitions"). The goodwill resulting from the
acquisition relates to our government technology services operating segment.
Goodwill will not be amortized, but instead will be subject to annual impairment
testing. We did not record an impairment loss for goodwill in any period
presented.
Changes in the carrying amount of goodwill since December 31, 2004 consist of
the following:
DIVERSIFIED
IT GOVERNMENT IT CONSULTING
OUTSOURCING TECHNOLOGY AND SYSTEMS
SERVICES SERVICES INTEGRATION TOTAL
----------- ---------- ------------- --------
(In thousands)
Balance as of January 1, 2005........................ $ 371 $ 3,830 $ 567 $ 4,768
Goodwill acquired................................ - 14,815 - 14,815
Effect of exchange rate changes.................. - - (27) (27)
----------- ---------- ------------- --------
Balance as of March 31, 2005......................... $ 371 $ 18,645 $ 540 $ 19,556
=========== ========== ============= ========
Other intangible assets consist of the following at March 31, 2005:
ACCUMULATED AMORTIZATION
COST AMORTIZATION PERIOD
------------- ------------ ------------
(In thousands)
Customer relationship asset.......................... $ 6,802 $ 243 7 Years
Customer relationship asset.......................... 3,367 421 10 years
Noncompete agreement................................. 712 44 4 years
Customer relationship asset.......................... 701 547 5 years
Customer relationship asset.......................... 488 70 6 years
Trademark and name................................... 339 21 4 years
------------- ------------
$ 12,409 $ 1,346
============= ============
The useful life of amortizable intangible assets is determined based on the
period from which we expect to realize cash flows from these assets and
considers, among other items, ability and cost to renew contracts with similar
terms and conditions, historical customer retention rates, and the contractual
life of the asset.
We re-evaluate intangible assets based on undiscounted operating cash flows
whenever significant events or changes occur that might indicate a possible
impairment of costs. If undiscounted cash flows are insufficient to recover
recorded costs, we write down the carrying value of the assets to fair value
based on discounted cash flows or market values. We did not record an impairment
loss for intangible assets in any period presented.
Our expected future amortization expense for intangible assets held at March 31,
2005 is as follows: $1,310,000 for the remainder of 2005, $1,750,000 in 2006,
$1,660,000 in 2007, $1,660,000 in 2008, and $1,390,000 in 2009.
9
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
NOTE 6 -- STOCK-BASED COMPENSATION
We account for stock-based compensation awards granted to employees using the
intrinsic value method prescribed in Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees" and related interpretations.
The effect on net income and earnings per share had compensation costs been
recognized based on the fair value method prescribed by SFAS 123, "Accounting
for Stock-Based Compensation," is as follows:
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
-------- ---------
(In thousands, except per
share data)
Reported net income.............................................. $ 1,750 $ 624
Add: Total stock-based compensation expense included
in reported net income, net of tax........................... 28 11
Deduct: Total stock-based compensation expense determined
under the fair value method for all awards, net of tax....... (272) (285)
-------- ---------
Pro forma net income............................................. $ 1,506 $ 350
======== =========
Basic earnings per common and preferred share:
As reported.................................................. $ 0.18 $ 0.07
Pro forma.................................................... $ 0.16 $ 0.04
Diluted earnings per common share:
As reported.................................................. $ 0.18 $ 0.07
Pro forma.................................................... $ 0.15 $ 0.04
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 123R,
"Share-Based Payment," which replaces SFAS 123 and supersedes APB 25. SFAS 123R
eliminates the ability to account for share-based compensation transactions
using APB 25, and requires instead that such transactions be accounted for using
a fair-value-based method. SFAS 123R is effective for awards that are granted,
modified, or settled in periods beginning after December 15, 2005, or the
Company's fiscal year beginning January 1, 2006. The Company intends to adopt
SFAS 123R on January 1, 2006. As we use the fair value method of accounting
under the original provisions of SFAS 123 for pro forma disclosure purposes, we
are also required to apply the provisions of SFAS 123R in recognizing
compensation cost for any portion of awards granted or modified after December
15, 1994, that are not yet vested at the date SFAS 123R is adopted. Based on the
number of non-vested stock options the Company has outstanding at March 31, 2005
adoption of SFAS 123R will result in approximately $18,000 of aggregate
compensation expense, net of tax, in fiscal years after 2005 and will not have a
material affect on our financial position or operating results.
10
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
NOTE 7 -- INCOME TAXES
For the three months ended March 31, 2005, the consolidated effective tax rate
of 31.5% differs from the statutory tax rate of 34% primarily due to the tax
benefit of tax rates in certain foreign countries that are lower than 34% and
the tax benefit of certain permanent deductions. For the three months ended
March 31, 2004, the consolidated effective tax rate of 48.5% differs from the
statutory tax rate of 34% primarily due to providing a valuation allowance
against the future tax benefit of operating loss carryforwards in certain tax
jurisdictions.
No provision has been made with respect to approximately $5.6 million of
undistributed earnings of foreign subsidiaries at March 31, 2005, since we
consider these earnings to be permanently reinvested. In December 2004, the FASB
issued FASB Staff Position ("FSP") No. 109-2, "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004," which provides guidance under SFAS No. 109,
"Accounting for Income Taxes," with respect to recording the potential impact of
the repatriation provisions of the American Jobs Creation Act of 2004 ("Jobs
Act") on an enterprise's income tax expense and deferred taxes. The Jobs Act was
enacted on October 22, 2004. FSP 109-2 states that an enterprise is allowed time
beyond the financial reporting period of enactment to evaluate the effect of the
Jobs Act on its plan for reinvestment or repatriation of foreign earnings for
purposes of applying SFAS 109. We have not yet evaluated the impact of the
repatriation provisions. Accordingly, as provided for in FSP 109-2, we have not
adjusted income tax expense or deferred taxes to reflect the repatriation
provisions of the Jobs Act.
NOTE 8 -- SEGMENT REPORTING
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or decision-making group, in deciding how to
allocate resources and in assessing performance. Our chief operating
decision-making group is the Senior Management Committee, which is comprised of
the President and the lead executives of each of our functional divisions. The
operating segments are managed separately because each operating segment
represents a strategic business unit that offers different services.
As a result of acquiring three companies over a 13-month period from December
31, 2003, we have strategically added the government technology services
vertical market to our business and have expanded this segment. In order to
better describe our business following these changes, during the fourth quarter
of 2004, we modified our four reporting business segments into five reporting
segments -- Diversified IT Outsourcing Services, Government Technology Services,
IT Consulting and Systems Integration, Technical Staffing, and Learning
Services. Prior year amounts have been reclassified to reflect the current
presentation.
The accounting policies of the operating segments are the same as those
described in Note 1 to the Company's consolidated financial statements contained
in the Company's Annual Report on Form 10-K for the year ended December 31,
2004. We evaluate segment performance based on segment gross profit. We do not
allocate assets to operating segments, but we allocate certain amounts of
depreciation and amortization expense to operating segments.
11
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
NOTE 8 -- SEGMENT REPORTING (continued)
Financial information for our operating segments is as follows:
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
-------- ---------
(In thousands)
REVENUE
Diversified IT outsourcing services....................... $ 19,099 $ 18,438
Government technology services............................ 14,962 6,556
IT consulting and systems integration..................... 5,852 3,006
Technical staffing........................................ 2,015 2,029
Learning Services......................................... 110 136
-------- ---------
Total revenue................................................. $ 42,038 $ 30,165
======== =========
GROSS PROFIT
Diversified IT outsourcing services....................... $ 4,913 $ 4,762
Government technology services............................ 4,337 1,595
IT consulting and systems integration..................... 1,038 395
Technical staffing........................................ 404 390
Learning Services......................................... 16 15
-------- ---------
Total gross profit............................................ 10,708 7,157
Selling, general, and administrative expense.............. 8,290 5,905
Net interest income....................................... 83 167
Foreign currency transaction loss......................... (24) (199)
-------- ---------
Income from continuing operations before income taxes......... $ 2,477 $ 1,220
======== =========
We attribute revenue to different geographic areas on the basis of the location
providing the services to the customer. Revenue by geographic area is presented
below:
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
-------- ---------
(In thousands)
REVENUE
United States............................................. $ 29,395 $ 21,418
Europe:
Belgium................................................ 8,905 5,136
Other.................................................. 3,738 3,611
-------- ---------
Total Europe.............................................. 12,643 8,747
-------- ---------
Total revenue................................................. $ 42,038 $ 30,165
======== =========
12
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
NOTE 8 -- SEGMENT REPORTING (continued)
Revenue from customers, or groups of customers under common control, that
comprise 10% or greater of our total revenue in any period presented are as
follows:
THREE MONTHS ENDED MARCH 31
---------------------------
2005 2004
-------- ---------
Ford Motor Company and Subsidiaries........................... 28.3% 40.1%
United States Government...................................... 29.9% 12.8%
-------- ---------
Total......................................................... 58.2% 52.9%
======== =========
We conduct business under multiple contracts with various entities within the
Ford Motor Company organization and with various agencies and departments of the
United States Government. For the three months ended March 31, 2005, no single
agency or department of the United States Government comprised 10% or greater of
the Company's total revenue. For the three months ended March 31, 2004, one
customer within the United States Government comprised 10.2% of the Company's
total revenue.
NOTE 9 -- STOCK REPURCHASE PROGRAM
In February 2004, we announced a stock repurchase program to repurchase up
to 1,000,000 shares of the Company's common stock. Under this program, we
purchased 350,000 shares of our common stock from a director of the Company and
his immediate family for $7.84 per share, inclusive of sales commission expense,
during the first quarter of 2004. No other repurchases were made under the
program. The repurchase program expired on January 27, 2005.
NOTE 10 -- CONTINGENCIES
MINORITY FOREIGN OWNERSHIP, CONTROL, OR INFLUENCE:
TechTeam acquired 100% of the outstanding stock of Digital Support Corporation
("DSC") on December 31, 2003. DSC provides services to various departments
within the United States Department of Defense ("DoD"). DSC acquired 100% of the
outstanding capital stock of Sytel on January 3, 2005. Sytel provides services
to various departments within the DoD and the United States Department of State
("DoS"). Both DSC and Sytel require facility security clearances ("FSC") in
order to perform their services for one or more of their DoD and DoS customers.
Given the beneficial ownership of over 5% of TechTeam's capital stock by
ChrysCapital II, LLC, a Mauritius entity ("ChrysCapital"), and ChrysCapital's
right to appoint a member of TechTeam's Board of Directors, TechTeam is
considered to be under minority foreign ownership, control, or influence
("FOCI") for purposes of the National Industrial Security Program Operating
Manual ("NISPOM"). On May 5, 2005, we entered into a Security Control Agreement,
which is a recognized measure under NISPOM for mitigation of minority FOCI, with
the DoD.
LEGAL PROCEEDINGS:
The Company is a party to various legal proceedings that are routine and
incidental to its business. Although the consequences of these proceedings are
not presently determinable, in the opinion of management, they will not have a
material adverse affect on our liquidity, financial condition, or results of
operations, although no assurances can be given in this regard.
13
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
NOTE 11 -- ACQUISITIONS
On January 3, 2005, TechTeam Global, Inc., through its wholly-owned subsidiary
DSC, completed the acquisition of all of the outstanding stock of Sytel, Inc., a
diversified information technology services and solutions company headquartered
in Bethesda, Maryland, that provides managed network services and advanced
enterprise solutions -- including network design, management, and support;
network security services; help desk support; program design and implementation;
and e-government and e-learning solutions -- to several departments of the
United States Government. The total purchase price of $21,903,000 consists of
initial consideration paid by the Company of $18,500,000, acquisition costs of
$724,000, a noncompete agreement of $500,000, an estimated working capital
payment of $1,567,000, and stock options with a fair value of $612,000 to
purchase 160,900 shares of Company common stock. The stock options were valued
using the Black-Scholes valuation model using the following assumptions --
risk-free interest rate of 3.28%, volatility factor of the expected market price
of our common stock of 50%, expected life of 3 years, and dividend yield of 0%.
In addition to the initial purchase price, the selling shareholders will be paid
an amount equal to 7% of Sytel's gross profit in excess of $12,000,000 in 2005
and $14,000,000 in 2006.
Of the initial consideration, $2,475,000 was placed into an escrow account,
which consists of $825,000 related to a potential working capital adjustment and
$1,650,000 related to representations and warranties of the selling shareholders
contained in the purchase agreement. The purchase price is subject to a working
capital adjustment based upon Sytel's final net working capital position at
January 3, 2005. As noted above, the Selling Shareholders were paid an estimated
working capital adjustment of $1,567,000, subject to final adjustment and
settlement.
The following table summarizes the preliminary allocation of the purchase price
at January 3, 2005 and the net cash used in the acquisition. The allocation of
the purchase price may change in future periods based on the final working
capital settlement and valuation of long-lived assets.
AMOUNT
------------
(In thousands)
Goodwill...................................................... $ 14,815
Intangible assets............................................. 7,853
Property, equipment, and purchased software................... 169
Other current and non-current assets, net of cash
acquired of $31........................................... 11,836
Accounts payable, accrued liabilities, and deferred
tax liabilities assumed................................... (12,801)
--------
Total purchase price, net of cash acquired.................... 21,872
Issuance of stock options..................................... (612)
--------
Net cash used................................................. $ 21,260
========
14
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
NOTE 11 -- ACQUISITIONS (continued)
The operating results of Sytel are included in the consolidated results of
operations of the Company from January 3, 2005. The unaudited pro forma
condensed consolidated results of operations for the three months ended March
31, 2004 are presented below as though Sytel had been acquired as of January 1,
2004.
THREE MONTHS
ENDED
MARCH 31,
2004
--------------
(In thousands)
Revenue
As reported............................................... $ 30,165
Pro forma................................................. $ 37,369
Income (loss) from continuing operations
As reported............................................... $ 628
Pro forma................................................. $ (82)
Net income (loss)
As reported............................................... $ 624
Pro forma................................................. $ (86)
Diluted earnings (loss) per common share
As reported............................................... $ 0.07
Pro forma................................................. $ (0.01)
NOTE 12 -- DISCONTINUED OPERATIONS
TechTeam Capital Group, LLC ("Capital Group"), a subsidiary of the Company,
previously wrote leases for computer, telecommunications, and other types of
capital equipment, with initial lease terms ranging from two to five years.
Capital Group ceased writing new leases in March 2000 and is in the final stages
of running out its lease portfolio. Our future revenue stream from contractually
committed leases is inconsequential to our results of operations. The primary
activity that remains in closing down the leasing operation is the collection of
accounts receivable, including older accounts receivable related to terminated
leases, which will continue during 2005. As a result, Capital Group has been
presented as a discontinued operation in accordance with SFAS No. 144,
"Accounting for the Disposal or Impairment of Long-Lived Assets." Under SFAS
144, the operating results of Capital Group are presented separately from
continuing operations in the accompanying financial statements for all periods
presented. Capital Group previously was reported as a separate operating segment
called Leasing Operations.
Summarized information for Capital Group is as follows:
THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
-------- ---------
(In thousands)
Revenue....................................................... $ 67 $ 105
Income (loss) before income taxes............................. $ 84 $ (6)
15
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
NOTE 13 -- SUBSEQUENT EVENT
On May 3, 2005, the holder of preferred stock converted 319,656 shares of
preferred stock into an equal number of shares of unregistered Company common
stock. Had this transaction occurred during the three months ended March 31,
2005, our reported basic and diluted earnings per common share would not have
changed.
During the three months ended March 31, 2005, the preferred shareholder
exercised its right to cause the Company to register for sale the shares of
common stock issuable upon conversion of the preferred shares. In connection
therewith, the Company filed a registration statement on Form S-3 with the
United States Securities and Exchange Commission on April 8, 2005.
16
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Item 2, contains
forward-looking statements that involve risks and uncertainties, as well as
assumptions that, if they never materialize or prove incorrect, could cause the
results of TechTeam Global, Inc. and its consolidated subsidiaries ("TechTeam")
to differ materially from those expressed or implied by such forward-looking
statements. All statements other than statements of historical fact are
statements that could be deemed forward-looking statements, including any
projections of revenue, gross margin, expenses, earnings or losses from
operations, synergies, or other financial items; any statements of the plans,
strategies, and objectives of management for future operations; any statement
concerning developments or performance relating to or services; any statements
regarding future economic conditions or performance; any statements of
expectation or belief; and any statements of assumptions underlying any of the
foregoing. The risks, uncertainties and assumptions referred to above include
the performance of contracts by suppliers, customers, and partners; employee
management issues; the difficulty of aligning expense levels with revenue
changes; complexities of global political and economic developments; and other
risks that are described herein, including but not limited to the items
discussed in "Factors that Could Affect Future Results" set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 2 of this report, and that are otherwise described from time
to time in TechTeam's Securities and Exchange Commission reports filed after
this report. TechTeam assumes no obligation and does not intend to update these
forward-looking statements.
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
TechTeam is a global provider of information technology ("IT") and business
process outsourcing support services to Fortune 1000 companies, multinational
companies, product providers, small and mid-size companies, and government
entities. Our goal is to deliver the best overall value proposition in our
industry -- the best combination of high quality, low cost, flexibility, and
customer satisfaction -- and become a global provider of IT and business process
outsourcing support services with $500 million in revenue by 2009 through a
combination of sustained organic growth coupled with selective, strategic, and
accretive acquisitions.
Our results for the three months ended March 31, 2005 reflect the early success
of our acquisition strategy. On January 3, 2005, we acquired Sytel, Inc.
("Sytel"), a diversified information technology services and solutions company
headquartered in Bethesda, Maryland, that provides managed network services and
advanced enterprise solutions -- including network design, management, and
support; network security services; help desk support; program design and
implementation; and e-government and e-learning solutions -- to several
departments of the United States Government. We also acquired Advanced Network
Engineering NV ("A.N.E.") on May 13, 2004, an information technology services
and solutions company in Belgium that provides software application, network
infrastructure, and systems integration services to various global,
pan-European, and Belgian customers. Together, Sytel and A.N.E. contributed
revenue of $10.2 million for the three months ended March 31, 2005, which
resulted in an increase in total revenue of 39.4% to $42.0 million, from $30.2
million for the comparable period in 2004. Excluding revenue contributed by
Sytel and A.N.E., total revenue increased 5.7% to $31.9 million for the three
months ended March 31, 2005, from $30.2 million for the comparable period in
2004.
17
As a result of acquiring three companies over a 13-month period from December
31, 2003, we have significantly grown our business and strategically added the
government technology services vertical market to our business and expanded this
segment. The services provided in this business segment mirror the services
offered in our other business segments, but are provided to various departments
of the United States Government, local government entities, and the European
Union. In order to better describe our business following these changes, during
the fourth quarter of 2004, we modified our four reporting business segments
into five reporting segments -- Diversified IT Outsourcing Services, Government
Technology Services, IT Consulting and Systems Integration, Technical Staffing,
and Learning Services. Prior year amounts have been reclassified to reflect the
current presentation.
Our results for the three months ended March 31, 2005 also reflect profitability
improvement over the comparable period in 2004 through our continued growth in
Europe, success at establishing multilingual help desk operations in Romania
(with the delivery of customer support services beginning in April 2004), and
continuing efforts to improve operating efficiencies and performance and control
costs. Revenue from our European operations, including the revenue contributed
from A.N.E., increased 44.5% to $12.6 million for the three months ended March
31, 2005, from $8.75 million for the comparable period in 2004. Total Company
gross profit improved 49.6% to $10.7 million for the three months ended March
31, 2005, from $7.16 million for the comparable period in 2004. The Company's
gross margin (gross profit expressed as a percentage of revenue) improved to
25.5% for the three months ended March 31, 2005, from 23.7% for the comparable
period in 2004. Excluding the gross profit contributed by Sytel and A.N.E.,
gross profit grew 11.9% to $8.01 million for the three months ended March 31,
2005, from $7.16 million for the comparable period in 2004, and gross margin
improved to 25.1%.
As we look to the remainder of 2005, we expect certain challenges to impact our
profitability in future periods. First, we are required to adopt the provisions
of Section 404 of the Sarbanes-Oxley Act of 2002 (the "Act") for the year ended
December 31, 2005, which requires us to certify our system of internal control
over financial reporting and disclosure. We expect to incur between $1.0 million
to $1.5 million of incremental expense in 2005 to implement this section of the
Act. These costs may increase if it is determined that significant efforts will
be required to remediate control deficiencies that may be identified during
implementation. In addition, significant time and effort of management will be
required. For the three months ended March 31, 2005, we incurred approximately
$20,000 of third party expense related to this project.
Next, we are investing in our global infrastructure to support our growth. We
are implementing a new human capital management system during 2005 and 2006,
which will encompass most aspects of our global human resource functions. We
expect to incur approximately $600,000 to $700,000 of expense in 2005 during
implementation before we begin to realize resulting operational efficiencies in
future periods. For the three months ended March 31, 2005, we incurred
approximately $80,000 of expense related to this project. As our customers
continue to require services delivered globally, we also expect to make
investments necessary to establish operations in new countries from time to
time.
In connection with our acquisitions, we expect to incur expenses totaling
$556,000 for the remainder of 2005 and $59,000 in 2006 related to contingent
consideration and retention bonuses for key employees. The contingent
consideration is payable to key employees if certain operating targets are met
and is also contingent upon the key employees continuing to be employed by the
Company. Therefore, these amounts are reported as compensation expense in the
accompanying financial statements.
Finally, as previously reported, a large help desk contract with DaimlerChrysler
AG has not been renewed and another contract with Liberty Mutual Insurance
Company ("Liberty Mutual") ended in March 2005, as the client brought these
services in-house. Since services for these projects were delivered from our
Southfield, Michigan help desk facility, our facility is currently
underutilized.
18
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO MARCH 31, 2004
THREE MONTHS ENDED MARCH 31,
--------------------------- INCREASE
2005 2004 (DECREASE) % CHANGE
---------- ----------- ----------- --------
(In thousands, except percentages)
REVENUE
Diversified IT outsourcing services .... $ 19,099 $ 18,438 $ 661 3.6%
Government technology services ......... 14,962 6,556 8,406 128%
IT consulting and systems integration .. 5,852 3,006 2,846 94.7%
Technical staffing ..................... 2,015 2,029 (14) (0.7)%
Learning services ...................... 110 136 (26) (19.1)%
----------- ----------- ----------- -----
TOTAL REVENUE ............................... $ 42,038 $ 30,165 $ 11,873 39.4%
=========== =========== =========== =====
The majority of the overall revenue growth of 39.4% for the three months ended
March 31, 2005, from the comparable period in 2004, is attributable to our
acquisitions of Sytel and A.N.E. and revenue growth in Belgium and at our
subsidiary, TechTeam Cyntergy. Our acquisition of Sytel on January 3, 2005
accounts for all of the increase in revenue from government technology services
of 128% to $15.0 million for the three months ended March 31, 2005, from $6.56
million for the comparable period in 2004. Excluding Sytel, revenue from
government technology services decreased 1.8% to $6.44 million for the three
months ended March 31, 2005, from the comparable period in 2004, because the
first quarter of 2004 included higher hardware sales.
Our acquisition of A.N.E. on May 13, 2004 accounts for 55.4% of the increase in
revenue of $2.85 million from IT consulting and systems integration to $5.85
million for the three months ended March 31, 2005, an increase in revenue of
94.7% from $3.01 million for the comparable period in 2004. Excluding A.N.E.,
revenue from IT consulting and systems integration increased 42.2% to $4.28
million for the three months ended March 31, 2005, from $3.01 million for the
comparable period in 2004, primarily due to additional business from new and
existing customers at TechTeam Cyntergy, which provides deployment, training,
and implementation services to companies in the hospitality, retail, food
service, and other industries throughout the United States.
Revenue from our diversified IT outsourcing services increased 3.6% to $19.1
million for the three months ended March 31, 2005, from $18.4 million for the
comparable period in 2004, as a result of 42.7% revenue growth from our blended
solution Belgium and Romania, offset by a decline in revenue from diversified IT
outsourcing services in the United States of 13.7%. The growth in Belgium and
Romania is primarily due to new customer contracts. The decrease in revenue in
the United States is primarily due to the decline in revenue from
DaimlerChrysler and Liberty Mutual, which is partially offset by new customer
contracts.
Total revenue generated in the United States increased 37.2% to $29.4 million
for the three months ended March 31, 2005, from $21.4 million for the comparable
period in 2004, due to our acquisition of Sytel. Excluding revenue contributed
by Sytel, revenue generated in the United States decreased 2.8% to $20.8 million
for the three months ended March 31, 2005, from $21.4 million for the comparable
period in 2004, primarily due to the aforementioned decline in revenue from
DaimlerChrysler and Liberty Mutual and a contractual price reduction to Ford
effective August 1, 2004, partially offset by new customer contracts in
diversified IT outsourcing services, government technology services, and
additional business from new and existing customers in IT consulting and systems
integration at our subsidiary, TechTeam Cyntergy.
19
Revenue generated in Europe increased 44.5% to $12.6 million for the three
months ended March 31, 2005, from $8.75 million for the comparable period in
2004, primarily due to growth in business in Belgium and Romania from new
customer contracts, our acquisition of A.N.E., and the strengthening of European
currencies relative to the U.S. dollar. Excluding revenue contributed by A.N.E.,
revenue generated in Europe increased 26.5% to $11.1 million for the three
months ended March 31, 2005, from $8.75 million for the comparable period in
2004. If revenue in Europe for the three months ended March 31, 2005 was
translated at the average exchange rate for the comparable period in 2004,
reported revenue would have been reduced by approximately $590,000. Since most
of the Company's international operating expenses are also incurred in the same
foreign currencies in which the associated revenue is denominated, the net
impact of exchange rate fluctuations on gross profit and operating income is
considerably less than the estimated impact on revenue.
THREE MONTHS ENDED MARCH 31,
------------------------------------------------
2005 2004
--------------------- ---------------------
GROSS GROSS INCREASE
AMOUNT MARGIN % AMOUNT MARGIN % (DECREASE) %CHANGE
-------- -------- -------- -------- ---------- -------
(In thousands, except percentages)
GROSS PROFIT
Diversified IT outsourcing services .... $ 4,913 25.7% $ 4,762 25.8% $ 151 3.2%
Government technology services ......... 4,337 29.0% 1,595 24.3% 2,742 172%
IT consulting and systems integration .. 1,038 17.7% 395 13.1% 643 163%
Technical staffing ..................... 404 20.0% 390 19.2% 14 3.6%
Learning services ...................... 16 14.5% 15 11.0% 1 6.7%
-------- -------- --------
TOTAL GROSS PROFIT .......................... $ 10,708 25.5% $ 7,157 23.7% $ 3,551 49.6%
======== ======== ========
Consistent with revenue, the majority of the overall gross profit growth of
49.6% for the three months ended March 31, 2005, from the comparable period in
2004, is attributable to our acquisitions of Sytel and A.N.E. and growth in
Belgium and at TechTeam Cyntergy.
Our acquisition of Sytel accounts for the 88.1% of the increase in gross profit
of $2.74 million from government technology services to $4.34 million for the
three months ended March 31, 2005, an increase in gross profit of 172% from
$1.60 million for the comparable period in 2004. Excluding Sytel, gross profit
from government technology services increased 20.4% to $1.92 million for the
three months ended March 31, 2005, from $1.60 million for the comparable period
in 2004, due to higher margin contracts and less revenue from lower margin
hardware sales that were included in the first quarter of 2004. Gross margin
from government technology services increased to 29.0% for the three months
ended March 31, 2005, from 24.3% for the comparable period in 2004, primarily
due to less revenue from lower margin hardware sales in the first quarter of
2004.
Gross profit from IT consulting and systems integration increased 163% to $1.04
million for the three months ended March 31, 2005, from $395,000 for the
comparable period in 2004. Gross margin from IT consulting and systems
integration increased to 17.7% for the three months ended March 31, 2005, from
13.1% for the comparable period in 2004. The increase in gross profit and gross
margin was primarily due to our acquisition of A.N.E. and additional business
from new and existing customers at TechTeam Cyntergy. Excluding the gross profit
contributed by A.N.E., gross profit increased 94.7% to $769,000 for the three
months ended March 31, 2005, from $395,000 for the comparable period in 2004.
20
Gross profit from our diversified IT outsourcing services increased 3.2% to
$4.91 million for the three months ended March 31, 2005, from $4.76 million for
the comparable period in 2004. Gross margin from diversified IT outsourcing
services remained consistent at 25.7% for the three months ended March 31, 2005,
from 25.8% for the comparable period in 2004. The increase in gross profit is a
result of the aforementioned revenue growth from our blended solution Belgium
and Romania; partially offset by a decline in revenue from diversified IT
outsourcing services in the United States.
THREE MONTHS ENDED
MARCH 31,
---------------------- INCREASE
2005 2004 (DECREASE) % CHANGE
-------- -------- ---------- --------
(In thousands, except percentages)
OPERATING EXPENSES AND OTHER
Selling, general, and administrative expense $ 8,290 $ 5,905 $ 2,385 40.4%
Net interest income ......................... $ 83 $ 167 $ (84) (50.3)%
Foreign currency transaction loss ........... $ (24) $ (199) $ 175 (87.9)%
Income tax provision ........................ $ 782 $ 592 $ 190 32.1%
Selling, general, and administrative expense increased 40.4% to $8.29 million,
or 19.7% of total revenue, for the three months ended March 31, 2005, from $5.91
million, or 19.6% of total revenue, for the comparable period in 2004, primarily
due to our acquisitions of Sytel and A.N.E. Excluding the revenue and expenses
contributed by Sytel and A.N.E., selling, general, and administrative expense
increased 11.0% to $6.56 million, or 20.6% of total revenue, for the three
months ended March 31, 2005, primarily due to a $200,000 bonus payable upon
renewal of DSC's largest contract in March 2005 and higher expenses related to
training, marketing and investor relations activity, and reinstatement of the
Company's 401(k) matching contribution.
Net interest income decreased to $83,000 for the three months ended March 31,
2005, from $167,000 for the comparable period in 2004, as a result of the
Company borrowing $15.0 million on January 3, 2005 under a term loan to
partially finance the acquisition of Sytel, and reduced interest income from
cash and cash equivalents being held as collateral for the term loan in a
non-interest-bearing account.
Foreign currency transaction loss decreased to a loss of $(24,000) for the three
months ended March 31, 2005, from a loss of $(199,000) for the comparable period
in 2004, primarily due to the U.S. dollar weakening relative to the euro and
British pound sterling to a greater extent in 2004 than in 2005 and lower
foreign-denominated balances subject to transaction gains and losses in 2005
than in 2004.
For the three months ended March 31, 2005, the consolidated effective tax rate
of 31.6% differs from the statutory tax rate of 34% primarily due to the tax
benefit of tax rates in certain foreign countries that are lower than 34% and
the tax benefit of certain permanent deductions. For the three months ended
March 31, 2004, the consolidated effective tax rate of 48.5% differs from the
statutory tax rate of 34% primarily due to providing a valuation allowance
against the future tax benefit of operating loss carryforwards in certain tax
jurisdictions.
21
IMPACT OF BUSINESS WITH MAJOR CLIENTS
We have historically been heavily dependent upon two or three major clients for
a substantial portion of our revenue. For the three months ended March 31, 2005
and 2004, Ford Motor Company and the United States Government were our only
clients that exceeded the threshold for being reported as a significant customer
or group of customers under common control. We conduct business under multiple
contracts with various entities within the Ford organization and with various
agencies and departments of the United States Government. For the three months
ended March 31, 2005 and 2004, Ford accounted for 28.3% and 40.1%, respectively,
of the Company's total revenue, and the United States Government accounted for
29.9% and 12.8%, respectively, of the Company's total revenue. For the three
months ended March 31, 2005, no single agency or department of the United States
Government comprised 10% or greater of the Company's total revenue. For the
three months ended March 31, 2004, one customer within the United States
Government comprised 10.2% of the Company's total revenue.
Our business with Ford consists of help desk services discussed above, technical
staffing, installation of new personal computer equipment through Dell Inc., and
the support services provided to Volvo Car Corporation, a subsidiary of Ford
Motor Company. We anticipate that our revenue from Ford will continue to grow
during 2005. Our largest contract with Ford for its Global Help desk is
scheduled to expire on July 31, 2005. Following the completion of a benchmarking
study that reaffirmed the value and quality of TechTeam's services, we are
currently in active negotiations with Ford on the renewal of this contract. We
are not aware of any request-for-proposal process that has been initiated by
Ford. Accordingly, we believe that we are well positioned to win this renewal
due to our strong performance, although no assurances can be given in this
regard.
Ford's credit rating was lowered to "below investment grade" status by Standard
& Poor's Rating Services on May 5, 2005. At this time, we do not expect this
downgrade to negatively affect our business with Ford or the collectibility of
our accounts receivable from Ford. However, any loss of (or failure to retain a
significant amount of business with) Ford would have a material adverse effect
on the Company's operating results and liquidity.
The Company continues to seek to diversify its client base from both a client
and industry perspective. During 2004, we were successful in expanding our
non-Ford-related business, especially through our multilingual help desk
offering and the results from our acquisitions of TechTeam A.N.E. and DSC.
During the three months ended March 31, 2005, we achieved further
diversification as a result of our acquisition of Sytel. While a major facet of
our business strategy remains to diversify our customer base and become less
dependent on our business with Ford, we believe our strong performance and
relationship with Ford will continue to result in increasing revenue dollars
while the percentage of our total revenue derived from Ford declines, although
no assurances can be given in this regard.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS No. 123R, "Share-Based
Payment," which replaces SFAS 123 and supersedes APB 25. SFAS 123R eliminates
the ability to account for share-based compensation transactions using APB 25,
and requires instead that such transactions be accounted for using a
fair-value-based method. SFAS 123R is effective for awards that are granted,
modified, or settled in periods beginning after December 15, 2005, or the
Company's fiscal year beginning January 1, 2006. The Company intends to adopt
SFAS123R on January 1, 2006. As we use the fair value method of accounting under
the original provisions of SFAS 123 for pro forma disclosure purposes, we are
also required to apply the provisions of SFAS 123R in recognizing compensation
cost for any portion of awards granted or modified after December 15, 1994, that
are not yet vested at the date SFAS 123R is adopted. Based on the number of
non-vested stock options the Company has outstanding at March 31, 2005 adoption
of SFAS 123R will result in approximately $18,000 of aggregate compensation
expense, net of tax, in fiscal years after 2005 and will not have a material
affect on our financial position or operating results.
22
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $37.5 million at March 31, 2005, as compared to
$40.4 million at December 31, 2004. During the three months ended March 31,
2005, cash and cash equivalents decreased $2.98 million primarily due to $5.66
million in cash provided by operations offset by $6.26 million in cash used to
acquire Sytel (net of debt borrowings of $15.0 million), $809,000 in cash used
for capital expenditures, and $1.30 million in payments on long-term debt. Our
operating cash flow of $5.66 million for the three months ended March 31, 2005
was generated primarily by income prior to non-cash charges for depreciation and
amortization of $3.22 million, and conversion of working capital to cash as
accounts payable and accrued liabilities increased $5.13 million whereas current
assets less cash increased $2.98 million. Cash flow from operations increased
12.6% to $5.66 million for the three months ended March 31, 2005, from $5.02
million for the comparable period in 2004, primarily due to an increase in
income prior to non-cash charges for depreciation and amortization, partially
offset by less cash from working capital changes and discontinued operations.
Long-term cash requirements, other than for normal operating expenses, are
anticipated for the continued expansion in Europe, enhancements of existing
technologies, possible repurchases of our common stock, additional consideration
that is payable to the selling shareholders of Sytel, DSC, and A.N.E. if
specific performance conditions and operating targets are met in 2005 - 2007,
possible global expansion activities, the possible payment of Company dividends,
and the possible acquisition of businesses complementary to the Company's
existing businesses. We believe that positive cash flows from operations,
together with existing cash balances, will continue to be sufficient to meet our
ongoing requirements for the next twelve months and foreseeable future. We have
historically not paid dividends.
MATERIAL COMMITMENTS
As a result of the Company's acquisition of Sytel on January 3, 2005, the
Company's outstanding contractual obligations have changed to include $15.0
million the Company borrowed under a term loan with a bank to finance our
acquisition of Sytel and operating lease commitments of Sytel. The Company has
the following contractual obligations outstanding at March 31, 2005:
REDEEMABLE
CONVERTIBLE
PREFERRED OPERATING
MATURITIES OF CONTRACTUAL OBLIGATIONS DEBT STOCK LEASES
---------------------------------------- ---------- ----------- ----------
Less than one year ..................... $ 15 $ -- $ 3,928
1-3 years .............................. -- 5,000 9,637
4-5 years .............................. 13,712 -- 5,730
Thereafter ............................. -- -- 4,689
---------- ---------- ----------
Total .................................. $ 13,727 $ 5,000 $ 23,984
========== ========== ==========
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no changes in the selection and application of critical
accounting policies and estimates disclosed in Item 7 of our Annual Report on
Form 10-K for the year ended December 31, 2004.
FACTORS INFLUENCING FUTURE RESULTS
Refer to Item 7 of our Annual Report on Form 10-K for the year ended December
31, 2004.
23
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in reported market risks since December 31,
2004.
ITEM 4 -- CONTROLS AND PROCEDURES
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected.
On January 3, 2005, we acquired Sytel, Inc., which expanded our internal
controls over financial reporting and disclosure. As of March 31, 2005, an
evaluation was performed under the supervision and with the participation of the
Company's management, including the Chief Executive Officer, Chief Financial
Officer, and Chief Accounting Officer, of the effectiveness of the design and
operations of the Company's disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based
upon that evaluation, the Company's Management, including the Chief Executive
Officer, Chief Financial Officer, and Chief Accounting Officer, concluded that
the Company's disclosure controls and procedures were effective as of March 31,
2005.
24
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
The Company is a party to various legal proceedings that are routine and
incidental to its business. Although the consequences of these proceedings are
not presently determinable, in the opinion of management, they will not have a
material adverse affect on our liquidity, financial condition, or results of
operations, although no assurances can be given in this regard.
ITEM 2 -- UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no sales of unregistered equity securities of the Company during the
three months ended March 31, 2005.
There were no purchases of Company common stock made by the Company during the
three months ended March 31, 2005. A stock repurchase program to repurchase up
to 1,000,000 shares of the Company's common stock expired on January 27, 2005.
ITEM 6 -- EXHIBITS
The following exhibits are filed as part of this report on Form 10-Q:
31.1 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.3 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.3 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TechTeam Global, Inc.
(Registrant)
Date: May 11, 2005 By: /s/ William F. Coyro, Jr. William F. Coyro, Jr.
------------------------- President, Chief Executive
Officer, and Director
(Principal Executive Officer)
By: /s/ David W. Morgan David W. Morgan
------------------------- Chief Financial Officer and
Treasurer (Principal Financial
Officer)
By: /s/ Marc J. Lichtman Marc J. Lichtman
------------------------- Chief Accounting Officer
(Principal Accounting Officer)
26
EXHIBIT INDEX
EX NO. DESCRIPTION
------ -----------
31.1 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.3 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.3 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
27