SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission file number 0-16284
TECHTEAM GLOBAL, INC.
---------------------
(Name of issuer in its charter)
DELAWARE 38-2774613
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
27335 W. 11 Mile Road, Southfield, MI 48034
-------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 357-2866
Registrant's Internet address: www.techteam.com
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer.
Yes [ ] No [X]
The number of shares of the registrant's common stock outstanding at October 29,
2004 was 8,710,437.
1
TECHTEAM GLOBAL, INC.
FORM 10-Q
INDEX
PAGE
NUMBER
------
PART I -- FINANCIAL INFORMATION
ITEM 1
Condensed Consolidated Statements of Operations -- Three and Nine Months Ended
September 30, 2004 and 2003 3
Condensed Consolidated Statements of Financial Position -- As of September 30, 2004
and December 31, 2003 4 - 5
Condensed Consolidated Statements of Cash Flows -- Nine Months Ended September 30, 2004 and 2003 6
Notes to the Condensed Consolidated Financial Statements 7 - 14
ITEM 2
Management's Discussion and Analysis of Financial Condition and Results of Operations 15 - 23
ITEM 3
Quantitative and Qualitative Disclosures About Market Risk 24
ITEM 4
Controls and Procedures 24
PART II -- OTHER INFORMATION
ITEM 1
Legal Proceedings 25
ITEM 2
Unregistered Sales of Equity Securities and Use of Proceeds 25
ITEM 6
Exhibits 25
SIGNATURES 26
EXHIBITS
2
PART 1 -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
REVENUE
Corporate services
Corporate help desk services ................... $ 19,274 $ 17,211 $ 57,289 $ 49,677
Professional services/systems integration ...... 12,837 2,242 31,176 6,524
Technical staffing ............................. 1,781 2,233 5,767 7,011
Training programs .............................. 133 213 440 674
-------- -------- -------- --------
Total corporate services ............................ 34,025 21,899 94,672 63,886
Leasing operations .................................. 94 409 397 2,101
-------- -------- -------- --------
TOTAL REVENUE ............................................. 34,119 22,308 95,069 65,987
COST OF SERVICES DELIVERED
Cost of corporate services .......................... 26,134 17,305 71,635 50,225
Cost of leasing operations .......................... 60 752 304 3,793
-------- -------- -------- --------
TOTAL COST OF SERVICES DELIVERED .......................... 26,194 18,057 71,939 54,018
-------- -------- -------- --------
GROSS PROFIT .............................................. 7,925 4,251 23,130 11,969
Selling, general, and administrative expense .............. 5,781 4,703 17,986 14,630
-------- -------- -------- --------
OPERATING INCOME (LOSS) ................................... 2,144 (452) 5,144 (2,661)
-------- -------- -------- --------
OTHER INCOME (EXPENSE)
Interest income, net ................................ 175 388 464 875
Foreign currency transaction gain (loss) ............ (50) 86 (268) 449
-------- -------- -------- --------
TOTAL OTHER INCOME ........................................ 125 474 196 1,324
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES ......................... 2,269 22 5,340 (1,337)
Income tax provision ...................................... 751 453 2,122 459
-------- -------- -------- --------
NET INCOME (LOSS) ......................................... $ 1,518 $ (431) $ 3,218 $ (1,796)
======== ======== ======== ========
BASIC EARNINGS (LOSS) PER SHARE ........................... $ 0.18 $ (0.04) $ 0.37 $ (0.18)
======== ======== ======== ========
DILUTED EARNINGS (LOSS) PER SHARE ......................... $ 0.16 $ (0.04) $ 0.34 $ (0.18)
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND COMMON SHARE EQUIVALENTS OUTSTANDING
Basic ............................................... 8,636 9,723 8,640 9,975
Net effect of dilutive stock options ................ 268 -- 224 --
Effect of redeemable convertible preferred stock .... 690 -- 690 --
-------- -------- -------- --------
Diluted ............................................. 9,594 9,723 9,554 9,975
======== ======== ======== ========
See accompanying notes.
3
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands)
SEPTEMBER 30, DECEMBER 31,
ASSETS 2004 2003
------ ------------- ------------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents ........................................... $40,103 $35,195
Accounts receivable -- corporate services (less allowances of
$705 at September 30, 2004 and $637 at December 31, 2003) ...... 24,527 22,434
Accounts receivable -- leasing (less allowances of $738 at
September 30, 2004 and $740 at December 31, 2003) .............. 116 713
Prepaid expenses and other .......................................... 2,296 1,696
Deferred income taxes ............................................... 76 562
------- -------
TOTAL CURRENT ASSETS ................................................ 67,118 60,600
PROPERTY, EQUIPMENT, AND PURCHASED SOFTWARE
Computer equipment and office furniture ............................. 21,819 20,610
Purchased software .................................................. 11,291 11,093
Leasehold improvements .............................................. 4,580 4,522
Transportation equipment ............................................ 316 269
------- -------
38,006 36,494
Less -- Accumulated depreciation and amortization ................... 29,732 26,590
------- -------
NET PROPERTY, EQUIPMENT, AND PURCHASED SOFTWARE ..................... 8,274 9,904
OTHER ASSETS
Intangible assets, net .............................................. 3,750 3,634
Goodwill ............................................................ 2,743 2,099
Deferred income taxes ............................................... 75 862
Other ............................................................... 290 601
------- -------
TOTAL OTHER ASSETS .................................................. 6,858 7,196
------- -------
TOTAL ASSETS .............................................................. $82,250 $77,700
======= =======
See accompanying notes.
4
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (continued)
(In thousands, except share and per share amounts)
SEPTEMBER 30, DECEMBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2004 2003
------------------------------------ ------------ ------------
(Unaudited)
CURRENT LIABILITIES
Notes payable .................................................................. $ 91 $ 906
Accounts payable ............................................................... 3,008 2,785
Accrued payroll, related taxes, and withholdings ............................... 7,280 4,692
Accrued expenses ............................................................... 1,303 1,471
Accrued income taxes ........................................................... 822 922
Deferred revenue ............................................................... 1,600 746
------- -------
TOTAL CURRENT LIABILITIES ...................................................... 14,104 11,522
LONG-TERM LIABILITIES ................................................................ 332 408
REDEEMABLE CONVERTIBLE PREFERRED STOCK, 5,000,000 shares authorized, 689,656
shares issued and outstanding; liquidation preference of
$5,000 at September 30, 2004 and December 31, 2003 ............................. 5,000 5,000
SHAREHOLDERS' EQUITY
Common stock, par value $0.01, 45,000,000 shares authorized, 8,710,437 and
8,817,265 shares issued and outstanding at
September 30, 2004 and December 31, 2003, respectively .................... 87 88
Additional paid-in capital ..................................................... 58,587 59,932
Retained earnings .............................................................. 3,286 68
Accumulated other comprehensive income -- cumulative foreign
currency translation adjustment ........................................... 854 682
------- -------
TOTAL SHAREHOLDERS' EQUITY ..................................................... 62,814 60,770
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........................................... $82,250 $77,700
======= =======
See accompanying notes.
5
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2004 2003
-------- --------
OPERATING ACTIVITIES
Net income (loss) ................................................... $ 3,218 $ (1,796)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ............................. 3,348 4,576
Non-cash expense related to stock options and common
stock issued to 401(k) plan and directors ........... 305 105
Other ..................................................... 131 3,421
Changes in current assets and liabilities ................. 2,496 (2,077)
Changes in long-term assets and liabilities ............... 147 246
-------- --------
Net cash provided by operating activities ...................... 9,645 4,475
INVESTING ACTIVITIES
Purchase of property, equipment and software ........................ (1,252) (3,840)
Cash paid for acquisitions, net of cash acquired .................... (1,036) --
Sale of marketable securities available for sale .................... -- 6,492
Proceeds from disposal of property and equipment .................... -- 15
-------- --------
Net cash provided by (used in) investing activities ............ (2,288) 2,667
FINANCING ACTIVITIES
Purchase of Company common stock .................................... (2,744) (6,750)
Payments on long-term borrowings .................................... (1,045) (323)
Proceeds from issuance of common stock .............................. 1,093 461
Proceeds from issuance of preferred stock ........................... -- 4,817
-------- --------
Net cash used in financing activities .......................... (2,696) (1,795)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS .............. 247 336
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS ..................................... 4,908 5,683
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .......................... 35,195 39,435
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................ $ 40,103 $ 45,118
======== ========
See accompanying notes.
6
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared by TechTeam Global, Inc. ("TechTeam" or the "Company" or "we") in
accordance with accounting principles generally accepted in the United States
for interim financial information and the instructions to Form 10-Q and Article
10 of Regulation S-X of the Securities and Exchange Commission Rules and
Regulations. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included, and
such adjustments are of a normal recurring nature. Operating results for the
three and nine months ended September 30, 2004 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2004. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2003.
Certain reclassifications have been made to the 2003 financial statements in
order to conform to the 2004 financial statement presentation.
NOTE 2 -- EARNINGS PER SHARE
Earnings (loss) per share is computed using the weighted average number of
common shares and common share equivalents outstanding. Common share equivalents
consist of stock options and convertible preferred stock.
During the nine months ended September 30, 2004 and 2003, 508,900 and 721,077
stock options, respectively, were excluded from the computation of diluted
earnings per share because the options' exercise prices were higher than the
average market price of the common shares during the respective period. During
the nine months ended September 30, 2003, an additional 496,504 stock options
and 689,656 outstanding shares of convertible preferred stock were excluded
from the computation of diluted earnings per share due to the net loss for the
period.
NOTE 3 -- COMPREHENSIVE INCOME
Comprehensive income (loss) consists of net income (loss) and foreign currency
translation adjustments. A summary of comprehensive income is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2004 2003 2004 2003
------- ------- ------- -------
(In thousands)
COMPREHENSIVE INCOME (LOSS)
Net income (loss) ............................... $ 1,518 $ (431) $ 3,218 $(1,796)
Other comprehensive income (loss)--
Foreign currency translation adjustment ... 299 (28) 172 335
------- ------- ------- -------
Comprehensive income (loss) ..................... $ 1,817 $ (459) $ 3,390 $(1,461)
======= ======= ======= =======
7
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 4 -- INCOME TAXES
The consolidated effective tax rate in 2004 and 2003 differs from the statutory
tax rate of 34% primarily due to providing a valuation allowance against the
future tax benefit of operating loss carryforwards in certain foreign tax
jurisdictions.
NOTE 5 -- STOCK-BASED COMPENSATION
We account for stock-based compensation awards granted to employees using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations. The effect on net income and earnings per share had
compensation costs been recognized based on the fair value method prescribed by
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2004 2003 2004 2003
--------- --------- --------- ---------
(In thousands)
Reported net income (loss) ............................. $ 1,518 $ (431) $ 3,218 $ (1,796)
Add -- total stock-based compensation expense
included in reported net income, net of tax ...... -- 3 -- 8
Deduct -- total stock-based compensation expense
determined under the fair value method for all
awards, net of tax ............................... (699) (72) (974) (467)
--------- --------- --------- ---------
Pro forma net income (loss) ............................ $ 819 $ (500) $ 2,244 $ (2,255)
========= ========= ========= =========
Basic earnings (loss) per share:
As reported ...................................... $ 0.18 $ (0.04) $ 0.37 $ (0.18)
Pro forma ........................................ $ 0.09 $ (0.05) $ 0.26 $ (0.23)
Diluted earnings (loss) per share:
As reported ...................................... $ 0.16 $ (0.04) $ 0.34 $ (0.18)
Pro forma ........................................ $ 0.09 $ (0.05) $ 0.23 $ (0.23)
The Financial Accounting Standards Board has issued an Exposure Draft,
"Share-Based Payment - an Amendment of FASB Statements No. 123 and 95," and is
expected to issue a final Statement by December 31, 2004. The proposed Statement
would eliminate the ability to account for share-based compensation transactions
using APB 25, and generally would require instead that such transactions be
accounted for using a fair-value-based method. This Statement is expected to be
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 this Statement in recognizing compensation cost for any portion of awards
granted or modified after December 15, 1994, that are not yet vested at the date
this Statement is adopted. Based on the number of non-vested stock options the
Company has outstanding at September 30, 2004, adoption of this Statement will
not have a material affect on our financial position or operating results.
8
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 6 -- LINE OF CREDIT
In August 2004, we entered into a revolving line-of-credit agreement with
Standard Federal Bank, N.A. whereby the Company may borrow up to $5 million.
Outstanding borrowings bear interest at 0.5% and are collateralized by a
compensating balance cash deposit required to be held at the bank equal to the
amount of any outstanding borrowings. The Company has not borrowed any amounts
under this agreement at September 30, 2004. The agreement expires on September
7, 2006.
NOTE 7 -- SEGMENT REPORTING
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or decision-making group, in deciding how to
allocate resources and in assessing performance. Our chief operating
decision-making group is the Senior Management Committee, which is comprised of
the President and the lead executives of each of our functional divisions. The
operating segments are managed separately because each operating segment
represents a strategic business unit that offers different services.
Our reportable operating segments include corporate help desk services,
professional services/systems integration (formerly referred to as "systems
integration"), technical staffing, and training programs (collectively referred
to as "corporate services") and leasing operations.
CORPORATE HELP DESK SERVICES -- this segment provides corporations and
governments with around-the-clock (24x7x365) technical and customer
support for their end-users and other constituencies. We support the
full range of a client's information technology ("IT"), client service,
and business process infrastructure. We also provide technical support
to customers of our clients' products and software.
PROFESSIONAL SERVICES/SYSTEMS INTEGRATION -- this segment provides IT
infrastructure (personal computers, printers, phone systems, networks,
servers, switches, etc.) support through systems integration, technology
deployment, and implementation services from project planning and
maintenance to full-scale network server and workstation installations.
We offer a wide range of information technology services for the
customer, ranging from technology consulting to desk-side support to
network monitoring. We also provide full-service IT staff and consulting
services to companies to help manage their IT infrastructure.
TECHNICAL STAFFING -- this segment maintains a staff of trained
technical personnel, which we place at our clients' facilities to
provide technical support services including help desk technicians,
software developers, and network support.
TRAINING PROGRAMS -- this segment provides custom training and
documentation solutions that include computer-based training, distance
learning, course catalogs, registration, instructional design
consultants, customized course materials, certified trainers, evaluation
options, desk-side tutorials, and custom reports. We provide customized
training programs for many of our customers' proprietary applications.
LEASING OPERATIONS -- this segment previously wrote leases for computer,
telecommunications, and other types of capital equipment. Effective
March 31, 2000, we ceased looking for new leasing opportunities and are
currently running out our lease portfolio.
The accounting policies of the operating segments are the same as those
described in Note 1 to the Company's consolidated financial statements contained
in the Company's Annual Report on Form 10-K for the year ended December 31,
2003. We evaluate segment performance based on segment gross profit.
9
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 7 -- SEGMENT REPORTING (continued)
Financial information for our operating segments is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
(In thousands)
REVENUE
Corporate services
Corporate help desk services ................. $ 19,274 $ 17,211 $ 57,289 $ 49,677
Professional services/systems integration .... 12,837 2,242 31,176 6,524
Technical staffing ........................... 1,781 2,233 5,767 7,011
Training programs ............................ 133 213 440 674
-------- -------- -------- --------
Total corporate services ........................... 34,025 21,899 94,672 63,886
Leasing operations ................................. 94 409 397 2,101
-------- -------- -------- --------
Total revenue ...................................... $ 34,119 $ 22,308 $ 95,069 $ 65,987
======== ======== ======== ========
GROSS PROFIT (LOSS)
Corporate services:
Corporate help desk services ................. $ 4,898 $ 3,522 $ 14,939 $ 10,417
Professional services/systems integration .... 2,671 600 6,865 1,678
Technical staffing ........................... 300 436 1,141 1,450
Training programs ............................ 22 36 93 116
-------- -------- -------- --------
Total corporate services ........................... 7,891 4,594 23,038 13,661
Leasing operations ................................. 34 (343) 92 (1,692)
-------- -------- -------- --------
Total gross profit ................................. 7,925 4,251 23,130 11,969
Selling, general, and administrative expense ....... (5,781) (4,703) (17,986) (14,630)
Interest income, net ............................... 175 388 464 875
Foreign currency transaction gain (loss) ........... (50) 86 (268) 449
-------- -------- -------- --------
Income (loss) before income taxes .................. $ 2,269 $ 22 $ 5,340 $ (1,337)
======== ======== ======== ========
We attribute revenue to different geographic areas on the basis of the location
providing the services to the customer. Revenue by geographic area is presented
below:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
2004 2003 2004 2003
------- ------- ------- -------
(In thousands)
REVENUE
United States .......... $23,297 $14,993 $66,080 $46,537
Europe:
Belgium .......... 7,663 4,574 18,631 11,965
United Kingdom ... 1,272 1,326 4,263 3,949
Other ............ 1,887 1,415 6,095 3,536
------- ------- ------- -------
Total Europe ........... 10,822 7,315 28,989 19,450
------- ------- ------- -------
Total revenue .......... $34,119 $22,308 $95,069 $65,987
======= ======= ======= =======
10
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 7 -- SEGMENT REPORTING (continued)
We provide corporate services for major companies on an international scale.
Revenue from customers that comprise 10% or greater of our total revenue in any
period presented are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
2004 2003 2004 2003
---- ---- ---- ----
Ford Motor Company .................... 33.8% 46.6% 37.9% 49.6%
United States Department of Defense ... 9.7% -- 10.5% --
DaimlerChrysler ....................... 7.4% 13.0% 8.6% 14.1%
---- ---- ---- ----
Total ................................. 50.9% 59.6% 57.0% 63.7%
==== ==== ==== ====
NOTE 8 -- CONTINGENCIES
DIGITAL SUPPORT CORPORATION:
TechTeam acquired 100% of the outstanding capital stock of Digital Support
Corporation ("DSC") on December 31, 2003. DSC provides services to various
departments within the United States Department of Defense ("DoD"). A Facility
Security Clearance ("FSC") is required as a condition for DSC to perform its
services for the DoD. As the acquiring entity, TechTeam also needs to obtain an
FSC or negate any foreign ownership, control, or influence that could impair our
ability to obtain an FSC. We have applied for an FSC, but as of the date of the
filing of this document, we have not received a response from the DoD. It is
reasonably possible that we will not be deemed eligible for an FSC due to the
beneficial ownership of over 5% of our capital stock by ChrysCapital II, LLC, a
Mauritius entity ("ChrysCapital"), and ChrysCapital's right to appoint a member
of our Board of Directors. We have applied to the DoD for a Security Control
Agreement ("SCA") between DSC and the DoD in order to negate the foreign
interest. The SCA, if approved, would negate the impact of the foreign interest
without affecting TechTeam's ability to integrate DSC into the TechTeam group of
companies.
LEGAL PROCEEDINGS:
The Company is a party to various legal proceedings that are routine and
incidental to its business. Although the consequences of these proceedings are
not presently determinable, in the opinion of management, they will not have a
material adverse affect on our liquidity, financial condition, or results of
operations, although no assurances can be given in this regard.
NOTE 9 -- ACQUISITIONS
ADVANCED NETWORK ENGINEERING:
On May 13, 2004, TechTeam Global NV/SA, the Company's wholly-owned subsidiary in
Belgium, completed the acquisition of all of the outstanding stock of Advanced
Network Engineering NV/SA (formerly Advanced Network Engineering CVBA)
("A.N.E.") for (euro)885,000 plus acquisition costs of (euro)143,000 for an
initial purchase price of (euro)1.03 million ($1.22 million at May 13, 2004). Of
the initial purchase price, (euro)750,000 was paid at closing, (euro)178,000
will be paid in 2004, and (euro)100,000 will be paid on May 13, 2005, provided
there are no claims asserted by us based upon the representations and warranties
of the sellers in the Share Purchase Agreement. In addition to the initial
purchase price, an additional (euro)150,000 is payable on May 13, 2007 provided
a cumulative operating income target is met for the three-year period ending
April 30, 2007. The additional consideration paid to selling shareholders will
be recorded as additional goodwill when it is earned.
11
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 9 -- ACQUISITIONS (continued)
A.N.E. is an information technology services and solutions company headquartered
in Gent, Belgium, that provides software application, network, and systems
integration services to various global, pan-European, and Belgian customers. The
acquisition of A.N.E. will complement our subsidiary in Belgium, which primarily
provides corporate help desk services. The acquisition was accounted for using
the purchase method of accounting and, accordingly, the operating results of
A.N.E. are included in the consolidated operating results of TechTeam since the
acquisition date. Goodwill and other intangible assets acquired totaled
(euro)810,000 ($961,000 at May 13, 2004). Of this amount, other intangible
assets totaled (euro)378,000 ($449,000 at May 13, 2004) and consist of customer
relationship assets, which are being amortized on a straight-line basis over
their estimated useful life of six years. A.N.E. has been assigned to our
professional services/systems integration operating segment. Subsequent to the
acquisition, A.N.E.'s name has been changed to TechTeam A.N.E. NV/SA.
The following table summarizes the allocation of the initial purchase price at
May 13, 2004:
AMOUNT
--------------
(In thousands)
Customer relationship assets ........................ $ 449
Goodwill ............................................ 512
Property, equipment and software .................... 72
Other current and non-current assets, net of cash
acquired of $128 .............................. 1,367
Accounts payable and accrued liabilities assumed .... (1,117)
Accrued purchase price .............................. (261)
Notes payable assumed ............................... (191)
-------
Net cash used ....................................... $ 831
=======
The unaudited pro forma condensed consolidated results of operations for the
nine months ended September 30, 2004, and the three and nine months ended
September 30, and 2003 are presented below as though A.N.E. had been acquired on
January 1, 2003.
THREE MONTHS NINE MONTHS ENDED
ENDED SEPTEMBER 30,
SEPTEMBER 30, -------------------
2003 2004 2003
------------- -------- --------
(In thousands)
Revenue
As reported .................. $ 22,308 $ 95,069 $ 65,987
Pro forma .................... $ 23,615 $ 97,593 $ 69,659
Net income (loss)
As reported .................. $ (431) $ 3,218 $ (1,796)
Pro forma .................... $ (506) $ 3,205 $ (1,879)
Diluted earnings (loss) per share
As reported .................. $ (0.04) $ 0.34 $ (0.18)
Pro forma .................... $ (0.05) $ 0.34 $ (0.19)
12
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 9 -- ACQUISITIONS (continued)
DIGITAL SUPPORT CORPORATION:
TechTeam acquired 100% of the outstanding capital stock of DSC on December 31,
2003. The unaudited pro forma condensed consolidated results of operations for
the three and nine months ended September 30, 2003 are presented below as though
DSC had been acquired on January 1, 2003.
THREE NINE
MONTHS MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2003
------------- -------------
(In thousands)
Revenue
As reported .... $ 22,308 $ 65,987
Pro forma ...... $ 27,386 $ 80,160
Net loss
As reported .... $ (431) $ (1,796)
Pro forma ...... $ (188) $ (1,284)
Diluted loss per share
As reported .... $ (0.04) $ (0.18)
Pro forma ...... $ (0.02) $ (0.13)
The unaudited pro forma condensed consolidated results of operations for the
three and nine months ended September 30, 2003 are presented below as though
both DSC and A.N.E. had been acquired on January 1, 2003.
THREE NINE
MONTHS MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2003
------------- -------------
(In thousands)
Revenue
As reported .... $ 22,308 $ 65,987
Pro forma ...... $ 28,693 $ 83,832
Net loss
As reported .... $ (431) $ (1,796)
Pro forma ...... $ (263) $ (1,367)
Diluted loss per share
As reported .... $ (0.04) $ (0.18)
Pro forma ...... $ (0.03) $ (0.14)
13
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 10 -- GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill by operating segment consist of the
following:
PROFESSIONAL
CORPORATE SERVICES/
HELP DESK SYSTEMS
SERVICES INTEGRATION TOTAL
--------- ------------ ------
(In thousands)
Balance as of January 1, 2004 ................... $ 371 $1,728 $2,099
Goodwill acquired from A.N.E. and DSC ..... -- 624 624
Foreign currency translation adjustment ... -- 20 20
------ ------ ------
Balance as of September 30, 2004 ................ $ 371 $2,372 $2,743
====== ====== ======
Other intangible assets consist of the following:
SEPTEMBER 30, 2004 DECEMBER 31, 2003
--------------------- ----------------------------------
ACCUMULATED ACCUMULATED AMORTIZATION
COST AMORTIZATION COST AMORTIZATION PERIOD
------ ------------ ------ ------------ ------------
(In thousands)
Customer relationships -- DSC ........ $3,367 $ 253 $3,367 $ -- 10 years
Customer relationships -- Cyntergy ... 701 502 701 434 5 years
Customer relationships -- A.N.E. ..... 466 29 -- -- 6 years
------ ------ ------ ------
$4,534 $ 784 $4,068 $ 434
====== ====== ====== ======
We evaluate definite-lived intangible assets based on undiscounted operating
cash flows whenever significant events or changes occur that might indicate
impairment of recorded costs. If undiscounted cash flows are insufficient to
recover recorded costs, we write down the carrying value of the assets to fair
value based on discounted cash flows or market values. We did not record an
impairment loss for definite-lived intangible assets in any period presented.
On September 30, 2004 and 2003, we conducted our annual impairment test of
goodwill and concluded that no component of goodwill was impaired at either
balance sheet date. In conducting the test, we 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 estimated fair values of the reporting units
exceeded their carrying values.
Our expected amortization expense for definite-lived intangible assets is as
follows: $123,000 for the remainder of 2004, $499,000 for 2005, $499,000 for
2006, $411,000 for 2007, and $411,000 for 2008.
14
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Item 2, contains
forward-looking statements that involve risks and uncertainties, as well as
assumptions that, if they never materialize or prove incorrect, could cause the
results of TechTeam Global, Inc. and its consolidated subsidiaries ("TechTeam")
to differ materially from those expressed or implied by such forward-looking
statements. All statements other than statements of historical fact are
statements that could be deemed forward-looking statements, including any
projections of revenue, gross margin, expenses, earnings or losses from
operations, synergies, or other financial items; any statements of the plans,
strategies, and objectives of management for future operations; any statement
concerning developments or performance relating to our services; any statements
regarding future economic conditions or performance; any statements of
expectation or belief; and any statements of assumptions underlying any of the
foregoing. The risks, uncertainties and assumptions referred to above include
the performance of contracts by suppliers, customers, and partners; employee
management issues; the difficulty of aligning expense levels with revenue
changes; complexities of global political and economic developments; and other
risks that are described herein, including but not limited to the items
discussed in "Factors that Could Affect Future Results" set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 2 of this report, and that are otherwise described from time
to time in TechTeam's Securities and Exchange Commission reports filed after
this report. TechTeam assumes no obligation and does not intend to update these
forward-looking statements.
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We are an information technology ("IT") and business process outsourcing support
services provider, offering our customers with assistance in designing,
implementing, managing, and maintaining their IT infrastructure and computer
systems through our provision of corporate help desk services,
professional/systems integration services (formerly referred to as "systems
integration"), technical staffing, and training programs. Thus far in 2004, we
have significantly improved our operating performance over 2003 by pursuing four
strategic initiatives: (1) grow our overall business through strategic and
accretive acquisitions both domestically and internationally, (2) expand our
footprint in the IT professional services sector, 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 corporate
help desk services operating segment, through various performance improvement
and cost saving initiatives, and (4) continue our growth in Europe and establish
multilingual call center operations in Romania to realize operational
efficiencies and cost savings from offering our customers a blended solution
with our multilingual call center operations in Belgium.
Our progress with the first two strategic initiatives is demonstrated by our
acquisition of two companies in our professional services/systems integration
operating segment -- 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. 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.
Together A.N.E. and DSC contributed revenue and gross profit of $23.8 million
and $5.01 million, respectively, to our operating results for the nine months
ended September 30, 2004, which resulted in an increase in professional
services/systems integration revenue of 378% to $31.2 million and increase in
gross profit of 309% to $6.87 million, over the comparable period in 2003.
15
Our 2004 results to date reflect progress toward our third strategic initiative
of realizing operating efficiencies and cost savings from initiatives
implemented in 2003 and 2004. These efficiencies and cost savings primarily
relate to our corporate help desk services operating segment and include, but
are not limited to, 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
corporate help desk services increased 43.4% to $14.9 million for the nine
months ended September 30, 2004, from $10.4 million for the comparable period in
2003. Gross margin (gross profit as a percentage of revenue) from corporate help
desk services increased to 26.1% for the nine months ended September 30, 2004,
from 21.0% for the comparable period in 2003. The increase in gross profit and
gross margin was primarily due to increased business with new customers in
Europe and realization of the aforementioned operational efficiencies and cost
savings on a global basis. Gross margin from corporate help desk services in the
United States increased to 25.4% for the nine months ended September 30, 2004,
from 23.2% for the comparable period in 2003. Gross margin from corporate help
desk services in Europe increased to 26.9% for the nine months ended September
30, 2004, from 17.2% for the comparable period in 2003.
Lastly, our progress toward meeting our fourth strategic initiative is
demonstrated by revenue generated in Europe increasing 49.0% to $29.0 million
for the nine months ended September 30, 2004, from $19.5 million for the
comparable period in 2003, and by successfully establishing call center
operations in Bucharest, Romania with the delivery of customer support services
beginning in April 2004. And as noted, we significantly improved gross margin
performance in Europe. Excluding revenue contributed by A.N.E., revenue
generated in Europe increased 37.7% to $26.8 million for the nine months ended
September 30, 2004, from the comparable period 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 for the
nine months ended September 30, 2004 were translated at the average exchange
rate for the comparable period in 2003, reported revenue would have been reduced
by approximately $2.59 million for the nine months ended September 30, 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.
While making solid progress toward our strategic initiatives, we recently
reported that DaimlerChrysler, AG ("DaimlerChrysler"), following a formal
request for proposal and bid process, has decided to transition the majority of
its North American Dealership Help Desk to a new vendor by January 31, 2005.
DaimlerChrysler remains a very valued customer. We will continue to provide
DaimlerChrysler with Dealership Help Desk services for DaimlerChrysler's
European dealers, technical staffing, and desktop training services. We also
reported that Liberty Mutual Insurance Company ("Liberty Mutual") has extended
the Company's contract for help desk services from August 31, 2004 through June
30, 2005. Liberty Mutual also informed us of its decision not to renew the help
desk services contract beyond June 30, 2005 as a result of a strategic business
decision to provide these services with internal resources to Liberty Mutual,
and that their decision was not influenced by the quality of services rendered
or the price charged by the Company.
We expect the effect of the transition in business with DaimlerChrysler to
result in a reduction in revenue of approximately $3.7 million in 2005, as
compared to 2004. The volume of work activity for the North American Dealership
Help Desk has been trending downward over the past twelve months as it is an
established and stable help desk. We expect the loss in revenue from the
Liberty Mutual contract to be less than $1.5 million for 2005, all in the last
five months of the year.
Furthermore, we also recently announced that we have been awarded business with
new customers worth approximately $6.8 million in annual revenue, which we will
begin to realize before the end of this year.
16
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO SEPTEMBER 30, 2003
THREE MONTHS ENDED
SEPTEMBER 30,
------------------- INCREASE %
2004 2003 (DECREASE) CHANGE
-------- -------- ---------- -------
(In thousands)
REVENUE
Corporate services:
Corporate help desk services ................. $ 19,274 $ 17,211 $ 2,063 12.0%
Professional services/systems integration..... 12,837 2,242 10,595 472.6%
Technical staffing ........................... 1,781 2,233 (452) (20.2)%
Training programs ............................ 133 213 (80) (37.6)%
-------- -------- --------
Total corporate services ........................ 34,025 21,899 12,126 55.4%
Leasing operations .............................. 94 409 (315) (77.0)%
-------- -------- --------
Total revenue ................................... $ 34,119 22,308 $ 11,811 52.9%
======== ======== ========
Revenue from corporate help desk services increased 12.0% to $19.3 million for
the three months ended September 30, 2004, from $17.2 million for the comparable
period in 2003, primarily due to additional business from new customers in
Belgium and the strengthening of the euro, British pound sterling, and Swedish
kroner relative to the U.S. dollar, partially offset by a contractual price
reduction granted to Ford Motor Company ("Ford") effective August 1, 2004.
Revenue from professional services/systems integration increased 473% to $12.8
million for the three months ended September 30, 2004, from $2.24 million for
the comparable period in 2003, due to our acquisitions of DSC and A.N.E. and
additional business from existing customers. Excluding revenue contributed by
DSC and A.N.E., professional services/systems integration revenue increased
13.5% to $2.54 million for the three months ended September 30, 2004, from the
comparable period in 2003. Revenue from technical staffing services decreased
20.2% to $1.78 million for the three months ended September 30, 2004, from $2.23
million for the comparable period in 2003, primarily due to staffing reductions
in the United States, which were only partially offset by additional business
received in Europe.
Revenue from leasing operations decreased 77.0% to $94,000 for the three months
ended September 30, 2004, from $409,000 for the comparable period in 2003. The
decline in leasing operations revenue was the result of our decision in March
2000 to discontinue actively seeking new leasing business and to commence the
wind down of our lease portfolio. The trend of declining revenue from our
leasing operations will continue.
Revenue generated in the United States increased 55.4% to $23.3 million for the
three months ended September 30, 2004, from $15.0 million for the comparable
period in 2003, due to our acquisition of DSC. Excluding revenue contributed by
DSC and our leasing operations, revenue generated in the United States decreased
0.8% to $14.5 million for the three months ended September 30, 2004, from the
comparable period in 2003, primarily due additional business from new and
existing customers, offset by a contractual price reduction to Ford effective
August 1, 2004, and reduced volumes from established and stable help desks such
as DaimlerChrysler.
Revenue generated in Europe increased 47.9% to $10.8 million for the three
months ended September 30, 2004, from $7.32 million for the comparable period in
2003, primarily due to growth in business at our Belgian and Swedish
subsidiaries, our acquisition of A.N.E., and the strengthening of European
currencies relative to the U.S. dollar, partially offset by a contractual price
reduction to Ford effective August 1, 2004. Excluding revenue contributed by
A.N.E., revenue generated in Europe increased 26.6% to $9.26 million for the
three months ended September 30, 2004, from the comparable period in 2003. If
revenue in Europe for the three months ended September 30, 2004 were translated
at the average exchange rate for the comparable period in 2003, reported revenue
would have been reduced by approximately $834,000 for the three months ended
September 30, 2004. Within Europe, revenue from our Belgian operation increased
67.5% to $7.66 million for the three months ended September 30, 2004, from $4.57
million for the comparable period 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.
17
Excluding revenue contributed by A.N.E., revenue generated in Belgium increased
33.4% to $6.10 million for the three months ended September 30, 2004, from the
comparable period in 2003. If revenue in Belgium for three months ended
September 30, 2004 were translated at the average exchange rate for the
comparable period in 2003, reported revenue would have been reduced by
approximately $487,000 for the three months ended September 30, 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.
Under our contract with Ford for its global help desk, we provide corporate help
desk services on a fixed-price-per-seat, or "managed service," basis. Under the
contract, we were required to reduce the price of our services on a per-seat
basis effective August 1, 2004. The contract also provides for an adjustment to
the number of seats that we are compensated for supporting at Ford, adjusted up
or down and applied prospectively, effective August 1, 2004. We estimate that
the combination of these two events resulted in a decrease in consolidated
monthly revenue of approximately $225,000 - $250,000 since August 1, 2004. We
expect to offset the majority of the reduction in revenue with continued growth
in the Ford Global Help Desk. Revenue from the Ford Global Help Desk for the
nine months ended September 30, 2004 is approximately $1.2 million greater than
revenue for the comparable period in 2003.
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
2004 2003
------------------- --------------------
GROSS GROSS INCREASE %
AMOUNT MARGIN % AMOUNT MARGIN % (DECREASE) CHANGE
------- -------- ------- -------- --------- ------
(In thousands, except percentages)
GROSS PROFIT (LOSS)
Corporate services:
Corporate help desk services ... $ 4,898 25.4% $ 3,522 20.5% $ 1,376 39.1%
Professional services/
systems integration ....... 2,671 20.8% 600 26.8% 2,071 345.2%
Technical staffing ............. 300 16.8% 436 19.5% (136) (31.2)%
Training programs .............. 22 16.5% 36 16.9% (14) (38.9)%
------- ------- -------
Total corporate services ............. 7,891 23.2% 4,594 21.0% 3,297 71.8%
Leasing operations ................... 34 36.2% (343) (83.9)% 377 (109.9)%
------- ------- -------
Total gross profit ................... $ 7,925 23.2% $ 4,251 19.1% $ 3,674 86.4%
======= ======= =======
Gross profit from corporate help desk services increased 39.1% to $4.90 million
for the three months ended September 30, 2004, from $3.52 million for the
comparable period in 2003. Gross margin from corporate help desk services
increased to 25.4% for the three months ended September 30, 2004, from 20.5% for
the comparable period in 2003. The increase in gross profit dollars and gross
margin was primarily due to realization of the aforementioned operational
efficiencies from re-aligning our cost structure, expanding our help desk
capabilities in Europe, and increased business with new and existing customers.
These improvements were partially offset by the impact of reductions in revenue
under our Ford contract, as discussed earlier in this section. We estimate that
the combination of a reduced price per seat and reduced number of seats being
supported on our Ford contract reduced our gross margin on corporate help desk
services by 50 - 100 basis points and our overall gross margin on corporate
services by 30 - 60 basis points for the three months ended September 30, 2004.
We expect to offset a portion of the reduction in gross profit through
additional business from Ford and our management of costs; however, we can give
no assurances in this regard.
Gross profit from professional services/systems integration increased 345% to
$2.67 million for the three months ended September 30, 2004, from $600,000 for
the comparable period in 2003. Gross margin from professional services/systems
integration decreased to 20.8% for the three months ended September 30, 2004,
from 26.8% for the comparable period in 2003. The increase in gross profit
dollars and decrease in gross margin was primarily due to our acquisitions of
DSC and A.N.E., and more specifically, lower margin hardware sales. Excluding
the gross profit contributed by DSC and A.N.E., gross profit decreased 3.2% to
$581,000 and gross margin decreased to 22.8% for the three months ended
September 30, 2004, from 26.8% for the comparable period in 2003, primarily due
to a temporary delay in the implementation of certain projects by one customer.
These delayed projects are in
18
operation. As noted, gross margin from professional services/systems integration
was negatively affected by hardware sales at DSC and A.N.E. of approximately
$4.26 million for the three months ended September 30, 2004. Excluding these
hardware sales, gross margin from professional services/systems integration was
27.0% for the three months ended September 30, 2004.
Gross profit from technical staffing decreased 31.2% to $300,000 for the three
months ended September 30, 2004, from $436,000 for the comparable period in
2003, which is consistent with the decrease in technical staffing revenue.
THREE MONTHS ENDED
SEPTEMBER 30,
------------------ INCREASE %
2004 2003 (DECREASE) CHANGE
------- ------- ---------- -------
(In thousands)
OPERATING EXPENSES AND OTHER
Selling, general, and administrative expense ... $ 5,781 $ 4,703 $ 1,078 22.9%
Net interest income ............................ $ 175 $ 388 $ (213) (54.9)%
Foreign currency transaction gain (loss) ....... $ (50) $ 86 $ (136) (158.1)%
Income tax provision ........................... $ 751 $ 453 $ 298 65.8%
Selling, general, and administrative expense increased 22.9% to $5.78 million,
or 16.9% of total revenue, for the three months ended September 30, 2004, from
$4.70 million, or 21.1% of total revenue, for the comparable period in 2003,
primarily due to our acquisition of DSC and A.N.E. and expense related to the
Company's incentive compensation plans. Excluding revenue and expenses
contributed by DSC and A.N.E., selling, general, and administrative expense
decreased $26,000 to $4.68 million, or 19.6% of total revenue, for the three
months ended September 30, 2004. Expenses have increased to support revenue
growth and expansion in Romania, but expenses as a percentage of revenue have
decreased due to efforts to control costs in all areas of the Company and
reduced overall depreciation and amortization expense of $196,000 for the three
months ended September 30, 2004, as certain assets have become fully depreciated
or amortized. Under the Company's incentive compensation plans which were
effective January 1, 2004, certain members of management are entitled to bonuses
if specific revenue and operating income targets are met for 2004. Under these
plans, we accrued $336,000 of expense for the three months ended September 30,
2004, of which $269,000 was accrued to selling, general, and administrative
expense and $67,000 was accrued to cost of services delivered.
Net interest income decreased to $175,000 for the three months ended September
30, 2004, from $388,000 for the comparable period in 2003, due to higher average
cash balances maintained in 2003 and interest income received in 2003 related to
a tax refund.
Foreign currency transaction gain (loss) decreased to a loss of $(50,000) for
the three months ended September 30, 2004, from a gain of $86,000 for the
comparable period in 2003, primarily due to the U.S. dollar strengthening since
December 31, 2003 relative to the euro and British pound sterling whereas the
U.S. dollar weakened relative to the euro and pound sterling in the three months
ended September 30, 2003.
The consolidated effective tax rate in 2004 and 2003 differs from the statutory
tax rate of 34% primarily due to recognizing a favorable tax benefit from a
change in estimate regarding the Company's tax liabilities for prior years,
which is partially offset by the unfavorable tax effect of providing a valuation
allowance against the future tax benefit of operating loss carryforwards in
certain foreign tax jurisdictions.
19
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO SEPTEMBER 30, 2003
NINE MONTHS ENDED
SEPTEMBER 30,
------------------- INCREASE %
2004 2003 (DECREASE) CHANGE
-------- -------- -------- ------
(In thousands)
REVENUE
Corporate services:
Corporate help desk services ................. $ 57,289 $ 49,677 $ 7,612 15.3%
Professional services/systems integration..... 31,176 6,524 24,652 377.9%
Technical staffing ........................... 5,767 7,011 (1,244) (17.7)%
Training programs ............................ 440 674 (234) (34.7)%
-------- -------- --------
Total corporate services ........................ 94,672 63,886 30,786 48.2%
Leasing operations .............................. 397 2,101 (1,704) (81.1)%
-------- -------- --------
Total revenue ................................... $ 95,069 $ 65,987 $ 29,082 44.1%
======== ======== ========
Revenue from corporate help desk services increased 15.3% to $57.3 million for
the nine months ended September 30, 2004, from $49.7 million for the comparable
period in 2003, primarily due to additional business from new customers in
Europe and the strengthening of the euro, British pound sterling, and Swedish
kroner relative to the U.S. dollar. Revenue from professional services/systems
integration increased 378% to $31.2 million for the nine months ended September
30, 2004, from $6.52 million for the comparable period in 2003, due to our
acquisitions of DSC and A.N.E. and additional business from existing customers.
Excluding revenue contributed by DSC and A.N.E., professional services/systems
integration revenue increased 13.6% to $7.41 million for the nine months ended
September 30, 2004, from the comparable period in 2003. Revenue from technical
staffing services decreased 17.7% to $5.77 million for the nine months ended
September 30, 2004, from $7.01 million for the comparable period in 2003,
primarily due to staffing reductions in the United States, which were only
partially offset by additional business received in Europe.
Revenue from leasing operations decreased 81.1% to $397,000 for the nine months
ended September 30, 2004, from $2.10 million for the comparable period in 2003.
The decline in leasing operations revenue was the result of our decision in
March 2000 to discontinue actively seeking new leasing business and to commence
the wind down of our lease portfolio. The trend of declining revenue from our
leasing operations will continue.
Revenue generated in the United States increased 42.0% to $66.1 million for the
nine months ended September 30, 2004, from $46.5 million for the comparable
period in 2003, due to our acquisition of DSC. Excluding revenue contributed by
DSC and our leasing operations, revenue generated in the United States decreased
0.7% to $44.1 million for the nine months ended September 30, 2004, from $44.4
million for the comparable period in 2003, primarily due additional business
from new and existing customers, offset by a contractual price reduction to Ford
effective August 1, 2004, and reduced volumes from established and stable help
desks such as DaimlerChrysler, as discussed in the Overview of this section.
Revenue generated in Europe increased 49.0% to $29.0 million for the nine months
ended September 30, 2004, from $19.5 million for the comparable period in 2003,
primarily due to growth in business at our Belgian and Swedish subsidiaries, our
acquisition of A.N.E., and the strengthening of European currencies relative to
the U.S. dollar. Excluding revenue contributed by A.N.E., revenue generated in
Europe increased 37.7% to $26.8 million for the nine months ended September 30,
2004, from the comparable period in 2003. If revenue in Europe for the nine
months ended September 30, 2004 were translated at the average exchange rate for
the comparable period in 2003, reported revenue would have been reduced by
approximately $2.59 million for the nine months ended September 30, 2004. Within
Europe, revenue from our Belgian operation increased 55.7% to $18.6 million for
the nine months ended September 30, 2004, from $12.0 million for the comparable
period in 2003, primarily due to additional business from new and existing
customers, such as our recently-announced contract with Proximus; our
acquisition of A.N.E.; and the strengthening of the euro relative to the U.S.
dollar. Excluding revenue contributed by A.N.E., revenue generated in Belgium
increased 37.2% to $16.4 million for the nine months ended
20
September 30, 2004, from the comparable period in 2003. If revenue in Belgium
for the nine months ended September 30, 2004 were translated at the average
exchange rate for the comparable period in 2003, reported revenue would have
been reduced by approximately $1.53 million for the nine months ended September
30, 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.
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------
2004 2003
---------------------- -----------------------
GROSS GROSS INCREASE %
AMOUNT MARGIN % AMOUNT MARGIN % (DECREASE) CHANGE
-------- -------- -------- -------- -------- ------
(In thousands, except percentages)
GROSS PROFIT (LOSS)
Corporate services:
Corporate help desk services .... $ 14,939 26.1% $ 10,417 21.0% $ 4,522 43.4%
Professional services/
systems integration ........ 6,865 22.0% 1,678 25.7% 5,187 309.1%
Technical staffing .............. 1,141 19.8% 1,450 20.7% (309) (21.3)%
Training programs ............... 93 21.1% 116 17.2% (23) (19.8)%
-------- -------- --------
Total corporate services .............. 23,038 24.3% 13,661 21.4% 9,377 68.6%
Leasing operations .................... 92 23.2% (1,692) (80.5)% 1,784 (105.4)%
-------- -------- --------
Total gross profit .................... $ 23,130 24.3% $ 11,969 18.1% $ 11,161 93.2%
======== ======== ========
Gross profit from corporate help desk services increased 43.4% to $14.9 million
for the nine months ended September 30, 2004, from $10.4 million for the
comparable period in 2003. Gross margin from corporate help desk services
increased to 26.1% for the nine months ended September 30, 2004, from 21.0% for
the comparable period in 2003. The increase in gross profit dollars and gross
margin was primarily due to realization of the aforementioned operational
efficiencies and cost savings from re-aligning our cost structure and expanding
our help desk capabilities in Europe, and increased business with new and
existing customers. These improvements were partially offset by the impact of
reductions in revenue under our Ford contract, as discussed earlier in this
section. We estimate that the combination of a reduced price per seat and
reduced number of seats being supported on our Ford contract reduced our gross
margin on corporate help desk services by less than 30 basis points and our
overall gross margin on corporate services by less than 20 basis points for the
nine months ended September 30, 2004. We expect to offset a portion of the
reduction in gross profit through additional business from Ford and our
management of costs; however, we can give no assurances in this regard.
Gross profit from professional services/systems integration increased 309% to
$6.87 million for the nine months ended September 30, 2004, from $1.68 million
for the comparable period in 2003. Gross margin from professional
services/systems integration decreased to 22.0% for the nine months ended
September 30, 2004, from 25.7% for the comparable period in 2003. The increase
in gross profit dollars and decrease in gross margin was primarily due to our
acquisitions of DSC and A.N.E., and more specifically, lower margin hardware
sales. Excluding the gross profit contributed by DSC and A.N.E., gross profit
increased 10.7% to $1.86 million and gross margin decreased to 25.1% for the
nine months ended September 30, 2004, from 25.7% for the comparable period in
2003, primarily due to a temporary delay in the implementation of certain
projects by one customer during the third quarter. These delayed projects are in
operation. As noted, gross margin from professional services/systems integration
was negatively affected by hardware sales of approximately $6.93 million for the
nine months ended September 30, 2004. Excluding these hardware sales, gross
margin from professional services/systems integration was 26.5% for the nine
months ended September 30, 2004.
Gross profit from technical staffing decreased 21.3% to $1.41 million for the
nine months ended September 30, 2004, from $1.45 million for the comparable
period in 2003, which is consistent with the decrease in technical staffing
revenue.
21
Gross profit from leasing operations increased to $92,000 for the nine months
ended September 30, 2004, from a gross loss of $(1.69) million for the
comparable period in 2003, primarily due to charges of $1.65 million for the
write-down of off-lease equipment inventories and assets under lease in 2003.
During 2003, we determined that we would not be able to obtain the value
previously expected from the sale of off-lease equipment inventories due to a
significant decline in the fair market value of the equipment in the secondary
market.
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------- INCREASE %
2004 2003 (DECREASE) CHANGE
-------- -------- -------- ------
(In thousands)
OPERATING EXPENSES AND OTHER
Selling, general, and administrative expense ... $ 17,986 $ 14,630 $ 3,356 22.9%
Net interest income ............................ $ 464 $ 875 $ (411) (47.0)%
Foreign currency transaction gain (loss) ....... $ (268) $ 449 $ (717) (159.7)%
Income tax provision ........................... $ 2,122 $ 459 $ 1,663 362.3%
Selling, general, and administrative expense increased 22.9% to $18.0 million,
or 18.9% of total revenue, for the nine months ended September 30, 2004, from
$14.6 million, or 22.2% of total revenue, for the comparable period in 2003,
primarily due to our acquisition of DSC and A.N.E. and expense related to the
Company's incentive compensation plans. Excluding revenue and expenses
contributed by DSC and A.N.E., selling, general, and administrative expense
increased 2.9% to $15.1 million, or 21.1% of total revenue, for the nine months
ended September 30, 2004. Expenses have increased to support revenue growth and
expansion in Romania, but expenses as a percentage of revenue have decreased due
to efforts to control costs in all areas of the Company and reduced overall
depreciation and amortization expense of $1.23 million for the nine months ended
September 30, 2004, as certain assets have become fully depreciated or
amortized. Under the Company's incentive compensation plans which were effective
January 1, 2004, certain members of management are entitled to bonuses if
specific revenue and operating income targets are met for 2004. Under these
plans, we accrued $729,000 of expense for the nine months ended September 30,
2004, of which $577,000 was accrued to selling, general, and administrative
expense and $152,000 was accrued to cost of services delivered.
Net interest income decreased to $464,000 for the nine months ended September
30, 2004, from $875,000 for the comparable period in 2003, due to higher average
cash balances maintained in 2003.
Foreign currency transaction gain (loss) decreased to a loss of $(268,000) for
the nine months ended September 30, 2004, from a gain of $449,000 for the
comparable period in 2003, primarily due to the U.S. dollar strengthening since
December 31, 2003 relative to the euro, British pound sterling, and Swedish
kroner whereas the U.S. dollar weakened relative to the euro, pound sterling,
and Swedish kroner in the nine months ended September 30, 2003.
The consolidated effective tax rate in 2004 and 2003 differs from the statutory
tax rate of 34% primarily due to providing a valuation allowance against the
future tax benefit of operating loss carryforwards in certain tax jurisdictions.
22
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued an Exposure Draft,
Share-Based Payment - an Amendment of FASB Statements No. 123 and 95, and is
expected to issue a final Statement by December 31, 2004. The proposed Statement
would eliminate the ability to account for share-based compensation transactions
using APB 25, and generally would require instead that such transactions be
accounted for using a fair-value-based method. This Statement is expected to be
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 this Statement in recognizing compensation cost for any portion of awards
granted or modified after December 15, 1994, that are not yet vested at the date
this Statement is adopted. Based on the number of non-vested stock options the
Company has outstanding at September 30, 2004, adoption of this Statement will
not have a material affect on our financial position or operating results.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $40.1 million at September 30, 2004, as compared
to $35.2 million at December 31, 2003. During the nine months ended September
30, 2004, cash and cash equivalents increased $4.91 million primarily due to
$9.65 million in cash provided by operations and $1.09 million in proceeds from
the exercise of stock options, offset by $2.74 million in cash used to
repurchase 350,000 shares of our common stock under our stock repurchase
program, $831,000 in cash used to acquire A.N.E., $205,000 in cash used to pay
expenses related to our acquisition of DSC, $1.25 million in cash used for
capital expenditures, and $1.04 million in payments on long-term debt, primarily
related to notes payable acquired in our acquisitions of DSC and A.N.E.
A significant source of operating cash flow of $9.65 million for the nine months
ended September 30, 2004 was generated by income prior to non-cash charges for
depreciation and amortization of $6.57 million. An additional source of
operating cash flow resulted from converting working capital to cash as current
liabilities less notes payable increased greater than current assets less cash
and cash equivalents.
In February 2004, we announced a new stock repurchase program to repurchase up
to 1,000,000 shares of the Company's common stock. Under this program, we
purchased 350,000 shares of our common stock from a director of the Company and
his immediate family for $7.84 per share, inclusive of sales commission expense,
during the first quarter of 2004. There were no stock repurchases during the
second or third quarter of 2004.
Long-term cash requirements, other than for normal operating expenses, are
anticipated for the continued expansion in Europe, enhancements of existing
technologies, possible repurchases of our common stock, additional consideration
that is payable to the selling shareholders of DSC and A.N.E. if specific
performance conditions and operating targets are met in 2004-2007, and the
possible acquisition of businesses complementary to the Company's existing
business. We believe that positive cash flows from operations, together with
existing cash balances, will continue to be sufficient to meet our ongoing
requirements for working capital, capital expenditures, and possible stock
repurchases for the next twelve months and foreseeable future. We have
historically not paid dividends.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no changes in the selection and application of critical
accounting policies and estimates disclosed in Item 7 of our Annual Report on
Form 10-K for the year ended December 31, 2003.
FACTORS INFLUENCING FUTURE RESULTS
Refer to Item 7 of our Annual Report on Form 10-K for the year ended December
31, 2003.
23
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in reported market risks since December 31,
2003.
ITEM 4 -- CONTROLS AND PROCEDURES
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected.
During the first quarter of 2004, the Company converted its accounting and
financial reporting system in Europe, with the exception of Romania, to a
pre-existing common information technology platform that had been deployed in
the United States in prior periods. There have been no significant changes in
the Company's internal controls or in other factors that could significantly
affect internal controls subsequent to December 31, 2003. As of September 30,
2004, an evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief Executive
Officer, Chief Financial Officer, and Chief Accounting Officer of the
effectiveness of the design and operations of the Company's disclosure controls
and procedures. Based upon that evaluation, the Company's management, including
the CEO, CFO, and CAO, concluded that the Company's disclosure controls and
procedures were effective as of September 30, 2004.
24
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
The Company is a party to various legal proceedings that are routine and
incidental to its business. Although the consequences of these proceedings are
not presently determinable, in the opinion of management, they will not have a
material adverse affect on our liquidity, financial condition, or results of
operations, although no assurances can be given in this regard.
ITEM 2 -- UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company purchased shares of its common stock during the six months ended
September 30, 2004 as follows:
TOTAL NUMBER MAXIMUM
OF SHARES NUMBER OF
PURCHASED SHARES THAT
AS PART OF MAY YET BE
TOTAL NUMBER AVERAGE PUBLICLY PURCHASED
OF SHARES PRICE PAID ANNOUNCED UNDER THE
PERIOD PURCHASED PER SHARE PROGRAMS PROGRAMS
------ ------------ ---------- ------------ -----------
July 1, 2004 to July 31, 2004 -- -- -- 650,000
August 1, 2004 to August 31, 2004 -- -- -- 650,000
September 1, 2004 to September 30, 2004 -- -- -- 650,000
(a) A stock repurchase program to repurchase up to 1,000,000 shares of the
Company's common stock was announced on February 18, 2004. The program
expires on January 27, 2005.
ITEM 6 -- EXHIBITS
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.3 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.3 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
ITEMS 3, 4, AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TechTeam Global, Inc.
---------------------
(Registrant)
/s/ William F. Coyro, Jr.
-------------------------
Date: November 5, 2004 By: William F. Coyro, Jr.
President and Chief Executive Officer
/s/ David W. Morgan
-------------------
Date: November 5, 2004 By: David W. Morgan
Vice President, Chief Financial Officer,
and Treasurer
/s/ Marc J. Lichtman
--------------------
Date: November 5, 2004 By: Marc J. Lichtman
Vice President and Chief Accounting Officer
26
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.3 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32.3 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002