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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2003
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--- ---
Commission file number 0-16284
TECHTEAM GLOBAL, INC.
(Name of issuer in its charter)
DELAWARE 38-2774613
--------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
27335 W. 11 Mile Road, Southfield, MI 48034
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 357-2866
--------------
Registrant's Internet address: www.techteam.com
-----------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
|X| Yes |_| No
The number of shares of the registrant's only class of common stock outstanding
at July 31, 2003 was 9,728,953.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ACTUAL RESULTS COULD
DIFFER FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF
CERTAIN FACTORS DESCRIBED IN THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 2002 PREVIOUSLY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
1
TECHTEAM GLOBAL, INC.
FORM 10-Q
INDEX
- -----------------------------------------------------------------------------------------------------------------------
PAGE
NUMBER
- -----------------------------------------------------------------------------------------------------------------------
PART I -- FINANCIAL INFORMATION
ITEM 1
Condensed Consolidated Statements of Operations (Unaudited) 3
Three and Six Months Ended
June 30, 2003 and 2002
Condensed Consolidated Statements of Financial Position (Unaudited) 4-5
June 30, 2003 and December 31, 2002
Condensed Consolidated Statements of Cash Flows (Unaudited) 6
June 30, 2003 and 2002
Notes to the Condensed Consolidated Financial Statements (Unaudited) 7-14
ITEM 2
Management's Discussion and Analysis of Financial Condition and Results of Operations 15-20
ITEM 4
Controls and Procedures
PART II -- OTHER INFORMATION 20
ITEM 1
Legal Proceedings
ITEM 2 21
Changes in Securities and Use of Proceeds
ITEM 4 21
Submission of Matters to a Vote of Security Holders
ITEM 5 21
Other Information
ITEM 6 22
Exhibits and Reports on Form 8-K 22
Signatures 23
- -----------------------------------------------------------------------------------------------------------------------
2
PART 1 -- FINANCIAL INFORMATION
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
ITEM 1--FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ------------ -----------
(In thousands, except per share data)
REVENUES
Corporate services
Corporate help desk services....................... $ 16,457 $ 14,309 $ 32,466 $ 28,728
Technical staffing................................. 2,412 2,594 4,778 5,402
Systems integration................................ 2,144 2,211 4,282 4,446
Training programs.................................. 243 307 461 583
------------ ----------- ------------ ------------
Total corporate services.............................. 21,256 19,421 41,987 39,159
Leasing operations.................................... 660 2,481 1,692 5,690
------------ ----------- ------------ ------------
TOTAL REVENUES............................................ 21,916 21,902 43,679 44,849
COST OF SERVICES DELIVERED................................ 18,857 16,732 35,961 34,525
------------ ----------- ------------ ------------
GROSS PROFIT.............................................. 3,059 5,170 7,718 10,324
------------ ----------- ------------ ------------
OTHER OPERATING EXPENSES
Selling, general, and administrative.................. 4,932 4,434 9,385 8,324
Michigan Single Business Tax.......................... 340 225 542 450
------------ ----------- ------------ ------------
TOTAL OTHER OPERATING EXPENSES............................ 5,272 4,659 9,927 8,774
------------ ----------- ------------ ------------
Operating income (loss)................................... (2,213) 511 (2,209) 1,550
------------ ----------- ------------ ------------
Currency transaction gain................................. 311 -- 363 --
Interest income........................................... 292 269 510 474
Interest expense.......................................... (14) (14) (23) (84)
------------ ----------- ------------ ------------
NET OTHER INCOME.......................................... 589 255 850 390
------------ ----------- ------------ ------------
Income (loss) before income taxes......................... (1,624) 766 (1,359) 1,940
Income tax provision (credit)............................. (200) 348 6 880
------------ ----------- ------------ ------------
Income (loss) before cumulative effect of accounting change (1,424) 418 (1,365) 1,060
Cumulative effect of accounting change.................... -- -- -- 1,123
------------ ----------- ------------ ------------
NET INCOME (LOSS)......................................... $ (1,424) $ 418 $ (1,365) $ (63)
============ =========== ============ ============
BASIC EARNINGS (LOSS) PER SHARE
Income (loss) before cumulative effect of accounting change $ (.14) $ .04 $ (.13) $ 0.10
Cumulative effect of accounting change ................... -- -- (0.11)
------------ ----------- ------------ ------------
Total basic earnings (loss) per share .................... $ (.14) $ .04 $ (.13) $ (0.01)
============ =========== ============ ============
DILUTED EARNINGS (LOSS) PER SHARE
Income (loss) before cumulative effect of accounting change $ (.14) $ .04 $ (.13) $ 0.10
Cumulative effect of accounting change ................... -- -- -- (0.11)
------------ ----------- ------------ ------------
Total diluted earnings (loss) per share .................. $ (.14) $ .04 $ (.13) $ (0.01)
============ =========== ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND COMMON SHARE EQUIVALENTS OUTSTANDING
Basic................................................. 10,492 10,941 10,593 10,922
Net effect of dilutive stock options.................. -- 306 -- 182
------------ ----------- ------------ ------------
Diluted............................................... 10,492 11,247 10,593 11,104
============ =========== ============ ============
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS), AS SET FORTH ABOVE..................... (1,424) 418 (1,365) (63)
Foreign currency translation adjustments.................. 174 392 363 295
------------ ----------- ------------ ------------
COMPREHENSIVE INCOME (LOSS)............................... (1,250) 810 (1,002) 232
============ =========== ============ ============
See accompanying notes.
3
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)
JUNE 30, DECEMBER 31,
ASSETS 2003 2002
- --------------------------------------------------------------------------- -------------- ---------------
(In thousands)
CURRENT ASSETS
Cash and cash equivalents.............................................. $ 40,562 $ 39,435
Securities available for sale.......................................... 5,806 6,492
Accounts receivable -- corporate services (less allowances of $160
June 30, 2003 and $182 at December 31, 2002)........................ 18,356 14,328
Accounts receivable -- leasing (less allowances of $704 at June 30,
2003 and $415 at December 31, 2002)................................. 1,762 2,906
Refundable taxes....................................................... 863 1,393
Inventories of off-lease equipment and supplies (less reserves of
$2,572 at June 30, 2003 and $1,974 at December 31, 2002)............... 166 1,452
Prepaid expenses and other............................................. 820 864
Deferred income tax.................................................... 1,442 1,242
-------------- ---------------
TOTAL CURRENT ASSETS .................................................. 69,777 68,112
PROPERTY, EQUIPMENT, AND PURCHASED SOFTWARE
Computer equipment and office furniture................................ 19,673 18,169
Purchased software..................................................... 9,943 9,435
Leasehold improvements................................................. 4,177 3,531
Transportation equipment............................................... 226 273
-------------- ---------------
34,019 31,408
Less -- Accumulated depreciation and amortization...................... 24,714 22,768
-------------- ---------------
9,305 8,640
OTHER ASSETS
Assets of leasing operations, net of amortization (less reserves of
$246 at June 30, 2003 and $823 at December 31, 2002)................ 1,471 3,489
Intangibles (less accumulated amortization of $6,838 at
June 30, 2003 and $6,442 at December 31, 2002)...................... 1,035 1,432
Other.................................................................. 128 191
-------------- ---------------
2,634 5,112
-------------- ---------------
TOTAL ASSETS............................................................... $ 81,716 $ 81,864
============== ===============
See accompanying notes.
4
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (continued)
(UNAUDITED)
JUNE 30, DECEMBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2003 2002
- --------------------------------------------------------------------------- -------------- ---------------
(In thousands)
CURRENT LIABILITIES
Accounts payable....................................................... $ 3,257 $ 1,639
Accrued payroll, related taxes, and withholdings....................... 3,179 3,187
Deferred revenues...................................................... 475 321
Accrued expenses and taxes............................................. 1,942 1,618
Current portion of notes payable....................................... 340 492
Other.................................................................. 169 175
-------------- ---------------
TOTAL CURRENT LIABILITIES.............................................. 9,362 7,432
LONG-TERM LIABILITIES...................................................... 565 1,112
REDEEMABLE CONVERTIBLE PREFERRED STOCK, PAR VALUE $.01, 5,000,000
SHARES AUTHORIZED, 689,656 ISSUED AND OUTSTANDING...................... 5,000 --
SHAREHOLDERS' EQUITY
Common stock, par value $.01, 45,000,000 shares authorized,
issued 17,000,167 and 16,953,100 shares at
June 30, 2003 and December 31, 2002, respectively................... 170 169
Additional paid-in capital............................................. 109,537 109,482
Retained earnings (deficit)............................................ (250) 1,114
Accumulated other comprehensive income -- foreign currency
translation adjustment.............................................. 519 156
-------------- ---------------
Total.................................................................. 109,976 110,921
Less -- Treasury stock (7,171,214 and 6,274,436 shares
at June 30, 2003 and December 31, 2002, respectively)............... 43,187 37,601
-------------- ---------------
Total shareholders' equity............................................. 66,789 73,320
-------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................. $ 81,716 $ 81,864
============== ===============
See accompanying notes.
5
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
----------------------------------
2003 2002
-------------- --------------
(In thousands)
OPERATING ACTIVITIES
Income (loss) before cumulative effect of accounting change........... $ (1,365) $ 1,060
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................... 3,150 6,763
Change in leasing business reserves............................. 1,050 --
Non-cash stock option compensation expense...................... 36 439
Treasury stock contributed to 401(k) plan and other............. 38 104
Changes in current assets and liabilities....................... (819) (2,204)
Changes in long-term liabilities................................ (40) --
-------------- --------------
Net cash provided by operating activities.......................... 2,050 6,162
INVESTING ACTIVITIES
Purchase of property, equipment and software, net..................... (2,548) (2,315)
Disposal of leased equipment.......................................... 1,251 2,713
Sale of marketable securities......................................... 686 1,640
Decrease in investment in direct financing leases and residuals....... 132 71
Other................................................................. 63 (10)
-------------- --------------
Net cash (used in) provided by investing activities................ (416) 2,099
FINANCING ACTIVITIES
Purchase of Company common stock...................................... (5,628) --
Proceeds from issuance of redeemable preferred stock, net............. 4,817 --
Payments on notes payable, net........................................ (266) (2,885)
Proceeds from issuance of common stock................................ 207 326
Other................................................................. 363 295
-------------- --------------
Net cash used in financing activities.............................. (507) (2,264)
-------------- --------------
Increase in cash and cash equivalents.............................. 1,127 5,997
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.......................... 39,435 30,251
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................ $ 40,562 $ 36,248
============== ==============
See accompanying notes.
6
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying unaudited consolidated financial statements have been prepared
by TechTeam Global, Inc. ("TechTeam" or "Company" or "We") in accordance with
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 accounting
principles generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the six-month period ended June 30, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003. 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, 2002.
Certain reclassifications have been made to the 2002 financial statements in
order to conform to the 2003 financial statement presentation.
NOTE A -- EARNINGS PER SHARE
Earnings per share is computed using the weighted average number of common
shares and common share equivalents outstanding. Common share equivalents
consist of stock options and are calculated using the treasury stock method.
The weighted average number of diluted shares fell from 11,102,814 at December
31, 2002 to 10,593,131 at June 30, 2003, due primarily to the common shares the
Company repurchased during the second quarter of 2003 under the Company's stock
repurchase program.
For the three and six month periods ended June 30, 2003, diluted and basic
weighted average shares outstanding are the same because the effects of
potentially dilutive options would be antidilutive since there are losses in
each period.
NOTE B -- DESCRIPTION OF THE BUSINESS
Revenues from clients that represented ten percent or more of total revenue are
as follows:
2003 2002
------------------------------- ---------------------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
------------- ------------- -------------- -------------
(In thousands except percent of total data)
THREE MONTHS ENDED JUNE 30,
Ford Motor Company...................... $ 10,843 49.5% $ 11,004 50.2%
DaimlerChrysler......................... 3,091 14.1% 3,154 14.4%
SIX MONTHS ENDED JUNE 30,
Ford Motor Company...................... $ 22,316 51.1% $ 22,121 49.3%
DaimlerChrysler......................... 6,445 14.8% 6,580 14.7%
NOTE C -- EFFECTS OF ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets."
Under Statement 142, goodwill and indefinite lived intangible assets are no
longer amortized but are reviewed annually for impairment, or more frequently if
impairment indicators arise. Separable intangible assets that have finite lives
will continue to be amortized over their useful lives. As of January 1, 2002 we
adopted SFAS 142. Accordingly, we took a charge of $1.1 million related to
impaired goodwill in our Leasing operations in the first quarter of 2002. Under
SFAS 142, the charge recognized upon adoption of the statement was reported as
the cumulative effect of an accounting change.
7
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C -- EFFECTS OF ACCOUNTING PRONOUNCEMENTS (continued)
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS 150 is
effective for instruments entered into after May 31, 2003, and otherwise at the
beginning of the first interim period beginning after June 15, 2003 for public
entities. SFAS 150 requires instruments containing a mandatory redemption clause
to be reported on the balance sheet as a liability. The Company issued preferred
stock in April 2003. The preferred stock contains a mandatory redemption
requirement, with the right to convert the preferred stock into common stock
(see Note J). The conversion features in the preferred stock prevent the
instrument from being subject to the reporting requirements of SFAS 150.
Redeemable preferred stock is not shown as a component of equity, but is shown
separately between debt and equity on the balance sheet so as not to be confused
with permanent capital.
During 2003, the FASB issued FASB Interpretation 46, Consolidation of Variable
Interest Entities. FASB Interpretation 46 requires the consolidation of entities
in which an enterprise absorbs a majority of the entity's expected losses,
receives a majority of the entity's expected residual returns, or both, as a
result of ownership, contractual or other financial interests in the entity.
Currently, entities are generally consolidated by an enterprise when it has a
controlling financial interest through ownership of a majority voting interest
in the entity. The Company is in process of evaluating the effects of FASB
Interpretation 46. Based upon the in process review, the Company believes that
adoption of the pronouncement will have no significant effect on reported
financial position or results of operations.
NOTE D -- STOCK OPTIONS
We account for stock options under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
Pro forma information regarding net income/(loss) and earnings/(loss) per share
is required by SFAS No. 123, Accounting for Stock-Based Compensation, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method. 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: a range of risk-free interest rates of
5% to 7% based on the expected life of the options; a volatility factor of .491
and .464 at June 30, 2003 and 2002, respectively, based on the market prices of
our common stock; and a weighted average expected life of three years.
As previously disclosed in our Form 10-K, we and our President and Chief
Executive Officer, William F. Coyro, Jr., entered into an employment agreement
on August 9, 2001. The terms of the agreement provided for TechTeam Global, Inc.
stock options granted to Dr. Coyro to become exercisable on September 30, 2002,
with the number of stock options exercisable determined by the average closing
price of our common stock during the month of September 2002. The actual number
of stock options that became exercisable by Dr. Coyro under this formula was
100,000.
Accounting Principles Board Opinion No. 25 required that in 2002 we record a
charge that was determined by multiplying the number of options actually awarded
by the difference in the stock price at the time the number of options become
determined and the exercise price for the option. Accordingly, we recorded a
charge of $410,000, which represented 100,000 options multiplied by $6.85
(closing price of the stock on October 1, 2002) less $2.75 (the option exercise
price), $408,000 of this expense was accrued in the second quarter of 2002, and
an additional $2,000 in expense in the third quarter of 2002. These charges were
recorded in selling, general, and administrative expenses.
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
our 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 our opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
8
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE D -- STOCK OPTIONS (continued)
For purposes of pro forma disclosures, the estimated fair value of the stock
options is amortized over the options' vesting period. Our pro forma information
is as follows:
2003 2002
(In thousands, except per
share data)
THREE MONTHS ENDED JUNE 30,
Reported income (loss)....................................... $ (1,424) $ 418
Executive stock option....................................... -- 269
SFAS No. 123 expense......................................... (76) (122)
------------- ------------
Pro forma income (loss)...................................... (1,500) 565
Pro forma loss per share
Basic.................................................... (.14) .05
Diluted.................................................. (.14) .05
SIX MONTHS ENDED JUNE 30,
Reported loss................................................ (1,365) (63)
Executive stock option....................................... -- 269
SFAS No. 123 expense......................................... (390) (219)
------------- ------------
Pro forma loss............................................... (1,755) (13)
Pro forma loss per share
Basic.................................................... (.17) (.00)
Diluted.................................................. (.17) (.00)
NOTE E -- CHANGES IN ESTIMATES
Preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying footnotes. Actual results could differ from the estimates and
assumptions made. TechTeam senior management reviews these estimates and
reserves to ensure their reasonableness.
In the second quarter of 2003, we recorded a reduction to the values of the
Company's off-lease equipment inventory due to the significant decline in the
secondary market for used computer equipment. After obtaining an independent
valuation of this inventory equipment, management determined that it would be
prudent to augment its reserve account to reduce the net book value of the
inventory. We reduced the book value of off-lease inventory by $1.00 million to
$166,000, to reflect the deterioration in the secondary computer equipment
market.
Reserves against certain receivables were also increased during the second
quarter of 2003. After thorough examination of the collectibility of certain
receivables, management determined that there was a decreased probability of
collection. Allowances against certain receivables were increased by $267,000 to
reflect the revised estimate of collectibility on these outstanding notes.
9
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE F -- LEGAL PROCEEDINGS
Refer to Part II, Item 1 for a description of legal proceedings.
NOTE G -- STOCK REPURCHASE PROGRAMS
In April 2003, we announced a new stock repurchase program to repurchase up to
2,000,000 shares of Company common stock. Under this program, we repurchased
900,978 shares for $5,627,833 inclusive of sales commission expense. Including
purchases settled after June 30, 2003, we repurchased a total of 1,000,978
shares for a total cost of $6,268,774, inclusive of sales commission expense.
In August 2002, we announced a stock repurchase program to repurchase up to
2,000,000 shares of common stock. Under this program, we repurchased 470,600
shares for $3,422,701, inclusive of sales commission expense, in 2002. The
Company did not acquire any shares of its common stock during the first quarter
of 2003 in connection with the program, which expired on February 26, 2003.
NOTE H -- SEGMENT AND GEOGRAPHIC 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 products.
Our reportable operating segments include Corporate services (consisting of
corporate help desk services, technical staffing, systems integration, and
training programs), and Leasing operations.
Our reportable geographic segments are the United States and Europe. The
European segment provides corporate help desk services and technical staffing.
The United States geographic segment provides services in all operating
segments. Revenues are attributed to geographic segments based upon the location
of service delivery.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies in our December 31,
2002 Form 10-K. We evaluate performance based on stand-alone operating segment
gross profit.
10
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H -- SEGMENT AND GEOGRAPHIC REPORTING (continued)
Financial information for our business segments is as follows:
CORPORATE SERVICES
---------------------------------------------------------------
CORPORATE
HELP DESK TECHNICAL SYSTEMS TRAINING LEASING
SERVICES STAFFING INTEGRATION PROGRAMS TOTAL OPERATIONS TOTAL
--------- ---------- ----------- ----------- ---------- ---------- -----------
(In thousands)
THREE MONTHS ENDED
JUNE 30, 2003
Revenues................... $ 16,457 $ 2,412 $ 2,144 $ 243 $ 21,256 $ 660 $ 21,916
Gross profit............... 3,300 516 521 41 4,378 (1,318) 3,059
Depreciation and
amortization........... 770 -- 13 2 785 362 1,147
Expenditures for property.. 1,436 -- 6 1 1,443 -- 1,443
THREE MONTHS ENDED
JUNE 30, 2002
Revenues................... $ 14,309 $ 2,594 $ 2,211 $ 307 $ 19,421 $ 2,481 $ 21,902
Gross profit............... 3,875 454 553 43 4,925 245 5,170
Depreciation and
amortization........... 716 6 2 3 727 1,928 2,655
Expenditures for property.. 948 4 1 2 955 -- 955
SIX MONTHS ENDED
JUNE 30, 2003
Revenues................... $ 32,466 $ 4,778 $ 4,282 $ 461 $ 41,987 $ 1,692 $ 43,679
Gross profit............... 6,895 1,015 1,078 80 9,068 (1,349) 7,718
Depreciation and
amortization........... 1,508 1 18 3 1,530 903 2,433
Expenditures for property.. 2,189 -- 9 2 2,200 -- 2,200
SIX MONTHS ENDED
JUNE 30, 2002
Revenues................... $ 28,728 $ 5,402 $ 4,446 $ 583 $ 39,159 $ 5,690 $ 44,849
Gross profit............... 7,782 811 1,144 110 9,847 477 10,324
Depreciation and
amortization........... 1,402 13 5 5 1,425 4,661 6,086
Expenditures for property.. 1,671 12 4 4 1,691 -- 1,691
SEGMENT ASSETS
June 30, 2003.............. $ 20,432 $ 2,093 $ 1,945 $ 216 $ 24,686 $ 3,272 $ 27,958
December 31, 2002.......... 16,695 1,919 1,350 216 20,180 7,757 27,937
11
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H -- SEGMENT AND GEOGRAPHIC 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:
SIX MONTHS ENDED JUNE 30,
--------------------------------
2003 2002
-------------- --------------
(In thousands)
Depreciation and amortization
Total for reportable segments..................................... $ 2,433 $ 6,086
Corporate assets.................................................. 717 677
-------------- --------------
Total depreciation and amortization............................ $ 3,150 $ 6,763
============== ==============
SIX MONTHS ENDED JUNE 30,
--------------------------------
2003 2002
-------------- --------------
(In thousands)
Expenditures for property
Total assets for reportable segments............................... $ 2,200 $ 1,691
Corporate assets................................................... 348 624
-------------- --------------
Total expenditures for property................................. $ 2,548 $ 2,315
============== ==============
JUNE 30, DECEMBER 31,
2003 2002
-------------- --------------
(In thousands)
Assets
Total assets for reportable segments............................... $ 27,958 $ 27,937
Corporate assets................................................... 53,758 53,927
-------------- --------------
Total assets.................................................... $ 81,716 $ 81,864
============== ==============
Financial information from our geographic segments is as follows:
REVENUE
------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------- ------------------------------
2003 2002 2003 2002
------------- -------------- ------------ --------------
(In thousands)
United States................................... 15,446 18,114 31,544 37,274
Europe 6,470 3,788 12,135 7,575
------------- -------------- ------------ --------------
Total........................................... 21,916 21,902 43,679 44,849
============= ============== ============ ==============
12
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H -- SEGMENT AND GEOGRAPHIC REPORTING (continued)
GROSS PROFIT
---------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------- ---------------------------------
2003 2002 2003 2002
-------------- -------------- ------------- --------------
(In thousands)
United States................................... $ 1,898 $ 3,960 $ 5,109 $ 7,823
Europe 1,161 1,210 2,609 2,501
-------------- -------------- ---------------- --------------
Total........................................... $ 3,059 $ 5,170 $ 7,718 $ 10,324
============== ============== ================ ==============
ASSETS
--------------------------------
JUNE 30, DECEMBER 31,
2003 2002
-------------- --------------
(In thousands)
United States................................... $ 68,178 $ 71,731
Europe 13,538 10,133
-------------- --------------
Total........................................... $ 81,716 $ 81,864
============== ==============
NOTE I -- INCOME TAXES
The consolidated effective tax rate differs from the statutory tax rate due to
certain non-deductible expenses.
NOTE J -- PRIVATE PLACEMENT PREFERRED STOCK TRANSACTION
On April 8, 2003, TechTeam Global, Inc. completed a private placement of 689,656
shares of newly created Series A Convertible Preferred Stock ("Series A
Preferred Stock") with ChrysCapital II, LLC, ("CCII") a Mauritius limited
liability company for $5,000,006 or $7.25 per share. Series A Preferred
Stockholders are currently entitled to elect one director to the Company's Board
of Directors. The holder of Series A Preferred Stock may convert any or all of
its Series A Preferred Stock into Common Stock at any time after the first
anniversary of the initial issuance thereof on a one share of Series A Preferred
Stock for one share of Common Stock basis. The holder(s) of Series A Preferred
Stock has the right to vote each share of its Series A Preferred Stock as if it
were converted to the Company's Common Stock. The Company is required to redeem
the Series A Preferred Stock on April 8, 2006 or earlier in certain
circumstances.
13
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE K -- FOREIGN CURRENCY TRANSLATION
We translate the results of operations of our foreign subsidiaries on a monthly
basis using the ending exchange rates for the month, whereas we translate
balance sheet accounts using either period end rates for assets and liabilities,
or historical rates for stockholders' equity. Resulting currency translation
adjustments are recorded as a component of stockholders' equity. Transaction
gains and losses are recorded in the consolidated statements of earnings.
Currency transaction gains for the three and six month periods ended June 30,
2003 were $311,000 and $363,000, respectively, comprised of recalculation of
intercompany payables and customer receivables based on currency exchange rate
at quarter end. Currency transaction gains and losses for the six-months ended
June 30, 2002 were not significant.
NOTE L -- SUBSEQUENT EVENTS
On July 22, 2003, we amended our office-building lease in Southfield, Michigan
to reduce the amount of square footage leased and to extend the term of the
lease on our remaining space. Effective July 1, 2003, we reduced the amount of
square footage under lease by approximately 31,000 square feet, thereby
eliminating $46,000 per month in rental expense. We also extended the lease term
on the remaining square footage through June 30, 2011.
14
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain of the statements contained in this report that are not historical facts
are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. Our actual results may differ materially from those
included in the forward-looking statements. We caution readers not to place
undue reliance on these forward-looking statements, which reflect management's
opinions only as of the date hereof. We do not undertake an obligation to revise
or publicly release the results of any revisions to these forward-looking
statements. You should carefully review the risk factors described in other
documents the Company files from time to time with the SEC, including the Annual
Report on Form 10-K for the year ended December 31, 2002.
OVERVIEW
TECHTEAM GLOBAL, INC. ("TechTeam" or "Company" or "We") is a global provider of
information technology (IT) and business process outsourcing support services to
entities, including Fortune 1000 companies, multinational companies, product
providers, and governments. These services are provided with a single point of
contact philosophy centralized on our IT help desk support services. We also
offer other services, including technology deployment and migration services,
consulting, systems integration, training, and technical staffing. We provide
support services in Europe through our subsidiaries: TechTeam Europe, NV/SA;
TechTeam Europe, Ltd.; TechTeam Europe, GmbH; and TechTeam Europe, AB.
TechTeam Global, Inc. is incorporated under the laws of the State of Delaware.
The Company's common stock is traded on the Nasdaq National Stock Market(R)
under the symbol "TEAM". Our client base includes Ford Motor Company,
DaimlerChrysler, Deere & Company, Cendant Corporation, Liberty Mutual Insurance
Company, Schering-Plough Research Institute, and other companies in the
manufacturing, pharmaceutical, office equipment, insurance, logistics,
hospitality, food service, retail, and other industries.
EQUIPMENT LEASING
TechTeam Capital Group, L.L.C. ("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 2 to 5 years. Effective
March 31, 2000, the majority of Capital Group staff was terminated and Capital
Group ceased looking for new leasing opportunities. Capital Group is currently
running out its lease portfolio. With the exception of renewals of existing
leases, the majority of the original leases were completed by the end of the
second quarter 2003. We cannot predict how many lease renewals we will receive
or how long they will be in effect.
IMPACT OF BUSINESS WITH MAJOR CLIENTS
Historically, we have been heavily dependent upon two or three major clients for
a substantial portion of our revenues. Any loss of (or failure to retain a
significant amount of business with) these key clients would have a material
adverse impact on the Company. Our major clients include Ford Motor Company
("Ford") and DaimlerChrysler. For the second quarter 2003 and 2002, Ford
accounted for 49.5% and 50.2% and DaimlerChrysler accounted for 14.1% and 14.4%,
respectively. For the six months ended June 30, 2003 and 2002, Ford accounted
for 51.1% and 49.3% and DaimlerChrysler accounted for 14.8% and 14.7%,
respectively.
EUROPEAN OPERATIONS
We service our clients in Europe through four wholly-owned subsidiaries:
TechTeam Europe, Ltd., in Chelmsford, England; TechTeam Europe, NV/SA, in
Brussels, Belgium; TechTeam Europe, GmbH, in Cologne, Germany; and TechTeam
Europe, AB in Gothenburg, Sweden.
TechTeam Europe, Ltd., TechTeam Europe, GmbH, and TechTeam Europe, AB provide
clients with technical staffing and help desk services. TechTeam Europe, NV/SA
provides our clients primarily with multilingual help desk support. A
significant portion of our business in Europe is driven by our client base in
the United States.
15
Our 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. We are also exposed
to foreign currency exchange rate risk inherent in our sales commitments,
anticipated sales, and assets and liabilities denominated in currencies other
than the U.S. dollar. While these risks are believed to be manageable, no
assurances can be given.
LEASING OPERATIONS
As previously disclosed, TechTeam Capital Group is running out its lease
portfolio. Capital Group ceased writing new leases in March of 2000. While there
are a few leases whose original lease termination dates extend through March of
2005, the vast majority of the lease terminations have occurred. The future
revenue stream for the remaining contractually committed leases (which excludes
month-to-month leases) is $291,000 as of June 30, 2003.
Despite the decision to cease writing new leases, sustained efforts are required
in order to obtain maximum value from the lease portfolio. Capital Group seeks
to obtain value by extending leases on a month-to-month basis or for a fixed
term, selling lease equipment before its original lease term expires, and
selling off-lease equipment from its inventories.
Effective June 30, 2003, Edward J. Penkala, President of TechTeam Capital Group
and an Executive Officer of TechTeam Global, Inc., resigned from the Company. On
June 30, 2003, we entered into a consulting services agreement with Mr. Penkala
for the period July 1, 2003 through December 31, 2003.
During the first six months of 2003, Capital Group received $1.03 million in
revenue above the contractually committed to lease revenue amount. We have not
estimated additional revenues from future lease renewals as it is not possible
for us to predict how many lease renewals we will receive or how long they will
be extended.
As the lease portfolio runs out, these lease assets, and their associated
residual reserves, are transferred to the inventories account. During the second
quarter of 2003, we determined we would not be able to obtain the value we had
previously expected from sales of our computer equipment inventories due to the
significant decline in the values we obtained in the marketplace.
During the first six months of 2003, off-lease equipment inventory was sold in
the secondary market for an average of 2.4% of original cost, compared to an
average of 10.2% of original cost during 2002. In recognition of the market
deterioration, management determined it would be necessary to reduce inventory
values by $1.00 million in the second quarter of 2003. After the increase in the
reserve, the inventories of off-lease assets are carried at an adjusted value of
$166,000.
During the first six months of 2003, Capital Group sold inventory and lease
equipment with a net book value of $859,000 for $598,000, for a loss of
$261,000. Capital Group currently sells assets directly and also uses equipment
brokers to sell assets. Capital Group and its brokers sell assets to both retail
and wholesale customers.
The performing lease assets of $1.14 million have a reserve of $246,000 for an
adjusted net book value of $899,000, which represents 8.1% of original cost.
During the first six months of 2003, we sold leased equipment for an average of
9.6% of original cost. During the third quarter of 2003, we estimate that lease
assets with a residual value of $676,000 and a reserve of $243,000, for a net of
$433,000, will come off lease and transfer into inventories, unless renewed or
sold.
Capital Group's accounts receivable decreased to $1.76 million, net of reserves
at June 30, 2003 from $2.91 million net of reserves, at December 31, 2002. As we
close down our portfolio and as our leasing relationships end, we are
experiencing additional collection delays. Allowances against accounts
receivable were increased to $704,000 at June 30, 2003 from $415,000 at December
31, 2002 in recognition of the additional collection challenges.
16
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO JUNE 30, 2002
Revenues are $21.9 million for the three months ended June 30, 2003 the same
amount reported for the comparable period in 2002. Leasing operations
demonstrated a significant decrease in revenue, 73.4%, generating $660,000 in
the three months ended June 30, 2003 from $2.48 million of the comparable period
of 2002. The decrease is a result of our decision to cease actively seeking new
leasing business and to manage the winding down of the leasing portfolio.
Leasing revenues will continue to decline over the next year depending on the
size and duration of renewals. The Corporate services segment, comprised of
corporate help desk services, technical staffing, systems integration, and
training programs experienced a 9.5% increase in revenue, reaching $21.3 million
from $19.4 million for the comparable period last year. Revenues from corporate
help desk services increased 15.0% to $16.5 million from $14.3 million, due to
growth in business with our existing customers. These revenue increases were
primarily offset by revenue decreases in the other product lines. Revenues from
technical staffing decreased 7.0% to $2.41 million from $2.59 million
principally as a result of price concessions granted to existing customers and
reductions in placements. Revenues from systems integration decreased 3.0% to
$2.14 million from $2.21 million primarily due to reduced volume in the
hospitality, retail, and food service industries. If our revenues in the
hospitality, retail, and food services business do not continue to recover, we
may be required to write down certain intangible assets with a carrying value of
$335,000 at June 30, 2003. Revenue from the provision of training programs
declined 20.8% to $243,000 from $307,000.
Gross profit as a percentage of sales decreased to 13.9% in the second quarter
of 2003 from 23.6% in the second quarter of 2002. This decrease was primarily
due to a decrease in gross profit margins from our leasing operations, to a
negative gross profit margin of 199.9% in 2003 from a positive gross profit
margin of 9.9% in 2002. The decline in gross margin for Leasing operations is a
result of management's decision to revalue the off-lease inventory in response
to a deteriorating market. Upon receipt of an independent valuation, management
reduced the carrying value of inventory by $1.00 million (See Note E).
The gross profit margin decreased for corporate services to 20.6% from 25.4%.
Within the corporate services product segment, the corporate help desk services
gross profit margin decreased to 20.0% from 27.1% due primarily to the price
concessions included in the multi-year contracts negotiated during 2002 with
some of our help desk customers, including Ford Motor Company and others,
additional costs for the accelerated launch schedule for our expanded help desk
in Belgium, and severance expense related to aligning our cost structure in the
second quarter. The systems integration gross profit margin decreased slightly
to 24.3% from 25.0%. These gross profit margin decreases were partially offset
by improvements in the technical staffing gross profit margin to 21.4% from
17.5% and improvements in training gross margins.
Selling, general, and administrative (SG&A) expense increased to $4.93 million
in the second quarter of 2003 from $4.43 million in the second quarter of 2002.
The Selling portion of SG&A expense increased by $203,000 as we invested in
additional sales personnel in order to increase revenue during 2003. The
increased sales staff impacted payroll and travel expense, increasing expenses
by $198,000 for the three months ended June 30, 2003 over the comparable period
of 2002. The General and Administrative portion of SG&A expense increased
$295,000 primarily due to increased facility expenses, professional service
costs, and bad debt expense, less savings in payroll costs and travel expenses.
SG&A in 2002 included a non-cash charge of $408,000 resulting from the
appreciation in the intrinsic value of a variable stock option agreement made to
the Company's President and Chief Executive Officer, pursuant to an employment
agreement entered into on August 9, 2001.
The Company's Michigan Single Business Tax expense increased $115,000 to
$340,000 in the second quarter of 2003 from $225,000 in the second quarter of
2002, principally as a result of changes in estimates of amounts due for current
and prior years.
Currency transactions gains of $311,000 for the three-months ended June 30, 2003
were due to the weakening U.S. dollar against the euro, British pound sterling,
and the Swedish krona. Currency transaction gains and losses for the three
months ended June 30, 2002 were not significant.
Interest income increased to $292,000 from $269,000 in the second quarter of
2003 and 2002, respectively. This increase is a result of the increased cash,
cash equivalents, and marketable securities balance of $46.4 million at June 30,
2003 versus $36.9 million at June 30, 2002, and increased returns on our cash
investments. Interest expense remained constant at $14,000 for each quarter.
The consolidated effective tax rate differs from the statutory tax rate due to
certain non-deductible expenses.
17
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO JUNE 30, 2002
Revenues decreased 2.6% to $43.7 million from $44.8 million. This decline was
primarily due to 70.3% decrease in revenue from leasing operations to $1.69
million in 2003 from $5.69 million in 2002 as a result of our decision to cease
actively seeking new leasing business and to manage the winding down of the
leasing portfolio. Leasing revenues will continue to decline over the next year
depending on the size and duration of lease renewals. The corporate services
segment comprised of corporate help desk services, technical staffing, system
integration, and training programs, demonstrated a 7.2% increase in year to date
revenue, generating $42.0 million versus $39.2 million in the comparable period
of the prior year. Revenues from corporate help desk services increased 13.0% to
$32.5 million from $28.7 million due to growth in business with our existing
customers. Revenues from technical staffing decreased 11.6% to $4.77 million
from $5.40 million as a result of price concessions granted to existing
customers and reductions in placements. Revenues from systems integration
services decreased 3.7% to $4.28 million from $4.45 million primarily due to
reduced volume in the hospitality, retail, and food service industries. If our
revenues in the hospitality, retail, and food services business do not continue
to recover, we may be required to write down certain intangible assets with a
carrying value of $335,000 at June 30, 2003. Revenue from the provision of
training programs decreased 20.9% to $461,000 from $583,000.
Gross profit as a percentage of sales decreased to 17.7% in 2003 from 23.6% in
2002. This decrease was primarily due to a decrease in gross profit margins from
our leasing operations, to a negative gross profit margin of 79.8 % in 2003 from
a positive gross profit margin of 8.4% in 2002. The decline in gross margin for
Leasing operations is a result of management's decision to revalue the off-lease
inventory in response to a deteriorating market. Upon receipt of an independent
valuation, management reduced the carrying value of equipment inventory by $1.00
million (See Note E).
The gross profit margin decreased for corporate services to 21.6% from 25.1%.
Within the corporate services product segment, the corporate help desk services
gross profit margin decreased to 21.2% from 27.1% due primarily to the price
concessions included in multi-year contracts negotiated during 2002 with some of
our help desk customers, including Ford Motor Company and others, additional
costs for the accelerated launch schedule for our expanded help desk in Belgium,
and severance expense related to aligning our cost structure in the second
quarter. The systems integration gross profit margin decreased slightly to 25.2%
from 25.7%. The training program gross profit margin decreased to 17.4% from
18.9%. These gross profit margin decreases were partially offset by an
improvement in the technical staffing gross profit margin to 21.2% from 15%.
Selling, general, and administrative (SG&A) expense increased to $9.39 million
in 2003 from $8.32 million in 2002. The Selling portion of SG&A expense
increased by $423,000 as we invested in additional sales personnel in order to
increase revenue during 2003. The increased sales staff impacted payroll and
travel expenses by $320,000 and $65,000, respectively, over the comparable
period of 2002. The General and Administrative portion of SG&A expense increased
$638,000 primarily due to increased facility expenses, professional service
costs, and bad debt expense, less savings in travel expenses. SG&A in 2002
included a non-cash charge of $408,000 resulting from the appreciation in the
intrinsic value of a variable stock option agreement made to the Company's
President and Chief Executive Officer, pursuant to an employment agreement
entered into on August 9, 2001.
The Company's Michigan Single Business Tax expense increased $92,000 to $542,000
in 2003 from $450,000 in 2002, principally as a result of changes in estimates
of amounts due for current and prior years.
Currency transactions gains of $363,000 for the six-months ended June 30, 2003
were due to the weakening U.S. dollar against the euro, British pound sterling,
and the Swedish krona. Currency transaction gains and losses for the six-months
ended June 30, 2002 were not significant.
Interest income increased to $510,000 in 2003 from $474,000 in 2002. This
increase is a result of the increased cash, cash equivalents, and marketable
securities balance of $46.4 million at June 30, 2003 versus $36.9 million at
June 30, 2002, despite reduced returns from our cash investments. Interest
expense decreased to $23,000 from $84,000 due primarily to the continuing
reduction in outstanding debt, related to our leasing operations.
The consolidated effective tax rate differs from the statutory tax rate due to
certain non-deductible expenses.
18
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
DEFERRED INCOME TAXES:
At June 30, 2003, we had net deferred tax assets of $1.08 million, primarily
related to alternative minimum tax credit carry forwards in the United States,
which do not expire. Realization of the deferred tax assets depends upon
sufficient levels of future taxable income. Based on historical and expected
future taxable income, we believe it is more likely than not that these deferred
tax assets will be realized. If at any time we believe that current or future
taxable income will not support the realization of deferred tax assets, a
valuation allowance would be provided.
INVENTORIES:
Inventories consist primarily of equipment retained by the Company's leasing
operations subsequent to the end of the lease term and intended for resale. Such
off-lease equipment is valued at the lower of estimated market value at lease
termination or current market value. The values of inventories are impacted by a
number of factors, including the speed of technological change and the secondary
market for used computer equipment. Valuation reserves against depreciated costs
of off-lease equipment inventories amounted to $2.57 million at June 30, 2003
and $1.97 million at December 31, 2002. The net inventories balance of $166,000
at June 30, 2003 is 1.2% of the original cost of the equipment.
LEASED ASSETS:
We periodically review our estimate of residual values of leased assets, which
consist principally of computer equipment. The values of the leased assets are
impacted by a number of factors, including the speed of technological change,
the secondary market for used computer equipment, the disposition of customers
towards lease renewals, and our ability to offer structured alternatives to our
customers. Valuation reserves against depreciated cost of leased equipment
amounted to $246,000 at June 30, 2003 and $823,000 at December 31, 2002.
Substantially all of the net decreases in such reserves resulted from the lease
terms ending and the equipment being sold or transferred to inventories. The net
leased equipment amount of $899,000 represents approximately 8.1% of its
original cost. There can be no assurance that our estimates of residual values
will accurately reflect future results.
ACCOUNTS RECEIVABLE:
We periodically review our accounts receivable balances for collectibility based
on a combination of historical experience and existing economic conditions. The
definition of "delinquent accounts" is based on the governing contractual terms.
Delinquent accounts and balances are written off when we determine they are
uncollectible. Our customers are generally large, well-capitalized entities. We
generally do not require collateral. As our leasing portfolio winds down,
additional collection challenges may be encountered. Allowances against accounts
receivable amounted to $864,000 at June 30, 2003 and $597,000 at December 31,
2002. The accounts receivable balance for the leasing operations segment at June
30, 2003 amounted to $2.47 million, less $704,000 of the allowance against
receivables. There can be no assurance that our estimates of collectibility will
accurately reflect future results.
Our Senior Management has discussed the development and selection of critical
accounting policies and estimates with the Audit Committee of the Board of
Directors.
LIQUIDITY AND CAPITAL RESOURCES
BALANCE SHEET:
As of June 30, 2003 our balance sheet reflects a high degree of liquidity and
little financial leverage.
Cash, cash equivalents, and marketable securities increased by $441,000, from
$45.9 million on December 31, 2002 to $46.4 million on June 30, 2003. Our
working capital position decreased by $265,000 during the first six months of
2003, from $60.7 million as of December 31, 2002 to $60.4 million as of June 30,
2003.
19
Our total debt decreased during the first six months of 2003, from a balance of
$698,000 on December 31, 2002 to $431,000 on June 30, 2003. The Company's total
debt as a percentage of its cash, cash equivalents, and securities decreased
from 1.5% on December 31, 2002 to 0.9% on June 30, 2003.
As of June 30, 2003 our book value per share was $6.31.
CASH PROVIDED BY OPERATIONS:
Cash provided by operating activities was $2.05 million for the six months ended
June 30, 2003. A significant use of operating cash was the increase of $2.88
million in accounts receivable due to the timing of cash receipts from our major
customers. Depreciation and amortization expense for the three months ended June
30, 2003 was $3.15 million, of which $902,000 came from our leasing operations.
CASH PROVIDED BY INVESTING ACTIVITIES:
Net cash used in investing activities was $416,000 for the six months ended June
30, 2003. We used $2.55 million to purchase assets to be used in the provision
of customer services. We received $1.38 million from assets used in leasing
operations, $686,000 from the sale of marketable securities, and $63,000 from
other activities.
CASH USED IN FINANCING ACTIVITIES:
Cash used in financing activities was $507,000. We used $5.63 million to
purchase company common stock. We received $4.82 million from the issuance of
preferred stock and $207,000 from the issuance of common stock related to the
exercise of stock options. Additionally $363,000 resulted from foreign currency
transaction adjustments. We used $266,000 to pay down debt related to leasing
operations.
ITEM 4 -- CONTROLS AND PROCEDURES
As of June 30, 2003, an evaluation was performed under the supervision and with
the participation of our management, including the Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on that evaluation, our management,
including the Chief Executive Officer and Chief Financial Officer, concluded
that our disclosure controls and procedures were effective as of June 30, 2003.
There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to June 30,
2003.
20
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
The Company is a party to legal proceedings, which are routine and incidental to
its business. Although the consequences of these proceedings are not presently
determinable, in the opinion of management, they will not have a material
adverse affect on the Company's liquidity, financial position or results of
operations.
ITEM 2 -- CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 8, 2003, TechTeam Global, Inc. completed the private placement of
689,656 shares of a newly created Series A Redeemable Convertible Preferred
Stock ("Series A Preferred Stock") with ChrysCapital II, LLC ("CCII") for
$5,000,006 or $7.25 per share. Expenses incurred by the Company in connection
with the issuance of the Series A Preferred Stock were approximately $183,300,
including a commission of $50,000, none of which were paid or are owed to
directors or officers of the Company. The net offering proceeds are
approximately $4,816,700. We anticipate using these funds to acquire businesses
in the Far East. The transaction is exempt from registration requirements under
section 5 of the Securities Act of 1933 ("Act") under section 4(2) of the Act,
as amended, and Rule 506 of Regulation D promulgated by the U.S. Securities and
Exchange Commission. Specifically, CCII is a partnership with total assets in
excess of $5,000,000. The holder of Series A Preferred Stock may convert its
Series A Preferred Stock into Common Stock at any time after the first
anniversary of the initial issuance thereof on a one share of Series A Preferred
Stock for one share of Common Stock basis. The conversion ratio is subject to
adjustment if there is a dilutive issuance. Upon expiration of the agreement,
the Company is required to redeem the Series A Preferred Stock (See Note J).
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on May 14, 2003. The holders
of 8,685,932 shares were present in person or by proxy, representing attendance
by at least 85% of the outstanding shares. The following is a summary of the
matters voted on at that meeting.
(a) The following persons were elected to the Company's Board of
Directors. The number of shares cast favor and withheld were
as follows:
Name For Withheld
--------------------- --------- ---------
Kim A. Cooper 8,295,074 390,858
William F. Coyro, Jr. 8,500,224 185,708
G. Ted Derwa 8,498,174 187,758
Peter T. Kross 7,499,265 1,186,687
Conrad L. Mallett, Jr. 8,493,884 192,048
Wallace D. Riley 6,508,889 2,177,043
Gregory C. Smith 8,420,684 265,248
Richard G. Somerlott 6,697,221 1,988,711
Ronald T. Wong 8,501,807 184,125
(b) Ratification of Ernst & Young as independent auditors:
For Against
--------- ---------
8,501,807 18,027
21
ITEM 5 -- OTHER INFORMATION
Election to the Board of Directors
The Company's Board of Directors expanded the size of its membership to 10
seats to accommodate the seat granted with the private placement of newly
created Series A Convertible Preferred Stock with ChrysCapital II LLC.
Brahmal Vasudevan was appointed to the Board of Directors effective April
8, 2003 by ChrysCapital II, LLC to fill the seat granted with the private
placement of Series A Convertible Preferred Stock with ChrysCapital II,
LLC.
Kim A. Cooper was elected Chairman of the Board on May 14, 2003, succeeding
Wallace D. Riley, who remains a member of the Board.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Written Statement of the Chief Executive Officer
31.2 Written Statement of the Chief Financial Officer
32.1 Written Statement of the Chief Executive Officer Pursuant to
10 U.S.C. Section 1350
32.2 Written Statement of the Chief Financial Officer Pursuant to
10 U.S.C. Section 1350
99.1 Sixth Amendment to Lease
(b) Reports on Form 8-K
(i) Announcement of the private placement of Preferred Stock with
ChrysCapital II, LLC, dated April 9, 2003.
(ii) Announcement of the Company's earnings for the first quarter of
2003 dated May 8, 2003.
(iii) Announcement of the Company entering into a non-binding letter of
intent to require 88% of the outstanding stock in a group of
Malaysian companies dated May 9, 2003.
(iv) Filing of SEC Form 10-Q for the first quarter of 2003, dated
May 12, 2003.
(v) Announcement of the Company's financial guidance for 2003, dated
June 3, 2003.
(vi) Announcement of a blackout period for the TechTeam Global, Inc.
401K Savings Plan, dated June 10, 2003.
ITEM 3 IS NOT APPLICABLE AND HAS BEEN OMITTED
22
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: August 14, 2003 By: /s/William F. Coyro, Jr.
----------------------------
William F. Coyro, Jr.
President and Chief Executive
Officer
Date: August 14, 2003 By: /s/David W. Morgan
----------------------------
David W. Morgan
Vice President, Chief Financial
Officer and Treasurer
23
Exhibit Index
31.1 Written Statement of the Chief Executive Officer
31.2 Written Statement of the Chief Financial Officer
32.1 Written Statement of the Chief Executive Officer Pursuant to
10 U.S.C. Section 1350
32.2 Written Statement of the Chief Financial Officer Pursuant to
10 U.S.C. Section 1350
99.1 Sixth Amendment to Lease