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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, 2004
[ ] 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. 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 August 4,
2004 was 8,605,202.
1
TECHTEAM GLOBAL, INC.
FORM 10-Q
INDEX
PAGE
NUMBER
-------
PART I -- FINANCIAL INFORMATION
ITEM 1
Condensed Consolidated Statements of Operations -- Three and Six Months Ended
June 30, 2004 and 2003 3
Condensed Consolidated Statements of Financial Position -- As of June 30, 2004 and December 31, 2003 4 - 5
Condensed Consolidated Statements of Cash Flows -- Six Months Ended June 30, 2004 and 2003 6
Notes to the Condensed Consolidated Financial Statements 7 - 14
ITEM 2
Management's Discussion and Analysis of Financial Condition and Results of Operations 15 - 21
ITEM 4
Controls and Procedures 22
PART II -- OTHER INFORMATION
ITEM 1
Legal Proceedings 23
ITEM 2
Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 23
ITEM 4
Submission of Matters to a Vote of Security Holders 24
ITEM 6
Exhibits and Reports on Form 8-K 24
SIGNATURES 25
EXHIBITS 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ----------------------------
2004 2003 2004 2003
------------ ----------- ------------ ------------
REVENUE
Corporate services
Corporate help desk services....................... $ 18,976 $ 16,457 $ 38,015 $ 32,466
Systems integration................................ 9,384 2,144 18,345 4,282
Technical staffing................................. 1,957 2,412 3,986 4,778
Training programs.................................. 171 243 307 461
------------ ----------- ------------ ------------
Total corporate services.............................. 30,488 21,256 60,653 41,987
Leasing operations.................................... 197 660 302 1,692
------------ ----------- ------------ ------------
TOTAL REVENUE............................................. 30,685 21,916 60,955 43,679
COST OF SERVICES DELIVERED
Cost of corporate services............................ 22,491 16,879 45,500 32,920
Cost of leasing services.............................. 135 1,978 244 3,041
------------ ----------- ------------ ------------
TOTAL COST OF SERVICES DELIVERED.......................... 22,626 18,857 45,744 35,961
------------ ----------- ------------ ------------
GROSS PROFIT.............................................. 8,059 3,059 15,211 7,718
Selling, general, and administrative expense.............. 6,249 5,272 12,212 9,927
------------ ----------- ------------ ------------
OPERATING INCOME (LOSS)................................... 1,810 (2,213) 2,999 (2,209)
------------ ----------- ------------ ------------
OTHER INCOME (EXPENSE)
Interest income, net.................................. 123 278 289 487
Foreign currency transaction gain (loss).............. (17) 311 (217) 363
------------ ----------- ------------ ------------
TOTAL OTHER INCOME........................................ 106 589 72 850
------------ ----------- ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES......................... 1,916 (1,624) 3,071 (1,359)
Income tax provision (credit)............................. 839 (200) 1,371 6
------------ ----------- ------------ ------------
NET INCOME (LOSS)......................................... $ 1,077 $ (1,424) $ 1,700 $ (1,365)
============ =========== ============ ============
BASIC EARNINGS (LOSS) PER SHARE........................... $ 0.13 $ (0.14) $ 0.20 $ (0.13)
============ =========== ============ ============
DILUTED EARNINGS (LOSS) PER SHARE......................... $ 0.11 $ (0.14) $ 0.18 $ (0.13)
============ =========== ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND COMMON SHARE EQUIVALENTS OUTSTANDING
Basic................................................. 8,550 10,492 8,642 10,593
Net effect of dilutive stock options.................. 153 -- 152 --
Effect of redeemable convertible preferred stock...... 690 -- 690 --
------------ ----------- ------------ ------------
Diluted............................................... 9,393 10,492 9,484 10,593
============ =========== ============ ============
See accompanying notes.
3
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands)
JUNE 30, DECEMBER 31,
ASSETS 2004 2003
- --------------------------------------------------------------------------- -------------- ---------------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents.............................................. $ 35,666 $ 35,195
Accounts receivable -- corporate services (less allowances of
$708 at June 30, 2004 and $637 at December 31, 2003)................ 24,877 22,434
Accounts receivable -- leasing (less allowances of $775 at
June 30, 2004 and $740 at December 31, 2003)........................ 167 713
Prepaid expenses and other............................................. 1,150 1,696
Deferred income taxes.................................................. 562 562
-------------- ---------------
TOTAL CURRENT ASSETS................................................... 62,422 60,600
PROPERTY, EQUIPMENT, AND PURCHASED SOFTWARE
Computer equipment and office furniture................................ 21,600 20,610
Purchased software..................................................... 11,144 11,093
Leasehold improvements................................................. 4,534 4,522
Transportation equipment............................................... 337 269
-------------- ---------------
37,615 36,494
Less -- Accumulated depreciation and amortization...................... 28,675 26,590
-------------- ---------------
NET PROPERTY, EQUIPMENT, AND PURCHASED SOFTWARE....................... 8,940 9,904
OTHER ASSETS
Intangible assets, net................................................. 3,862 3,634
Goodwill............................................................... 2,732 2,099
Deferred income taxes.................................................. 862 862
Other.................................................................. 292 601
-------------- ---------------
TOTAL OTHER ASSETS..................................................... 7,748 7,196
-------------- ---------------
TOTAL ASSETS............................................................... $ 79,110 $ 77,700
============== ===============
See accompanying notes.
4
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (continued)
(In thousands, except share and per share amounts)
JUNE 30, DECEMBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2004 2003
- --------------------------------------------------------------------------- -------------- ---------------
(Unaudited)
CURRENT LIABILITIES
Notes payable.......................................................... $ 172 $ 906
Accounts payable....................................................... 2,335 2,785
Accrued payroll, related taxes, and withholdings....................... 5,794 4,692
Accrued expenses....................................................... 1,812 1,471
Accrued income taxes................................................... 1,438 922
Deferred revenue....................................................... 2,017 746
-------------- ---------------
TOTAL CURRENT LIABILITIES.............................................. 13,568 11,522
LONG-TERM LIABILITIES...................................................... 344 408
REDEEMABLE CONVERTIBLE PREFERRED STOCK, 5,000,000 shares authorized,
689,656 shares issued and outstanding; liquidation preference of
$5,000 at June 30, 2004 and December 31, 2003......................... 5,000 5,000
SHAREHOLDERS' EQUITY
Common stock, par value $0.01, 45,000,000 shares authorized,
8,591,534 and 8,817,265 shares issued and outstanding at
June 30, 2004 and December 31, 2003, respectively................... 86 88
Additional paid-in capital............................................. 57,789 59,932
Retained earnings...................................................... 1,768 68
Accumulated other comprehensive income -- cumulative foreign
currency translation adjustment..................................... 555 682
-------------- ---------------
TOTAL SHAREHOLDERS' EQUITY............................................. 60,198 60,770
-------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................. $ 79,110 $ 77,700
============== ===============
See accompanying notes.
5
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
SIX MONTHS ENDED JUNE 30,
---------------------------------
2004 2003
------------- ---------------
OPERATING ACTIVITIES
Net income (loss)..................................................... $ 1,700 $ (1,365)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization................................... 2,118 3,150
Non-cash expense related to stock options and common
stock issued to 401(k) plan and directors................... 176 73
Other........................................................... 121 2,131
Changes in current assets and liabilities....................... 1,288 (597)
Changes in long-term assets and liabilities..................... 170 92
------------- --------------
Net cash provided by operating activities.......................... 5,573 3,484
INVESTING ACTIVITIES
Purchase of property, equipment and software.......................... (902) (2,548)
Cash paid for acquisitions, net of cash acquired...................... (1,036) --
Sale of marketable securities available for sale...................... -- 686
Proceeds from disposal of property and equipment...................... -- 12
------------- --------------
Net cash used in investing activities.............................. (1,938) (1,850)
FINANCING ACTIVITIES
Purchase of Company common stock...................................... (2,744) (5,628)
Payments on long-term borrowings...................................... (949) (266)
Proceeds from issuance of common stock................................ 423 207
Proceeds from issuance of preferred stock............................. -- 4,817
------------- --------------
Net cash used in financing activities.............................. (3,270) (870)
------------- --------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS.............. 106 363
------------- --------------
INCREASE IN CASH AND CASH EQUIVALENTS..................................... 471 1,127
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.......................... 35,195 39,435
------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................ $ 35,666 $ 40,562
============= ==============
See accompanying notes.
6
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 accounting principles generally accepted in the United States
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 considered necessary for a fair presentation have been included, and
such adjustments are of a normal recurring nature. Operating results for the
three and six months ended June 30, 2004 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2004. 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, 2003.
Certain reclassifications have been made to the 2003 financial statements in
order to conform to the 2004 financial statement presentation.
NOTE 2 -- 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 convertible preferred stock.
The weighted average number of diluted shares decreased to 9,483,892 shares for
the six months ended June 30, 2004 from 10,065,916 shares for the year ended
December 31, 2003 primarily due to Company common shares repurchased during the
first quarter of 2004 and second half of 2003 under the Company's stock
repurchase programs.
During the six months ended June 30, 2004 and 2003, 360,000 and 746,477 stock
options, respectively, were excluded from the computation of diluted earnings
per share because the options' exercise prices were higher than the average
market price of the common shares during the respective period. During the six
months ended June 30, 2003, an additional 632,804 stock options were excluded
from the computation of diluted earnings per share due to the net loss for the
period.
NOTE 3 -- COMPREHENSIVE INCOME
Comprehensive income consists of net income (loss) and foreign currency
translation adjustments. A summary of comprehensive income is as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ -------------
(In thousands)
COMPREHENSIVE INCOME (LOSS)
Net income (loss)......................................... $ 1,077 $ (1,424) $ 1,700 $ (1,365)
Other comprehensive income (loss) --
Foreign currency translation adjustment, net of tax... 9 174 (127) 363
------------ ----------- ------------ ------------
Comprehensive income (loss)............................... $ 1,086 $ (1,250) $ 1,573 $ (1,002)
============ =========== ============ ============
7
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 4 -- INCOME TAXES
The consolidated effective tax rate in 2004 and 2003 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.
NOTE 5 -- STOCK-BASED COMPENSATION
We account for stock-based compensation awards granted to employees using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), 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 No. 123, Accounting for Stock-Based Compensation, is as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ---------------------------
2004 2003 2004 2003
------------ ----------- ------------ ------------
(In thousands)
Reported net income (loss)................................ $ 1,077 $ (1,424) $ 1,700 $ (1,365)
Add -- total stock-based compensation expense
included in reported net income, net of tax........... -- 4 -- 8
Deduct -- total stock-based compensation expense
determined under the fair value method for all
awards, net of tax.................................... (35) (76) (275) (390)
------------ ----------- ------------ ------------
Pro forma net income (loss)............................... $ 1,042 $ (1,496) $ 1,425 $ (1,747)
============ =========== ============ ============
Basic earnings (loss) per share:
As reported........................................... $ 0.13 $ (0.14) $ 0.20 $ (0.13)
Pro forma............................................. $ 0.12 $ (0.14) $ 0.16 $ (0.17)
Diluted earnings (loss) per share:
As reported........................................... $ 0.11 $ (0.14) $ 0.18 $ (0.13)
Pro forma............................................. $ 0.11 $ (0.14) $ 0.15 $ (0.17)
8
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 6 -- 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.
Our reportable operating segments include corporate help desk services, systems
integration, technical staffing, and training programs (collectively referred to
as corporate services) and leasing operations.
CORPORATE HELP DESK SERVICES -- this segment provides corporations and
governments with around-the-clock (24x7x365) technical and customer
support for their end-users and other constituencies. We support the full
range of a client's information technology ("IT"), client service, and
business process infrastructure. We also provide technical support to
customers of our clients' products and software.
SYSTEMS INTEGRATION -- this segment provides IT infrastructure (personal
computers, printers, phone systems, networks, servers, switches, etc.)
support through systems integration, technology deployment, and
implementation services from project planning and maintenance to
full-scale network server and workstation installations. We offer a wide
range of information technology services for the customer, ranging from
technology consulting to desk-side support to network monitoring. We also
provide full-service IT staff and consulting services to companies to help
manage their IT infrastructure.
TECHNICAL STAFFING -- this segment maintains a staff of trained technical
personnel, which we place at our clients' facilities to provide technical
support services including help desk technicians, software developers, and
network support.
TRAINING PROGRAMS -- this segment provides custom training and
documentation solutions that include computer-based training, distance
learning, course catalogs, registration, instructional design consultants,
customized course materials, certified trainers, evaluation options,
desk-side tutorials, and custom reports. We provide customized training
programs for many of our customers' proprietary applications.
LEASING OPERATIONS -- this segment previously wrote leases for computer,
telecommunications, and other types of capital equipment. Effective March
31, 2000, we ceased looking for new leasing opportunities and are
currently running out our lease portfolio.
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,
2003. We evaluate segment performance based on segment gross profit.
9
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 6 -- SEGMENT REPORTING (continued)
Financial information for our operating segments is as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ----------- ------------ ------------
(In thousands)
REVENUE
Corporate services
Corporate help desk services.......................... $ 18,976 $ 16,457 $ 38,015 $ 32,466
Systems integration................................... 9,384 2,144 18,345 4,282
Technical staffing.................................... 1,957 2,412 3,986 4,778
Training programs..................................... 171 243 307 461
------------ ----------- ------------ ------------
Total corporate services.................................. 30,488 21,256 60,653 41,987
Leasing operations........................................ 197 660 302 1,692
------------ ----------- ------------ ------------
Total revenue............................................. $ 30,685 $ 21,916 $ 60,955 $ 43,679
============ =========== ============ ============
GROSS PROFIT (LOSS)
Corporate services:
Corporate help desk services.......................... $ 5,098 $ 3,300 $ 10,041 $ 6,895
Systems integration................................... 2,391 521 4,200 1,078
Technical staffing.................................... 451 516 841 1,015
Training programs..................................... 56 41 71 80
------------ ----------- ------------ ------------
Total corporate services.................................. 7,996 4,378 15,153 9,068
Leasing operations........................................ 63 (1,319) 58 (1,350)
------------ ----------- ------------ ------------
Total gross profit........................................ 8,059 3,059 15,211 7,718
Selling, general, and administrative expense.......... (6,249) (5,272) (12,212) (9,927)
Interest income, net.................................. 123 278 289 487
Foreign currency transaction gain (loss).............. (17) 311 (217) 363
------------ ----------- ------------ ------------
Income (loss) before income taxes......................... $ 1,916 $ (1,624) $ 3,071 $ (1,359)
============ =========== ============ ============
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 JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ----------- ------------ ------------
(In thousands)
REVENUE
United States............................................. $ 21,265 $ 15,446 $ 42,788 $ 31,544
Europe:
Belgium............................................... 5,832 4,027 10,968 7,391
United Kingdom........................................ 1,475 1,310 2,991 2,623
Other................................................. 2,113 1,133 4,208 2,121
------------ ----------- ------------ ------------
Total Europe.............................................. 9,420 6,470 18,167 12,135
------------ ----------- ------------ ------------
Total revenue............................................. $ 30,685 $ 21,916 $ 60,955 $ 43,679
============ =========== ============ ============
10
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 6 -- SEGMENT REPORTING (continued)
We provide corporate services for major companies on an international scale.
Revenue from customers that comprise 10% or greater of our total revenue in any
period presented are as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2004 2003 2004 2003
---------- -------- --------- --------
Ford Motor Company........................................ 40.1% 49.5% 40.1% 51.1%
Department of Defense..................................... 10.8% -- 10.9% --
Daimler Chrysler.......................................... 9.2% 14.1% 9.3% 14.8%
---- ---- ---- ----
Total..................................................... 60.1% 63.6% 60.3% 65.9%
==== ==== ==== ====
NOTE 7 -- CONTINGENCIES
DIGITAL SUPPORT CORPORATION:
TechTeam acquired 100% of the outstanding capital stock of Digital Support
Corporation ("DSC") on December 31, 2003. DSC provides services to various
departments within the Department of Defense ("DoD"). A Facility Security
Clearance ("FSC") is required as a condition for DSC to perform its services for
the DoD. As the acquiring entity, TechTeam also needs to obtain an FSC or negate
any foreign ownership, control, or influence that could impair our ability to
obtain an FSC. We have applied for an FSC, but as of the date of the filing of
this document, we have not received a response from the DoD. It is reasonably
possible that we will not be deemed eligible for an FSC due to the beneficial
ownership of over 5% of our capital stock by ChrysCapital II, LLC, a Mauritius
entity ("ChrysCapital"), and ChrysCapital's right to appoint a member of our
Board of Directors. We have applied to the DoD for a Security Control Agreement
("SCA") between DSC and the DoD in order to negate the foreign interest. The
SCA, if approved, would negate the impact of the foreign interest without
affecting TechTeam's ability to integrate DSC into the TechTeam group of
companies.
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.
NOTE 8 -- ACQUISITIONS
ADVANCED NETWORK ENGINEERING:
On May 13, 2004, TechTeam Global NV/SA, the Company's wholly-owned subsidiary in
Belgium, completed the acquisition of all of the outstanding stock of Advanced
Network Engineering NV/SA (formerly Advanced Network Engineering CVBA)
("A.N.E.") for (euro)885,000 plus acquisition costs of (euro)143,000 for an
initial purchase price of (euro)1.03 million ($1.22 million at May 13, 2004). Of
the initial purchase price, (euro)750,000 was paid at closing, (euro)178,000
will be paid in 2004, and (euro)100,000 will be paid on May 13, 2005, provided
there are no claims asserted by us based upon the representations and warranties
of the sellers in the Share Purchase Agreement. In addition to the initial
purchase price, an additional (euro)150,000 is payable on May 13, 2007 provided
a cumulative operating income target is met for the three-year period ending
April 30, 2007. The additional consideration paid to selling shareholders will
be recorded as additional goodwill when it is earned.
11
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 8 -- ACQUISITIONS (continued)
A.N.E. is an information technology services and solutions company headquartered
in Gent, Belgium, that provides software application, network, and systems
integration services to various global, pan-European, and Belgian customers. The
acquisition of A.N.E. will complement our subsidiary in Belgium, which primarily
provides corporate help desk services. The acquisition was accounted for using
the purchase method of accounting and, accordingly, the operating results of
A.N.E. are included in the consolidated operating results of TechTeam since the
acquisition date. Goodwill and other intangible assets acquired totaled
(euro)810,000 ($961,000 at May 13, 2004). Of this amount, other intangible
assets totaled (euro)378,000 ($449,000 at May 13, 2004) and consist of customer
relationship assets, which are being amortized on a straight-line basis over
their estimated useful life of six years. A.N.E. has been assigned to our
systems integration operating segment. Subsequent to the acquisition, A.N.E.'s
name has been changed to TechTeam A.N.E. NV/SA.
The following table summarizes the allocation of the initial purchase price at
May 13, 2004:
AMOUNT
--------------
(In thousands)
Customer relationship assets.................................. $ 449
Goodwill...................................................... 512
Property, equipment and software.............................. 72
Other current and non-current assets, net of cash
acquired of $128.......................................... 1,367
Accounts payable and accrued liabilities assumed.............. (1,117)
Accrued purchase price........................................ (261)
Notes payable assumed......................................... (191)
-------------
Net cash used................................................. $ 831
=============
The unaudited pro forma condensed consolidated results of operations for the
three and six months ended June 30, 2004 and 2003 are presented below as though
A.N.E. had been acquired on January 1, 2003.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(In thousands)
Revenue
As reported...................................... $ 30,685 $ 21,916 $ 60,955 $ 43,679
Pro forma........................................ $ 32,362 $ 23,061 $ 64,137 $ 45,808
Net income (loss)
As reported...................................... $ 1,077 $ (1,424) $ 1,700 $ (1,365)
Pro forma........................................ $ 1,085 $ (1,362) $ 1,664 $ (1,363)
Diluted earnings (loss) per share
As reported...................................... $ 0.11 $ (0.14) $ 0.18 $ (0.13)
Pro forma........................................ $ 0.12 $ (0.13) $ 0.18 $ (0.13)
12
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 8 -- ACQUISITIONS (continued)
DIGITAL SUPPORT CORPORATION:
TechTeam acquired 100% of the outstanding capital stock of DSC on December 31,
2003. The unaudited pro forma condensed consolidated results of operations for
the three and six months ended June 30, 2003 are presented below as though DSC
had been acquired on January 1, 2003.
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2003 JUNE 30, 2003
------------- --------------
(In thousands)
Revenue
As reported...................................... $ 21,916 $ 43,679
Pro forma........................................ $ 26,646 $ 52,774
Net loss
As reported...................................... $ (1,424) $ (1,365)
Pro forma........................................ $ (1,324) $ (1,096)
Diluted loss per share
As reported...................................... $ (0.14) $ (0.13)
Pro forma........................................ $ (0.13) $ (0.10)
The unaudited pro forma condensed consolidated results of operations for the
three and six months ended June 30, 2003 are presented below as though both DSC
and A.N.E. had been acquired on January 1, 2003.
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2003 JUNE 30, 2003
------------- --------------
(In thousands)
Revenue
As reported...................................... $ 21,916 $ 43,679
Pro forma........................................ $ 27,791 $ 54,903
Net loss
As reported...................................... $ (1,424) $ (1,365)
Pro forma........................................ $ (1,262) $ (1,094)
Diluted loss per share
As reported...................................... $ (0.14) $ (0.13)
Pro forma........................................ $ (0.12) $ (0.10)
13
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 9 -- GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill consist of the following:
CORPORATE
HELP DESK SYSTEMS
SERVICES INTEGRATION TOTAL
------------- ------------- -------------
(In thousands)
Balance as of January 1, 2004........................ $ 371 $ 1,728 $ 2,099
Goodwill acquired from A.N.E. and DSC............ -- 624 624
Foreign currency translation adjustment.......... -- 9 9
------------- ------------- -------------
Balance as of June 30, 2004.......................... $ 371 $ 2,361 $ 2,732
============= ============= =============
Other intangible assets consist of the following:
JUNE 30, 2004 DECEMBER 31, 2003
--------------------------- -----------------------------
ACCUMULATED ACCUMULATED AMORTIZATION
COST AMORTIZATION COST AMORTIZATION PERIOD
----------- ------------ ------------- ------------- ------------
(In thousands)
Customer relationships -- DSC.......... $ 3,367 $ 169 $ 3,367 $ -- 10 years
Customer relationships -- Cyntergy..... 701 479 701 434 5 years
Customer relationships -- A.N.E........ 457 15 -- -- 6 years
----------- ------------ ------------- -------------
$ 4,525 $ 663 $ 4,068 $ 434
=========== ============ ============= =============
We re-evaluate definite-lived intangible assets based on undiscounted operating
cash flows whenever significant events or changes occur that might indicate
impairment of recorded 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 definite-lived intangible assets in any period presented.
Our expected amortization expense for definite-lived intangible assets is as
follows: $246,000 for the remainder of 2004, $499,000 for 2005, $499,000 for
2006, $411,000 for 2007, and $411,000 for 2008.
14
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 our 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
As an information technology ("IT") and business process outsourcing support
services provider, we provide our customers with assistance in designing,
implementing, managing, and maintaining their IT infrastructure and computer
systems through our provision of corporate help desk services, systems
integration services, technical staffing, and training programs. Thus far in
2004, we have significantly grown our systems integration operating segment
primarily through acquisitions, and the profitability of the segment has
improved. We also realized growth and improved profitability in our corporate
help desk services operating segment, and we successfully established call
center operations in Romania.
As part of our long-term strategic plan, we are committed to further expanding
our footprint in the IT systems integration and professional services sector. We
believe the further development of infrastructure support services is an
important aspect of our sales strategy. In May 2004, we purchased Advanced
Network Engineering NV/SA ("A.N.E."), 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. In December 2003, we purchased Digital
Support Corporation ("DSC"), an information technology services and solutions
company that provides network infrastructure, information assurance, enterprise
application, systems integration, and hardware services and solutions to various
governmental and commercial customers. Together A.N.E. and DSC contributed
revenue and gross profit of $13.5 million and $2.92 million, respectively, to
our systems integration operating segment for the six months ended June 30,
2004, which resulted in an increase in systems integration revenue of 328.4% to
$18.3 million and increase in gross profit of 289.6% to $4.20 million, over the
comparable period in 2003. Excluding A.N.E. and DSC, systems integration revenue
increased 13.7% to $4.87 million for the six months ended June 30, 2004, and
gross profit increased 18.5% to $1.28 million over the comparable period in
2003.
Our 2004 results to date also reflect the realization of certain operating
efficiencies and cost savings from initiatives implemented in 2003 and 2004,
additional business from new and existing customers, and efforts to control
costs throughout the Company. These efficiencies and cost savings primarily
relate to our corporate help desk services operating segment and include, but
are not limited to, re-aligning our headcount with the level of business being
generated from our customers, reducing operational office space in the U.S. and
Belgium, and reduced depreciation and amortization expense as certain assets
have become fully depreciated and amortized. Total revenue from our
15
corporate help desk services increased 17.1% to $38.0 million for the six months
ended June 30, 2004, from $32.5 million for the comparable period in 2003. Gross
profit from corporate help desk services increased 45.6% to $10.0 million for
the six months ended June 30, 2004, from $6.90 million for the comparable period
in 2003. Gross margin (gross profit as a percentage of revenue) from corporate
help desk services increased to 26.4% for the six months ended June 30, 2004,
from 21.2% for the comparable period in 2003. The increase in revenue and gross
profit was primarily due to increased business with new and existing customers
in Europe and realization of the aforementioned operational efficiencies and
cost savings. Our international revenue from corporate help desk services was
also positively affected by the strengthening of European currencies relative to
the U.S. dollar. If revenue in Europe for the six months ended June 30, 2004
were translated into U.S. dollars at the average exchange rates for the
comparable period in 2003, reported revenue would have been reduced by
approximately $1.80 million for the six months ended June 30, 2004. Since most
of the Company's international operating expenses are also incurred in foreign
currencies, the net impact of exchange rate fluctuations on gross profit and
operating income is considerably less than the estimated impact on revenue.
Under our contract with Ford Motor Company ("Ford") for its global help desk, we
provide corporate help desk services on a fixed-price-per-seat basis. Our
current contract with Ford will require us to reduce the price of our services
on a per-seat basis prospectively beginning in August 2004. The contract also
provides for an adjustment to the number of seats that we are compensated for
supporting at Ford, adjusted up or down and applied prospectively beginning in
August 2004. The combination of these two events is expected to result in a
decrease in revenue of up to $2 million over the twelve months ending July 31,
2005. The combination of a reduced price per seat and reduced number of seats
being supported will reduce our gross profit as we will not be able to
completely offset the reduction in revenue with a reduction in costs. While we
cannot currently estimate the impact on our gross profit and gross margin, we
expect to offset a portion of the reduction in gross profit through additional
business from Ford and our management of costs. We estimate that the impact on
our overall gross margin will not be significant; however, we can give no
assurances in this regard.
Last, we successfully established call center operations in Bucharest, Romania
and began providing support services in the French, English, Spanish, Italian,
and German languages in April 2004. Our net loss in Romania totaled $730,000 for
the six months ended June 30, 2004, which is consistent with our expectations at
current operating levels. Our profitability in Romania will improve as we
increase the volume of work performed for new customers and begin to realize
operational efficiencies from offering a blended solution with our operations in
Belgium.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO JUNE 30, 2003
THREE MONTHS ENDED JUNE 30,
------------------------------ INCREASE %
2004 2003 (DECREASE) CHANGE
------------- ------------- ------------- -------
(In thousands)
REVENUE
Corporate services:
Corporate help desk services.................. $ 18,976 $ 16,457 $ 2,519 15.3%
Systems integration........................... 9,384 2,144 7,240 337.7%
Technical staffing............................ 1,957 2,412 (455) (18.9)%
Training programs............................. 171 243 (72) (29.6)%
------------- ------------- -------------
Total corporate services.......................... 30,488 21,256 9,232 43.4%
Leasing operations................................ 197 660 (463) (70.2)%
------------- ------------- -------------
Total revenue..................................... $ 30,685 $ 21,916 $ 8,769 40.0%
============= ============= =============
Revenue from corporate help desk services increased 15.3% to $19.0 million for
the three months ended June 30, 2004, from $16.5 million for the comparable
period in 2003, primarily due to additional business from new and existing
customers in Europe and the strengthening of the euro, British pound sterling,
and Swedish kroner relative to the U.S. dollar. Revenue from systems integration
services increased 337.7% to $9.38 million for the three
16
months ended June 30, 2004, from $2.14 million for the comparable period in
2003, due to our acquisition of DSC and A.N.E. and additional business from
existing customers. Excluding revenue contributed by DSC and A.N.E., systems
integration revenue increased 28.3% to $2.75 million for the three months ended
June 30, 2004, from the comparable period in 2003. Revenue from technical
staffing services decreased 18.9% to $1.96 million for the three months ended
June 30, 2004, from $2.41 million for the comparable period in 2003, primarily
due to price concessions granted to Ford during the second half of 2003 and
staffing reductions, which were only partially offset by additional business
received from Ford in Europe.
Revenue from leasing operations decreased 70.2% to $197,000 for the three months
ended June 30, 2004, from $660,000 for the comparable period in 2003. The
decline in leasing operations revenue was the result of our decision in March
2000 to discontinue actively seeking new leasing business and to commence the
wind down of our lease portfolio. The trend of reduced revenue from our leasing
operations will continue over the next year depending on the size and duration
of renewals.
Revenue generated in the United States increased 37.7% to $21.3 million for the
three months ended June 30, 2004, from $15.4 million for the comparable period
in 2003, primarily due to our acquisition of DSC. Excluding revenue contributed
by DSC and our leasing operations, revenue generated in the United States
increased 2.1% to $15.1 million for the three months ended June 30, 2004, from
the comparable period in 2003, primarily due additional business from new and
existing customers, partially offset by price concessions granted to existing
customers in the second half of 2003 and reduced volumes from established and
stable help desks.
Revenue generated in Europe increased 45.6% to $9.42 million for the three
months ended June 30, 2004, from $6.47 million for the comparable period in
2003, primarily due to growth in business at our Belgian and Swedish
subsidiaries, 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 35.4% to $8.76 million for the three
months ended June 30, 2004, from the comparable period in 2003. If revenue in
Europe for the three months ended June 30, 2004 were translated at the average
exchange rate for the comparable period in 2003, reported revenue would have
been reduced by approximately $573,000 for the three months ended June 30, 2004.
Revenue from our Belgian operation increased 44.8% to $5.83 million for the
three months ended June 30, 2004, from $4.03 million for the comparable period
in 2003, primarily due to additional business from new and existing customers,
the strengthening of the euro relative to the U.S. dollar, and our acquisition
of A.N.E. Excluding revenue contributed by A.N.E., revenue generated in Belgium
increased 28.5% to $5.17 million for the three months ended June 30, 2004, from
the comparable period in 2003. If revenue in Belgium for the three months ended
June 30, 2004 were translated at the average exchange rate for the comparable
period in 2003, reported revenue would have been reduced by approximately
$293,000 for the three months ended June 30, 2004.
THREE MONTHS ENDED JUNE 30,
------------------------------ INCREASE %
2004 2003 (DECREASE) CHANGE
------------- ------------- ------------- -------
(In thousands)
GROSS PROFIT (LOSS)
Corporate services:
Corporate help desk services.................. $ 5,098 $ 3,300 $ 1,798 54.5%
Systems integration........................... 2,391 521 1,870 358.9%
Technical staffing............................ 451 516 (65) (12.6)%
Training programs............................. 56 41 15 36.6%
------------- ------------- -------------
Total corporate services.......................... 7,996 4,378 3,618 82.6%
Leasing operations................................ 63 (1,319) 1,382 (104.8)%
------------- ------------- -------------
Total gross profit................................ $ 8,059 $ 3,059 $ 5,000 163.5%
============= ============= =============
Gross profit from corporate help desk services increased 54.5% to $5.10 million
for the three months ended June 30, 2004, from $3.30 million for the comparable
period in 2003. Gross margin from corporate help desk services increased to
26.9% for the three months ended June 30, 2004, from 20.1% for the comparable
period in 2003. The increase in gross profit dollars and gross margin was
primarily due to realization of the aforementioned operational efficiencies from
re-aligning our cost structure and expanding our help desk capabilities in
Belgium,
17
and increased business with new and existing customers. Gross profit from
systems integration services increased 358.9% to $2.39 million for the three
months ended June 30, 2004, from $521,000 for the comparable period in 2003.
Gross margin from systems integration services increased to 25.5% for the three
months ended June 30, 2004, from 24.3% for the comparable period in 2003. The
increase in gross profit dollars was primarily due to our acquisitions of DSC
and A.N.E. Excluding the gross profit contributed by DSC and A.N.E., gross
profit increased 39.3% to $726,000 and gross margin increased to 26.4% for the
three months ended June 30, 2004, from the comparable period in 2003. Gross
profit and gross margin from DSC and A.N.E. were $1.66 million and 25.1%,
respectively, for the three months ended June 30, 2004. Gross profit from
technical staffing decreased 12.6% to $451,000 for the three months ended June
30, 2004, from $516,000 for the comparable period in 2003, which is consistent
with the decrease in technical staffing revenue.
Gross profit from leasing operations increased to $63,000 for the three months
ended June 30, 2004, from a gross loss of $(1.32) million for the comparable
period in 2003, primarily due to charges of $1.32 million for the write-down of
off-lease equipment inventories and assets under lease in 2003. During 2003, we
determined that we would not be able to obtain the value previously expected
from the sale of off-lease equipment inventories due to a significant decline in
the fair market value of the equipment in the secondary market.
THREE MONTHS ENDED JUNE 30,
------------------------------- INCREASE %
2004 2003 (DECREASE) CHANGE
------------- ------------- -------------- --------
(In thousands)
OPERATING EXPENSES AND OTHER
Selling, general, and administrative expense...... $ 6,249 $ 5,272 $ 977 18.5%
Net interest income............................... $ 123 $ 278 $ (155) (55.8)%
Foreign currency transaction gain (loss).......... $ (17) $ 311 $ (328) (105.5)%
Income tax provision.............................. $ 839 $ (200) $ 1,039 (519.5)%
Selling, general, and administrative expense increased 18.5% to $6.25 million,
or 20.4% of total revenue, for the three months ended June 30, 2004, from $5.27
million, or 24.1% of total revenue, for the comparable period in 2003, primarily
due to our acquisition of DSC and A.N.E. and expense related to the Company's
incentive compensation plans. Excluding revenue and expenses contributed by DSC
and A.N.E., selling, general, and administrative expense increased $34,000 to
$5.31 million, or 22.1% of total revenue, for the three months ended June 30,
2004. Excluding DSC and A.N.E., expenses have increased to support revenue
growth and expansion in Romania, but expenses as a percentage of revenue have
decreased due to efforts to control costs in all areas of the Company. Under the
Company's incentive compensation plans which were effective January 1, 2004,
certain members of management are entitled to bonuses if specific revenue and
operating income targets are met for 2004. Under these plans, we accrued
$212,000 of expense for the three months ended June 30, 2004, of which $142,000
was accrued to selling, general, and administrative expense and $70,000 was
accrued to cost of services delivered.
Net interest income decreased to $123,000 for the three months ended June 30,
2004, from $278,000 for the comparable period in 2003, due to higher average
cash balances maintained in 2003.
Foreign currency transaction gain (loss) decreased to a loss of $(17,000) for
the three months ended June 30, 2004, from a gain of $311,000 for the comparable
period in 2003, primarily due to the U.S. dollar strengthening since December
31, 2003 relative to the euro and British pound sterling whereas the U.S. dollar
weakened relative to the euro and pound sterling in the three months ended June
30, 2003.
The consolidated effective tax rate in 2004 and 2003 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.
18
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO JUNE 30, 2003
SIX MONTHS ENDED JUNE 30,
------------------------------ INCREASE %
2004 2003 (DECREASE) CHANGE
------------- ------------- -------------- --------
(In thousands)
REVENUE
Corporate services:
Corporate help desk services.................. $ 38,015 $ 32,466 $ 5,549 17.1%
Systems integration........................... 18,345 4,282 14,063 328.4%
Technical staffing............................ 3,986 4,778 (792) (16.6)%
Training programs............................. 307 461 (154) (33.4)%
------------- ------------- -------------
Total corporate services.......................... 60,653 41,987 18,666 44.5%
Leasing operations................................ 302 1,692 (1,390) (82.2)%
------------- ------------- -------------
Total revenue..................................... $ 60,955 $ 43,679 $ 17,276 39.6%
============= ============= =============
Revenue from corporate help desk services increased 17.1% to $38.0 million for
the six months ended June 30, 2004, from $32.5 million for the comparable period
in 2003, primarily due to additional business from new and existing customers in
Europe and the strengthening of the euro, British pound sterling, and Swedish
kroner relative to the U.S. dollar. Revenue from systems integration services
increased 328.4% to $18.3 million for the six months ended June 31, 2004, from
$4.28 million for the comparable period in 2003, due to our acquisitions of DSC
and A.N.E. and additional business from existing customers in the second
quarter. Excluding revenue contributed by DSC and A.N.E., systems integration
revenue increased 13.7% to $4.87 million for the six months ended June 30, 2004,
from the comparable period in 2003. Revenue from technical staffing services
decreased 16.6% to $3.99 million for the six months ended June 30, 2004, from
$4.78 million for the comparable period in 2003, primarily due to price
concessions granted to Ford during the second half of 2003 and staffing
reductions, which were only partially offset by additional business received
from Ford in Europe.
Revenue from leasing operations decreased 82.2% to $302,000 for the six months
ended June 30, 2004, from $1.69 million for the comparable period in 2003. The
decline in leasing operations revenue was the result of our decision in March
2000 to discontinue actively seeking new leasing business and to commence the
wind down of our lease portfolio. The trend of reduced revenue from our leasing
operations will continue over the next year depending on the size and duration
of renewals.
Revenue generated in the United States increased 35.6% to $42.8 million for the
six months ended June 30, 2004, from $31.5 million for the comparable period in
2003, due to our acquisition of DSC. Excluding revenue contributed by DSC and
our leasing operations, revenue generated in the United States decreased 0.6% to
$29.7 million for the six months ended June 30, 2004, from $29.9 million for the
comparable period in 2003.
Revenue generated in Europe increased 49.7% to $18.2 million for the six months
ended June 30, 2004, from $12.1 million for the comparable period in 2003,
primarily due to growth in business at our Belgian and Swedish subsidiaries, 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 44.3% to $17.5 million for the six months ended June 30, 2004,
from the comparable period in 2003. If revenue in Europe for the six months
ended June 30, 2004 were translated at the average exchange rate for the
comparable period in 2003, reported revenue would have been reduced by
approximately $1.80 million for the six months ended June 30, 2004. Revenue from
our Belgian operation increased 48.4% to $11.0 million for the six months ended
June 30, 2004, from $7.39 million for the comparable period in 2003, primarily
due to additional business from new and existing customers, our acquisition of
A.N.E., and the strengthening of the euro relative to the U.S. dollar. Excluding
revenue contributed by A.N.E., revenue generated in Belgium increased 39.5% to
$10.3 million for the six months ended June 30, 2004, from the comparable period
in 2003. If revenue in Belgium for the six months ended June 30, 2004 were
translated at the average exchange rate for the comparable period in 2003,
reported revenue would have been reduced by approximately $1.03 million for the
six months ended June 30, 2004.
19
SIX MONTHS ENDED JUNE 30,
------------------------------ INCREASE %
2004 2003 (DECREASE) CHANGE
------------- ------------- ------------- --------
(In thousands)
GROSS PROFIT (LOSS)
Corporate services:
Corporate help desk services.................. $ 10,041 $ 6,895 $ 3,146 45.6%
Systems integration........................... 4,200 1,078 3,122 289.6%
Technical staffing............................ 841 1,015 (174) (17.1)%
Training programs............................. 71 80 (9) (11.3)%
------------- ------------- -------------
Total corporate services.......................... 15,153 9,068 6,085 67.1%
Leasing operations................................ 58 (1,350) 1,408 (104.3)%
------------- ------------- -------------
Total gross profit................................ $ 15,211 $ 7,718 $ 7,493 103.0%
============= ============= =============
Gross profit from corporate help desk services increased 45.6% to $10.0 million
for the six months ended June 30, 2004, from $6.90 million for the comparable
period in 2003. Gross margin from corporate help desk services increased to
26.4% for the six months ended June 30, 2004, from 21.2% for the comparable
period in 2003. The increase in gross profit dollars and gross margin was
primarily due to realization of the aforementioned operational efficiencies and
cost savings from re-aligning our cost structure and expanding our help desk
capabilities in Belgium, and increased business with new and existing customers.
Gross profit from systems integration services increased 289.6% to $4.20 million
for the six months ended June 30, 2004, from $1.08 million for the comparable
period in 2003. Gross margin from systems integration services decreased to
22.9% for the six months ended June 30, 2004, from 25.2% for the comparable
period in 2003. The increase in gross profit dollars and decrease in gross
margin was primarily due to our acquisitions of DSC and A.N.E. Excluding the
gross profit contributed by DSC and A.N.E., gross profit increased 18.5% to
$1.28 million and gross margin increased to 26.2% for the six months ended June
30, 2004, from the comparable period in 2003. Gross profit and gross margin from
DSC and A.N.E. were $2.92 million and 21.7%, respectively, for the six months
ended June 30, 2004. Gross profit from technical staffing decreased 17.1% to
$841,000 for the six months ended June 30, 2004, from $1.02 million for the
comparable period in 2003, which is consistent with the decrease in technical
staffing revenue.
Gross profit from leasing operations increased to $58,000 for the six months
ended June 30, 2004, from a gross loss of $(1.35) million for the comparable
period in 2003, primarily due to charges of $1.32 million for the write-down of
off-lease equipment inventories and assets under lease in 2003. During 2003, we
determined that we would not be able to obtain the value previously expected
from the sale of off-lease equipment inventories due to a significant decline in
the fair market value of the equipment in the secondary market.
SIX MONTHS ENDED JUNE 30,
------------------------------ INCREASE %
2004 2003 (DECREASE) CHANGE
------------- ------------- ------------- --------
(In thousands)
OPERATING EXPENSES AND OTHER
Selling, general, and administrative expense...... $ 12,212 $ 9,927 $ 2,285 23.0%
Net interest income............................... $ 289 $ 487 $ (198) (40.7)%
Foreign currency transaction gain (loss).......... $ (217) $ 363 $ (580) (159.8)%
Income tax provision.............................. $ 1,371 $ 6 $ 1,365 n/a
Selling, general, and administrative expense increased 23.0% to $12.2 million,
or 20.0% of total revenue, for the six months ended June 30, 2004, from $9.93
million, or 22.7% of total revenue, for the comparable period in 2003, primarily
due to our acquisition of DSC and A.N.E. and expense related to the Company's
incentive compensation plans. Excluding revenue and expenses contributed by DSC
and A.N.E., selling, general, and administrative expense increased 4.5% to $10.4
million, or 21.9% of total revenue, for the six months ended June 30, 2004.
Excluding DSC and A.N.E., expenses have increased to support revenue growth and
expansion in Romania, but expenses as a percentage of revenue have decreased due
to efforts to control costs in all areas of the Company.
20
Under the Company's incentive compensation plans which were effective January 1,
2004, certain members of management are entitled to bonuses if specific revenue
and operating income targets are met for 2004. Under these plans, we accrued
$337,000 of expense for the six months ended June 30, 2004, of which $252,000
was accrued to selling, general, and administrative expense and $85,000 was
accrued to cost of services delivered.
Net interest income decreased to $289,000 for the six months ended June 30,
2004, from $487,000 for the comparable period in 2003, due to higher average
cash balances maintained in 2003.
Foreign currency transaction gain (loss) decreased to a loss of $(217,000) for
the six months ended June 30, 2004, from a gain of $363,000 for the comparable
period in 2003, primarily due to the U.S. dollar strengthening since December
31, 2003 relative to the euro, British pound sterling, and Swedish kroner
whereas the U.S. dollar weakened relative to the euro, pound sterling, and
Swedish kroner in the six months ended June 30, 2003.
The consolidated effective tax rate in 2004 and 2003 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $35.7 million at June 30, 2004, as compared to
$35.2 million at December 31, 2003. During the six months ended June 30, 2004,
cash and cash equivalents increased $471,000 primarily due to $5.57 million in
cash provided by operations and $423,000 in proceeds from the exercise of stock
options offset by $2.74 million in cash used to repurchase 350,000 shares of our
common stock under our stock repurchase program, $831,000 in cash used to
acquire A.N.E., $205,000 in cash used to pay expenses related to our acquisition
of DSC, $902,000 in cash used for capital expenditures, and $949,000 in payments
on long-term debt primarily related to notes payable acquired in our
acquisitions of DSC and A.N.E.
A significant source of operating cash flow of $5.57 million for the six months
ended June 30, 2004 was generated by net income of $1.70 million and non-cash
charges for depreciation and amortization of $2.12 million. An additional source
of operating cash flow resulted from increased working capital as current
liabilities less notes payable increased $1.58 million whereas current assets
only increased $288,000.
In February 2004, we announced a new 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. There were no stock repurchases in the second
quarter of 2004.
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 DSC and A.N.E. if specific
performance conditions and operating targets are met in 2004-2007, and the
possible acquisition of businesses complementary to the Company's existing
business. We believe that positive cash flows from operations, together with
existing cash balances, will continue to be sufficient to meet our ongoing
requirements for working capital, capital expenditures, and possible stock
repurchases for the next twelve months and foreseeable future. We have
historically not paid dividends.
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, 2003.
FACTORS INFLUENCING FUTURE RESULTS
Refer to Item 7 of our Annual Report on Form 10-K for the year ended December
31, 2003.
21
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.
During the first quarter of 2004, the Company converted its accounting and
financial reporting system in Europe, with the exception of Romania, to a
pre-existing common information technology platform that had been deployed in
the United States in prior periods. There have been no significant changes in
the Company's internal controls or in other factors that could significantly
affect internal controls subsequent to December 31, 2003. As of June 30, 2004,
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. Based upon that
evaluation, the Company's management, including the CEO, CFO, and CAO, concluded
that the Company's disclosure controls and procedures were effective as of June
30, 2004.
22
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 -- CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
The Company purchased shares of its common stock during the six months ended
June 30, 2004 as follows:
TOTAL NUMBER MAXIMUM
OF SHARES NUMBER OF
PURCHASED SHARES THAT
AS PART OF MAY YET BE
TOTAL NUMBER AVERAGE PUBLICLY PURCHASED
OF SHARES PRICE PAID ANNOUNCED UNDER THE
PERIOD PURCHASED PER SHARE PROGRAMS PROGRAMS
- ---------------------------------------------- ------------ ---------- ------------ -----------
January 1, 2004 to January 31, 2004 -- -- -- --
February 1, 2004 to February 29, 2004 350,000(a) $7.84 350,000(a) 650,000(a)
March 1, 2004 to March 31, 2004 -- -- -- 650,000
April 1, 2004 to April 30, 2004 -- -- -- 650,000
May 1, 2004 to May 31, 2004 -- -- -- 650,000
June 1, 2004 to June 30, 2004 -- -- -- 650,000
(a) A stock repurchase program to repurchase up to 1,000,000 shares of the
Company's common stock was announced on February 18, 2004. The program
expires on January 27, 2005.
23
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on May 12, 2004. The holders
of 7,392,619 shares of the Company's common stock and 689,656 shares of the
Company's Series A senior convertible preferred stock were present in person or
by proxy, representing attendance by at least 87.7% of the outstanding shares
eligible to vote. 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 7,492,141 1,452,355
William F. Coyro, Jr. 7,857,696 1,087,146
G. Ted Derwa 7,866,034 1,077,446
Peter T. Kross 7,694,085 1,202,859
Conrad L. Mallett, Jr. 7,660,857 1,236,087
Wallace D. Riley 6,760,202 2,130,170
Gregory C. Smith 7,836,080 1,108,814
Richard G. Somerlott 7,928,600 912,079
Ronald T. Wong 7,850,563 1,089,686
(b) Ratification of Ernst & Young as independent auditors:
For Against
8,813,030 131,580
(c) Approval of TechTeam Global, Inc. 2004 Incentive Stock and Awards
Plan:
For Against
2,985,780 2,220,874
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.3 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.3 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(b) Reports on Form 8-K
(i) Announcement of the Company's earnings for the first quarter of
2004, filed on April 29, 2004.
(ii) Announcement of the re-election of Kim A. Cooper as Chairman of the
Board on May 12, 2004, and the acquisition of Advanced Network
Engineering NV/SA on May 13, 2004, filed on May 14, 2004.
(iii) Announcement of a presentation to financial analysts posted to the
Company's website, filed on June 1, 2004.
24
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)
/s/ William F. Coyro, Jr.
--------------------------------------------
Date: August 6, 2004 By: William F. Coyro, Jr.
President and Chief Executive Officer
/s/ David W. Morgan
--------------------------------------------
Date: August 6, 2004 By: David W. Morgan
Vice President, Chief Financial Officer,
and Treasurer
/s/ Marc J. Lichtman
--------------------------------------------
Date: August 6, 2004 By: Marc J. Lichtman
Vice President and Chief Accounting
Officer
25
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.3 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.3 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002