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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2004
Commission File Number: 0-16284
TECHTEAM GLOBAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 38-2774613
(State or other jurisdiction of (I.R.S. Employer
incorporation) Identification No.)
27335 WEST 11 MILE ROAD, SOUTHFIELD, MI 48034
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 357-2866
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name on each exchange on which registered
------------------- -----------------------------------------
Common Stock, $.01 par value NASDAQ(R) National Stock Market
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer. Yes [ ]
No [X]
The aggregate market value of the Registrant's common stock held by
non-affiliates of the registrant as of June 30, 2004 was approximately
$73,161,000 (based on the June 30, 2004 closing sales price of $9.07 of the
Registrant's common stock, as reported on the NASDAQ(R) National Stock Market).
For the sole purpose of making this calculation, the term "non-affiliates" has
been interpreted to exclude directors and executive officers of the Company.
Such interpretation is not intended to be, and should not be construed to be, an
admission by TechTeam Global, Inc. or such directors or executive officers of
the Company that such directors and executive officers of the Company are
"affiliates" of TechTeam Global, Inc., as that term is defined under the
Securities Act of 1934.
The number of shares outstanding of the registrant's common stock as of March
11, 2005 was 8,775,970.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement, dated on or about April
4, 2005, are incorporated by reference into Items 10, 11, 12, 13 and 14 of Part
III of this report.
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TECHTEAM GLOBAL, INC.
FORM 10-K
TABLE OF CONTENTS
PAGE
NUMBER
------
PART I
Item 1 Business 3
Item 2 Properties 9
Item 3 Legal Proceedings 10
Item 4 Submission of Matters to a Vote of Security Holders 10
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 11
Item 6 Selected Financial Data 12-13
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-30
Item 7A Quantitative and Qualitative Disclosures about Market Risk 30-31
Item 8 Financial Statements and Supplementary Data 31-61
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 62
Item 9A Controls and Procedures 62
PART III
Item 10 Directors and Executive Officers of the Registrant 62
Item 11 Executive Compensation 62
Item 12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 63
Item 13 Certain Relationships and Related Transactions 63
Item 14 Principal Accountant Fees and Services 63
PART IV
Item 15 Exhibits and Financial Statement Schedules 63-67
SIGNATURES 68
FINANCIAL STATEMENT SCHEDULE 69
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including "Item 7 -- Management's Discussion
and Analysis of Financial Condition and Results of Operations," 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 statements
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 "Item 7 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations," 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.
PART I
ITEM 1. BUSINESS
GENERAL
TECHTEAM GLOBAL, INC. (including its consolidated subsidiaries, "TechTeam" or
the "Company" or "we") is a global provider of information technology ("IT") and
business process outsourcing ("BPO") support services to Fortune 1000 companies,
multinational companies, product providers, small and mid-size companies, and
government entities.
TechTeam Global, Inc. was incorporated under the laws of the State of Delaware
in 1987. 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,
Canon Europe NV, Deere & Company, MICROS, Inc., United Parcel Service, American
Community Mutual Insurance Company, DaimlerChrysler AG, and Schering-Plough
Research Institute, as well as Federal government agencies and local government
entities, such as the United States Department of Defense.
Our subsidiaries are: TechTeam Global NV/SA (Brussels, Belgium), with its
subsidiary TechTeam A.N.E. NV/SA (Gent, Belgium); TechTeam Global Ltd. (United
Kingdom); TechTeam Global GmbH (Germany); TechTeam Global AB (Sweden); S.C.
TechTeam Global SRL (Romania); TechTeam Asia Pacific (Private) Ltd. (India);
Digital Support Corporation ("DSC," Chantilly, Virginia), with its subsidiary
Sytel, Inc., acquired on January 3, 2005, ("Sytel," Bethesda, Maryland);
TechTeam Cyntergy, L.L.C., and TechTeam Capital Group, L.L.C. (Southfield,
Michigan).
SERVICES AND INFORMATION ABOUT OPERATING SEGMENTS
Over the past 15 months, TechTeam has acquired three companies -- DSC, TechTeam
A.N.E., and Sytel. As a result of these acquisitions, we have strategically
added governmental technology services to our long-standing core businesses of
corporate helpdesk, professional services/systems integration, technical
staffing, and training services. In order to better describe our business
following these changes, we have modified our four reporting business segments
into five reporting segments -- Diversified IT Outsourcing Services (comprised
primarily of our former corporate helpdesk services segment), Government
Technology Services (comprised of
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all services provided to government-based customers primarily through our DSC
and Sytel subsidiaries), IT Consulting and Systems Integration (comprised
primarily of our former Professional Services/Systems Integration segment),
Technical Staffing, and Learning Services (formerly our training programs
segment). Prior year amounts have been reclassified to reflect the current year
presentation.
Information with respect to each of our segments is included in "Item 7 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in Note 13 of the Notes to Consolidated Financial Statements
included in "Item 8 -- Financial Statements and Supplementary Data."
1. DIVERSIFIED IT OUTSOURCING SERVICES
Our Diversified IT Outsourcing Services segment provides helpdesk and
infrastructure support services around-the-clock (24x7x365) for our clients,
their end-users, and other constituencies. We help maintain and support a full
range of our clients' IT and business process infrastructure from network
environments to computing systems, and from shrink-wrapped applications to
advanced proprietary and acquired application systems. We also provide technical
support to customers of our clients' products. We provide this service
internationally in multiple languages. There are two primary elements to this
segment: Helpdesk services and BPO services.
Helpdesk Services. Our helpdesk services are principally deployed using a
"single point of contact" ("SPOC") delivery model to enable our clients to
consolidate their problem resolution support functions into a centralized
helpdesk, thereby reducing their costs by standardizing responses to incidents,
eliminating overlapping helpdesks, and reducing the number of incidents that
need to be escalated to a higher-level support function. Our technicians are
trained in the client's products and applications to enable them to diagnose
problems and answer technical questions on problems regarding the technology or
infrastructure that we support. If the technician is not able to resolve the
problem with the end-user, the call is escalated to the appropriate resource to
resolve the problem.
We also offer our clients helpdesk support bundled together with a wide range of
other infrastructure support services. For example, under the Ford Motor Company
("Ford") SPOC program, the Company's largest contract generating revenue in 2004
in excess of $32 million, TechTeam provides a single point of contact helpdesk
for certain parts of the technology infrastructure of Ford in North America, the
United Kingdom, and Germany, and Ford Motor Credit Corporation in North America
and the United Kingdom, together with deskside support and server maintenance
services.
Our helpdesk services are provided from our facilities in the United States
(Dearborn and Southfield, Michigan; and Davenport, Iowa) and our facilities in
Europe (Brussels, Belgium; and Bucharest, Romania). Our technicians provide
support for the same client from different locations through the use of advanced
technology tools. Utilizing a client-specific solution that blends the
advantages of each location, we are able to provide cost-effective service in
over 25 languages.
While most of our helpdesk business is performed as a dedicated desk for a
single client, we have introduced and are continuing to develop a "shared desk"
service offering, where our technicians provide support for more than one
client. The shared desk has locations in our Brussels facility and our
Southfield, Michigan facility providing support for electronic data capture of
drug trial information for a number of international pharmaceutical clients. The
shared desk in our Southfield location also provides support to the retail,
hospitality, and food service industries, as well as other clients who do not
have sufficient call volume to warrant a dedicated desk.
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BPO Services. Our BPO service clients primarily outsource the technical support
aspect of their customer service business process to us. We provide technical
support for our clients' products, services, and software that is used by our
clients' customers. For example, we provide technical product support to the
owners of Canon consumer products (cameras, printers, etc.) sold in Europe. We
also provide non-technical customer service support for our clients, such as
customer enrollments and marketing promotion support.
In 2004, in order to address the trend toward offshore helpdesk and BPO
operations and the downward pressure on the pricing of our services, we
established a multilingual helpdesk facility in Bucharest, Romania. As of
December 31, 2004, our Romanian subsidiary had approximately 60 technicians
supporting an existing client, and 60 employees in training to provide support
to a new client beginning in January 2005. Our Romanian operation provides us
with a unique ability to manage, at a lower cost per technician, the multiple
variables that affect the pricing of a multilingual helpdesk, including but not
limited to: (a) language distribution, (b) hours of operation, and (c) technical
skills. We anticipate that our Romanian facility will attract business from both
our existing clients and new clients when the permanent helpdesk space in
Romania is completed (see "Item 2 -- Facilities"). We are beginning to see
increased interest in our Romanian offering as we have been able to demonstrate
the quality of the services provided by our Romanian technicians, and
accordingly, we anticipate that the lower cost structure in Romania will be a
significant asset in securing new global business from the United States,
Europe, or other locations speaking French, Italian, Spanish, Russian, German,
English, or languages of Eastern European countries.
In an effort to offer further value to our helpdesk and BPO services clients,
TechTeam has invested in the development of an integrated, web-based support
tool that encompasses incident management, knowledge management, data analytics,
self-help, and distance learning, known as the "Support Portal." This support
offering enables end users to submit inquiries for support and to solve their
incidents through access to focused knowledge articles. Allowing end users to
solve their own incidents and providing them access to open incident information
results in call deflection and lower total cost of ownership to the client. Our
tools also provide our clients with real-time access to their project's
performance statistics. This data analytic capability allows our clients to be
proactive in addressing changes in their environment. TechTeam has developed
other tools and methodologies that we believe provide us with strategic
advantages in the marketplace.
2. GOVERNMENT TECHNOLOGY SERVICES
We significantly expanded this vertical market with the acquisition of Digital
Support Corporation on December 31, 2003, and further expanded its size and
service offerings with our acquisition of Sytel on January 3, 2005. The services
provided in this business segment mirror the services offered in our diversified
IT outsourcing services, IT consulting and systems integration, technical
staffing, and learning services segments, but are provided to various
departments of the United States Government, including but not limited to the
Department of Defense, National Institutes of Health, Export-Import Bank, US
Geological Service, Department of Health and Human Services, Department of
Justice, local governmental entities in the United States, and the European
Union (see information with respect to this segment included in the risk factor
"Risks Inherent in Government Technology Services" located in "Item 7 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations").
The majority of our revenue from this business segment is earned through
long-term contracts through which we provide managed network services in the
form of a monthly service. For our managed network services customers, we
provide complete life cycle support for a customer's IT infrastructure ranging
from their desktops to their data and voice networks. We provide design,
implementation, operation, and maintenance (helpdesk and deskside support)
services. For example, DSC provides systems administration support, database
administration and engineering support, and other IT technical support services
to a widely distributed division of the Department of Defense.
With respect to the advance enterprise solutions business, we assist our
customers in the design, development, and implementation of enterprise-level
technology solutions, ranging from databases and applications to enterprise
portals, which seek to enable government agencies to maximize efficiency of key
business processes by utilizing the internet and other advanced technologies.
5
3. IT CONSULTING AND SYSTEMS INTEGRATION
Within this business segment, we provide customers with IT infrastructure (such
as personal computers, printers, phone systems, networks, servers, and switches)
design, development, technology deployment, and implementation services from
project planning and implementation to full-scale network, server and
workstation installations, and maintenance. We offer customers a wide spectrum
of IT services, ranging from technology consulting, security, application
integration, and storage, to small scale application development. We follow our
implementation with a full range of services ranging from maintenance, helpdesk,
and deskside support to network monitoring in order to assist companies in
managing their IT infrastructure. In 2004, we continued to expand our
capabilities within this segment with the addition of TechTeam A.N.E. NV/SA.
Through our TechTeam Cyntergy, L.L.C. subsidiary, we offer deployment, technical
support and training services to companies in the hospitality, retail, and food
service industries throughout the United States. TechTeam Cyntergy employees
provide on-site services to implement technology and train the customers'
personnel in the use of point-of-sale and property management software.
4. TECHNICAL STAFFING
Our Technical Staffing business segment consists of providing on-site technical
support services including helpdesk technicians, software developers, and
network support technicians. We strive to recruit a technically proficient
employee base. We enhance our employees' proficiency by providing access to
technical training programs, which includes training in new technologies, in
advanced operating systems like Windows XP and Unix, and in sophisticated
applications such as Oracle. This training allows us to provide our customers
with highly-skilled professionals that are trained and certified in the latest
technologies. Most of our technical staffing placements are long-term
assignments.
Further, our technical staffing business assists us in offering qualified
employees with a diverse career path. As helpdesk technicians learn new
technologies and utilize our internal training programs, they often migrate to
technical staffing positions where they can increase their knowledge and
compensation. We believe this career path program offers us a competitive
advantage relative to many other staffing service and helpdesk service providers
and assists us in reducing employee turnover.
5. LEARNING SERVICES
We provide custom training and documentation solutions that include a wide
spectrum of offerings, including computer-based training (CBT), distance
learning, course catalogs, registration, instructional design consultants,
customized course materials, certified trainers, evaluation options, deskside
tutorials, and custom reports. We provide customized training programs for many
of our customers' proprietary applications.
IMPACT OF BUSINESS WITH MAJOR CLIENTS
Historically, we have been heavily dependent upon two or three major clients for
a substantial portion of our revenue. In 2004, Ford Motor Company was our only
client to exceed the threshold for being reported as a significant customer. For
the three years ended December 31, 2002, 2003, and 2004 Ford accounted for
55.9%, 52.9%, and 37.4%, respectively, of the Company's total revenue. Any loss
of (or failure to retain a significant amount of business with) Ford would have
a material adverse effect on the Company.
Revenue generated through our business with Ford increased from $43.3 million in
2002 to $45.4 million in 2003 and to $47.9 million in 2004. Our business with
Ford consists of helpdesk services discussed above, technical staffing,
installation of new personal computer equipment through Dell Inc., and the
support services provided to Volvo Car Corporation, a subsidiary of Ford Motor
Company. We anticipate that our revenue from Ford will continue to grow during
2005. Our largest contract with Ford for its Global Helpdesk is scheduled to
expire on July 31, 2005. While we believe that we are well positioned to win
this renewal due to our strong performance, there can be no assurance in this
regard.
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During 2004, our revenue generated from business with DaimlerChrysler AG
accounted for less than 10% of our total revenue (for the three years ended
December 31, 2002, 2003, and 2004, DaimlerChrysler accounted for 14.5%, 13.8%,
and 7.7%, respectively, of the Company's total revenue). The decline in business
from DaimlerChrysler is due in part to a significant decline in revenue
generated from DaimlerChrysler through our leasing unit, and to the reduction in
size of the DaimlerChrysler dealership helpdesk during 2004. As previously
announced, the dealership helpdesk contract was awarded to another vendor in
November 2004. Accordingly, while we continue to provide DaimlerChrysler with
training, technical staffing, and other helpdesk services, DaimlerChrysler is
not expected to exceed the threshold for being reported as a significant
customer in 2005.
The Company continues to seek to diversify its client base from both a client
and industry perspective. During 2004, we were successful in expanding our
non-Ford-related business, especially through our multilingual helpdesk offering
and the results from our acquisitions of TechTeam A.N.E. and DSC. We expect
further diversification in 2005 as a result of our acquisition of Sytel, Inc.
While a major facet of our business strategy for 2005 remains to diversify our
customer base and become less dependent on our business with Ford, we believe
our strong performance and relationship with Ford will continue to result in
increasing revenue dollars while the percentage of our total revenue derived
from Ford declines, although no assurances can be given in this regard.
COMPETITION
We are engaged in a highly competitive business. While there are many companies
that provide similar services, no one company dominates our industry. We
frequently find ourselves competing with larger IT outsourcing companies, such
as IBM, EDS, and CSC. We believe that we have a strong overall value proposition
when one considers our price, quality, focus on customer satisfaction, and
flexibility of our service offerings. Accordingly, we compete principally on the
basis of service excellence, the ability to provide best-in-class helpdesk
services, price, experience and reputation in the industry, technological
capabilities, ISO quality practices, responsiveness to client needs, and
referrals from existing clients.
We believe the following factors may provide us with competitive advantages over
certain of our competitors:
- Strong Internationally-Recognized Client Base -- Our existing
multinational clients provide us with excellent references and a
strong foundation for the development of new business.
- Price -- Our cost structure is often lower than our major outsourcing
competitors enabling us to price our services cost effectively.
- Qualified Technical Staff -- We focus on developing and retaining
high-quality, motivated talent. Our employees are trained and offered
a career path to higher-level positions within the Company.
- Quality Client-Driven Metrics and Service Excellence -- As an ISO 9001
certified company, we follow a well-defined quality system with a
focus on continuous improvement. We utilize the ITIL (IT
Infrastructure Library) process-based approach to managing IT support
services.
- Core Expertise and Experience -- Our ability to deliver mission
critical IT and business process solutions has been well established
and recognized by our diverse customer base in the IT service
industry.
As noted previously, we have implemented an offshore outsourcing strategy in
Romania. We anticipate that our Romanian offering will enhance our overall IT
outsourcing offering because of the technicians' technical and multilingual
capabilities, which are provided at a cost that is currently significantly lower
than in the United States and Western Europe.
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SALES AND MARKETING
Our sales and marketing objective is to leverage our expertise and global
presence to develop long-term relationships with existing and potential clients
both domestically and internationally. Our marketing and business development
initiatives are designed to build stronger brand identity within our current
vertical markets and the overall IT outsourcing marketplace. We believe that our
client base provides excellent opportunities for further marketing and cross
selling of our services. Our plans for increasing our visibility include market
focused advertising, consultative personal visits with potential and existing
clients, participation in market specific trade shows and seminars, speaking
engagements, articles and white papers and our website. Our sales force is
comprised of sales people that pursue new business opportunities and account
managers that manage and grow relationships with existing accounts.
As we continue to diversify our business through acquisitions, we work to
integrate the service offerings of our acquisitions into our global service
offerings and integrate the sales forces into one integrated global sales force.
INTELLECTUAL PROPERTY
We rely upon a combination of contract provisions and trade secret laws to
protect the proprietary technology we use in our operations. We also rely on a
combination of copyright, trademark and trade secret laws to protect our
proprietary software. We attempt to further protect our trade secrets and other
proprietary information through agreements with employees and consultants. We do
not hold any material patents and do not have any patent applications pending.
There can be no assurance that the steps we have taken to protect our
proprietary technology will be adequate to deter misappropriation of our
proprietary rights or third-party development of similar proprietary software.
We hold a registered trademark for TechTeam(R).
EMPLOYEES
We had total employees of 1,738 worldwide as of December 31, 2004 comprised of
1,601 technicians and operational staff, 36 sales and marketing employees, and
101 administrative employees. Our employees, with the exception of approximately
380 employees in Europe, are not represented by a labor union and we have never
suffered an interruption of business as a result of a labor dispute. We consider
our relations with our employees to be good.
EUROPEAN OPERATIONS
We service our clients in Europe through six wholly-owned subsidiaries: TechTeam
Global Ltd., TechTeam Global NV/SA, TechTeam A.N.E. NV/SA (wholly-owned by
TechTeam Global NV/SA), TechTeam Global GmbH, TechTeam Global AB, and S.C.
TechTeam Global SRL. We offer services from each of our business segments in
Europe. However, the majority of the revenue is currently generated in our
diversified IT outsourcing services segment.
TechTeam Global Ltd., TechTeam Global GmbH, and TechTeam Global AB provide Ford
and its subsidiaries with helpdesk services and technical staffing. TechTeam
Global NV/SA and S.C. TechTeam Global SRL provide our clients primarily with
multilingual helpdesk support. A significant portion of our business in Europe
is driven by our client base in the United States. Ford and its subsidiaries are
currently the only clients of TechTeam Global GmbH and TechTeam Global AB.
A summary of our international net revenue and long-lived assets is set forth in
Note 13 to our Consolidated Financial Statements in "Item 8 -- Financial
Statements and Supplementary Data," which is incorporated herein by reference.
Our international business is subject to risks customarily encountered in
foreign operations, including changes in a specific country 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,
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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 or the local
currency of the subsidiary delivering the service. However, we are naturally
hedged, with over 95% of our revenue being received in same currency in which we
pay our expenses. While these risks are believed to be manageable, no assurances
can be given in this regard.
DISCONTINUED OPERATION -- 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 two to five years.
Capital Group ceased writing new leases in March 2000 and is in the final stages
of running out its lease portfolio. At December 31, 2004, our future revenue
stream from contractually committed leases was inconsequential. The primary
activity that remains in winding down the leasing operation is the collection of
accounts receivable, including older accounts receivable related to terminated
leases, which will continue during 2005. As a result, Capital Group has been
presented as a discontinued operation in accordance with Statement of Financial
Accounting Standards No. 144, "Accounting for the Disposal or Impairment of
Long-Lived Assets." Under this statement, the operating results of Capital Group
are presented separately from continuing operations in the accompanying
financial statements for all periods presented. Capital Group previously was
reported as a separate operating segment called Leasing Operations.
During 2003, we determined that we would not be able to obtain the value
previously expected from the sale of off-lease equipment inventories and that
certain estimated residual values of leased equipment were overstated due to a
significant decline in the fair market value of the equipment in the secondary
market. In recognition of the deterioration in these market prices, we recorded
non-cash charges to earnings totaling approximately $1,677,000 during 2003 to
increase our reserve for inventories and residual values. No such charges were
recorded in 2002 and 2004.
ITEM 2. PROPERTIES
Our world headquarters and principal executive offices are located in
Southfield, Michigan. The following table sets forth certain information
regarding the principal properties used by TechTeam, all of which are leased:
LEASE TERM BEGINNING SQUARE
LOCATION FUNCTION AND END (MM/DD/YR) FOOTAGE
-------- -------- -------------------- -------
Southfield, MI World Headquarters and Helpdesk Facility 11/01/93 - 06/30/11 69,840
Brussels, Belgium European Headquarters and Helpdesk Facility 08/01/97 - 07/31/06 53,733
Dearborn, MI Helpdesk Facility and Training Center 04/01/97 - 09/30/08 30,182
Bucharest, Romania Helpdesk Facility 09/01/04 - 8/31/14 30,139
Davenport, IA Helpdesk Facility 10/15/99 - 10/14/09 22,263
Chantilly, VA Headquarters of Digital Support Corporation 06/12/04 - 06/30/11 17,597
Bethesda, MD Headquarters of Sytel, Inc. 06/01/01 - 5/31/06 17,338
Herndon, VA Office Space 02/18/99 - 8/31/06 12,003
Gent, Belgium Headquarters of TechTeam A.N.E. NV/SA 09/01/01 - 8/31/06 6,243
Portsmouth, RI Sales and Administrative Office 06/01/01 - 05/31/06 4,200
Gothenburg, Sweden Sales and Administrative Office 09/01/02 - 09/30/05 1,829
Germantown, MD Sales and Administrative Office 03/01/04 - 02/28/07 1,405
9
We believe the facilities we occupy are well maintained and in good operating
condition. We are awaiting completion of our permanent helpdesk facility in
Bucharest, Romania, which has been delayed. We anticipate being able to take
possession of the permanent space, noted above, during the month of May 2005. We
are currently using temporary office space, which is sufficient for the amount
of business currently conducted from Romania. As the delivery of our permanent
space has been delayed, we are not paying for the use of the temporary space at
this time, and the landlord is incurring penalties. Except for our temporary
Bucharest office space, we believe these locations are adequate to meet our
needs for the foreseeable future. These facilities include general office space
and computer training classrooms. Because some of our services are performed at
client sites, the cost of maintaining multiple offices is minimized. As
previously announced, we lost some helpdesk contracts in 2004. As these projects
were delivered from our Southfield, Michigan call center, our helpdesk facility
there is currently underutilized and provides space for future business
expansion.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2004.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the NASDAQ National Stock Market(R) under the symbol
"TEAM." The following table sets forth the reported high and low sales prices of
our common stock for the quarters indicated as reported by the NASDAQ National
Stock Market(R).
YEAR AND QUARTER HIGH LOW
- --------------------- ------ -----
2003
First Quarter .... $ 7.89 $5.73
Second Quarter ... 7.00 5.55
Third Quarter .... 6.95 6.00
Fourth Quarter ... 7.38 5.68
2004
First Quarter .... $ 8.22 $6.79
Second Quarter ... 9.45 6.63
Third Quarter .... 10.89 8.56
Fourth Quarter ... 10.38 8.35
The Company has never paid any dividends on its common stock. Any future
decision as to payment of dividends will be made at the discretion of our Board
of Directors and will depend upon our earnings, financial position, capital
requirements, and such other factors as the Board of Directors deems relevant.
TechTeam had 430 shareholders of record as of March 1, 2005.
The following table sets forth the information with respect to purchases made by
the Company of shares of its common stock during the fourth quarter of 2004:
TOTAL NUMBER OF MAXIMUM NUMBER OF
TOTAL NUMBER AVERAGE SHARES PURCHASED AS SHARES THAT MAY YET
OF SHARES PRICE PAID PART OF PUBLICLY BE PURCHASED UNDER
PERIOD PURCHASED PER SHARE ANNOUNCED PROGRAMS THE PROGRAMS
------ ------------ ---------- ------------------- -------------------
October 1, 2004 to October 31, 2004 -- -- -- 650,000
November 1, 2004 to November 30, 2004 -- -- -- 650,000
December 1, 2004 to December 31, 2004 -- -- -- 650,000
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 expired on January
27, 2005.
11
ITEM 6. SELECTED FINANCIAL DATA
The following table presents information derived from our consolidated financial
statements for the five years ended December 31, 2004. This information should
be read in conjunction with "Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Item 8 -- Financial
Statements and Supplementary Data." The results of operations presented below
are not necessarily indicative of the results of operations that may be achieved
in the future.
YEAR ENDED DECEMBER 31,
------------------------------------------------
STATEMENTS OF OPERATIONS DATA 2004 2003 2002 2001 2000
----------------------------- -------- ------- ------- ------- -------
(In thousands)
REVENUE
Diversified IT outsourcing services ............ $ 74,608 $65,614 $57,675 $50,048 $59,941
Government technology services ................. 25,712 2,055 1,431 1,268 4,828
IT consulting and systems integration .......... 19,668 8,195 7,197 6,918 9,679
Technical staffing ............................. 7,445 9,090 10,153 14,522 18,874
Learning services .............................. 555 879 1,077 2,005 3,485
-------- ------- ------- ------- -------
TOTAL REVENUE ..................................... 127,988 85,833 77,533 74,761 96,807
COST OF SERVICES DELIVERED
Cost of services delivered ..................... 96,916 67,949 58,078 55,271 73,628
Asset impairment loss .......................... 485 -- -- -- --
-------- ------- ------- ------- -------
TOTAL COST OF SERVICES DELIVERED .................. 97,401 67,949 58,078 55,271 73,628
-------- ------- ------- ------- -------
GROSS PROFIT ...................................... 30,587 17,884 19,455 19,490 23,179
Selling, general, and administrative expense ... 24,040 18,695 17,801 21,733 22,895
Goodwill amortization expense .................. -- -- -- 362 213
-------- ------- ------- ------- -------
OPERATING INCOME (LOSS) ........................... 6,547 (811) 1,654 (2,605) 71
OTHER INCOME (EXPENSE)
Net interest income ............................ 719 1,139 910 1,086 514
Foreign currency transaction gain (loss) ....... (91) 920 37 -- --
Gain on sale of joint venture .................. -- -- -- -- 322
-------- ------- ------- ------- -------
TOTAL OTHER INCOME ................................ 628 2,059 947 1,086 836
-------- ------- ------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES ............................ 7,175 1,248 2,601 (1,519) 907
Income tax provision ........................... 2,547 1,438 1,483 587 1,060
-------- ------- ------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS .......... 4,628 (190) 1,118 (2,106) (153)
Income (loss) from discontinued operations,
net of tax .................................. 97 (856) 280 (1,472) 2,299
-------- ------- ------- ------- -------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE .............................. 4,725 (1,046) 1,398 (3,578) 2,146
Cumulative effect of accounting change,
net of $0 tax ............................... -- -- (1,123) -- --
-------- ------- ------- ------- -------
NET INCOME (LOSS) ................................. $ 4,725 $(1,046) $ 275 $(3,578) $ 2,146
======== ======= ======= ======= =======
12
YEAR ENDED DECEMBER 31,
----------------------------------------------
STATEMENTS OF OPERATIONS DATA 2004 2003 2002 2001 2000
----------------------------- ------ ------- ------- ------- -------
(In thousands, except per share data)
BASIC EARNINGS (LOSS) PER COMMON SHARE
Income (loss) from continuing operations ....... $ 0.49 $ (0.02) $ 0.10 $ (0.20) $ (0.01)
Income (loss) from discontinued operation ...... 0.01 (0.09) 0.03 (0.14) 0.18
Cumulative effect of accounting change ......... -- -- (0.10) -- --
------ ------- ------- ------- -------
Total basic earnings (loss) per common share ... $ 0.51 $ (0.10) $ 0.03 $ (0.33) $ 0.17
====== ======= ======= ======= =======
BASIC EARNINGS PER PREFERRED SHARE
Income from continuing operations .............. $ 0.49 $ -- N/A N/A N/A
Income from discontinued operation ............. 0.01 -- N/A N/A N/A
Cumulative effect of accounting change ......... -- -- N/A N/A N/A
------ ------- ------- ------- -------
Total basic earnings per common share .......... $ 0.51 $ -- N/A N/A N/A
====== ======= ======= ======= =======
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Income (loss) from continuing operations ....... $ 0.48 $ (0.02) $ 0.10 $ (0.20) $ (0.01)
Income (loss) from discontinued operation ...... 0.01 (0.09) 0.03 (0.14) 0.18
Cumulative effect of accounting change ......... -- -- (0.10) -- --
------ ------- ------- ------- -------
Total diluted earnings (loss) per
common share ................................ $ 0.49 $ (0.10) $ 0.02 $ (0.33) $ 0.17
====== ======= ======= ======= =======
WEIGHTED AVERAGE COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING
Basic -- common ................................ 8,660 10,066 10,957 10,771 12,554
Basic -- preferred ............................. 690 503 -- -- --
Diluted -- common .............................. 8,904 10,066 11,103 10,771 12,554
AS OF DECEMBER 31,
------------------------------------------------
STATEMENTS OF FINANCIAL POSITION DATA 2004 2003 2002 2001 2000
------------------------------------- ------- ------- ------- ------- --------
(In thousands)
Current assets .................................... $71,709 $60,600 $68,549 $58,801 $ 40,985
Current liabilities ............................... 15,628 11,522 7,869 11,746 17,840
Total assets ...................................... 88,987 77,700 82,301 87,121 100,774
Long-term obligations ............................. 1,699 408 376 805 4,817
Redeemable convertible preferred stock ............ 5,000 5,000 -- -- --
Total shareholders' equity ........................ $66,660 $60,770 $73,320 $74,570 $ 78,117
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
TechTeam is a global provider of information technology ("IT") and business
process outsourcing support services to Fortune 1000 companies, multinational
companies, product providers, small and mid-size companies, and government
entities. Over the past 15 months, TechTeam has acquired three companies. As a
result of these acquisitions, we have strategically added governmental
technology services to our long-standing core businesses of corporate helpdesk,
professional services/systems integration, technical staffing, and training
services. In order to better describe our business following these changes, we
have modified our four reporting business segments into five new reporting
segments -- Diversified IT Outsourcing Services (comprised primarily of our
former corporate helpdesk services segment), Government Technology Services
(comprised of all services provided to government-based customers primarily by
our Digital Support Corporation and Sytel subsidiaries), IT Consulting and
Systems Integration (comprised primarily of our former Professional
Services/Systems Integration segment), Technical Staffing, and Learning Services
(formerly our training programs segment). Prior year amounts have been
reclassified to reflect the current year presentation.
We grew our revenue 49.1% in 2004 and significantly improved our operating
performance over 2003 by pursuing four strategic initiatives: (1) grow our
overall business through strategic, accretive acquisitions both domestically and
internationally, (2) expand our footprint in the IT consulting and systems
integration services sector, including technology services for government-based
customers, as we believe infrastructure support services and systems and
software implementation services offer significant opportunity for complementary
growth and improved gross margin, (3) improve operating efficiencies and
profitability, primarily in our diversified IT outsourcing services operating
segment, through various performance improvement and cost saving initiatives,
and (4) continue our growth in Europe and establish multilingual helpdesk
operations in Romania to realize operational efficiencies and cost savings from
offering our customers a blended solution with our multilingual helpdesk
operations in Belgium.
Pursuant to our first two strategic initiatives, we completed the acquisition of
two companies -- Advanced Network Engineering NV/SA ("A.N.E.") on May 13, 2004
and Digital Support Corporation ("DSC") on December 31, 2003. A.N.E. is 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. A.N.E. is part of our IT
consulting and systems integration operating segment. DSC is 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. Revenue
and expense from DSC's government-based customers comprise the majority of our
newly created government technology services operating segment, while revenue
and expense from DSC's commercial customers are included in our IT consulting
and systems integration operating segment. A.N.E. and DSC contributed revenue of
$4.13 million and $28.1 million, respectively, in 2004, which resulted in an
increase in IT consulting and systems integration revenue of 140% from 2003 to
$19.7 million and an increase in government technology services revenue of $25.7
million.
Continuing to pursue our first two strategic initiatives in 2005, on January 3,
2005, we acquired Sytel, Inc. ("Sytel"), an information technology services and
solutions company that provides network engineering, outsourcing services, and
systems integration services principally under prime contracts and subcontracts
with agencies and departments of U.S. government. Sytel had unaudited revenue
and net income of $28.8 million and $1.67 million, respectively, for the year
ended December 31, 2004, which is not included in the accompanying financial
statements. Together, the government-based customers of Sytel and DSC will
comprise the majority of our government technology services operating segment.
14
We believe our 2004 results also reflect progress in implementing our third
strategic initiative, improving operating efficiencies and profitability through
performance improvement and cost saving initiatives. In 2003 and 2004, we
implemented various measures relating primarily to our diversified IT
outsourcing services operating segment including consistently aligning our
headcount with the level of business being generated from our customers,
reducing operational office space in the U.S. and Belgium, and implementing a
global performance management process to promote operational improvements. As a
result, gross profit from diversified IT outsourcing services increased 40.0% to
$19.1 million for the year ended December 31, 2004, from $13.6 million for the
comparable period in 2003. Gross margin (gross profit as a percentage of
revenue) from diversified IT outsourcing services increased to 25.6% in 2004,
from 20.8% in 2003. The increase in this gross margin in 2004 was negatively
impacted by a $485,000 pre-tax charge in the fourth quarter for an impairment of
a software asset. Excluding the impairment charge, gross margin from diversified
IT outsourcing services increased to 26.2% in 2004, from 20.8% in 2003. The
increase in gross profit and gross margin (excluding the impairment charge) was
primarily due to increased business with new and existing customers in Europe
and realization of the aforementioned operational efficiencies and cost savings
on a global basis.
Finally, we made significant progress in 2004 toward meeting our fourth
strategic initiative. Revenue generated from our European operations increased
47.8% to $41.2 million in 2004, from $27.9 million in 2003. In addition, we
established helpdesk operations in Bucharest, Romania, with the delivery of
customer support services beginning in April 2004. Lastly, we improved our gross
margin performance. Excluding revenue contributed by A.N.E., revenue generated
in Europe increased 32.9% to $37.0 million in 2004, from $27.9 million in 2003,
primarily due to growth in business at our Belgian and Swedish subsidiaries and
the strengthening of European currencies relative to the U.S. dollar. If revenue
in Europe in 2004 was translated at the average exchange rate for 2003, reported
revenue would have been reduced by approximately $3.45 million. Since most of
the Company's international operating expenses are also incurred in the same
foreign currencies in which the associated revenue is denominated, the net
impact of exchange rate fluctuations on gross profit and operating income is
considerably less than the estimated impact on revenue.
As we look to 2005, we expect to face challenges that will likely impact our
profitability in future periods. First, we are required to adopt the provisions
of Section 404 of the Sarbanes-Oxley Act of 2002 (the "Act") for the year ended
December 31, 2005, which requires us to certify our system of internal control
over financial reporting and disclosure. We expect to incur between $1.0 million
to $1.5 million of incremental expense in 2005 to implement this section of the
Act. These costs may increase if it is determined that significant efforts will
be required to remediate control deficiencies that may be identified during
implementation.
Next, we are investing in our global infrastructure to support our growth
through the implementation of a new human capital management system during 2005
and 2006, which will encompass most aspects of our global human resource
functions. We expect to incur approximately $600,000 to $700,000 of expense in
2005 during implementation before we begin to realize resulting operational
efficiencies in future periods. We are also investing in increased sales and
marketing activities to promote the Company and our service offerings and
capabilities. As our customers continue to require services delivered globally,
we expect to make investments necessary to establish operations in new countries
from time to time.
Finally, as previously reported, a large helpdesk contract with DaimlerChrysler
AG has not been renewed and the Company will lose another contract with Liberty
Mutual Insurance Company on or about April 30, 2005, as the client is expected
to take these services in-house. As services for these projects were delivered
from our Southfield, Michigan helpdesk facility, our facility is currently
underutilized.
15
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004 COMPARED TO THE YEAR ENDED DECEMBER 31, 2003
YEAR ENDED DECEMBER 31,
------------------------- INCREASE %
2004 2003 (DECREASE) CHANGE
-------- -------------- ---------- -------
(In thousands)
REVENUE
Diversified IT outsourcing services .... $ 74,608 $65,614 $ 8,994 13.7%
Government technology services ......... 25,712 2,055 23,657 1151%
IT consulting and systems integration .. 19,668 8,195 11,473 140.0%
Technical staffing ..................... 7,445 9,090 (1,645) (18.1)%
Learning services ...................... 555 879 (324) (36.9)%
-------- ------- -------
TOTAL REVENUE $127,988 $85,833 $42,155 49.1%
======== ======= =======
Revenue from our diversified IT outsourcing services increased 13.7% to $74.6
million in 2004, from $65.6 million in 2003, primarily due to growth at our
Belgian and Swedish subsidiaries, and the strengthening of the euro, British
pound sterling, and Swedish kroner relative to the U.S. dollar. These increases
were partially offset by a contractual price reduction granted to Ford Motor
Company ("Ford") effective August 1, 2004. Revenue from IT consulting and
systems integration increased 140% to $19.7 million in 2004, from $8.20 million
in 2003, due to our acquisitions of DSC and A.N.E. and additional business from
new and existing customers in the United States. Excluding revenue contributed
by DSC and A.N.E., IT consulting and systems integration revenue increased 28.3%
to $10.5 million in 2004, from $8.20 million in 2003. Revenue from technical
staffing decreased 18.1% to $7.45 million in 2004, from $9.09 million in 2003,
primarily due to staffing reductions in the United States that were partially
offset by additional business received in Europe. The increase in revenue from
government technology services was attributable to our acquisition of DSC on
December 31, 2003.
Revenue generated in the United States increased 49.8% to $86.8 million in 2004,
from $58.0 million in 2003, due to our acquisition of DSC. Excluding revenue
contributed by DSC, revenue generated in the United States increased 1.2% to
$58.7 million in 2004, from $58.0 million in 2003, primarily due to additional
business from new and existing customers, which was partially offset by a
contractual price reduction to Ford effective August 1, 2004, as hereinafter
described, and reduced volumes from established and stable help desks.
Revenue generated in Europe increased 47.8% to $41.2 million in 2004, from $27.9
million 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, which were partially offset by the
contractual price reduction to Ford. Excluding revenue contributed by A.N.E.,
revenue generated in Europe increased 32.9% to $37.0 million in 2004, from $27.9
million in 2003. If revenue in Europe for 2004 was translated at the average
exchange rate for 2003, reported revenue would have been reduced by
approximately $3.45 million in 2004. Within Europe, revenue from our Belgian
operation increased 62.9% to $27.3 million in 2004, from $16.8 million in 2003,
primarily due to additional business from new 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 from our Belgian operation
increased 38.3% to $23.2 million in 2004, from $16.8 million in 2003. If revenue
from our Belgian operation in 2004 was translated at the average exchange rate
for 2003, reported revenue would have been reduced by approximately $2.10
million in 2004. Since most of the Company's international operating expenses
are also incurred in the same foreign currencies in which the associated revenue
is denominated, the net impact of exchange rate fluctuations on gross profit and
operating income is considerably less than the estimated impact on revenue.
16
Under our services agreement with Ford for its global helpdesk, we provide
corporate helpdesk services on a fixed-price-per-seat, or "managed service,"
basis. Pursuant to the terms of the contract, we were required to reduce the
price of our services on a per-seat basis effective August 1, 2004. The
agreement 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, effective August 1, 2004. We estimate that the combination of
these two events resulted in a decrease in revenue in 2004 of approximately
$900,000 to $950,000. We expect to offset the majority of the reduction in
revenue with continued expansion and growth in the Ford Global Helpdesk. Revenue
from the Ford Global Helpdesk in 2004 was approximately $3.96 million greater
than revenue from the Ford Global Helpdesk in 2003.
YEAR ENDED DECEMBER 31,
---------------------------------------
2004 2003
------------------ ------------------
GROSS GROSS INCREASE %
AMOUNT MARGIN % AMOUNT MARGIN % (DECREASE) CHANGE
------- -------- ------- -------- ---------- ------
(In thousands, except percentages)
GROSS PROFIT
Diversified IT outsourcing services ... $19,560 26.2% $13,627 20.8% $ 5,933 43.5%
Asset impairment loss ................. (485) -- (485)
------- ------- -------
Total Diversified IT
outsourcing services ............ 19,075 25.6% 13,627 20.8% 5,448 40.0%
Government technology
services ........................... 6,749 26.2% 534 26.0% 6,215 1164%
IT consulting and systems
integration ........................ 3,358 17.1% 1,871 22.8% 1,487 79.5%
Staffing .............................. 1,301 17.5% 1,789 19.7% (488) (27.3)%
Learning services ..................... 104 18.7% 63 7.2% 41 65.1%
------- ------- -------
TOTAL GROSS PROFIT ....................... $30,587 23.9% $17,884 20.8% $12,703 71.0%
======= ======= =======
Gross profit from our diversified IT outsourcing services increased 40.0% to
$19.1 million in 2004, from $13.6 million in 2003. Gross margin from diversified
IT outsourcing services increased to 25.6% in 2004, from 20.8% in 2003. The
increases in gross profit and gross margin from diversified IT outsourcing
services were primarily due to realization of the aforementioned operational
efficiencies from re-aligning our cost structure, expanding our help desk
capabilities in Europe, and increased business with new and existing customers,
which were partially offset by an asset impairment charge of $485,000 related to
customization costs for certain software that we determined would not be
utilized to deliver services to our customers or be used for any other purpose.
As there are no expected future cash flows related to the customization, we
recorded an impairment charge representing the net book value of these costs.
Excluding the impairment charge, gross margin from diversified IT outsourcing
services increased to 26.2% in 2004, from 20.8% in 2003. This improvement in
gross margin was also partially offset by the impact of reductions in revenue
under our Ford contract, as discussed above. Based on historical trends, we
estimate that the combination of a reduced price per seat and the reduced number
of seats being supported on our Ford contract reduced our gross margin on
diversified IT outsourcing services by 70-90 basis points and our overall gross
margin by 40-60 basis points in 2004.
Gross profit from IT consulting and systems integration increased 79.5% to $3.36
million in 2004, from $1.87 million in 2003. Gross margin from IT consulting and
systems integration decreased to 17.1% in 2004, from 22.8% in 2003. The increase
in gross profit and decrease in gross margin was primarily due to our
acquisitions of DSC and A.N.E. and lower margin hardware sales of $3.96 million
at these subsidiaries. Excluding the total gross profit contributed by DSC and
A.N.E., gross profit increased 44.3% to $2.70 million, from $1.87 million in
2003, and gross margin increased
17
to 25.7% in 2004, from 22.8% in 2003, primarily due to additional business from
new and existing customers at our subsidiary, TechTeam Cyntergy, which provides
deployment, training, and implementation services to companies in the
hospitality, retail, food service, and other industries throughout the United
States.
The increase in gross profit from government technology services of $6.22
million to $6.7 million in 2004, from $534,000 in 2003, is attributable
primarily to our acquisition of DSC on December 31, 2003. Gross margin from
government technology services of 26.2% in 2004 was negatively impacted by
lower margin hardware sales of $5.22 million. Excluding these hardware sales,
gross margin from government technology services increased to 31.2% in 2004
from 26.0% in 2003.
Gross profit from technical staffing decreased 27.3% to $1.30 million in 2004,
from $1.79 million in 2003, which is consistent with the decrease in technical
staffing revenue.
YEAR ENDED DECEMBER 31,
------------------------ INCREASE %
2004 2003 (DECREASE) CHANGE
------- -------------- ---------- ------
(In thousands)
OPERATING EXPENSES AND OTHER
Selling, general, and administrative expense...... $24,040 $18,695 $ 5,345 28.6%
Net interest income............................... $ 719 $ 1,139 $ (420) (36.9)%
Foreign currency transaction gain (loss).......... $ (91) $ 920 $(1,011) (109.9)%
Income tax provision.............................. $ 2,547 $ 1,438 $ 1,109 77.1%
Selling, general, and administrative expense increased 28.6% to $24.0 million,
or 18.8% of total revenue, in 2004, from $18.7 million, or 21.8% of total
revenue, 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 6.7% to $19.9 million, or 20.8% of total revenue, in 2004,
from $18.7 million, or 21.8% of total revenue, in 2003. 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 and reduced
amortization expense of $315,000 in 2004 from 2003, as certain assets have
become fully amortized. Under the Company's incentive compensation plans that
became effective January 1, 2004, certain members of management are entitled to
bonuses as a result of our meeting specific revenue and operating income targets
for 2004. We incurred approximately $1.07 million of expense under these plans
in 2004, of which $239,000 was recorded to cost of services delivered.
Net interest income decreased to $719,000 in 2004, from $1.14 million in 2003,
primarily due to lower average cash balances maintained in 2004, and interest
income received in 2003 related to a tax refund.
Foreign currency transaction gain (loss) decreased to a loss of $(91,000) in
2004 from a gain of $920,000 in 2003, primarily due to the U.S. dollar weakening
relative to the euro and British pound sterling to a greater extent in 2003 than
in 2004 and lower foreign-denominated balances subject to transaction gains and
losses in 2004 than in 2003.
The consolidated effective tax rate in 2004 differs from the statutory tax rate
of 34% primarily due to the unfavorable tax effect of providing a valuation
allowance against the future tax benefit of operating loss carryforwards in
certain foreign tax jurisdictions and state income taxes. These items are
partially offset by recognizing a favorable tax benefit from the expected
recovery of taxes paid in prior years and a change in estimate regarding the
Company's tax liabilities for prior years. In 2003, the consolidated effective
tax rate differs from the statutory rate primarily due to the unfavorable tax
effect of providing a valuation allowance against the future tax benefit of
operating loss carryforwards in certain foreign tax jurisdictions and the
existence of nondeductible expenses.
18
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE YEAR ENDED DECEMBER 31, 2002
YEAR ENDED DECEMBER 31,
------------------------ INCREASE %
2003 2002 (DECREASE) CHANGE
------- -------------- ---------- ------
(In thousands)
REVENUE
Diversified IT outsourcing services ..... $65,614 $57,675 $ 7,939 13.8%
Government technology services .......... 2,055 1,431 624 43.6%
IT consulting and systems integration ... 8,195 7,197 998 13.9%
Technical staffing ...................... 9,090 10,153 (1,063) (10.5)%
Learning services ....................... 879 1,077 (198) (18.4)%
------- ------- -------
TOTAL REVENUE .............................. $85,833 $77,533 $ 8,300 10.7%
======= ======= =======
Revenue from our diversified IT outsourcing services increased 13.8% to $65.6
million in 2003, from $57.7 million in 2002, primarily due to increased revenue
generated by our European subsidiaries and the strengthening of the euro,
British pound sterling, and Swedish kroner relative to the U.S. dollar. These
increases were partially offset by a contractual price reduction granted to
Ford. Revenue from IT consulting and systems integration services increased
13.9% to $8.20 million in 2003, from $7.20 million in 2002, primarily due to
additional business from existing customers. Revenue from technical staffing
services decreased 10.5% to $9.09 million in 2003, from $10.2 million in 2002,
primarily due to price concessions granted to Ford and staffing reductions,
which were partially offset by additional business received from Ford in Europe.
Revenue generated in the United States decreased 3.9% to $58.0 million in 2003,
from $60.3 million in 2002. The decrease in revenue in the United States was
primarily due to a contractual price reduction to Ford in our diversified IT
outsourcing services and technical staffing segments, and a reduction in
placements in our technical staffing operating segment with Ford. The price
reductions and staffing reductions adversely affected total Company revenue by
approximately $2.67 million, with the majority of this effect occurring in the
United States.
Revenue generated in Europe increased 62.1% to $27.9 million in 2003, from $17.2
million in 2002, primarily due to additional business from existing customers in
our diversified IT outsourcing services segment, efforts to expand our
multilingual help desk capabilities in Europe, and the weakening of the U.S.
dollar relative to the euro and the British pound sterling. If revenue in Europe
for 2003 was translated at the average exchange rate for 2002, reported revenue
would have been reduced by approximately $4.63 million during 2003. Since most
of the Company's international operating expenses are also incurred in the same
foreign currencies in which the associated revenue is denominated, the net
impact of exchange rate fluctuations on gross profit and operating income is
considerably less than the estimated impact on revenue. Within Europe, revenue
from our Belgian operation increased 94.5% to $16.8 million in 2003, from $8.6
million in 2002, due to growth in our existing customer base and the
aforementioned weakening of the U.S. dollar relative to the euro. If revenue in
Belgium in 2003 was translated at the average exchange rate for 2002, reported
revenue would have been reduced by approximately $3.04 million during 2003.
Since most of the Company's international operating expenses are also incurred
in the same foreign currencies in which the associated revenue is denominated,
the net impact of exchange rate fluctuations on gross profit and operating
income is considerably less than the estimated impact on revenue.
19
YEAR ENDED DECEMBER 31,
---------------------------------------
2003 2002
------------------ ------------------
GROSS GROSS INCREASE %
AMOUNT MARGIN % AMOUNT MARGIN % (DECREASE) CHANGE
------- -------- ------- -------- ---------- ------
(In thousands, except percentages)
GROSS PROFIT
Diversified IT Outsourcing
Services .................. $13,627 20.8% $15,792 27.4% $(2,165) (13.7)%
Government technology
services .................. 534 26.0% 300 21.0% 234 78.0%
IT consulting and systems
integration ............... 1,871 22.8% 1,657 23.0% 214 12.9%
Technical staffing ........... 1,789 19.7% 1,482 14.6% 307 20.7%
Learning services ............ 63 7.2% 224 20.8% (161) (71.9)%
------- ------- -------
TOTAL GROSS PROFIT .............. $17,884 20.8% $19,455 25.1% $(1,571) (8.1)%
======= ======= =======
Gross profit from diversified IT outsourcing services decreased 13.7% to $13.6
million in 2003, from $15.8 million in 2002. Gross margin from diversified IT
outsourcing services decreased to 20.8% in 2003, from 27.4% in 2002. The
decreases in gross profit and gross margin from diversified IT outsourcing
services were primarily due to price concessions granted to existing customers
in multi-year contracts negotiated during 2002 and 2003, costs associated with
the launch of new business and our expanded help desk in Belgium, and expenses
related to re-aligning our cost structure in our European operations. Gross
profit from IT consulting and systems integration increased 12.9% to $1.87
million in 2003, from $1.66 million in 2002. Gross margin from IT consulting and
systems integration decreased slightly to 22.8% in 2003, from 23.0% in 2002. The
increase in gross profit was primarily due to additional business from new and
existing customers in the United States. Gross profit from technical staffing
increased 20.7% to $1.79 million in 2003, from $1.48 million in 2002. Gross
margin from technical staffing increased to 19.7% in 2003, from 14.6% in 2002.
The increases in gross profit and gross margin from technical staffing was
primarily due to the implementation of our internal cost reduction efforts.
YEAR ENDED DECEMBER 31,
------------------------ INCREASE %
2003 2002 (DECREASE) CHANGE
------- -------------- ---------- ------
(In thousands)
OPERATING EXPENSES AND OTHER
Selling, general, and administrative expense..... $18,695 $17,801 $894 5.0%
Net interest income.............................. $ 1,139 $ 910 $229 25.2%
Foreign currency transaction gain................ $ 920 $ 37 $883 2386%
Income tax provision............................. $ 1,438 $ 1,483 $(45) (3.0)%
Selling, general, and administrative expense increased 5.0% to $18.7 million in
2003, from $17.8 million in 2002. This increase was primarily due to an increase
of approximately $593,000 in bad debt expense primarily from three customers who
declared bankruptcy in 2003, our investment in the expansion of Belgium and
Romania, a full-year's impact of the costs for our office in Sweden that we
opened in 2002 of approximately $200,000, and expenses incurred in reviewing
acquisitions of businesses that we ultimately decided not to acquire of
approximately $200,000. These increases were partially offset by various
decreases including, but not limited to, reduced Michigan Single Business Tax of
approximately $260,000, reduced rent expense of approximately $500,000 from less
square footage being leased, and internal cost containment efforts.
Net interest income increased to $1.14 million in 2003, from $910,000 in 2002,
due to higher average cash balances maintained in 2003, and interest income
received in 2003 related to a tax refund.
20
Foreign currency transaction gain increased to $920,000 in 2003, from $37,000 in
2002, primarily due to the significant weakening of the U.S. dollar in 2003
relative to the euro and British pound sterling and higher foreign-denominated
balances subject to transaction gains and losses in 2003 as compared to 2002.
The consolidated effective tax rate in 2003 differs from the statutory tax rate
of 34% primarily due to the unfavorable tax effect of providing a valuation
allowance against the future tax benefit of operating loss carryforwards in
certain foreign tax jurisdictions and state income taxes. In 2002, the
consolidated effective tax rate differs from the statutory rate primarily due to
nondeductible amortization expense and the unfavorable tax effect of providing a
valuation allowance against the future tax benefit of operating loss
carryforwards in certain foreign tax jurisdictions.
On January 1, 2002, we adopted Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets," pursuant to which we
no longer amortize goodwill beginning in 2002, but are required to subject
goodwill to an annual impairment test, or more frequently if impairment
indicators arise. Upon adoption of SFAS 142, we performed an impairment test of
goodwill as of January 1, 2002. We first compared the estimated fair value of
each reporting unit, as that term is defined by SFAS 142, with the reporting
unit's carrying amount. The fair values of the reporting units were estimated
using the expected present value of future cash flows. Upon completing this
first step, we identified our leasing operations reporting segment whose
carrying amount exceeded the fair value. As a result, we recorded a goodwill
impairment loss of $1.12 million representing the remaining carrying value of
this goodwill, which was recognized as the cumulative effect of an accounting
change as of January 1, 2002. The goodwill related to our leasing operations
segment and became impaired primarily due to our decision to exit the leasing
business and a significant decline in the fair market value of the leased
equipment in the secondary market.
IMPACT OF BUSINESS WITH MAJOR CLIENTS
As set forth in "Item 1 -- Business," we have historically been heavily
dependent upon two or three major clients for a substantial portion of our
revenue. In 2004, Ford Motor Company was our only client to exceed the threshold
for being reported as a significant customer. For the three years ended December
31, 2002, 2003, and 2004 Ford accounted for 55.9%, 52.9%, and 37.4%,
respectively, of the Company's total revenue. Any loss of (or failure to retain
a significant amount of business with) Ford would have a material adverse effect
on the Company's operating results and liquidity.
Revenue generated through our business with Ford increased from $43.3 million in
2002 to $45.4 million in 2003 and to $47.9 million in 2004. Our business with
Ford consists of helpdesk services discussed above, technical staffing,
installation of new personal computer equipment through Dell Inc., and the
support services provided to Volvo Car Corporation, a subsidiary of Ford Motor
Company. We anticipate that that our revenue from Ford will continue to grow
during 2005. Our largest contract with Ford for its Global Helpdesk is
scheduled to expire on July 31, 2005. While we believe that we are well
positioned to win this renewal due to our strong performance, there can be no
assurance in this regard.
During 2004, our revenue generated from business with DaimlerChrysler AG
accounted for less than 10% of our total revenue (for the three years ended
December 31, 2002, 2003, and 2004, DaimlerChrysler accounted for 14.5%, 13.8%,
and 7.7%, respectively, of the Company's total revenue). The decline in business
from DaimlerChrysler is due in part to a significant decline in revenue
generated from DaimlerChrysler through our leasing unit, and to the reduction in
size of the DaimlerChrysler dealership helpdesk during 2004. As previously
announced, the dealership helpdesk contract was awarded to another vendor in
November 2004. Accordingly, while we continue to provide DaimlerChrysler with
training, technical staffing, and other helpdesk services, DaimlerChrysler is
not expected to exceed the threshold for being reported as a significant
customer in 2005.
The Company continues to seek to diversify its client base from both a client
and industry perspective. During 2004, we were successful in expanding our
non-Ford-related business, especially through our multilingual helpdesk offering
and the results from our acquisitions of TechTeam A.N.E. and DSC. We expect
further diversification in 2005 as a result of our acquisition of Sytel, Inc.
While a major facet of our business strategy for 2005 remains to diversify our
customer base and become less dependent on our business with Ford, we believe
our strong performance and relationship with Ford will continue to result in
increasing revenue dollars
21
while the percentage of our total revenue derived from Ford declines, although
no assurances can be given in this regard.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 123R,
"Share-Based Payment," which replaces SFAS 123 and supersedes APB 25. SFAS 123R
eliminates the ability to account for share-based compensation transactions
using Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25"), and requires instead that such transactions be
accounted for using a fair-value-based method. SFAS 123R is effective for the
Company for awards that are granted, modified, or settled in periods beginning
after June 15, 2005, or the Company's third quarter. As we use the fair value
method of accounting under the original provisions of SFAS 123 for pro forma
disclosure purposes, we are also required to apply the provisions of SFAS 123R
in recognizing compensation cost for any portion of awards granted or modified
after December 15, 1994, that are not yet vested at the date SFAS 123R is
adopted. Based on the number of non-vested stock options the Company has
outstanding at December 31, 2004, adoption of SFAS 123R will result in
approximately $22,000 of compensation expense, net of tax, in 2005 and will not
have a material affect on our financial position or operating results.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $40.4 million at December 31, 2004, as compared
to $35.2 million at December 31, 2003. Cash and cash equivalents increased $5.24
million in 2004 primarily due to $8.84 million in cash provided by continuing
operations, $1.39 million in proceeds from the exercise of stock options, and
cash provided by discontinued operations of $974,000, which were partially
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,
$2.47 million in cash used for capital expenditures, and $885,000 in payments on
long-term debt, primarily related to notes payable acquired in our acquisitions
of DSC and A.N.E. Our operating cash flow of $10.0 million in 2004 was generated
primarily by income prior to non-cash charges for depreciation and amortization
of $9.57 million, and $1.19 million of operating cash flow from our discontinued
operation.
Cash and cash equivalents decreased $4.24 million in 2003 to $35.2 million at
December 31, 2003, from $39.4 million at December 31, 2002, primarily due to
$6.50 million in cash used to acquire DSC, $12.5 million in cash used to
repurchase 2,000,000 shares of our common stock under our stock repurchase
programs, $4.35 million in cash used for capital expenditures, and $468,000 in
payments on long-term debt of Capital Group. These decreases were partially
offset by $8.31 million in cash provided by operations, $4.82 million in
proceeds from the issuance of preferred stock, $544,000 in proceeds from the
exercise of stock options, and $6.49 million in proceeds from the sale of
marketable securities. Operating cash flow of $8.31 million in 2003 and $20.3
million in 2002 included $4.59 million and $12.1 million of operating cash flow
from Capital Group, our discontinued operation.
Capital expenditures were $2.47 million in 2004, $4.35 million in 2003, and
$3.44 million in 2002. The increase in capital spending in 2003 as compared to
2004 and 2002 was the result of our expansion in Europe and continued investment
in newer technologies and infrastructure support. We expect our capital
expenditures in 2005 to be at a comparable level to our average for the
three-year period ending December 31, 2004.
Long-term cash requirements, other than for normal operating expenses, are
currently anticipated for 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 2005-2007,
possible global expansion activities, the possible payment of Company dividends,
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 be sufficient to meet our ongoing requirements
for working capital, capital expenditures, and possible stock repurchases for
the next twelve months. We have historically not paid dividends.
22
MATERIAL COMMITMENTS
The Company has the following contractual obligations outstanding at December
31, 2004:
REDEEMABLE
CONVERTIBLE
PREFERRED OPERATING
MATURITIES OF CONTRACTUAL OBLIGATIONS DEBT STOCK LEASES
------------------------------------- ---- ----------- ---------
Less than one year................................. $38 $ -- $ 3,867
1-3 years.......................................... -- 5,000 9,086
4-5 years.......................................... -- -- 5,878
Thereafter......................................... -- -- 4,898
--- ------ -------
Total.............................................. $38 $5,000 $23,729
=== ====== =======
Subsequent to year-end on January 3, 2005, we borrowed $15.0 million under a
term loan with a bank due January 3, 2010 to finance our acquisition of Sytel,
Inc.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our financial statements in conformity with United States generally
accepted accounting principles ("GAAP"). Under GAAP, we make estimates and
assumptions that affect the amounts reported in our financial statements. As
additional information becomes available, these estimates and assumptions can
change and impact amounts reported in the future. We have identified below
accounting policies that we use to make these estimates and assumptions. We
consider these policies critical due to the amount of judgment uncertainty
inherent in their application.
DEFERRED INCOME TAXES:
Deferred income taxes represent temporary differences in the recognition of
certain items for income tax and financial reporting purposes. Realization of
deferred tax assets depends upon sufficient levels of future taxable income. If
at any time we believe that current or future taxable income does not support
the realization of deferred tax assets, a valuation allowance is provided.
Based on historical losses in Belgium and Romania, we have provided a valuation
allowance against the deferred tax asset related to our net operating loss
carryforward in these countries. We anticipate providing a valuation allowance
for any future losses incurred in Belgium and Romania. No valuation allowance
has been recognized against other deferred tax assets, which are in the United
States, as we believe it is more likely than not that these deferred tax assets
will be realized based on estimates of future taxable income, which have
considered, among other factors, the future benefits of our recent acquisitions.
No provision has been made with respect to approximately $4.58 million of
undistributed earnings of foreign subsidiaries at December 31, 2004, since we
have typically considered these earnings to be permanently reinvested. In
December 2004, the FASB issued FASB Staff Position ("FSP") No. 109-2,
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004," which provides
guidance under SFAS 109, "Accounting for Income Taxes," with respect to
recording the potential impact of the repatriation provisions of the American
Jobs Creation Act of 2004 ("Jobs Act") on an enterprise's income tax expense and
deferred taxes. The Jobs Act was enacted on October 22, 2004. FSP 109-2 states
that an enterprise is allowed time beyond the financial reporting period of
enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or
repatriation of foreign earnings for purposes of applying SFAS 109. We have not
yet evaluated the impact of the repatriation provisions. Accordingly, as
provided for in FSP 109-2, we have not adjusted income tax expense or deferred
taxes to reflect the repatriation provisions of the Jobs Act.
23
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 reserved when we determine they are more
likely than not to become uncollectible. Our customers are generally large,
well-capitalized entities. We generally do not require collateral and do not
charge interest on past due balances.
Our experience with delinquent accounts was adversely impacted by the bankruptcy
of three customers in the third and fourth quarters of 2003, which continue to
reflect the challenging economic conditions of our industry. One customer was a
former reseller of our leased equipment, one customer was related to our
corporate help desk services segment, and one customer was indebted to the
Company as a result of a note receivable acquired with our acquisition of
certain assets of Cyntergy Corporation in 2001. We are not aware of major
financial difficulties at any major customer and do not anticipate large
uncollectible accounts in the future.
FACTORS INFLUENCING FUTURE RESULTS
Because of the following factors, as well as other variables affecting our
operating results which are not set forth below, past financial performance may
not be a reliable indicator of future performance, and historical trends should
not be used to anticipate results or trends in future periods.
IMPACT OF BUSINESS WITH MAJOR CLIENTS:
As set forth in "Item 1 -- Business," we continue to depend upon Ford and its
subsidiaries for a substantial portion of our revenue. The past three years have
been difficult financially for this client, and further deterioration of its
financial condition could have a material adverse impact on our business as they
may seek further price concessions or the termination of projects. Similarly,
the loss of any significant customer or a reduction in economic activity in the
automotive industry would have a material adverse impact on our business,
financial condition, and results of operations.
Our two largest contracts, the Ford Global Helpdesk contract (currently
scheduled to expire on July 31, 2005) and a contract with a division of the
Department of Defense (currently scheduled to expire on March 31, 2005), are
both up for renewal during 2005. While we believe that we are well positioned
due to our strong performance to win these significant renewals, there can be no
assurance in this regard.
THE EXISTENCE OF SIGNIFICANT COMPETITION:
We face intense competition in all of our markets and for all of our services.
Many competitors have substantially greater resources, including more locations,
greater financial resources, a larger client base, and greater name and brand
recognition. These competitors may be willing to provide the same services that
we do at a loss in order to attain other, more lucrative business from our
customers. Due to this competition, it may be difficult for us to retain our
current customers or grow our revenue outside of our current customer base.
The intense competition may result in our customers being able to demand reduced
pricing in order for us to remain a preferred vendor. These pressures will
likely increase due to the trend to move outsourcing services offshore to
countries with lower labor costs, such as India, Malaysia, and the Philippines.
Our inability to continue to execute upon our strategy to address the
globalization of the support services market could have a material adverse
impact on our ability to maintain and grow our customer base. Further, we may
have to continue to lower the prices of our services to stay competitive, while
at the same time trying to maintain or improve revenue and gross margin. If we
cannot proportionately decrease our cost structure on a timely basis in response
to competitive price pressures, our gross margin and therefore our profitability
could be adversely affected. Any of these circumstances could have a material
adverse effect on our business, financial condition, and results of operations.
24
Moreover, the process to win new business tends to be long. Our diversified IT
outsourcing services business models require significant changes to our
customer's business processes and each customer has significant internal
political difficulties with local environments giving up decentralized control
of the support function. The decision makers are rarely involved in the early
details of the selection process so there are multiple sales efforts -- to the
team charged with selection and then to the Chief Information Officer/Chief
Executive Officer/Board -- that have to occur. Our results are dependent on our
ability to successfully manage the sales process and strong competition in these
markets.
CONTRACT RISKS INHERENT IN OUR BUSINESS:
The great majority of our contracts, including our Ford Global Helpdesk
contract, may be terminated without cause on short notice, often upon as little
as 90 days' notice. Terminations and non-renewals of major contracts could have
a material adverse impact upon our business, financial condition, and results of
operations.
A portion of our diversified IT outsourcing services business is billed on a
managed service basis (where the fee is fixed to perform specified services) as
opposed to time and materials. The onset of problems in our customers'
infrastructure, such as computer viruses, may require us to deploy additional
resources to solve these problems. In many instances, we would not receive any
additional revenue for the work performed, thereby adversely impacting our
profitability.
To the extent we provide service on a per-incident or per-minute basis, our
financial performance is dependent upon the volume of service requests that we
receive on the project. Some of our contracts do not contain minimum guaranteed
volume, so we may not always receive enough volume to pay for our costs relating
to a specific contract. Also, many of our contracts contain financial penalties
for our failure to meet the contractual performance service levels. If the
volume is too high, we may not be able to meet the service levels. In the United
States, we are able to manage this risk through changes in our staffing, but due
to labor laws, our European entities do not have as much flexibility in
staffing. Our inability to estimate accurately the resources and related
expenses required for the managed service project or our failure to complete our
contractual obligations in a manner consistent with their terms could materially
and adversely affect the business.
RISKS INHERENT IN GOVERNMENT TECHNOLOGY SERVICES
We derive an increasing amount of our revenues from government contracts that
typically are awarded through competitive processes and span a one-year base
period and one or more option years. The unexpected termination or non-renewal
of one or more of our significant contracts could result in significant revenue
shortfalls. Our clients generally have the right not to exercise the option
periods. In addition, our contracts typically contain provisions permitting an
agency to terminate the contract on short notice, with or without cause.
Following the expiration of the contract term, if the client requires further
services of the type provided in the contract, there is frequently a competitive
re-bidding process. We may not win any particular re-bid or be able to
successfully bid on new contracts to replace those that have been terminated.
Many of the systems we support involve managing and protecting information
involved in the Department of Defense and other sensitive government functions.
A security breach in one of these systems could cause serious harm to our
business, could result in negative publicity and could prevent us from having
further access to such critically sensitive systems or other similarly sensitive
areas for other governmental clients. Losses that we could incur from such a
security breach could exceed the policy limits that we have for "errors and
omissions" insurance.
Some of our government contracts require us, and some of our employees, to
maintain security clearances. If we lose or are unable to obtain security
clearances, the client can terminate the contract or decide not to renew it upon
its expiration. As a result, to the extent we cannot obtain the required
security clearances for our employees working on a particular engagement, we may
not derive the revenue anticipated from the engagement, which, if not replaced
with revenue from other engagements, could negatively impact our operating
results.
25
Federal government agencies routinely audit government contracts. These agencies
review a contractor's performance on its contract, pricing practices, cost
structure and compliance with applicable laws, regulations and standards. An
audit could result in an adjustment to our revenues because any costs found to
be improperly allocated to a specific contract will not be reimbursed, while
improper costs already reimbursed must be refunded. If a government audit
uncovers improper or illegal activities, we may be subject to civil and criminal
penalties and administrative sanctions, including termination of contracts,
forfeiture of profits, suspension of payments, fines and suspension or debarment
from doing business with federal government agencies. In addition, we could
suffer harm to our reputation if allegations of impropriety were made against
us.
We must comply with and are affected by federal government regulations relating
to the formation, administration, and performance of government contracts. These
regulations affect how we do business with our clients and may impose added
costs on our business. Any failure to comply with applicable laws and
regulations could result in contract termination, price or fee reductions or
suspension or debarment from contracting with the federal government. Further,
the federal government may reform its procurement practices or adopt new
contracting methods relating to the GSA schedule or other government-wide
contract vehicles. To the extent that we are unable to successfully comply with
these regulations, our government technology services business could be
negatively impacted.
RELIANCE ON SENIOR MANAGEMENT:
The success of the Company is highly dependent upon the efforts, direction, and
guidance of its senior management. The only employment agreements that we
currently have with the executive officers of the Company are with the President
and Chief Executive Officer, the Vice President Sales and Marketing, EMEA, the
President and Chief Executive Officer of Digital Support Corporation, and the
President and Chief Executive Officer of Sytel, Inc. Except for Employment
Agreements Relating to a Change of Control, which only apply to a change in the
control of the Company, we do not have any other employment agreements with
other members of our executive officer team. The loss of any of these senior
executives or our inability to attract, retain, or replace key management
personnel in the future, could have a material adverse effect on our business,
financial condition, and results of operations.
ATTRACTION AND RETENTION OF EMPLOYEES:
Our business involves the delivery of professional services and is very labor
intensive. Our success depends in large part upon our ability to attract,
develop, motivate, and retain highly skilled technical, clerical, and
administrative employees. Qualified personnel, especially in Washington, D.C.,
are in high demand. Accordingly, we expect to experience increased compensation
costs that may not be offset through either increased productivity or higher
customer pricing. Moreover, no assurances can be given that we will be able to
attract and retain sufficient numbers of qualified employees in the future,
especially when we need to expand our services in a short time period. We
attempt to implement a career path model where our helpdesks are located,
thereby enabling our employees to move to new jobs that require higher skill
levels and pay more money. Our inability to effectively implement this business
model in these locations could negatively affect our employee retention rates.
Our failure to attract and retain employees could have a material adverse effect
on our business, financial condition, and results of operations.
MANAGEMENT OF GROWTH BY ACQUISITION:
Our business strategy includes seeking to make complementary business
acquisitions. In order to pursue a growth by acquisition strategy successfully,
we must identify suitable candidates for these transactions, complete these
transactions, and manage post-closing issues such as the integration of acquired
companies or their employees. Integration issues are complex, time-consuming and
expensive and, without proper planning and implementation, could significantly
disrupt our business, including, but not limited to, the diversion of
management's attention, the loss of key business and/or personnel from the
acquired company, unanticipated
26
events, legal liabilities, dilutive effect of the issuance of additional
securities, and amortization of intangibles. Moreover, the financial risks
continue after the integration of the company. If the business becomes impaired,
there could be a non-cash partial or full write-off of the goodwill attributed
to the acquisition. Transactions may result in significant costs and expenses
and charges to earnings, including those related to severance pay, early
retirement costs, employee benefit costs, asset impairment charges, charges from
the elimination of duplicative facilities and contracts, in-process research and
development charges, inventory adjustments, legal, accounting and financial
advisory fees, and required payments to executive officers and key employees
under retention plans. Any of these possible difficulties could have a material
adverse effect on our business, financial condition, and results of operations.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS:
We operate businesses in many countries outside the United States, all of which
are currently located throughout Europe. As part of our business strategy, we
plan to further expand our global reach to be able to deliver services from Asia
and South America. As a result, we expect to continue expansion through start-up
operations and acquisitions in additional countries. Expansion of our existing
international operations and entry into additional countries will require
management attention and financial resources. Our future revenue, gross margin,
expenses, and financial condition also could suffer due to a variety of
international factors, including the following:
- changes in a country's or region's economic or political conditions,
including inflation, recession, interest rate fluctuations, and
unanticipated military conflicts;
- currency fluctuations, particularly in the euro, which contribute to
variations in sales of services in impacted jurisdictions and also
affect our reported results expressed in U.S. dollars;
- longer accounts receivable cycles and financial instability among
customers;
- local labor conditions and regulations;
- differences in cultures and languages, which impair our ability to
work as an effective global team;
- differing political and social systems;
- changes in the regulatory or legal environment;
- differing technology standards or customer requirements;
- difficulties associated with repatriating cash generated or held
abroad in a tax-efficient manner and changes in tax laws;
- natural and medical disasters.
To the extent that the Company does not manage its international operations
successfully, its business could be adversely affected and its revenues or
earnings could be reduced.
In addition, there has been an increasing amount of political discussion and
debate related to worldwide outsourcing, particularly from the United States to
offshore locations. While there is federal and state legislation currently
pending related to this issue, it is too early to determine whether such
legislation, if enacted, would have an adverse effect on the Company's results
of operations and financial condition.
RISKS IN OFFSHORE MARKETS:
The industry trend to move business towards offshore markets could result in
excess operating capacity in the United States, thereby increasing competition
for customers. Moreover, there are no assurances that we will be able to
successfully expand into and conduct business in offshore markets. The success
of any offshore operation is subject to numerous contingencies, some of which
are beyond management control, including general and regional economic
conditions, prices for our services, competition, changes in regulation, and
other risks. Any failure in our strategy could have a material adverse effect on
our business, financial condition, and results of operations. See "Risks
Associated with International Operations."
27
Our customers are primarily attracted to a reduction in cost of our services as
a result of delivery from an offshore location, and they are looking to enter
into long-term contracts to provide monthly services with a price that does not
adjust significantly with inflation. When a number of service providers enter
these offshore locations, the competition for employees increases, causing
turnover and increasing labor costs. In these circumstances, the Company bears
the risk of inflation, which could result in our costs increasing faster than we
can improve technician productivity.
CURRENCY FLUCTUATIONS:
We serve an increasing number of our U.S.-based customers using helpdesks in
Europe. Some of these contracts are priced in U.S. dollars, while a substantial
portion of our costs are incurred in Romanian lei or the euro. Thus, we are
subject to a foreign currency exchange risk. Although we enter into contracts to
limit potential foreign currency exposure, the Company does not fully hedge this
exposure. As a result, our gross profit may be reduced on these contracts.
MANAGEMENT OF CAPACITY AND PROJECTS:
The Company's ability to profit from the global trend toward outsourcing depends
in part on how effectively it manages its helpdesk capacity. There are several
factors and trends that have intensified the challenge of resource management.
In order to create the additional capacity necessary to accommodate new or
expanded outsourcing projects, the Company must consider opening new helpdesk
facilities. The opening or expansion of a helpdesk facility may result, at least
in the short term, in idle capacity until any new or expanded program is
implemented fully. The Company periodically assesses the expected long-term
capacity utilization of its helpdesk facilities. As a result, it may, if deemed
necessary, consolidate, close or partially close under-performing helpdesk
facilities in order to maintain or improve targeted utilization and margins.
There can be no assurance that the Company will be able to achieve or maintain
optimal utilization of its helpdesk capacity. If the Company does not
effectively manage its capacity, its results of operations could be adversely
affected.
With the inclusion of our Romanian helpdesk facility, we have significantly
increased the amount of business that we are performing for the same customers
from more than one location. Multi-site delivery increases the complexity of the
service provided, including but not limited to managing call volume and
resources. The inability of the Company to manage the different cultures and
personnel to deliver consistent quality from different sites could reduce the
Company's profitability and results of operation.
TECHNOLOGICAL CHANGES; DEPENDENCE ON TECHNOLOGY; INTERRUPTION OF
TELECOMMUNICATIONS:
Our success depends in part on our ability to develop IT solutions that keep
pace with continuing changes in the IT industry, evolving industry standards,
and changing client preferences. There can be no assurance that we will be
successful in adequately addressing these developments on a timely basis or
that, if these developments are addressed, we will be successful in the
marketplace. For example, our Support Portal offering is comprised of our
proprietary incident management tool and software developed and sold by software
companies. We have integrated this software into the Support Portal. During this
time, there have been other tools developed by other competitors and software
vendors that can match the functionality of the Support Portal. If these other
tools can provide similar or better functionality at a lower effective cost, or
if our software vendors go out of business, we could have a product and service
offering that will lose its marketability. The cost to update our incident
management tool and change the third party software comprising the Support
Portal could be significant. Our inability to effectively keep pace with
continuing changes in the IT industry could have a material adverse effect on
our business, financial condition, and results of operations.
28
Moreover, experienced computer programmers and hackers may be able to penetrate
our network security, or that of our customers, and misappropriate our
confidential information, create system disruptions, or cause shutdowns. As a
result, we could incur significant expenses in addressing problems created by
security breaches of our network. Moreover, we could lose existing or potential
customers for information technology outsourcing services or other information
technology solutions, or incur significant expenses in connection with our
customers' system failures. In addition, sophisticated hardware and operating
system software and applications that we produce or procure from third parties
may contain defects in design and manufacture, including "bugs" and other
problems that can unexpectedly interfere with the operation of our systems. The
costs to eliminate or alleviate security problems, viruses, worms, and bugs
could be significant, and the efforts to address these problems could result in
interruptions, delays, or cessation of service.
Our operations are dependent upon our ability to protect our helpdesk facility
and our information databases against damages that may be caused by fire and
other disasters, power failure, telecommunications failures, unauthorized
intrusion, computer viruses, and other emergencies. The temporary or permanent
loss of such systems could have a material adverse effect on our business,
financial condition, and results of operations. Notwithstanding precautions we
have taken to protect ourselves and our clients from events that could interrupt
delivery of our services, there can be no assurance that a fire, natural
disaster, human error, equipment malfunction or inadequacy, computer virus,
firewall breach, or other event would not result in a prolonged interruption in
our ability to provide support services to our clients. As we commence
delivering services from an offshore location, the risks attendant to
interruption of telecommunications increase. Any interruption to our data or
voice telecommunications networks could have a material adverse effect on our
business, financial condition, and our results of operations.
ECONOMIC WEAKNESS:
Our revenue and gross profit depend significantly on general economic conditions
and the demand for our services in the markets in which we compete. Softened
demand for our services caused by economic weakness and constrained information
technology spending over the past several years has resulted, and may result in
the future, in decreased revenue, gross profit, earnings, or growth rates and
problems with our ability to realize customer receivables. In addition, customer
financial difficulties have resulted, and could in the future result, in
increases in bad debt write-offs and additions to reserves in our receivables
portfolio. Uncertainty about future economic conditions makes it difficult to
forecast operating results and to make decisions about future investments.
Further delays or reductions in information technology spending could have a
material adverse effect on demand for our products and services and consequently
our results of operations, prospects, and stock price.
HEALTH CARE AND OTHER BENEFIT COSTS:
Health care and other benefit costs continue to increase. Our business is labor
intensive, and therefore we have exposure to these increasing healthcare benefit
costs. While we attempt to compensate for these escalating costs in our business
cost models and customer pricing and have passed along some of these increased
costs to our employees, we have long-term, generally fixed-price pricing
agreements with our customers.
TERRORISM:
Terrorist acts or acts of war (wherever located around the world) may cause
damage or disruption to TechTeam, our employees, facilities, partners,
suppliers, distributors, resellers, or customers, which could adversely impact
our revenue, costs and expenses, and financial condition.
29
LIMITED PROTECTION OF PROPRIETARY SYSTEMS AND PROCEDURES:
We rely upon a combination of nondisclosure and other contractual arrangements
and trade secrets, copyright, and trademark laws to protect our proprietary
rights and the proprietary rights of third parties from whom we license
intellectual property. We enter into confidentiality agreements with our
employees, customers, and suppliers and limit distribution of proprietary
information. There can be no assurance, however, that the steps taken by us in
this regard will be adequate to deter misappropriation of proprietary
information or that we will be able to detect unauthorized use of such
information and take appropriate steps to enforce our intellectual property
rights.
Although we believe our services and/or software do not infringe upon the
intellectual property rights of others and that we have all of the rights
necessary to utilize the intellectual property employed in our business, we are
subject to the risk of litigation alleging infringement of third-party
intellectual property rights. Any such claims could require us to spend
significant sums of money in litigation, pay damages, develop non-infringing
intellectual property, or acquire licenses of the intellectual property, which
may be the subject of asserted infringement.
VOLATILITY OF STOCK PRICE:
The market price of our common stock has fluctuated over a wide range during the
past several years and may continue to do so in the future. (See "Item 5 --
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities"). The market price of our common stock could be
subject to significant fluctuations in response to various factors or events,
including, among other things, the depth and liquidity of the trading market for
our common stock, public float in our common stock, quarterly variations in our
operating results, actual versus anticipated operating results, growth rates,
market conditions in the industry in which we compete, announcements by
competitors, regulatory actions, litigation (including class action litigation),
and general economic conditions. In addition, the stock market has from
time-to-time experienced significant price and volume fluctuations, which have
particularly affected the market prices of the stocks of technology companies.
As a result of the foregoing, our operating results and future prospects at
various times may be below the expectations of public market analysts and
investors. Any such event could have a material adverse effect on the price of
our common stock.
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, we are subject to market exposure from changes
in foreign currency exchange rates. We do not have any material market risk
related to interest rates as our debt obligations have fixed interest rates and
short lives.
We are subject to the risk of changes in foreign currency exchange rates due to
our global operations as we provide services in the United States and Europe. As
a result, our financial results could be significantly affected by factors such
as changes in foreign currency exchange rates or weak economic conditions in
foreign markets in which we provide services. Our operating results are
primarily exposed to changes in exchange rates between the U.S. dollar and
European currencies; specifically the euro, British pound sterling, Swedish
kroner, and Romanian lei. As currency exchange rates change, translation of the
statements of operations of our international subsidiaries into U.S. dollars
affects year-over-year comparability of operating results. We do not hedge
operating translation risks because cash flows from international operations are
generally reinvested locally.
At December 31, 2004 and 2003, our net current assets (defined as current assets
less current liabilities) subject to foreign currency translation risk were
$16.6 million and $8.93 million, respectively. The potential decrease in net
current assets from a hypothetical 10% adverse change in quoted foreign currency
exchange rates would be $1.66 million and $893,000 at December 31, 2004 and
2003, respectively. The sensitivity analysis presented assumes a parallel shift
in foreign currency exchange rates yet exchange rates rarely move in the same
direction. This assumption may overstate the impact of changing exchange rates
on individual assets and liabilities denominated in a foreign currency.
30
Certain of our trade receivables at our international subsidiaries are
denominated in currencies other than the local currency of the TechTeam entities
that deliver the service. In December 2004, we entered into a foreign currency
option contract to manage the Company's exposure to fluctuations in the exchange
rate between the U.S. dollar and euro. Under the option contract, we may sell an
aggregate of $2,300,000 (notional amount) in monthly transactions, at our
option, and purchase euros at a fixed exchange rate. The fair value of the
option contract was $41,000 at December 31, 2004, which represents the
difference between the exchange rate at December 31, 2004 and the fixed rate in
the contract applied to the notional amount. We do not enter into derivatives or
similar instruments for trading or speculative purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of TechTeam Global, Inc. and
Subsidiaries are included in this Item 8:
PAGE
-----
Report of Independent Registered Public Accounting Firm ................ 32
Consolidated Statements of Operations -- Years Ended
December 31, 2004, 2003, and 2002 ................................... 33
Consolidated Statements of Comprehensive Income (Loss) -- Years
Ended December 31, 2004, 2003, and 2002 ............................. 34
Consolidated Statements of Financial Position --
December 31, 2004 and 2003 .......................................... 35-36
Consolidated Statements of Shareholders' Equity --
Years Ended December 31, 2004, 2003, and 2002 ....................... 37
Consolidated Statements of Cash Flows -- Years Ended
December 31, 2004, 2003, and 2002 ................................... 38
Notes to the Consolidated Financial Statements ......................... 39-61
The following financial statement schedules of TechTeam Global, Inc. and
Subsidiaries are included pursuant to the requirements of Item 15(c):
Schedule II -- Valuation and Qualifying Accounts for the years ended December
31, 2004, 2003, and 2002
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission and for which the
information is not already included in the financial statements are not required
under the related instructions or are not applicable and, therefore, have been
omitted.
31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
BOARD OF DIRECTORS AND SHAREHOLDERS
TECHTEAM GLOBAL, INC.
We have audited the accompanying consolidated statements of financial position
of TechTeam Global, Inc. and subsidiaries as of December 31, 2004 and 2003 and
the related consolidated statements of operations, comprehensive income (loss),
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2004. Our audits also included the financial statement
schedule listed in the Index at Item 15. These financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
TechTeam Global, Inc. and subsidiaries at December 31, 2004 and 2003, and the
consolidated results of their operations and their cash flows for the each of
the three years in the period ended December 31, 2004, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, effective January 1, 2002.
/s/ Ernst & Young LLP
Detroit, Michigan
February 9, 2005
32
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
YEAR ENDED DECEMBER 31,
----------------------------
2004 2003 2002
-------- ------- -------
REVENUE
Diversified IT outsourcing services ................................ $ 74,608 $65,614 $57,675
Government technology services ..................................... 25,712 2,055 1,431
IT consulting and systems integration .............................. 19,668 8,195 7,197
Technical staffing ................................................. 7,445 9,090 10,153
Learning services .................................................. 555 879 1,077
-------- ------- -------
TOTAL REVENUE ......................................................... 127,988 85,833 77,533
-------- ------- -------
COST OF SERVICES DELIVERED
Cost of services delivered ......................................... 96,916 67,949 58,078
Asset impairment loss .............................................. 485 -- --
-------- ------- -------
TOTAL COST OF SERVICES DELIVERED ...................................... 97,401 67,949 58,078
-------- ------- -------
GROSS PROFIT .......................................................... 30,587 17,884 19,455
Selling, general, and administrative expense ....................... 24,040 18,695 17,801
-------- ------- -------
OPERATING INCOME (LOSS) ............................................... 6,547 (811) 1,654
Net interest income ................................................ 719 1,139 910
Foreign currency transaction gain (loss) ........................... (91) 920 37
-------- ------- -------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES ................. 7,175 1,248 2,601
Income tax provision ............................................... 2,547 1,438 1,483
-------- ------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS .............................. 4,628 (190) 1,118
Income (loss) from discontinued operation, net of tax provision
(credit) of $50 in 2004, $(1,028) in 2003, and $144 in 2002 ..... 97 (856) 280
-------- ------- -------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE ........... 4,725 (1,046) 1,398
Cumulative effect of accounting change, net of $0 tax .............. -- -- (1,123)
-------- ------- -------
NET INCOME (LOSS) ..................................................... 4,725 $(1,046) $ 275
======== ======= =======
BASIC EARNINGS (LOSS) PER COMMON SHARE
Income (loss) from continuing operations ........................... $ 0.49 $ (0.02) $ 0.10
Income (loss) from discontinued operation .......................... 0.01 (0.09) 0.03
Cumulative effect of accounting change ............................. -- -- (0.10)
-------- ------- -------
Total basic earnings (loss) per common share ....................... $ 0.51 $ (0.10) $ 0.03
======== ======= =======
BASIC EARNINGS PER PREFERRED SHARE
Income from continuing operations .................................. $ 0.49 $ -- N/A
Income from discontinued operation ................................. 0.01 -- N/A
Cumulative effect of accounting change ............................. -- -- N/A
-------- ------- -------
Total basic earnings per preferred share ........................... $ 0.51 $ -- N/A
======== ======= =======
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Income (loss) from continuing operations ........................... $ 0.48 $ (0.02) $ 0.10
Income (loss) from discontinued operation .......................... 0.01 (0.09) 0.03
Cumulative effect of accounting change ............................. -- -- (0.10)
-------- ------- -------
Total diluted earnings (loss) per common share ..................... $ 0.49 $ (0.10) $ 0.02
======== ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND COMMON SHARE EQUIVALENTS OUTSTANDING
Basic--common ...................................................... 8,660 10,066 10,957
Basic--preferred ................................................... 690 503 --
Diluted--common .................................................... 8,904 10,066 11,103
See accompanying notes.
33
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
YEAR ENDED DECEMBER 31,
-----------------------
2004 2003 2002
------ ------- ----
NET INCOME (LOSS), AS SET FORTH IN THE CONSOLIDATED
STATEMENTS OF OPERATIONS .......................... $4,725 $(1,046) $275
OTHER COMPREHENSIVE INCOME
Foreign currency translation adjustment ........... 2,193 526 383
------ ------- ----
COMPREHENSIVE INCOME (LOSS) .......................... $6,918 $ (520) $658
====== ======= ====
See accompanying notes.
34
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands)
DECEMBER 31,
-------------------
2004 2003
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents .................................................... $ 40,436 $ 35,195
Accounts receivable (less allowances of $912 and $637 at December 31, 2004
and 2003, respectively) .................................................... 28,888 22,434
Prepaid expenses and other ................................................... 2,288 1,688
Deferred income taxes ........................................................ -- 224
Net current assets of discontinued operation ................................. 97 1,059
-------- --------
TOTAL CURRENT ASSETS ......................................................... 71,709 60,600
-------- --------
PROPERTY, EQUIPMENT, AND PURCHASED SOFTWARE
Computer equipment and office furniture ...................................... 22,768 20,610
Software ..................................................................... 11,545 11,093
Leasehold improvements ....................................................... 4,822 4,522
Transportation equipment ..................................................... 321 269
-------- --------
39,456 36,494
Less -- Accumulated depreciation and amortization ............................ (31,074) (26,590)
-------- --------
NET PROPERTY, EQUIPMENT, AND PURCHASED SOFTWARE .............................. 8,382 9,904
-------- --------
OTHER ASSETS
Goodwill ..................................................................... 4,768 2,099
Intangible assets, net ....................................................... 3,672 3,634
Deferred income taxes ........................................................ -- 1,011
Net noncurrent assets of discontinued operation .............................. 15 308
Other ........................................................................ 441 144
-------- --------
TOTAL OTHER ASSETS ........................................................... 8,896 7,196
-------- --------
TOTAL ASSETS .................................................................... $ 88,987 $ 77,700
======== ========
See accompanying notes.
35
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands, except share amounts)
DECEMBER 31,
-----------------
2004 2003
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of notes payable ............................................. $ 27 $ 687
Accounts payable ............................................................. 3,707 2,776
Accrued payroll, related taxes, and withholdings ............................. 7,485 4,692
Accrued expenses ............................................................. 2,217 1,369
Accrued income taxes ......................................................... 644 922
Deferred revenue ............................................................. 1,380 746
Deferred income taxes ........................................................ 156 --
Current liabilities of discontinued operation ................................ 12 330
------- -------
TOTAL CURRENT LIABILITIES .................................................... 15,628 11,522
------- -------
LONG-TERM LIABILITIES
Long-term liabilities ........................................................ 414 397
Deferred income taxes ........................................................ 1,285 --
Long-term debt of discontinued operation ..................................... -- 11
------- -------
TOTAL LONG-TERM LIABILITIES .................................................. 1,699 408
------- -------
REDEEMABLE CONVERTIBLE PREFERRED STOCK, 5,000,000 shares authorized, 689,656
shares issued and outstanding; liquidation preference of
$5,000 at December 31, 2004 .................................................. 5,000 5,000
SHAREHOLDERS' EQUITY
Common stock, par value $0.01, 45,000,000 shares authorized, 8,767,037 and
8,817,265 shares issued and outstanding
at December 31, 2004 and 2003, respectively ............................... 88 88
Additional paid-in capital ................................................... 59,437 59,932
Unamortized deferred compensation ............................................ (533) --
Retained earnings ............................................................ 4,793 68
Accumulated other comprehensive income ....................................... 2,875 682
------- -------
TOTAL SHAREHOLDERS' EQUITY ................................................... 66,660 60,770
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...................................... $88,987 $77,700
======= =======
See accompanying notes.
36
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
ACCUMULATED
UNAMORTIZED OTHER TOTAL
ADDITIONAL DEFERRED RETAINED COMPREHENSIVE SHAREHOLDERS'
COMMON STOCK PAID-IN CAPITAL COMPENSATION EARNINGS INCOME (LOSS) EQUITY
------------ --------------- ------------ -------- ------------- -------------
BALANCE AT JANUARY 1, 2002 ............ $109 $ 73,849 $ -- $ 839 $ (227) $ 74,570
Proceeds from issuance of shares
under stock option plans ........ 2 931 -- -- -- 933
Common stock issued to 401(k)
plan and directors .............. -- 114 -- -- -- 114
Compensation expense related
stock options granted ........... -- 432 -- -- -- 432
Purchase of common stock ........... (4) (3,419) -- -- -- (3,423)
Net income for 2002 ................ -- -- -- 275 -- 275
Foreign currency translation
adjustment ...................... -- -- -- -- 383 383
Other .............................. -- 36 -- -- -- 36
---- -------- ----- ------- ------ --------
BALANCE AT DECEMBER 31, 2002 .......... 107 71,943 -- 1,114 156 73,320
Proceeds from issuance of shares
under stock option plans ........ 1 543 -- -- -- 544
Common stock issued to directors ... -- 52 -- -- -- 52
Purchase of common stock ........... (20) (12,525) -- -- -- (12,545)
Net loss for 2003 .................. -- -- -- (1,046) -- (1,046)
Foreign currency translation
adjustment ...................... -- -- -- -- 526 526
Other .............................. -- (81) -- -- -- (81)
---- -------- ----- ------- ------ --------
BALANCE AT DECEMBER 31, 2003 .......... 88 59,932 -- 68 682 60,770
Proceeds from issuance of shares
under stock option plans ........ 3 1,384 -- -- -- 1,387
Common stock issued to directors ... -- 65 -- -- -- 65
Purchase of common stock ........... (3) (2,741) -- -- -- (2,744)
Restricted stock to be awarded ..... -- 533 (533) -- -- --
Net income for 2004 ................ -- -- -- 4,725 -- 4,725
Foreign currency translation
adjustment ...................... -- -- -- -- 2,193 2,193
Other .............................. -- 264 -- -- -- 264
---- -------- ----- ------- ------ --------
BALANCE AT DECEMBER 31, 2004 .......... $ 88 $ 59,437 $(533) $ 4,793 $2,875 $ 66,660
==== ======== ===== ======= ====== ========
See accompanying notes.
37
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
-----------------------------
2004 2003 2002
------- -------- --------
OPERATING ACTIVITIES
Net income (loss) ............................................. $ 4,725 $ (1,046) $ 275
(Income) loss from discontinued operation ..................... (97) 856 (280)
Other adjustments to reconcile net income (loss) to net cash
provided by operating activities: ..........................
Depreciation ............................................ 4,369 3,826 3,469
Amortization ............................................ 478 793 878
Non-cash expense related to stock options and common
stock issued to 401(k) plan and directors ............ 329 150 583
Provision (credit) for deferred income taxes ............ 1,186 (21) 418
Provision (credit) for uncollectible accounts ........... 220 600 (22)
Other ................................................... 12 8 (9)
Changes in operating assets and liabilities-
Accounts receivable .................................. (4,172) (3,957) (133)
Prepaid expenses and other assets .................... (779) (408) 297
Accounts payable ..................................... (102) 340 (286)
Accrued payroll, related taxes, and withholdings ..... 2,383 342 426
Refundable and accrued income taxes .................. (368) 2,389 2,878
Deferred revenue ..................................... 624 273 (751)
Accrued expenses and other liabilities ............... 33 (426) 513
Net operating cash flow from discontinued operation ..... 1,193 4,593 12,080
------- -------- --------
Net cash provided by operating activities .................. 10,034 8,312 20,336
------- -------- --------
INVESTING ACTIVITIES
Purchases of property, equipment, and software ................ (2,465) (4,353) (3,441)
Cash paid for acquisitions, net of cash acquired .............. (1,036) (6,504) --
Purchases of securities available for sale .................... -- (15,163) (21,805)
Proceeds from sales of securities available for sale .......... -- 21,655 20,634
Other ......................................................... -- 49 (3)
Net investing cash flow from discontinued operation ........... -- 21 46
------- -------- --------
Net cash used in investing activities ...................... (3,501) (4,295) (4,569)
------- -------- --------
FINANCING ACTIVITIES
Proceeds from issuance of common stock ........................ 1,387 544 933
Purchase of Company common stock .............................. (2,744) (12,545) (3,423)
Payments on long-term borrowings .............................. (885) -- --
Proceeds from issuance of preferred stock ..................... -- 4,820 --
Net financing cash flow from discontinued operation ........... (219) (468) (4,476)
------- -------- --------
Net cash used in financing activities ...................... (2,461) (7,649) (6,966)
------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ..... 1,169 (608) 383
------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................. 5,241 (4,240) 9,184
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ................... 35,195 39,435 30,251
------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR ......................... $40,436 $ 35,195 $ 39,435
======= ======== ========
See accompanying notes.
38
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND BASIS OF PRESENTATION:
TechTeam Global, Inc. ("TechTeam" or the "Company" or "we") is a global provider
of information technology and business process outsourcing support services to
Fortune 1000 companies, multinational companies, product providers, small and
mid-size companies, and government entities. TechTeam also offers other
services, including technology deployment and migration services, consulting,
systems integration, training, and technical staffing. TechTeam provides support
services globally through our wholly-owned subsidiaries: TechTeam Global NV/SA
and its subsidiary TechTeam A.N.E. NV/SA; TechTeam Global Ltd.; TechTeam Global
GmbH; TechTeam Global AB; S.C. TechTeam Global SRL; TechTeam Cyntergy, L.L.C.;
Digital Support Corporation; and TechTeam Asia Pacific (Private) Ltd. Our other
wholly-owned subsidiary is TechTeam Capital Group, L.L.C. ("Capital Group"), an
equipment leasing business that is winding down its operations and which has
been presented as a discontinued operation in the accompanying consolidated
financial statements for all periods presented (see Note 4).
The consolidated financial statements include the accounts of TechTeam Global,
Inc. and its wholly-owned subsidiaries. Intercompany accounts and transactions
have been eliminated.
USE OF ESTIMATES:
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenue and expense during the reporting
period. Actual results could differ from these estimates. Our significant
estimates include realization of deferred tax assets and reserves for
uncollectible accounts receivable.
CASH AND CASH EQUIVALENTS:
Cash includes both interest bearing and non-interest bearing deposits, which are
available on demand. Cash equivalents include all liquid investments with
maturities of three months or less when purchased, including money market funds
held at banks and other financial institutions.
In connection with our revolving line-of-credit agreement with Standard Federal
Bank, N.A. (see Note 5), outstanding borrowings are collateralized by a
compensating balance cash deposit required to be held at the bank equal to the
amount of any outstanding borrowings. There were no borrowings or compensating
balance cash deposits outstanding at December 31, 2004. On January 3, 2005, the
Company borrowed $15,000,000 under the agreement, which is collateralized by a
cash deposit of the same amount.
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 reserved when we determine they are more
likely than not to become uncollectible. Most of our customers are large,
well-capitalized entities. We do not require collateral and do not charge
interest on past due balances.
39
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
PROPERTY, EQUIPMENT, AND PURCHASED SOFTWARE:
Property, equipment, and purchased software for internal use are stated at cost.
Computer equipment, office furniture, and transportation equipment are
depreciated using the straight-line method over their estimated useful lives,
ranging from three to ten years. Leasehold improvements are amortized on a
straight-line basis over the shorter of the estimated useful lives of the
improvements or the term of the lease. Software is amortized over three to seven
years.
We continually evaluate whether events and circumstances have occurred that
indicate the remaining estimated useful lives of long-lived assets may warrant
revision or that the remaining balances may not be recoverable. When factors
indicate that such costs should be evaluated for possible impairment, we
estimate the undiscounted cash flows of the long-lived assets over their
remaining lives to evaluate whether the costs are recoverable. In the fourth
quarter of 2004, we determined that customization costs for certain software
related to our help desk operations would not be utilized to deliver services to
our customers or be used for any other purpose. Since we expect no future cash
flows related to the customization, we recorded an impairment loss of $485,000
in our diversified IT outsourcing services operating segment, which represented
the net book value of these costs. We did not record an impairment loss in 2003
or 2002.
GOODWILL AND OTHER INTANGIBLE ASSETS:
As required, on January 1, 2002, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." As a result,
beginning in 2002, we no longer amortize goodwill, but are required to subject
goodwill to an annual impairment test, or more frequently if impairment
indicators arise. Separable intangible assets that have definite lives continue
to be amortized on a straight-line basis over their estimated useful lives.
Upon adoption of SFAS 142, we performed an impairment test of goodwill as of
January 1, 2002. We first compared the estimated fair value of each reporting
unit, as that term is defined by SFAS 142, with the reporting unit's carrying
amount. The fair values of the reporting units were estimated using the expected
present value of future cash flows. Upon completing this first step, we
identified our leasing operations reporting segment whose carrying amount
exceeded the fair value. We then allocated the estimated fair value of our
leasing operations to its assets and liabilities and recorded a goodwill
impairment loss of $1,123,000, which has been recognized as the cumulative
effect of an accounting change as of January 1, 2002, in the accompanying
consolidated statements of operations. The goodwill related to our leasing
operations segment became impaired primarily due to our decision to exit the
leasing business and a significant decline in the fair market value of the
leased equipment in the secondary market. Our leasing operation has been
presented as a discontinued operation in the accompanying consolidated financial
statements for all periods presented (see Note 4).
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 ("A.N.E."). On December 31, 2003, we acquired all of
the outstanding capital stock of Digital Support Corporation ("DSC") (see "Note
3 -- Acquisitions"). The goodwill from the A.N.E. acquisition is related to our
IT consulting and systems integration operating segment and the goodwill from
the DSC acquisition is related to our government technology services operating
segment. All goodwill will not be amortized, but instead will be subject to
annual impairment testing. No impairment charges were recorded in 2004 and 2003.
40
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 1-- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Changes in the carrying amount of goodwill consist of the following:
DIVERSIFIED IT GOVERNMENT IT CONSULTING
OUTSOURCING TECHNOLOGY AND SYSTEMS LEASING
SERVICES SERVICES INTEGRATION OPERATIONS TOTAL
-------------- ---------- ------------- ---------- -------
(In thousands)
Balance as of January 1, 2002........ $371 $ -- $ -- $ 1,123 $ 1,494
Impairment loss................... -- -- -- (1,123) (1,123)
---- ------ ---- ------- -------
Balance as of December 31, 2002...... 371 -- -- -- 371
Goodwill acquired................. -- 1,728 -- -- 1,728
---- ------ ---- ------- -------
Balance as of December 31, 2003...... 371 1,728 -- -- 2,099
Goodwill acquired................. -- 2,102 512 -- 2,614
Effect of exchange rate changes... -- -- 55 -- 55
---- ------ ---- ------- -------
Balance as of December 31, 2004...... $371 $3,830 $567 $ -- $ 4,768
==== ====== ==== ======= =======
Other intangible assets consist of the following:
DECEMBER 31, 2004 DECEMBER 31, 2003
--------------------- ---------------------
ACCUMULATED ACCUMULATED AMORTIZATION
COST AMORTIZATION COST AMORTIZATION PERIOD
------ ------------ ------ ------------ ------------
(In thousands)
Customer relationships-- DSC ........ $3,367 $337 $3,367 $ -- 10 years
Customer relationships-- Cyntergy ... 701 525 701 434 5 years
Customer relationships-- A.N.E ...... 515 49 -- -- 6 years
------ ---- ------ ----
$4,583 $911 $4,068 $434
====== ==== ====== ====
The useful life of amortizable intangible assets is determined based on the
period from which we expect to realize cash flows from these assets and
considers, among other items, ability and cost to renew contracts with similar
terms and conditions and historical customer retention rates.
We re-evaluate amortizable 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 amortizable intangible assets in any period presented.
Our expected amortization expense for intangible assets held at December 31,
2004 is as follows: $511,000 for 2005, $511,000 for 2006, $423,000 for 2007,
$423,000 for 2008, and $423,000 for 2009.
41
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
DEFERRED INCOME TAXES:
Deferred income taxes represent temporary differences in the recognition of
certain items for income tax and financial reporting purposes. Realization of
deferred tax assets depends upon sufficient levels of future taxable income. If
at any time we believe that current or future taxable income does not support
the realization of deferred tax assets, a valuation allowance is provided.
REVENUE RECOGNITION:
Under all situations, revenue is not recognized until earned, which is when
persuasive evidence of an arrangement exists, services have been provided, the
revenue terms are fixed and determinable, and collectibility is reasonably
assured. Greater than 95% of our services are delivered as a "monthly service"
and not over multiple periods.
We earn revenue under our diversified IT outsourcing services operating segment
under one of the following four models: (1) time and materials contracts under
which we bill an agreed rate for each help desk agent based on the number of
units (i.e., hours or days) the individual agent worked during the month; (2)
per-transaction contracts under which we bill an agreed rate per incident
handled during a month or per minute for the length of the telephone call for
the incident; (3) fixed monthly fee contracts under which we agree to provide
all of the agreed-upon scheduled services on a monthly basis for a fixed monthly
fee; and (4) per-seat contracts under which we agree to provide agreed-upon
scheduled services for a monthly fee that is determined by multiplying the
number of users supported at the customer by the monthly per-seat fee. Within
the diversified IT outsourcing services operating segment, we also refer to our
fixed-fee and per-seat contracts as "managed service" contracts. Many of our
contracts that we bill on a per-incident basis contain a minimum monthly fee,
which is derived by multiplying the agreed-upon forecast of anticipated
incidents by an agreed-upon minimum percentage. Under this arrangement, we
receive a minimum revenue amount for having committed to provide a specific
level of staff to support the services projected during a month. Since we
invoice the customer for the minimum fee and do not reduce future billings, we
recognize the minimum fee as revenue in the month in which the incidents are
below the customer's minimum forecast. Incident resolution usually occurs in the
same month that incidents are reported. Under our managed service contracts, we
generally do not incur material costs in a future month to complete a service
obligation that arose in a prior month. In those instances where our service
obligation is not complete for a month and we expect to incur more than
immaterial costs in a future month, we will defer an amount of revenue that
represents the fair value of that service obligation.
Revenue from all other services that we provide under our other operating
segments -- government technology services, IT consulting and systems
integration, technical staffing, and learning services -- is earned under time
and materials contracts and, to a much lesser extent, fixed-fee contracts. Under
time and materials contracts, we bill an agreed rate for each unit of service
(i.e., hour or day) delivered during a month as a monthly service. We perform a
limited amount of work on a fixed-fee basis. Most of these jobs are of a short
duration and revenue under these projects is recognized when the work is
completed. In a few circumstances, we perform larger projects on a fixed-fee
basis over an extended period of time. Revenue is recognized under these
contracts based upon our progress toward completing contract milestones using
labor incurred to assess our progress. We accrue for anticipated losses under
these contracts when the losses become evident.
42
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
FOREIGN CURRENCY TRANSLATION:
We translate the assets and liabilities of our non-U.S. subsidiaries into U.S.
dollars based on the prevailing exchange rate at each respective balance sheet
date. We translate revenue and expenses into U.S. dollars based on the average
exchange rate for the period. Cumulative translation adjustments are included as
a separate component of shareholders' equity as accumulated other comprehensive
income. Currency transaction gains or losses are generally derived from
receivables and payables stated in a currency other than the local currency, and
are recognized as income or expense in the accompanying consolidated statements
of operations.
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 (loss) and earnings (loss) per share
had compensation costs been recognized based on the fair value method prescribed
by SFAS 123, "Accounting for Stock-Based Compensation," is as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------
2004 2003 2002
------- ------- ------
(In thousands, except per share data)
Reported net income (loss) .................................. $ 4,725 $(1,046) $ 275
Add: Total stock-based compensation expense included
in reported net income (loss), net of tax ................ 43 43 317
Deduct: Total stock-based compensation expense determined
under the fair value method for all awards, net of tax ... (1,073) (468) (741)
------- ------- ------
Pro forma net income (loss) ................................. $ 3,695 $(1,471) $ (149)
======= ======= ======
Basic earnings (loss) per common share:
As reported .............................................. $ 0.51 $ (0.10) $ 0.03
Pro forma ................................................ $ 0.40 $ (0.15) $(0.01)
Basic earnings per preferred share:
As reported .............................................. $ 0.51 $ -- N/A
Pro forma ................................................ $ 0.40 $ -- N/A
Diluted earnings (loss) per common share:
As reported .............................................. $ 0.49 $ (0.10) $ 0.02
Pro forma ................................................ $ 0.39 $ (0.15) $(0.01)
The fair value of stock-based compensation was estimated as of the date of grant
using the Black-Scholes option pricing model with the following assumptions for
2002 through 2004: a range of risk-free interest rates of 1.21% to 7% based on
the expected life of the options; a weighted average volatility factor of the
expected market price of our common stock of 53% in 2004, 52% in 2003, and 46%
in 2002; and a weighted average expected life of 3.4 years in 2004, 4 years in
2003, and 3.4 years in 2002. Pro forma compensation cost is generally recognized
on an accelerated basis.
43
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of the
Company's employee stock-based compensation.
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 123R,
"Share-Based Payment," which replaces SFAS 123 and supersedes APB 25. SFAS 123R
eliminates the ability to account for share-based compensation transactions
using APB 25 and requires instead that such transactions be accounted for using
a fair-value-based method. SFAS 123R is effective for the Company for awards
that are granted, modified, or settled in periods beginning after June 15, 2005,
or the Company's third quarter. As we use the fair value method of accounting
under the original provisions of SFAS 123 for pro forma disclosure purposes, we
are also required to apply the provisions of SFAS 123R in recognizing
compensation cost for any portion of awards granted or modified after December
15, 1994, that are not yet vested at the date SFAS 123R is adopted. Based on the
number of non-vested stock options the Company has outstanding at December 31,
2004, adoption of SFAS 123R will result in approximately $22,000 of compensation
expense, net of tax, in 2005 and will not have a material affect on our
financial position or operating results.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
At December 31, 2004, the Company's financial instruments consisted of accounts
receivable, accounts payable, notes payable, and redeemable convertible
preferred stock. Except for redeemable convertible preferred stock, the carrying
values of these financial instruments approximate their fair values due to their
short maturity periods, market interest rates, or quoted market prices for
equivalent instruments. The fair value of the redeemable convertible preferred
stock is approximately $7,014,000 and was computed by multiplying the number of
shares of common stock into which the preferred stock can be converted by the
closing price of our common stock on December 31, 2004.
Certain of our receivables are denominated in currencies other than the local
currency of the TechTeam entities that deliver the service. In December 2004, we
entered into a foreign currency option contract to manage the Company's exposure
to fluctuations in the exchange rate between the U.S. dollar and euro. Under the
option contract, we may sell an aggregate of $2,300,000 (notional amount) in
monthly transactions, at our option, and purchase euros at a fixed exchange
rate. The fair value of the option contract was $41,000 at December 31, 2004,
which represents the difference between the exchange rate at December 31, 2004
and the fixed rate in the contract applied to the notional amount. The resulting
asset is included in other current assets and recognized as a gain in the
accompanying statements of operations. We do not enter into derivatives or
similar instruments for trading or speculative purposes.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest expense totaled $20,000 in 2004, $8,000 in 2003, and $0
in 2002. Cash paid for income taxes totaled $1,260,000 in 2004, $546,000 in
2003, and $704,000 in 2002.
RECLASSIFICATIONS:
Certain reclassifications have been made to our 2003 and 2002 financial
statements in order to conform to the 2004 financial statement presentation.
44
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 2 -- EARNINGS PER SHARE
Earnings per share is computed using the two-class method as required by SFAS
No. 128, "Earnings Per Share." The two-class method is an earnings allocation
formula that determines earnings per share separately for common stock and
participating securities according to dividends declared (or accumulated) and
participation rights in undistributed earnings. The Company's redeemable
convertible preferred stock, which was issued in April 2003, is a participating
security under SFAS 128. The redeemable convertible preferred stock has rights
to undistributed earnings, but is not required to participate in net losses of
the Company. As a result, the entire loss from continuing operations and net
loss for 2003 have been allocated to common shareholders.
Earnings per share for 2004 and 2003 have been restated to conform to the
two-class method. The restatement had no impact on diluted earnings per common
share for interim periods during 2004, but it decreased reported basic earnings
per common share for the quarters ended June 30 and September 30, 2004, as
summarized in Note 17. The restatement had no impact on basic or diluted
earnings per common share for the year ended December 31, 2003, but it decreased
reported basic and diluted earnings per common share for the quarter ended
December 31, 2003, as summarized in Note 17.
Earnings per share for common stock is computed using the weighted average
number of common shares and common share equivalents outstanding. Common share
equivalents consist of stock options. Earnings per share for preferred stock is
computed using the weighted average number of preferred shares outstanding.
The following table reconciles the numerators and denominators of the basic and
diluted earnings per common share computations for income from continuing
operations:
YEAR ENDED DECEMBER 31,
-------------------------------------
2004 2003 2002
------ ------- -------
(In thousands, except per share data)
Income (loss) from continuing operations ............. $4,628 $ (190) $ 1,118
Less -- Income from continuing operations allocated to
preferred stock ................................... (342) -- --
------ ------- -------
Income (loss) from continuing operations available to
common shareholders ............................... $4,286 $ (190) $ 1,118
====== ======= =======
Basic weighted average common shares ................. 8,660 10,066 10,957
Common stock equivalents from stock options .......... 244 -- 146
------ ------- -------
Diluted weighted average common shares ............... 8,904 10,066 11,103
====== ======= =======
Earnings (loss) from continuing operations
Basic per common share ............................ $ 0.49 $ (0.02) $ 0.10
Diluted per common share .......................... $ 0.48 $ (0.02) $ 0.10
During 2004 and 2002, 506,400 and 538,400 stock options, respectively, were
excluded from the computation of diluted earnings per common share because the
exercise prices of the options were higher than the average market price of the
Company's common stock for the respective year. During 2003, 1,203,018 stock
options were excluded from the computation of diluted earnings per common share
due to the net loss for the year.
45
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 2 -- EARNINGS PER SHARE (continued)
The following table reconciles the numerators of the basic earnings per
preferred share computations for income from continuing operations:
YEAR ENDED DECEMBER 31,
-------------------------------------
2004 2003 2002
------- ----- -------
(In thousands, except per share data)
Income (loss) from continuing operations ................. $ 4,628 $(190) $ 1,118
Less -- (Income) loss from continuing operations allocated
to common stock ....................................... (4,286) 190 (1,118)
------- ----- -------
Income from continuing operations available to preferred
shareholders .......................................... $ 342 $ -- $ --
======= ===== =======
Weighted average preferred shares ........................ 690 503 --
======= ===== =======
Basic earnings from continuing operations per preferred
share ................................................. $ 0.49 $ -- N/A
NOTE 3 -- 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) for
E885,000 (E = euro) plus acquisition costs of E143,000 for an initial
purchase price of E1.03 million ($1.22 million at May 13, 2004). The
initial purchase price was paid at closing except that E100,000 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 E150,000 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.
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
$961,000. Of this amount, other intangible assets totaled $449,000 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 IT consulting and systems integration operating segment. Subsequent to the
acquisition, A.N.E.'s name was changed to TechTeam A.N.E. NV/SA.
46
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 3 -- ACQUISITIONS (continued)
DIGITAL SUPPORT CORPORATION:
On December 31, 2003, TechTeam acquired 100% of the outstanding capital stock of
Digital Support Corporation, a Virginia Corporation that provides consulting and
technical services to the U.S. federal and local governments and commercial
businesses. The acquisition was accounted for using the purchase method of
accounting and, accordingly, only the balance sheet of DSC at December 31, 2003
is included in our consolidated financial statements for the year ended December
31, 2003. The initial purchase price at closing was $6,786,000, including
acquisition costs of $428,000. In addition to the initial purchase price,
additional amounts up to a maximum of $2,500,000 are payable to the selling
shareholders and certain key employees provided specific performance conditions
and operating income targets are met in 2004 and 2005. For the year ended
December 31, 2004, DSC exceeded its operating income targets and, as a result,
an additional $500,000 will be paid to selling shareholders and $100,000 will be
paid to key employees in 2005. The amount payable to selling shareholders has
been recorded as goodwill while the amount payable to key employees has been
recorded as compensation expense. At December 31, 2004, goodwill and other
intangible assets acquired total $7,197,000. Other intangible assets total
$3,367,000 and consist of customer relationship assets, which are being
amortized on a straight-line basis over their estimated useful life of ten
years. The goodwill is not deductible for federal income tax purposes and is
related to our government technology services operating segment.
Of the initial purchase price, $2,815,000 was placed into an escrow account,
which consists of $2,027,500 related to the prospective renewal of a specific
customer contract ("Customer Contract Holdback"), $472,500 related to
representations and warranties of the selling shareholders ("Representations and
Warranties Holdback"), and $315,000 related to working capital changes ("Working
Capital Holdback"). The Customer Contract Holdback relates to a significant
customer contract that accounted for 51.6% of DSC's revenue in its fiscal year
ended September 30, 2003. The contract expired on September 30, 2004 and was
extended to March 31, 2005. The Customer Contract Holdback will be paid to the
selling shareholders if and when the customer contract is renewed with DSC,
provided that the customer contract is renewed prior to October 1, 2005. If the
customer contract is not renewed with DSC prior to October 1, 2005, the Customer
Contract Holdback will be remitted to TechTeam at that time. Since there were no
claims asserted regarding breaches to the representations and warranties
outlined in the stock purchase agreement during 2004, 50% of the Representations
and Warranties Holdback, or $236,250, will be paid to the selling shareholders
in 2005. The Representations and Warranties Holdback was reduced 50% since the
Customer Contract Holdback condition was not satisfied prior to December 31,
2004. The balance of the Representations and Warranties Holdback of $236,250 was
added to the Customer Contract Holdback and will be remitted as noted above. The
Working Capital Holdback was paid to the selling shareholders during 2004.
47
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 3 -- ACQUISITIONS (continued)
SUMMARY OF PURCHASE PRICES OF ACQUISITIONS:
The following table summarizes the allocation of the cumulative purchase price
for A.N.E. and DSC through December 31, 2004, including additional payments
earned and accrued during 2004:
A.N.E. DSC
------- -------
(In thousands)
Customer relationship asset ............................... $ 449 $ 3,367
Goodwill .................................................. 512 3,830
Property, equipment and software .......................... 72 330
Other current and non-current assets, excluding
cash acquired of $128 for A.N.E. and $81 for DSC ....... 1,367 3,803
Accounts payable and accrued liabilities assumed .......... (1,117) (3,411)
Accrued purchase price .................................... (261) (500)
Notes payable assumed ..................................... (191) (710)
------- -------
Net cash used ............................................. $ 831 $ 6,709
======= =======
PRO FORMA RESULTS OF OPERATIONS:
The unaudited pro forma condensed combined results of operations for the years
ended December 31, 2004 and 2003, as though A.N.E. had been acquired on January
1, 2003, and the unaudited pro forma condensed combined results of operations
for the years ended December 31, 2003 and 2002, as though DSC had been acquired
as of January 1, 2002, are presented below. The unaudited pro forma condensed
combined results of operations for the year ended December 31, 2003 for our
acquisition of A.N.E. give effect to the acquisition by combining the results of
TechTeam for the year ended December 31, 2003 with the results of A.N.E. for the
year ended March 31, 2004.
A.N.E. DSC
YEAR ENDED DECEMBER 31 YEAR ENDED DECEMBER 31
---------------------- ----------------------
2004 2003 2003 2002
-------- ------- -------- -------
(In thousands, except per share data)
Revenue
As reported ............................ $127,988 $85,833 $ 85,833 $77,533
Pro forma .............................. $134,710 $91,240 $104,507 $96,872
Income (loss) from continuing operations
As reported ............................ $ 4,628 $ (190) $ (190) $ 1,118
Pro forma .............................. $ 4,572 $ (162) $ 347 $ 1,233
Net income (loss)
As reported ............................ $ 4,725 $(1,046) $ (1,046) $ 275
Pro forma .............................. $ 4,669 $(1,018) $ (509) $ 390
Diluted earnings (loss) per common share
As reported ............................ $ 0.49 $ (0.10) $ (0.10) $ 0.02
Pro forma .............................. $ 0.49 $ (0.10) $ (0.05) $ 0.04
48
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 4 -- DISCONTINUED OPERATION
Capital Group, a subsidiary of the Company, previously wrote leases for
computer, telecommunications, and other types of capital equipment, with initial
lease terms ranging from two to five years. Capital Group ceased writing new
leases in March 2000 and is in the final stages of running out its lease
portfolio. At December 31, 2004, our future revenue stream from contractually
committed leases is inconsequential to our results of operations. The activity
that remains in winding-down the leasing operation is the collection of accounts
receivable, including older accounts receivable related to terminated leases,
which will continue during 2005. As a result, Capital Group has been presented
as a discontinued operation in accordance with SFAS No. 144, "Accounting for the
Disposal or Impairment of Long-Lived Assets." Under this statement, the
operating results of Capital Group are presented separately from continuing
operations in the accompanying financial statements for all periods presented.
Capital Group previously was reported as a separate operating segment called
Leasing Operations.
During 2003, we determined that we would not be able to obtain the value
previously expected from the sale of off-lease equipment inventories and that
certain estimated residual values of leased equipment were overstated due to a
significant decline in the fair market value of the equipment in the secondary
market. In recognition of the deterioration in these market prices, we recorded
charges totaling approximately $1,677,000 during 2003 to increase our reserve
for inventories and residual values. No such charges were recorded in 2004 and
2002.
Summarized information for Capital Group is as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------
2004 2003 2002
---- ------- ------
(In thousands, except per share data)
Revenue ............................. $483 $ 2,256 $9,102
Income (loss) before income taxes ... $147 $(1,885) $ 424
NOTE 5 -- NOTES PAYABLE AND LINE OF CREDIT
At December 31, 2004, we owe $27,000 under capital leases and a note payable,
which expire and mature in 2005. All other notes payable outstanding at December
31, 2003 were repaid during 2004, except for $11,000 that has been included in
net current liabilities of discontinued operation in the accompanying
consolidated balance sheet.
In August 2004, we entered into a business loan agreement with Standard Federal
Bank, N.A. whereby the Company may borrow up to $5,000,000 under a line of
credit and requests for letters of credit. Outstanding borrowings bear interest
at 0.5% per annum and are collateralized by a compensating balance cash deposit
required to be held at the bank equal to the amount of any outstanding
borrowings. During 2004, the Company had not borrowed any amounts under this
agreement, but the bank has issued $701,000 of letters of credit under the
agreement. The agreement expires on January 2, 2006, as amended on January 3,
2005 as noted below.
On January 3, 2005, we amended the agreement to allow for additional borrowings
of $15,000,000 under a term loan due January 3, 2010. We used the proceeds from
the term loan to partially finance the acquisition of Sytel, Inc. (see Note 16).
The term loan bears interest at 0.5% per annum and is collateralized by a
compensating balance cash deposit required to be held at the bank equal to the
amount of the outstanding principal.
49
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 6 -- INCOME TAXES
The income tax provision from continuing operations consists of the following:
YEAR ENDED DECEMBER 31,
------------------------
2004 2003 2002
------ ------ ------
(In thousands)
Current:
U.S. federal ......................................... $ -- $ 799 $ 794
State ................................................ 310 39 99
Foreign .............................................. 1,051 621 172
------ ------ ------
Total current provision 1,361 1,459 1,065
Deferred ................................................ 1,186 (21) 418
------ ------ ------
Total income tax provision from continuing operations ... $2,547 $1,438 $1,483
====== ====== ======
The income tax provision from continuing operations was calculated based on the
following components of income (loss) from continuing operations before income
taxes:
YEAR ENDED DECEMBER 31,
------------------------
2004 2003 2002
------ ------ ------
(In thousands)
Domestic income ......................................... $4,408 $1,449 $2,536
Foreign income (loss) ................................... 2,767 (201) 65
------ ------ ------
Income from continuing operations before income taxes ... $7,175 $1,248 $2,601
====== ====== ======
A reconciliation of the income tax provision and the amount computed by applying
the federal statutory income tax rate to income from continuing operations
before income taxes is as follows:
YEAR ENDED DECEMBER 31,
------------------------
2004 2003 2002
------ ------ ------
(In thousands)
Income tax provision at federal statutory rate of 34% ... $2,440 $ 424 $ 884
Permanent differences ................................... 24 296 528
Effect of foreign tax rates ............................. (208) (40) 13
Foreign operating losses not benefited .................. 346 668 151
State taxes, net of federal benefit ..................... 204 39 65
Recovery of taxes paid in prior years ................... (216) -- --
Other ................................................... (43) 51 (158)
------ ------ ------
Total income tax provision from continuing operations ... $2,547 $1,438 $1,483
====== ====== ======
50
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 6 -- INCOME TAXES (continued)
The principal components of deferred income taxes are as follows:
DECEMBER 31,
-------------------------------------------
2004 2003
-------------------- --------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
(In thousands)
Net operating loss carryforwards .............. $ 765 $ -- $1,742 $ --
Alternative minimum tax credit carryforward ... 752 -- 748 --
Allowance for uncollectible accounts .......... 70 -- 110 --
Intangible assets ............................. -- 1,212 -- --
Accelerated tax depreciation .................. -- 854 -- 858
Prepaid expenses .............................. -- 295 -- 116
Other ......................................... 98 -- 277 --
------ ------ ------ ----
Total deferred income taxes ................... 1,685 2,361 2,877 974
Less -- Valuation allowance ................... (765) -- (668) --
------ ------ ------ ----
Net deferred income taxes ..................... $ 920 $2,361 $2,209 $974
====== ====== ====== ====
At December 31, 2004, we had available pre-tax net operating loss carryforwards
of approximately $2,250,000 in Belgium and Romania, which may be used to offset
future taxable income in each respective jurisdiction. The loss carryforward in
Belgium does not expire. At December 31, 2004, we also had an alternative
minimum tax credit carryforward of $752,000 that does not expire, and which may
be used to offset federal income taxes in the United States. Based on the
historical losses in Belgium and Romania, we have provided a valuation allowance
against the deferred tax asset related to the net operating loss carryforwards
in these countries.
No provision has been made with respect to approximately $4.58 million of
undistributed earnings of foreign subsidiaries at December 31, 2004, since we
consider these earnings to be permanently reinvested. In December 2004, the FASB
issued FASB Staff Position ("FSP") No. 109-2, "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004," which provides guidance under SFAS No. 109,
"Accounting for Income Taxes," with respect to recording the potential impact of
the repatriation provisions of the American Jobs Creation Act of 2004 ("Jobs
Act") on an enterprise's income tax expense and deferred taxes. The Jobs Act was
enacted on October 22, 2004. FSP 109-2 states that an enterprise is allowed time
beyond the financial reporting period of enactment to evaluate the effect of the
Jobs Act on its plan for reinvestment or repatriation of foreign earnings for
purposes of applying SFAS 109. We have not yet evaluated the impact of the
repatriation provisions. Accordingly, as provided for in FSP 109-2, we have not
adjusted income tax expense or deferred taxes to reflect the repatriation
provisions of the Jobs Act.
NOTE 7 -- EMPLOYEE RETIREMENT PLAN
TechTeam Global, Inc. has a 401(k) Retirement Savings Plan ("TechTeam Plan")
that covers substantially all U.S.-based employees, except for employees of DSC
who are covered under a separate 401(k) plan. Under the provisions of both
plans, we are permitted to make discretionary employer matching contributions.
Matching contributions under both plans totaled $294,000 in 2004, $317,000 in
2003, and $294,000 in 2002. Our matching contributions for the TechTeam Plan are
made only with our common stock and are credited only to the TechTeam Global
Stock Fund for the benefit of each participant.
51
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 8 -- LEASES
We lease our call center facilities, corporate and other offices, and certain
office equipment under various operating and month-to-month leases. These leases
are renewable with various options and terms. Total rental expense was
$4,550,000 in 2004, $4,084,000 in 2003, and $3,788,000 in 2002. We sublease a
portion of our facilities to third parties. Total sublease income was $526,000
in 2004, $526,000 in 2003, and $414,000 in 2002.
Minimum future payments and receipts under noncancelable operating leases and
subleases with initial terms of one year or more at December 31, 2004 are as
follows:
LEASE SUBLEASE
YEAR PAYMENTS RECEIPTS
---- -------- --------
(In thousands)
2005 .................. $ 3,867 $507
2006 .................. 3,200 128
2007 .................. 2,928 --
2008 .................. 2,958 --
2009 and thereafter ... 10,776 --
------- ----
Total ................. $23,729 $635
======= ====
Certain of our leases for our facilities include periods of free rent or rent
payments that increase over the life of the lease. For these leases, we record
total rent expense for the entire lease on a straight-line basis over the life
of the lease and record either an asset or liability, as appropriate. At
December 31, 2004 and 2003, long-term liabilities include a liability of
$414,000 and $375,000, respectively, for these leases.
NOTE 9 -- STOCK-BASED COMPENSATION
We have four stock-based plans -- the 2004 Incentive Stock and Award Plan ("2004
Plan"), the 1996 Non-Employee Directors Stock Plan ("1996 Plan"), the 1990
Nonqualified Stock Option Plan ("1990 Plan"), and the Executive Long-Term
Incentive Plan ("Long-Term Plan"). As a result of the adoption of the 2004 Plan
during 2004, options may no longer be granted under the 1990 Plan. Outstanding
options granted under the 1990 Plan have expiration terms ranging from four to
six years and become exercisable ratably over periods ranging from three to five
years.
Under the 2004 Plan, the Compensation Committee of the Board of Directors may
issue stock options, performance shares, and restricted stock to employees and
consultants representing up to 1,200,000 shares of our common stock. Stock
options may be granted with terms up to ten years and must have an exercise
price that is equal to or greater than the fair market value of our common stock
on the date of grant. Performance shares and restricted stock awards may be
granted subject to such terms and conditions as the Compensation Committee deems
appropriate, including a condition that one or more performance goals be
achieved for the participant to realize all or a portion of the award. No
performance shares or restricted stock awards were granted during 2004 under the
2004 Plan.
Under the 1996 Plan, non-employee directors of the Company receive 100 shares of
common stock for attendance at each Board meeting and an annual award of 10,000
stock options, representing up to 1,000,000 shares of our common stock. Stock
options are granted with ten-year terms and become exercisable immediately on
the date of grant.
52
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 9 -- STOCK-BASED COMPENSATION (continued)
Under the Long-Term Plan, certain members of management are entitled to an award
of restricted stock equal to a percentage of the participant's salary if certain
operating targets are met on a rolling three-year basis, except that the first
year of the plan will be based on the operating target for only the first year
and the second year of the plan will be based on the cumulative operating target
for the first and second years. Restricted stock awards under the Long-Term Plan
do not vest ratably but instead become 100% vested at the end of five years from
the date of grant. For 2004, restricted stock awards totaling $533,000 were
granted to participants, which have been recorded as unamortized deferred
compensation in the accompanying consolidated statements of shareholders'
equity. The deferred compensation will be amortized to expense on a
straight-line basis over a five-year period beginning in 2005.
A summary of stock option activity under the above plans and related information
is as follows:
EMPLOYEES DIRECTORS OTHERS
-------------------- ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
TOTAL AVERAGE AVERAGE AVERAGE
SHARES SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- -------- ------- -------- ------- --------
Outstanding, January 1, 2002 ..... 1,647,126 1,232,126 $ 7.77 250,000 $10.17 165,000 $6.62
Granted .......................... 342,321 262,321 4.78 80,000 4.05 -- --
Exercised ........................ (230,100) (210,100) 4.06 (20,000) 4.05 -- --
Canceled ......................... (548,227) (468,227) 10.83 (30,000) 11.52 (50,000) 5.00
--------- --------- ------- -------
Outstanding, December 31, 2002 ... 1,211,120 816,120 6.01 280,000 8.72 115,000 7.32
Granted .......................... 313,231 221,002 7.00 80,000 6.50 12,229 5.49
Exercised ........................ (130,401) (120,401) 4.26 (10,000) 3.06 -- --
Canceled ......................... (180,932) (168,703) 7.62 -- -- (12,229) 5.49
--------- --------- ------- -------
Outstanding, December 31, 2003 ... 1,213,018 748,018 6.22 350,000 8.37 115,000 7.32
Granted .......................... 401,900 321,900 8.92 80,000 7.96 -- --
Exercised ........................ (292,172) (217,172) 4.33 (50,000) 5.47 (25,000) 6.94
Canceled ......................... (126,502) (36,502) 6.86 -- -- (90,000) 7.43
--------- --------- ------- -------
Outstanding, December 31, 2004 ... 1,196,244 816,244 $ 7.76 380,000 $ 8.67 -- $ --
========= ========= ======= =======
The following table summarizes certain information about stock options
outstanding at December 31, 2004:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF NUMBER OF AVERAGE AVERAGE PER NUMBER OF AVERAGE PER
PER SHARE OPTIONS REMAINING LIFE SHARE EXERCISE OPTIONS SHARE EXERCISE
EXERCISE PRICES OUTSTANDING IN YEARS PRICE EXERCISABLE PRICE
- --------------- ----------- -------------- -------------- ----------- --------------
$ 2.60 - 4.15 186,177 3.7 $ 3.78 123,505 $ 3.75
5.00 - 10.31 960,067 5.5 8.04 793,499 7.97
23.00 - 25.75 50,000 2.4 24.10 50,000 24.10
53
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 9 -- STOCK-BASED COMPENSATION (continued)
The weighted average fair value of options issued was $3.50 in 2004, $2.20 in
2003, and $2.78 in 2002. The weighted-average remaining contractual life of all
options was 5.1 years, 3.5 years, and 3.4 years at December 31, 2004, 2003, and
2002, respectively.
In August 2001, our President and Chief Executive Officer, Dr. William F. Coyro,
Jr., entered into an employment agreement with TechTeam. Under the agreement,
Dr. Coyro was granted an award of up to 325,000 stock options to become
exercisable on September 30, 2002, with the number of stock options granted
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. Under APB 25, the final amount of
compensation expense under this grant is measured by the difference between the
fair value of our common stock on September 30, 2002 and the exercise price of
the options. Accordingly, we recorded compensation expense of $410,000 in 2002,
which is included in selling, general, and administrative expense in the
accompanying consolidated statements of operations.
NOTE 10 -- COMMON STOCK
We have reserved for issuance shares of common stock necessary to effect the
conversion of all shares of preferred stock into common stock and exercise of
all outstanding and ungranted stock options.
The Company has acquired shares of its common stock in connection with various
authorized stock repurchase programs. In 2004, we purchased and retired 350,000
shares of common stock from a director of the Company and his immediate family
for $2,744,000, inclusive of commission expense, under a program approved in
2004. In 2003, we purchased and retired 2,000,000 shares of common stock for
$12,545,000, inclusive of commission expense, under a program approved in 2003.
In 2002, we purchased and retired 470,600 shares of common stock for $3,423,000,
inclusive of commission expense, under a program approved in 2002.
NOTE 11 -- REDEEMABLE CONVERTIBLE PREFERRED STOCK
On April 8, 2003, we completed a private placement of 689,656 shares of newly
created Series A convertible preferred stock ("Preferred Stock") for $5,000,000,
or $7.25 per share. The Preferred Stock provides the following rights,
preferences, privileges, and restrictions:
VOTING RIGHTS:
The holder of Preferred Stock is required to vote all shares together as a
single class of stock. The holder of Preferred Stock has the right to one vote
for each share of common stock into which each share of Preferred Stock can be
converted. The holder of Preferred Stock is currently entitled to elect one
member of the Company's Board of Directors.
DIVIDENDS:
The holder of Preferred Stock is entitled to receive non-cumulative dividends,
when and if declared by the Company's Board of Directors on shares of common
stock, equal to the dividends declared on the number of shares of common stock
into which each share of Preferred Stock could then be converted.
CONVERSION:
The holder of Preferred Stock may require us to convert each share of Preferred
Stock into one share of common stock, subject to adjustment for stock splits and
similar transactions, any time after April 8, 2004.
54
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 11 -- REDEEMABLE CONVERTIBLE PREFERRED STOCK (continued)
REDEMPTION:
We are required to redeem all outstanding shares of Preferred Stock on April 8,
2006 at $7.25 per share. In addition, the holder of Preferred Stock may require
us to redeem any or all of the outstanding shares of Preferred Stock at $7.25
within 90 days upon the occurrence of any of the following events: (1) Dr. Coyro
is removed without cause as Chief Executive Officer of the Company, (2) total
revenue for Corporate Services for any fiscal quarter is below $14,428,000 or
75% of the amount reported for the prior fiscal quarter, or (3) net cash,
defined as cash, cash equivalents and securities available for sale, less any
debt senior to the Preferred Stock, is less than $6,500,000.
If the Board of Directors of the Company elects to proceed with a transaction in
which there will be a change in control of the Company, the holder of Preferred
Stock may require us to redeem any or all of the outstanding shares of Preferred
Stock at $7.25 until the later of two business days after written notice by the
Company of the pending transaction or two business days prior to the closing of
the transaction.
LIQUIDATION PREFERENCE:
In the event of any liquidation, dissolution, or winding up of the affairs of
the Company, either voluntarily or involuntarily, the holder of Preferred Stock
is entitled to receive, prior to and in preference to any distributions to the
holders of common stock or any other security, an amount initially equal to
$7.25 per share, subject to adjustment for stock splits and similar
transactions, plus accrued but unpaid dividends.
NOTE 12 -- PREFERRED SHARE PURCHASE RIGHTS
On April 29, 1997, our Board of Directors authorized the distribution of one
Preferred Share Purchase Right ("Right") for each outstanding share of our
common stock under the terms of a Rights Agreement between the Company and U.S.
Stock Transfer Corporation, dated May 6, 1997, and as amended August 24, 2000
and May 5, 2003. Each Right entitles shareholders to buy one one-hundredth of a
share of a new series of preferred stock at a price of $80.
As distributed, the Rights trade together with the common stock of the Company
and do not have any separate voting powers. They may be exercised or traded
separately only after the earlier to occur of the following: (1) 10 days after
any person or group of persons acquires 15% or more of our common stock, (2) 10
business days after a person or group of persons announces an offer that, if
completed, would result in its owning 15% or more of our common stock, or (3)
promptly after a declaration by the Board that a person who acquires 15% or more
of our common stock is an "Adverse Person" as defined by the Rights Agreement.
Additionally, if the Company is acquired in a merger or other business
combination, each Right will entitle its holder to purchase, at the Right's
exercise price, shares of the acquiring Company's common stock (or stock of the
Company if it is the surviving corporation) having a market value of twice the
Right's exercise price.
The Rights may be redeemed at the option of the Board of Directors for $0.01 per
Right at any time before a person or group of persons accumulates 15% or more of
our common stock. At any time after a person or group of persons acquires 15%
but before the person or group of persons has acquired 50% of outstanding shares
of our common stock, the Board may exchange each Right for one share of common
stock. The Board may amend the Rights at anytime without shareholder approval.
The Rights will expire by their terms on May 6, 2007.
55
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 13 -- 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.
Over the past 15 months, TechTeam has acquired three companies. As a result of
these acquisitions, we have strategically added governmental technology services
to our long-standing core businesses of corporate helpdesk, professional
services/systems integration, technical staffing, and training services. In
order to better describe our business following these changes, during the fourth
quarter of 2004, we realigned our operating segments with the manner in which
management will be evaluating financial information in future periods by
modifying our four reporting business segments into the five new reporting
segments described below. Prior year amounts have been reclassified to reflect
the current year presentation. Our reportable operating segments currently
include the following:
DIVERSIFIED IT OUTSOURCING SERVICES (formerly Corporate Helpdesk Services)
-- this segment provides corporations and governments with around-the-clock
(24x7x365) technical support for their end-users and other constituencies.
We support the full range of a client's information technology ("IT") and
business process infrastructure. We also provide technical support to
customers of our client's products and software.
GOVERNMENT TECHNOLOGY SERVICES (formerly part of Professional
Services/Systems Integration and Corporate Helpdesk Services) -- this
segment provides managed network services and advanced enterprise
solutions. For our managed network services customers, we provide complete
life cycle support for a customer's IT infrastructure ranging from their
desktops to their data and voice networks. For our advance enterprise
solutions business, we assist our customers in the design, development, and
implementation of enterprise-level technology solutions. We also provide
design, implementation, operation, and maintenance (helpdesk and deskside
support) services.
IT CONSULTING AND SYSTEMS INTEGRATION (formerly part of Professional
Services/Systems Integration) -- this segment provides IT infrastructure
support to commercial customers 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.
LEARNING SERVICES (formerly referred to as 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.
56
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 13 -- SEGMENT REPORTING (continued)
The accounting policies of the operating segments are the same as those
described in Note 1. We evaluate segment performance based on segment gross
profit. We do not allocate assets to operating segments, but we allocate certain
amounts of depreciation and amortization expense to operating segments.
Financial information for our operating segments is as follows:
YEAR ENDED DECEMBER 31,
------------------------------
2004 2003 2002
-------- -------- --------
(In thousands)
REVENUE
Diversified IT outsourcing services .................. $ 74,608 $ 65,614 $ 57,675
Government technology services ....................... 25,712 2,055 1,431
IT consulting and systems integration ................ 19,668 8,195 7,197
Technical staffing ................................... 7,445 9,090 10,153
Learning services .................................... 555 879 1,077
-------- -------- --------
Total revenue ........................................... $127,988 $ 85,833 $ 77,533
======== ======== ========
GROSS PROFIT
Diversified IT outsourcing services .................. $ 19,560 $ 13,627 $ 15,792
Asset impairment loss ................................ (485) -- --
-------- -------- --------
Total diversified IT outsourcing services ......... 19,075 13,627 15,792
Government technology services ....................... 6,749 534 300
IT consulting and systems integration ................ 3,358 1,871 1,657
Technical staffing ................................... 1,301 1,789 1,482
Learning services .................................... 104 63 224
-------- -------- --------
Total gross profit ...................................... 30,587 17,884 19,455
Other operating expenses ............................. (24,040) (18,695) (17,801)
Net interest income .................................. 719 1,139 910
Foreign currency transaction gain (loss) ............. (91) 920 37
-------- -------- --------
Income from continuing operations before income taxes ... $ 7,175 $ 1,248 $ 2,601
======== ======== ========
DEPRECIATION AND AMORTIZATION
Diversified IT outsourcing services .................. $ 2,722 $ 3,064 $ 2,865
Government technology services ....................... 79 68 42
IT consulting and systems integration ................ 124 50 10
Technical staffing ................................... -- 2 21
Learning services .................................... -- 7 9
Unallocated depreciation and amortization ............ 1,922 1,428 1,400
-------- -------- --------
Total depreciation and amortization ..................... $ 4,847 $ 4,619 $ 4,347
======== ======== ========
57
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 13 -- SEGMENT REPORTING (continued)
We attribute revenue to different geographic areas on the basis of the location
providing the services to the customer. Revenue and long-lived assets by
geographic area is presented below:
GEOGRAPHIC INFORMATION
-------------------------------------------------------------------
2004 2003 2002
--------------------- -------------------- --------------------
LONG-LIVED LONG-LIVED LONG-LIVED
REVENUE ASSETS REVENUE ASSETS REVENUE ASSETS
-------- ---------- ------- ---------- ------- ----------
(In thousands)
United States ....... $ 86,814 $12,135 $57,966 $12,538 $60,336 $ 8,855
Europe:
Belgium .......... 27,335 4,095 16,781 3,131 8,627 1,266
Rest of Europe ... 13,839 1,083 11,086 99 8,570 97
-------- ------- ------- ------- ------- -------
Total Europe ........ 41,174 5,178 27,867 3,230 17,197 1,363
-------- ------- ------- ------- ------- -------
Total ............... $127,988 $17,313 $85,833 $15,768 $77,533 $10,218
======== ======= ======= ======= ======= =======
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:
YEAR ENDED DECEMBER 31,
-----------------------
2004 2003 2002
---- ---- ----
Ford Motor Company ... 37.4% 52.9% 55.9%
DaimlerChrysler ...... 7.7% 13.8% 14.5%
---- ---- ----
Total ................ 45.1% 66.7% 70.4%
==== ==== ====
At December 31, 2004 and 2003, amounts due from these two customers accounted
for 50.8% and 53.4% of total accounts receivable, respectively.
NOTE 14 -- RELATED PARTY TRANSACTIONS
We paid consulting fees of $22,000 in 2003 and $145,000 in 2002 to a director of
the Company for services rendered to TechTeam. No such payments were made in
2004.
We paid legal fees of $6,000 in 2002 to a law firm whose members include a
director of the Company. No such payments were made in 2004 and 2003.
In February 2004, we purchased 350,000 shares of our common stock from a
director of the Company and his immediate family for $7.84 per share. The
closing price of our common stock on February 26, 2004 was $7.88.
58
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 15 -- CONTINGENCIES
DIGITAL SUPPORT CORPORATION:
TechTeam acquired 100% of the outstanding capital stock of DSC on December 31,
2003. DSC provides services to various departments within the United States
Department of Defense ("DoD"). DSC acquired 100% of the outstanding capital
stock of Sytel, Inc. on January 3, 2005. Sytel provides services to various
departments within the DoD and the United States Department of State ("DoS").
Both DSC and Sytel require facility security clearances ("FSC") in order to
perform their services for one or more of their DoD and DoS customers. Given the
beneficial ownership of over 5% of TechTeam's capital stock by ChrysCapital II,
LLC, a Mauritius entity ("ChrysCapital"), and ChrysCapital's right to appoint a
member of TechTeam's Board of Directors, TechTeam is considered to be under
minority foreign ownership, control or influence ("FOCI") for purposes of the
National Industrial Security Program Operating Manual ("NISPOM"). We are in the
process of finalizing the implementation of a Security Control Agreement, which
is a recognized measure under the NISPOM for mitigation of minority FOCI, with
the DoD.
LEGAL PROCEEDINGS:
The Company is a party to various legal proceedings that are routine and
incidental to its business. Although the consequences of these proceedings are
not presently determinable, in the opinion of management, they will not have a
material adverse affect on our liquidity, financial condition, or results of
operations, although no assurances can be given in this regard.
NOTE 16 -- SUBSEQUENT EVENT
On January 3, 2005, TechTeam Global, Inc., through its wholly-owned subsidiary
DSC, completed the acquisition of all of the outstanding stock of Sytel, Inc., a
diversified information technology services and solutions company headquartered
in Bethesda, Maryland, that provides managed network services and advanced
enterprise solutions -- including network design, management, and support;
network security services; help desk support; program design and implementation;
and e-government and e-learning solutions -- to several departments of the U.S.
federal government. Sytel had unaudited revenue and net income of $28.8 million
and $1.67 million, respectively, for the year ended December 31, 2004, which is
not included in the accompanying financial statements. The initial consideration
paid by the Company was $18,500,000 plus acquisition costs of approximately
$714,000. In addition to the initial purchase price, the selling shareholders
will be paid an amount equal to 7% of Sytel's gross profit in excess of
$12,000,000 in 2005 and $14,000,000 in 2006.
Of the initial consideration, $16,025,000 was paid to the selling shareholders
and the remaining $2,475,000 was placed into an escrow account, which consists
of $825,000 related to a potential working capital adjustment $1,650,000 related
to representations and warranties of the selling shareholders contained in the
purchase agreement. The purchase price is subject to a working capital
adjustment based upon the change in Sytel's net working capital position from
June 30, 2004 through January 3, 2005. The Selling Shareholders were also paid
at closing an estimated working capital adjustment of $1,600,000, subject to
final adjustment and settlement, in addition to the amounts reported above.
59
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 17 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
As discussed in Note 2, earnings per share for interim periods in 2004 and 2003
have been restated to conform to the two-class method of computing and
presenting earnings per share. The restatement had no impact on diluted earnings
per common share for any period during 2004, but it decreased reported basic
earnings per common share for the quarters ended June 30 and September 30, 2004,
as summarized below. The restatement had no impact on basic or diluted earnings
per common share for the year ended December 31, 2003, but it decreased reported
basic and diluted earnings per common share for the quarter ended December 31,
2003, as shown below.
Quarterly condensed consolidated results of operations are summarized as
follows:
QUARTER ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(In thousands, except
per share data)
2004
Revenue................................. $30,164 $30,483 $34,025 $33,316
Gross profit............................ 7,157 7,989 7,891 7,550(1)
Income from continuing operations....... 628 1,058 1,496 1,446(2)
Income (loss) from discontinued (4) 19 22 60
operation............................
Net income.............................. $ 624 $ 1,077 $ 1,518 $ 1,506(2)
Earnings per share from continuing
operations
Basic per common..................... $ 0.07 $ 0.11 $ 0.16 $ 0.15(2)
Basic per preferred.................. $ 0.07 $ 0.11 $ 0.16 $ 0.15(2)
Diluted per common................... $ 0.07 $ 0.11 $ 0.16 $ 0.15(2)
Earnings per share
Basic per common, restated........... $ 0.07 $ 0.12 $ 0.16 N/A
Basic per common, as reported........ $ 0.07 $ 0.13 $ 0.18 $ 0.16(2)
Basic per preferred, restated........ $ 0.07 $ 0.12 $ 0.16 N/A
Basic per preferred, as reported..... N/A N/A N/A $ 0.16(2)
Diluted per common................... $ 0.07 $ 0.11 $ 0.16 $ 0.16(2)
(1) Includes the pre-tax loss of $485 from the write-down of a software asset.
(2) Includes the after-tax loss of $320 from the write-down of a software
asset, the after-tax benefit of $250 from the recovery of non-income-based
taxes recorded as a reduction of selling, general, and administrative
expenses, and $395 from the recovery of income taxes paid in prior years
and the reduction of tax liabilities related to prior years.
60
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 17 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (continued)
QUARTER ENDED
--------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ---------- ------------ -----------
(In thousands, except
per share data)
2003
Revenue .................................... $20,731 $21,256 $21,899 $21,947
Gross profit ............................... 4,691 4,378 4,593 4,222
Income (loss) from continuing operations ... 82 (552) (201) 481
Income (loss) from discontinued
operation ............................... (23) (872)(1) (230)(2) 269
Net income (loss) .......................... $ 59 $(1,424)(1) $ (431)(2) $ 750
Earnings (loss) per share from
continuing operations
Basic per common ........................ $ 0.01 $ (0.05) $ (0.02) $ 0.05
Basic per preferred ..................... $ -- $ -- $ -- $ 0.05
Diluted per common ...................... $ 0.01 $ (0.05) $ (0.02) $ 0.05
Earnings (loss) per share
Basic per common, restated .............. $ 0.01 $ (0.14)(1) $ (0.04)(2) $ 0.07
Basic per common, as reported ........... $ 0.01 $ (0.14)(1) $ (0.04)(2) $ 0.08
Basic per preferred, restated ........... $ -- $ -- $ -- $ 0.07
Basic per preferred, as reported ........ N/A N/A N/A N/A
Diluted per common, restated ............ $ 0.01 $ (0.14)(1) $ (0.04)(2) $ 0.07
Diluted per common, as reported ......... $ 0.01 $ (0.14)(1) $ (0.04)(2) $ 0.08
(1) Includes the after-tax loss of $871 from the write-down of off-lease
equipment and equipment under lease.
(2) Includes the after-tax loss of $236 from the write-down of off-lease
equipment and equipment under lease.
61
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in accountants, disagreements, or other events requiring
reporting under this Item.
ITEM 9A. CONTROLS AND PROCEDURES
As of December 31, 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, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934. Based upon that evaluation, the Company's Management,
including the Chief Executive Officer, Chief Financial Officer, and Chief
Accounting Officer, concluded that the Company's disclosure controls and
procedures were effective as of December 31, 2004.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information to be set forth under the caption "Election of Directors and
Management Information" in the Proxy Statement dated on or about April 4, 2005,
relating to the Annual Meeting of Shareholders to be held on May 25, 2005, (the
"Proxy Statement"), is incorporated herein by reference.
The information to be set forth under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement is incorporated herein by
reference.
The information to be set forth under the caption "Code of Ethics" in the Proxy
Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information to be set forth under the caption "Compensation of Executive
Officers" in the Proxy Statement is incorporated herein by reference.
62
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information to be set forth under the caption "Election of Directors and
Management Information -- Security Ownership of Certain Beneficial Holders and
Management" in the Proxy Statement is incorporated herein by reference.
EQUITY COMPENSATION PLAN INFORMATION
-------------------------------------------------------------------------
(A) (B) (C)
----------------------- -------------------- ------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES FUTURE ISSUANCE UNDER
TO BE ISSUED UPON WEIGHTED-AVERAGE EQUITY COMPENSATION
EXERCISE OF OUTSTANDING EXERCISE PRICE OF PLANS (EXCLUDING
OPTIONS, WARRANTS OUTSTANDING OPTIONS, SECURITIES
PLAN CATEGORY AND RIGHTS (1) WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
------------- ----------------------- -------------------- ------------------------
Equity compensation plans
approved by security holders ... 681,400 $8.82 1,366,500
Equity compensation plans not
approved by security holders ... 514,844 $7.04 --
--------- ----- ---------
Total ............................. 1,196,244 $8.05 1,366,500
========= ===== =========
(1) Represents options to purchase shares of the Company's common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information to be set forth under the caption "Compensation of Executive
Officers -- Certain Relationships and Related Transactions" in the Proxy
Statement is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT, FEES, AND SERVICES
The information to be set forth under the caption "Fees of the Independent
Auditors for 2004 and 2003" in the Proxy Statement is incorporated herein by
reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a) Certain documents are filed as part of this Report on Form 10-K.
(1) See "Item 8 -- Financial Statements and Supplementary Data"
beginning at page 31.
(2) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts for the years
ended December 31, 2004, 2003 and 2002
(3) Exhibits.
63
EXHIBIT
NUMBER EXHIBIT REFERENCE *
- ------ ------- --------------
2.1 Stock Purchase Agreement dated as of December 31, 2003, by and among TechTeam
Global, Inc. and Digital Support Corporation, Peter S. Brigham, Robert H.
Brigham, Christian J. Burneko, Fred O. Cornett, Jr., David W. Han, Satish Lulla,
Raj K. Sachdev, and Digital Support Corporation 401(K) Plan. *13
2.2 Share Purchase Agreement, dated May 13, 2004, in respect of the Shares in
Advance Network Engineering NV, between Peter De Gendt, Werner Meynaerts, Pascal
Claessens, Wim De Geetere, and Christophe Gesqueire, as Sellers, and TechTeam
Global NV as Purchaser (excluding Exhibits and Schedules thereto)
2.3 Stock Purchase Agreement, dated January 3, 2005 by and among TechTeam Global,
Inc. and Digital Support Corporation and Sytel, Inc., The Stockholders of Sytel,
Inc. and Certain of the Optionholders of Sytel, Inc. *16
3.1 Certification of Incorporation of TechTeam Global, Inc. filed with the Delaware
Secretary of State on September 14, 1987. *9
3.2 Certificate of Amendment dated November 27, 1987 to our Certificate of
Incorporation. *9
3.3 Certificate of Amendment dated May 8, 2002 to Certificate of Incorporation *9
3.4 Bylaws of TechTeam Global, Inc. as Amended and Restated October 28, 2003. *12
3.5 Certificate of Designations of the Series A Convertible Preferred Stock dated
April 7, 2003. *10
3.6 Certificate of Correction of Certificate of Designations of The Series A
Convertible Preferred Stock dated May 5, 2003. *15
4.1 Rights Agreement dated as of May 6, 1997, between TechTeam Global, Inc. and U.S.
Stock Transfer Corporation, as Rights Agent, which includes as Exhibit A thereto
the Form of Certificate of Designations, as Exhibit B thereto the Form of Right
Certificate, and as Exhibit C thereto the Summary of Rights to Purchase
Preferred Stock. *5
4.2 First Amendment of Rights Agreement dated as of May 6, 1997 *6
4.3 Second Amendment of Rights Agreement dated as of May 6, 1997. *14
10.1 Lease Agreement for office space in Southfield, Michigan known as the Cumberland
Tech Center between the Company and Eleven Inkster Associates dated September
29, 1993. *2
10.2 Sixth Amendment Lease Agreement dated March 13, 2000 for office space in
Southfield, Michigan between Eleven Inkster Associates and the Company. *11
10.3 Lease for office space in Dearborn, Michigan between the Company and Dearborn
Atrium Associates Limited Partnership dated November 18, 1996. *4
10.4 Third Amendment to Lease between the Company and Dearborn Tech, L.L.C (owner of
interest of Dearborn Atrium Associates Limited Partnership) dated November 30,
2004.
10.5 Lease Agreement for office space in Davenport, Iowa known as the 1010 Shopping
Center between the Company and Partnership 1010, L.L.P. dated August 28, 1999. *7
10.6 Office Lease Agreement by and between FJ Dulles Business Park II, L.L.C., as
Landlord, and Digital Support Corporation, as Tenant, dated December 21, 2000. *15
10.7 Lease Contract between IMMOBILIERE DE LA RUE DE STRASBOURG S.A and TechTeam
Global NV/SA, as amended, dated April 4, 2003. *15
10.8 Office Building Lease for office space in Bethesda, Maryland by and between
Sytel, Inc. and Elizabethean Court Associates III L.P. dated September 27, 1995
10.9 First Amendment to Lease by and between Sytel, Inc. and Elizabethean Court
Associates III L.P. dated March 7, 1996
64
EXHIBIT
NUMBER EXHIBIT REFERENCE *
- ------ ------- --------------
10.10 Lease Extension Agreement by and between Sytel, Inc. and Elizabethean Court
Associates III L.P. dated April 11, 2001
10.11 Office Lease Agreement for office space in Herndon, Virginia by and between APA
Properties No. 1, L.P. and Sytel, Inc. dated February 18,1999
10.12 First Amendment to Office Lease Agreement by and between APA Properties No. 1,
L.P. and Sytel, Inc. dated April 16, 1999
10.13 Lease Agreement for office space in Bucharest, Romania between S.C.
Italian-Romanian Industrial Development Enterprises - IRIDE SA and TechTeam
Global SRL dated February 2, 2005
10.14 1996 Nonemployee Directors Stock Plan. *3
10.15 1990 Nonqualified Stock Option Plan. *1
10.16 2004 Incentive Stock and Awards Plan
10.17 TechTeam Global, Inc. Executive Annual Incentive Plan. *15
10.18 TechTeam Global, Inc. Executive Long Term Incentive Program. *15
10.19 Supplemental Retirement Plan dated October 1, 2000. *7
10.20 Employment Agreement Relating to Change of Control. *15
10.21 Employment Agreement between TechTeam Global, Inc. and William F. Coyro, Jr.
dated January 1, 2003. *9
10.22 Employment Agreement between Sytel, Inc. and Jeannette Lee White, dated January
3, 2005 *17
10.23 Employment Agreement between TechTeam Europe, NV and Christoph Neut dated
October 2, 1996. *9
10.24 Agreement with Ford Motor Company dated July 31, 2002. *8
10.25 Securities Purchase Agreement between TechTeam Global, Inc. and ChrysCapital II,
LLC dated April 8, 2003 (excluding Exhibits and Schedules thereto*). *10
10.26 Registration Rights Agreement between TechTeam Global, Inc. and ChrysCapital II,
LLC dated April 8, 2003. *10
10.27 Amended and Restated Business Loan Agreement, dated January 3, 2005, between
TechTeam Global, Inc. and Standard Federal Bank NA *17
10.28 Promissory Note (Line of Credit), dated September 7, 2004 *16
10.29 Promissory Note (Term Loan), dated January 3, 2005 *17
14.1 TechTeam Global, Inc. Code of Business Conduct.
21 List of subsidiaries of TechTeam Global, Inc.
23.1 Consent of Independent Registered Public Accounting Firm.
31.1 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934,
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934,
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.3 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934,
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
65
EXHIBIT
NUMBER EXHIBIT REFERENCE *
- ------ ------- --------------
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.3 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
Exhibits 10.15 through 10.25 represent management contracts and compensatory
plans.
66
EXHIBIT
-------
*1 Incorporated by reference to our Annual Report on Form 10-K for the year
ended December 31, 1990, filed as Exhibit 4.14 thereto.
*2 Incorporated by reference to our Annual Report on Form 10-KSB for the year
ended December 31, 1993.
*3 Incorporated by reference to our Registration Statement on Form S-3
(Registration No. 333-10687).
*4 Incorporated by reference to our Annual Report on Form 10-K dated December
31, 1996.
*5 Incorporated by reference to our Registration Statement on Form 8-A dated
May 9, 1997.
*6 Incorporated by reference to our Registration Statement on Form 8-A/A,
dated September 23, 1999.
*7 Incorporated by reference to our Annual Report on Form 10-K dated March
31, 2001.
*8 Incorporated by reference to our Report on Form 10-Q dated August 8, 2002.
*9 Incorporated by reference to our Report on Form 10-K dated March 18, 2003.
*10 Incorporated by reference to our Report on Form 8-K dated April 9, 2003.
*11 Incorporated by reference to our Report on Form 10-Q dated August 14,
2003.
*12 Incorporated by reference to our Report on Form 10-Q dated November 7, 2003.
*13 Incorporated by reference to our Report on Form 8-K dated January 14,
2004.
*14 Incorporated by reference to our Registration Statement on form 8-A12G/A,
dated May 22, 2003.
*15 Incorporated by reference to our Report on Form 10-K dated March 24, 2004.
*16 Incorporated by reference to our Report on Form 8-K dated September 21,
2004.
*17 Incorporated by reference to our Report on Form 8-K dated January 5, 2005.
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 18, 2005 By: /s/ William F. Coyro, Jr. William F. Coyro, Jr.
------------------------------------ President, Chief Executive Officer,
and Director (Principal Executive
Officer)
By: /s/ David W. Morgan David W. Morgan
------------------------------------ Chief Financial Officer and
Treasurer (Principal Financial
Officer)
By: /s/ Marc J. Lichtman Marc J. Lichtman
------------------------------------ Chief Accounting Officer (Principal
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities indicated on March
24, 2003.
/s/ Kim A. Cooper Director
- -------------------------------------
Kim A. Cooper
/s/ G. Ted Derwa Director
- -------------------------------------
G. Ted Derwa
/s/ Peter T. Kross Director
- -------------------------------------
Peter T. Kross
/s/ Conrad L. Mallett, Jr. Director
- -------------------------------------
Conrad L. Mallett, Jr.
/s/ Wallace D. Riley Director
- -------------------------------------
Wallace D. Riley
/s/ Gregory C. Smith Director
- -------------------------------------
Gregory C. Smith
/s/ Richard G. Somerlott Director
- -------------------------------------
Richard G. Somerlott
/s/ Brahmal Vasudevan Director
- -------------------------------------
Brahmal Vasudevan
/s/ Ronald T. Wong Director
- -------------------------------------
Ronald T. Wong
68
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- ---------- ---------- ---------- ---------
(In thousands)
2004
Allowance for doubtful accounts .......... $ 637 $ 220 $ 55 $ 912
Valuation allowance for deferred taxes ... $ 668 $ 97 $ -- $ 765
2003
Allowance for doubtful accounts .......... $ 181 $ 492 $ (36) $ 637
Valuation allowance for deferred taxes ... $ -- $ 668 $ -- $ 668
2002
Allowance for doubtful accounts .......... $ 253 $ (22) $ (50) $ 181
69
INDEX OF EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------- -------
2.2 Share Purchase Agreement, dated May 13, 2004, in respect of the Shares
in Advance Network Engineering NV, between Peter De Gendt, Werner
Meynaerts, Pascal Claessens, Wim De Geetere, and Christophe Gesqueire,
as Sellers, and TechTeam Global NV as Purchaser (excluding Exhibits and
Schedules thereto)
10.4 Third Amendment to Lease between the Company and Dearborn Tech, L.L.C
(owner of interest of Dearborn Atrium Associates Limited Partnership)
dated November 30, 2004.
10.8 Office Building Lease for office space in Bethesda, Maryland by and
between Sytel, Inc. and Elizabethean Court Associates III L.P. dated
September 27, 1995
10.9 First Amendment to Lease by and between Sytel, Inc. and Elizabethean
Court Associates III L.P. dated March 7, 1996
10.10 Lease Extension Agreement by and between Sytel, Inc. and Elizabethean
Court Associates III L.P. dated April 11, 2001
10.11 Office Lease Agreement for office space in Herndon, Virginia by and
between APA Properties No. 1, L.P. and Sytel, Inc. dated February
18,1999
10.12 First Amendment to Office Lease Agreement by and between APA Properties
No. 1, L.P. and Sytel, Inc. dated April 16, 1999
10.13 Lease Agreement for office space in Bucharest, Romania between S.C.
Italian-Romanian Industrial Development Enterprises - IRIDE SA and
TechTeam Global SRL dated February 2, 2005
10.16 2004 Incentive Stock and Awards Plan
14.1 TechTeam Global, Inc. Code of Business Conduct.
21 List of subsidiaries to TechTeam Global, Inc.
23.1 Consent of Independent Registered Public Accounting Firm.
31.1 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.3 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.3 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
70