UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 2005
Commission File Number: 0-16284
TECHTEAM GLOBAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 38-2774613
(State or other (I.R.S. Employer
jurisdiction of 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
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]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act. Yes [ ] No [X]
The number of shares of the registrant's common stock outstanding at October 28,
2005 was 9,926,427.
TECHTEAM GLOBAL, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
NUMBER
------
PART I - FINANCIAL INFORMATION
Item 1 Condensed Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 2005 and 2004 3
Condensed Consolidated Balance Sheets -
As of September 30, 2005 and December 31, 2004 4-5
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2005 and 2004 6
Notes to Condensed Consolidated Financial Statements 7-15
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 16-28
Item 3 Quantitative and Qualitative Disclosures About Market Risk 28
Item 4 Controls and Procedures 28
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 29
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 6 Exhibits 29
SIGNATURES 30
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,
------------------ -----------------
2005 2004 2005 2004
------- ------- ------- -------
REVENUE
Diversified IT outsourcing services .............. $17,892 $18,624 $55,631 $55,401
Government technology services ................... 14,482 7,837 43,662 19,720
IT consulting and systems integration ............ 6,758 5,650 19,690 13,345
Technical staffing ............................... 1,967 1,781 6,099 5,767
Learning services ................................ 215 133 555 440
------- ------- ------- -------
TOTAL REVENUE ....................................... 41,314 34,025 125,637 94,673
Cost of revenue .................................. 30,971 26,134 93,585 71,635
------- ------- ------- -------
GROSS PROFIT ........................................ 10,343 7,891 32,052 23,038
Selling, general, and administrative expense ..... 8,606 5,779 25,767 17,928
------- ------- ------- -------
OPERATING INCOME .................................... 1,737 2,112 6,285 5,110
Interest income, net ............................. 151 177 314 502
Foreign currency transaction loss ................ (99) (50) (3) (268)
------- ------- ------- -------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES ..................................... 1,789 2,239 6,596 5,344
Income tax provision ............................. 563 743 2,098 2,162
------- ------- ------- -------
INCOME FROM CONTINUING OPERATIONS ................... 1,226 1,496 4,498 3,182
Income from discontinued operations, net of tax .. 3 22 59 36
------- ------- ------- -------
NET INCOME .......................................... $ 1,229 $ 1,518 $ 4,557 $ 3,218
======= ======= ======= =======
BASIC EARNINGS PER COMMON SHARE
Income from continuing operations ................ $ 0.12 $ 0.16 $ 0.46 $ 0.34
Income from discontinued operations .............. -- -- 0.01 --
------- ------- ------- -------
Total basic earnings per common share ............ $ 0.12 $ 0.16 $ 0.47 $ 0.34
======= ======= ======= =======
BASIC EARNINGS PER PREFERRED SHARE
Income from continuing operations ................ N/A $ 0.16 $ 0.46 $ 0.34
Income from discontinued operations .............. N/A -- 0.01 --
------- ------- ------- -------
Total basic earnings per preferred share ......... N/A $ 0.16 $ 0.47 $ 0.34
======= ======= ======= =======
DILUTED EARNINGS PER COMMON SHARE
Income from continuing operations ................ $ 0.12 $ 0.16 $ 0.45 $ 0.33
Income from discontinued operations .............. -- -- 0.01 --
------- ------- ------- -------
Total diluted earnings per common share .......... $ 0.12 $ 0.16 $ 0.45 $ 0.34
======= ======= ======= =======
WEIGHTED NUMBER OF COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING
Basic -- common .................................. 9,892 8,636 9,365 8,640
Basic -- preferred ............................... -- 690 327 690
Diluted -- common ................................ 10,209 8,904 9,718 8,864
See accompanying notes.
3
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents .............................. $ 36,515 $ 40,436
Accounts receivable (less allowance of $925 at
September 30, 2005 and $912 at December 31, 2004) ... 43,703 28,888
Prepaid expenses and other ............................. 2,415 2,288
Deferred income taxes .................................. 316 --
Net current assets of discontinued operations .......... 65 97
-------- --------
TOTAL CURRENT ASSETS ................................... 83,014 71,709
-------- --------
PROPERTY, EQUIPMENT, AND PURCHASED SOFTWARE
Computer equipment and office furniture ................ 23,282 22,768
Purchased software ..................................... 12,295 11,545
Leasehold improvements ................................. 5,115 4,822
Transportation equipment ............................... 339 321
-------- --------
41,031 39,456
Less -- accumulated depreciation and amortization ...... (33,389) (31,074)
-------- --------
NET PROPERTY, EQUIPMENT, AND PURCHASED SOFTWARE ........ 7,642 8,382
-------- --------
OTHER ASSETS
Goodwill ............................................... 20,069 4,768
Intangible assets, net ................................. 10,161 3,672
Other .................................................. 475 441
Net noncurrent assets of discontinued operations ....... -- 15
-------- --------
TOTAL OTHER ASSETS ..................................... 30,705 8,896
-------- --------
TOTAL ASSETS .............................................. $121,361 $ 88,987
======== ========
See accompanying notes.
4
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(In thousands, except share and per share amounts)
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ....................................... $ 9,994 $ 3,707
Accrued payroll, related taxes, and withholdings ....... 9,068 7,485
Accrued expenses ....................................... 10,591 2,244
Accrued income taxes ................................... 399 644
Deferred revenue ....................................... 243 1,380
Deferred income taxes .................................. -- 156
Current liabilities of discontinued operations ......... -- 12
-------- -------
TOTAL CURRENT LIABILITIES .............................. 30,295 15,628
-------- -------
LONG-TERM LIABILITIES
Long-term debt ......................................... 9,843 --
Deferred income taxes .................................. 2,887 1,285
Other long-term liabilities ............................ 551 414
-------- -------
TOTAL LONG-TERM LIABILITIES ............................ 13,281 1,699
-------- -------
REDEEMABLE CONVERTIBLE PREFERRED STOCK, 5,000,000
shares authorized, 0 and 689,656 shares issued and
outstanding at September 30, 2005 and December 31,
2004, respectively ..................................... -- 5,000
SHAREHOLDERS' EQUITY
Common stock, $0.01 par value, 45,000,000 shares
authorized, 9,901,857 and 8,767,037 shares issued
and outstanding at September 30, 2005 and
December 31, 2004, respectively ..................... 99 88
Additional paid-in capital ............................. 68,300 59,437
Unamortized deferred compensation ...................... (463) (533)
Retained earnings ...................................... 9,350 4,793
Accumulated other comprehensive income ................. 499 2,875
-------- -------
TOTAL SHAREHOLDERS' EQUITY ............................. 77,785 66,660
-------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................ $121,361 $88,987
======== =======
See accompanying notes.
5
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
2005 2004
-------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................... $ 4,557 $ 3,218
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .......................... 4,105 3,234
Non-cash expense related to stock options, restricted
stock awards, and common stock issued to 401(k) plan
and directors ....................................... 431 305
Other .................................................. (166) 82
Changes in current assets and liabilities .............. 829 1,972
Changes in long-term assets and liabilities ............ (1,306) (128)
Income from discontinued operations .................... (59) (36)
Net operating cash flow from discontinued operations ... 55 998
-------- -------
Net cash provided by operating activities ................. 8,446 9,645
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, equipment, and software ................ (2,344) (1,252)
Cash paid for acquisitions, net of cash acquired ............. (21,687) (1,036)
-------- -------
Net cash used in investing activities ..................... (24,031) (2,288)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt ..................... 15,000 --
Proceeds from issuance of common stock ....................... 2,972 1,093
Payments on long-term debt ................................... (5,184) (849)
Purchase of Company common stock ............................. -- (2,744)
Net financing cash flow from discontinued operations ......... (11) (196)
-------- -------
Net cash provided by (used in) financing activities ....... 12,777 (2,696)
-------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS .... (1,113) 247
-------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................ (3,921) 4,908
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................ 40,436 35,195
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................... $ 36,515 $40,103
======== =======
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 United States generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by United States generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included, and such
adjustments are of a normal recurring nature. Operating results for the three
and nine months ended September 30, 2005 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2005. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2004.
Certain reclassifications have been made to the 2004 financial statements in
order to conform to the 2005 financial statement presentation.
NOTE 2 -- COMPREHENSIVE INCOME
Comprehensive income consists of net income and foreign currency translation
adjustments. A summary of comprehensive income is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2005 2004 2005 2004
------ ------ ------- ------
(In thousands)
COMPREHENSIVE INCOME
Net income ................................... $1,229 $1,518 $ 4,557 $3,218
Other comprehensive income (loss)--
Foreign currency translation adjustment ... 227 299 (2,376) 172
------ ------ ------- ------
Comprehensive income ......................... $1,456 $1,817 $ 2,181 $3,390
====== ====== ======= ======
NOTE 3 -- EARNINGS PER SHARE
Earnings per share is computed using the two-class method as required by
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." The two-class method is an earnings allocation formula that determines
earnings per share separately for common stock and participating securities
according to dividends declared (or accumulated) and participation rights in
undistributed earnings. The Company's redeemable convertible preferred stock,
which was issued in April 2003, was a participating security under SFAS 128. The
redeemable convertible preferred stock had rights to undistributed earnings, but
was not required to participate in net losses of the Company. In May 2005
through a series of transactions, the holder of the Company's preferred stock
converted all 689,656 shares of preferred stock into an equal number of shares
of unregistered Company common stock and sold those shares in the open market
pursuant to rules and regulations of the United States Securities and Exchange
Commission.
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.
Earnings are allocated to each class of stock pro rata based on the weighted
average number of shares and share equivalents outstanding for each class of
stock.
7
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 3 -- EARNINGS PER SHARE (continued)
The following table reconciles the numerators and denominators of the basic and
diluted earnings per common share computations for income from continuing
operations:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ----------------
2005 2004 2005 2004
------- ------ ------ ------
(In thousands, except per share data)
Income from continuing operations ........................ $ 1,226 $1,496 $4,498 $3,182
Less - Income from continuing operations allocated to
preferred shareholders ................................ -- 110 152 235
------- ------ ------ ------
Income from continuing operations available to common
shareholders .......................................... $ 1,226 $1,386 $4,346 $2,947
======= ====== ====== ======
Basic weighted average common shares ..................... 9,892 8,636 9,365 8,640
Common stock equivalents from stock options .............. 317 268 353 224
------- ------ ------ ------
Diluted weighted average common shares ................... 10,209 8,904 9,718 8,864
======= ====== ====== ======
Weighted average preferred shares ........................ -- 690 327 690
======= ====== ====== ======
Earnings per share from continuing operations:
Basic earnings per common share ....................... $ 0.12 $ 0.16 $ 0.46 $ 0.34
Basic earnings per preferred share .................... N/A $ 0.16 $ 0.46 $ 0.34
Diluted earnings per common share ..................... $ 0.12 $ 0.16 $ 0.45 $ 0.33
During the three months ended September 30, 2005 and 2004, 95,000 and 215,000
stock options, respectively, were excluded from the computation of diluted
earnings per common share because the exercise prices of the options were higher
than the average market price of the Company's common stock for each respective
period.
During the nine months ended September 30, 2005 and 2004, 95,000 and 508,900
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 each respective
period.
NOTE 4 -- NOTES PAYABLE AND LINE OF CREDIT
The Company has a business loan agreement with LaSalle Bank, N.A. (formerly
known as Standard Federal Bank, N.A.) whereby the Company may borrow up to
$5,000,000 under a line of credit that expires on January 2, 2006 and up to
$15,000,000 under a term loan due January 3, 2010. The line of credit and term
loan 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 the
outstanding principal.
On October 3, 2005, we borrowed $3.03 million under the line of credit to
finance the acquisition of Akela Informatique SRL (see "Note 12 -- Subsequent
Event").
8
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 5 -- GOODWILL AND OTHER INTANGIBLE ASSETS
On January 3, 2005, we acquired all of the outstanding capital stock of Sytel,
Inc. ("Sytel," see "Note 10 -- Acquisitions"). The goodwill resulting from the
acquisition relates to our government technology services operating segment.
Goodwill is not amortized, but instead is subject to an annual impairment test.
We did not record an impairment loss for goodwill in any period presented.
Changes in the carrying amount of goodwill since December 31, 2004 consist of
the following:
DIVERSIFIED IT GOVERNMENT IT CONSULTING
OUTSOURCING TECHNOLOGY AND SYSTEMS
SERVICES SERVICES INTEGRATION TOTAL
-------------- ---------- ------------- --------
(In thousands)
Balance as of January 1, 2005 ......... $371 $ 3,830 $567 $ 4,768
Goodwill acquired .................. -- 15,364 -- 15,364
Effect of exchange rate changes .... -- -- (63) (63)
---- ------- ---- -------
Balance as of September 30, 2005 ...... $371 $19,194 $504 $20,069
==== ======= ==== =======
Other intangible assets consist of the following at September 30, 2005:
WEIGHTED
AVERAGE
ACCUMULATED AMORTIZATION
COST AMORTIZATION PERIOD
------- ------------ ------------
(In thousands)
Customer-related assets ... $11,325 $2,017 7.7 Years
Noncompete agreement ...... 712 134 4.0 Years
Trademark and name ........ 339 64 4.0 Years
------- ------
$12,376 $2,215
======= ======
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 factors, the ability and cost to renew contracts with
similar terms and conditions, historical customer retention rates, and the
contractual life of the assets.
We re-evaluate the carrying value of intangible assets based on undiscounted
operating cash flows whenever significant events or changes occur that might
indicate a possible impairment of capitalized costs. If undiscounted cash flows
are insufficient to recover recorded costs, we write down the carrying value of
the assets to fair value based on discounted cash flows or market values. We did
not record an impairment loss for intangible assets in any period presented.
Our expected future amortization expense for intangible assets held at September
30, 2005 is as follows: $439,000 for the remainder of 2005, $1,750,000 in 2006,
$1,660,000 in 2007, $1,660,000 in 2008, and $1,390,000 in 2009.
9
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 6 -- STOCK-BASED COMPENSATION
We account for stock-based compensation awards granted to employees using the
intrinsic value method prescribed in Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
The effect on net income and earnings per share had compensation costs been
recognized based on the fair value method prescribed by SFAS 123, "Accounting
for Stock-Based Compensation," is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2005 2004 2005 2004
------ ------ ------ -------
(In thousands, except per share amounts)
Reported net income ................................ $1,229 $1,518 $4,557 $ 3,218
Add -- total stock-based compensation expense
included in reported net income, net of tax ..... 25 10 82 33
Deduct -- total stock-based compensation expense
determined under the fair value method for all
awards, net of tax .............................. (126) (708) (806) (1,051)
------ ------ ------ -------
Pro forma net income ............................... $1,128 $ 820 $3,833 $ 2,200
====== ====== ====== =======
Basic earnings per common share:
As reported .................................... $ 0.12 $ 0.16 $ 0.47 $ 0.34
Pro forma ...................................... $ 0.11 $ 0.09 $ 0.40 $ 0.24
Diluted earnings per common share:
As reported .................................... $ 0.12 $ 0.16 $ 0.45 $ 0.34
Pro forma ...................................... $ 0.11 $ 0.09 $ 0.38 $ 0.23
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 123R,
"Share-Based Payment," which replaces SFAS 123 and supersedes APB 25. SFAS 123R
eliminates the ability to account for share-based compensation transactions
using APB 25, and requires instead that such transactions be accounted for using
a fair-value-based method. SFAS 123R is effective for awards that are granted,
modified, or settled in periods beginning after December 15, 2005, or the
Company's fiscal year beginning January 1, 2006. The Company intends to adopt
SFAS 123R on January 1, 2006. As we use the fair value method of accounting
under the original provisions of SFAS 123 for pro forma disclosure purposes, we
are also required to apply the provisions of SFAS 123R in recognizing
compensation cost for any portion of awards granted or modified after December
15, 1994, that are not yet vested at the date SFAS 123R is adopted. Based on the
number of non-vested stock options the Company has outstanding at September 30,
2005 adoption of SFAS 123R will result in approximately $18,000 of aggregate
compensation expense, net of tax, in fiscal years subsequent to 2005 and will
not have a material affect on our financial position or operating results.
10
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 7 -- INCOME TAXES
For the three and nine months ended September 30, 2005, the consolidated
effective tax rate of 31.5% and 31.8%, respectively, differs from the statutory
tax rate of 34% primarily due to the tax benefit of tax rates in certain foreign
countries that are lower than 34% and the tax benefit of certain permanent
deductions. For the three and nine months ended September 30, 2004, the
consolidated effective tax rate of 33.2% and 40.5%, respectively, differs from
the statutory tax rate of 34% primarily due to providing a valuation allowance
against the future tax benefit of operating loss carryforwards in certain tax
jurisdictions.
No provision has been made with respect to approximately $6.8 million of
undistributed earnings of foreign subsidiaries at September 30, 2005, since we
consider these earnings to be permanently reinvested. In December 2004, the FASB
issued FASB Staff Position ("FSP") No. 109-2, "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004," which provides guidance under SFAS No. 109,
"Accounting for Income Taxes," with respect to recording the potential impact of
the repatriation provisions of the American Jobs Creation Act of 2004 ("Jobs
Act") on an enterprise's income tax expense and deferred taxes. The Jobs Act was
enacted on October 22, 2004. FSP 109-2 states that an enterprise is allowed time
beyond the financial reporting period of enactment to evaluate the effect of the
Jobs Act on its plan for reinvestment or repatriation of foreign earnings for
purposes of applying SFAS 109. We have not yet evaluated the impact of the
repatriation provisions. Accordingly, as provided for in FSP 109-2, we have not
adjusted income tax expense or deferred taxes to reflect potential utilization
of the repatriation provisions of the Jobs Act.
NOTE 8 -- SEGMENT REPORTING
Operating segments are defined as components of an enterprise for 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 group, which is comprised of the President, Chief
Operating Officer, Vice Presidents, and the lead executives of each of our major
subsidiaries. The operating segments are managed separately because each
operating segment represents a strategic business unit that offers services
different from the others or serves a specific customer market.
As a result of acquiring four companies since December 31, 2003, we have
strategically added the government technology services operating segment to our
business and have expanded this segment. In order to better describe our
business following these changes, during the fourth quarter of 2004, we modified
our four reporting business segments into five reporting segments -- diversified
IT outsourcing services, government technology services, IT consulting and
systems integration, technical staffing, and learning services. Prior year
amounts have been reclassified to reflect the current presentation.
The accounting policies of the operating segments are the same as those
described in Note 1 to the Company's consolidated financial statements contained
in the Company's Annual Report on Form 10-K for the year ended December 31,
2004. We evaluate segment performance based on segment gross profit. We do not
allocate assets to operating segments, but we allocate certain amounts of
depreciation and amortization expense to operating segments.
11
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 8 -- SEGMENT REPORTING (continued)
Financial information for our operating segments is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2005 2004 2005 2004
------- ------- -------- -------
(In thousands)
REVENUE
Diversified IT outsourcing .......................... $17,892 $18,624 $ 55,631 $55,401
Government technology services ...................... 14,482 7,837 43,662 19,720
IT consulting and systems integration ............... 6,758 5,650 19,690 13,345
Technical staffing .................................. 1,967 1,781 6,099 5,767
Learning services ................................... 215 133 555 440
------- ------- -------- -------
Total revenue .......................................... $41,314 $34,025 $125,637 $94,673
======= ======= ======== =======
GROSS PROFIT
Diversified IT outsourcing .......................... $ 4,550 $ 4,796 $ 13,991 $14,506
Government technology services ...................... 4,010 1,826 12,601 5,052
IT consulting and systems integration ............... 1,337 947 3,964 2,246
Technical staffing .................................. 406 300 1,349 1,142
Learning services ................................... 40 22 147 92
------- ------- -------- -------
Total gross profit ..................................... 10,343 7,891 32,052 23,038
Selling, general, and administrative expense ........ 8,606 5,779 25,767 17,928
Interest income, net ................................ 151 177 314 502
Foreign currency transaction loss ................... (99) (50) (3) (268)
------- ------- -------- -------
Income from continuing operations before income taxes .. $ 1,789 $ 2,239 $ 6,596 $ 5,344
======= ======= ======== =======
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,
------------------ ------------------
2005 2004 2005 2004
------- ------- -------- -------
(In thousands)
REVENUE
United States ....................................... $29,747 $23,203 $ 88,693 $65,684
Europe:
Belgium .......................................... 8,413 7,663 26,679 18,631
Other ............................................ 3,154 3,159 10,265 10,358
------- ------- -------- -------
Total Europe ........................................ 11,567 10,822 36,944 28,989
------- ------- -------- -------
Total revenue .......................................... $41,314 $34,025 $125,637 $94,673
======= ======= ======== =======
12
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 8 -- SEGMENT REPORTING (continued)
Revenue from customers, or groups of customers under common control, that
comprise 10% or greater of our total revenue in any period presented are as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2005 2004 2005 2004
---- ---- ---- ----
United States Government .............. 29.5% 11.5% 29.7% 12.3%
Ford Motor Company and Subsidiaries ... 26.4% 33.8% 27.4% 37.8%
---- ---- ---- ----
Total ................................. 55.9% 45.3% 57.1% 50.1%
==== ==== ==== ====
We conduct business under multiple contracts with various entities within the
Ford Motor Company organization and with various agencies and departments of the
United States Government. No single agency or department of the United States
Government comprised 10% or greater of the Company's total revenue for all
periods presented except for the nine months ended September 30, 2004, whereby
one customer within the United States Government comprised 10.0% of the
Company's total revenue.
NOTE 9 -- CONTINGENCIES
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 10 -- ACQUISITIONS
On January 3, 2005, TechTeam Global, Inc., through its wholly-owned subsidiary
DSC, completed the acquisition of all of the outstanding stock of Sytel, Inc.
("Sytel"), a diversified information technology services and solutions company
headquartered in Bethesda, Maryland, that provides managed network services and
advanced enterprise solutions to several departments of the United States
Government. The total purchase price of $21,560,000 consists of initial
consideration paid by the Company of $18,500,000, acquisition costs of $695,000,
a noncompete agreement of $500,000, a working capital payment of $1,323,000, and
stock options with a fair value of $542,000 to purchase 160,900 shares of the
Company's common stock. 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, and will be paid up to
$2,000,000 subject to the renewal of a contract with the United States
Department of State (see below). Based on Sytel's year-to-date performance, we
do not anticipate that any additional purchase price will be paid for Sytel's
performance in 2005.
Of the initial consideration, $2,475,000 was placed into an escrow account,
which consists of $825,000 related to potential working capital adjustments and
$1,650,000 related to representations and warranties of the selling shareholders
contained in the purchase agreement. In July 2005, the working capital portion
of the escrow account was distributed to the selling shareholders and the
Company based upon Sytel's final net working capital position at January 3,
2005, as defined, from which the Company received $244,000 of the escrow
distribution.
13
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 10 -- ACQUISITIONS (continued)
When acquired, Sytel had been providing managed network services to the United
States Department of State under a contract extension through March 29, 2005. A
subsequent contract extension was awarded extending the period of performance
through September 29, 2005. The request for proposal for the renewal of this
business was issued as a Small Business Administration Section 8(a) minority
contractor set-aside procurement under which Sytel could not independently bid
because they do not meet the Section 8(a) requirements. Sytel teamed with a
qualified vendor to submit a proposal as the prime contractor, with Sytel
serving as a subcontractor to provide 49% of the contract labor revenue. As
previously disclosed, the prime contractor working with Sytel was not awarded
the contract. The business was transitioned to the new vendor during the third
quarter. As a result, we are no longer performing services for the Department of
State. Revenue from this contract for the nine months ended September 30, 2005
was $4.57 million. As a result of the loss of this contract, the aforementioned
potential additional purchase price payment of $2,000,000 for the renewal of the
contract will not be paid.
The following table summarizes the current allocation of the purchase price and
net cash used in the acquisition.
(In thousands)
--------------
Goodwill .............................................. $ 14,664
Other intangible assets ............................... 7,853
Property, equipment, and purchased software ........... 169
Other current and non-current assets, net of cash
acquired of $31 .................................... 11,703
Accounts payable, accrued liabilities, and deferred
tax liabilities assumed ............................ (12,860)
--------
Total purchase price, net of cash acquired ............ 21,529
Issuance of stock options ............................. (542)
--------
Net cash used ......................................... $ 20,987
========
The operating results of Sytel are included in the consolidated results of
operations of the Company from January 3, 2005. The unaudited pro forma
condensed consolidated results of operations for the three and nine months ended
September 30, 2004 are presented below as though Sytel had been acquired as of
January 1, 2004.
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2004
------------- -------------
(In thousands, except
per share data)
Revenue
As reported.............. $34,025 $ 94,673
Pro forma................ $41,267 $115,798
Net income
As reported.............. $ 1,518 $ 3,218
Pro forma................ $ 1,855 $ 3,721
Diluted earnings per share
As reported.............. $ 0.16 $ 0.34
Pro forma................ $ 0.19 $ 0.39
14
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 11 -- DISCONTINUED OPERATIONS
TechTeam Capital Group, LLC ("Capital Group"), a subsidiary of the Company,
previously wrote leases for computer, telecommunications, and other types of
capital equipment, with initial lease terms ranging from two to five years.
Capital Group ceased writing new leases in March 2000 and is in the final stages
of running out its lease portfolio. Our future revenue stream from contractually
committed leases is inconsequential to our results of operations. The primary
activity that remains in closing down the leasing operation is the collection of
accounts receivable, including older accounts receivable related to terminated
leases. As a result, Capital Group has been presented as a discontinued
operation in accordance with SFAS No. 144, "Accounting for the Disposal or
Impairment of Long-Lived Assets." Under SFAS 144, the operating results of
Capital Group are presented separately from continuing operations in the
accompanying financial statements for all periods presented. Capital Group
previously was reported as a separate operating segment.
Summarized information for Capital Group is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2005 2004 2005 2004
---- ---- ---- ----
(In thousands)
Revenue ..................... $6 $127 $74 $495
Income before income taxes .. $3 $ 33 $87 $ 54
NOTE 12 -- SUBSEQUENT EVENT
On October 3, 2005, TechTeam Global, Inc. completed the acquisition of all of
the outstanding stock of Akela Informatique SRL ("Akela"), a provider of custom
software solutions headquartered in Bucharest, Romania, that provides
application development, migration, implementation, and maintenance support
services to clients in Romania, France, the United Kingdom, Switzerland,
Belgium, Italy, Sweden, and the United States. The initial consideration paid by
the Company was 2,500,000 euros (1 euro = $1.203 on October 3, 2005) in cash,
shares of TechTeam common stock equal to 250,000 euros, and acquisition costs of
approximately $125,000. During 2006 and 2007, the Selling Shareholders may be
paid additional amounts based upon Akela's gross profit. If Akela's gross profit
exceeds 1,330,000 euros in 2006, the Company will pay the Selling Shareholders
additional purchase price consideration of 100,000 euros. If Akela's gross
profit exceeds 2,100,000 euros in 2007, the Company will pay the Selling
Shareholders additional purchase price consideration of 200,000 euros. If
Akela's aggregate gross profit for 2006 and 2007 exceeds 4,100,000 euros, the
Company will pay the Selling Shareholders additional purchase price
consideration of 50,000 euros, and certain key employees of Akela will share in
additional compensation of 100,000 euros.
15
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"
or the "Company" or "we") 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, the Company's Annual Report on Form 10-K
for the year ended December 31, 2004, 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 ("MD&A")
OVERVIEW
TechTeam is a global provider of information technology ("IT") and business
process outsourcing support services to Fortune 1000 companies, multinational
companies, product providers, small and mid-size companies, and government
entities. Our long-term goals are to deliver the best overall value proposition
in our industry -- the best combination of high quality, low cost, flexibility,
and customer satisfaction -- and become a global provider of IT and business
process outsourcing support services with $500 million in annual revenue through
a combination of sustained organic growth coupled with selective, strategic, and
accretive acquisitions.
As we have previously announced, our Ford Motor Company ("Ford") Global SPOC
Help Desk contract, which is the Company's largest contract, was originally
scheduled to expire on July 31, 2005. We are currently performing services under
the second extension of this contract, which expires on November 30, 2005. We
are in active negotiations with Ford on the renewal of this contract. While the
contract negotiations are ongoing, we note the following:
- We continue to believe that we are well-positioned to win the renewal
of this business;
- There will likely be a reduction in the revenue the Company earns
under the contract because Ford is seeking price reductions;
- To the extent there are price reductions in the renewal, TechTeam will
restructure the services it provides to Ford in order to minimize the
impact on the gross margin on the business; and
- Revenue under the contract is likely to continue to decline as Ford
undergoes internal restructuring and reduces its employee base, unless
the decline is offset by the expansion of the Global SPOC Help Desk
program into the estimated 35% of the Ford environment where TechTeam
does not currently provide support.
For the third quarter of 2005, revenue from our business with Ford was $10.9
million, or 26.4% of the Company's total revenue, down from $11.6 million, or
27.4% of the Company's total revenue, for the second quarter of 2005. This
revenue decline is largely due to the decline in the number of user seats
supported within the
16
Ford environment. Based on year-to-date revenue, our Ford revenue will decline
on a year-over-year basis for fiscal 2005 for the first time in the past five
years.
The Company continues to seek to diversify its customer base from both a client
and industry perspective through its strategy to grow our business through
strategic, accretive acquisitions both domestically and internationally. As a
result of our acquisition strategy, TechTeam has significantly increased its
revenue by acquiring four companies since December 31, 2003. These acquisitions
have strategically added the government technology services operating segment
and improved our ability to deliver services in the IT consulting and systems
integration market place. Our operating results in 2005 reflect strong revenue
growth in government technology services from our acquisition of Sytel, Inc.
("Sytel") on January 3, 2005, and strong revenue growth in IT consulting and
systems integration services through our subsidiary, TechTeam Cyntergy, and from
our acquisition of Advanced Network Engineering NV ("A.N.E.") on May 13, 2004.
Together, Sytel and A.N.E. contributed revenue of $9.43 million toward the 21.4%
increase in total Company revenue to $41.3 million for the three months ended
September 30, 2005, and contributed revenue of $29.9 million toward the 32.7%
increase in total Company revenue to $125.6 million for the nine months ended
September 30, 2005, from the comparable periods in 2004.
Our operating results also reflect improved profitability in each of our five
business segments except in diversified IT outsourcing services, which has been
negatively impacted by the previously reported loss of business from
DaimlerChrysler AG ("DaimlerChrysler") and Liberty Mutual Insurance Company
("Liberty Mutual"). We have been able to improve profitability through a
combination of additional revenue from higher margin service contracts, less
revenue from lower margin equipment resales, and operating efficiencies.
During the third quarter of 2005, a number of trends became apparent in the
Company's diversified IT outsourcing services business segment. First, our
United States operation successfully executed contracts with new customers that,
over the first half of 2006, will replace the DaimlerChrysler business lost in
the fourth quarter of 2004 and the Liberty Mutual business lost in the first
quarter of 2005. The estimated aggregate value of the new contracts is
approximately $21 million over the three-year length of each contract. We will
begin providing services to these customers during the fourth quarter of 2005,
with the last phase of the largest program launch expected to be completed
during the second quarter of 2006. Once these programs are fully launched, our
revenue in the United States from this business segment should increase and our
Southfield, Michigan, facility should no longer be underutilized. We anticipate
that we will continue to have success in selling new business in the United
States market.
Second, while our European operations continued to grow from 2004 based upon
revenue growth from our blended service delivery solution in Belgium and Romania
and from Sweden, there are a number of factors that will influence this business
in future periods, including but not limited to:
- The growth rate of our European business has slowed, and, depending
upon the outcome of the contract renewal of the Ford Global SPOC Help
Desk contract and other factors discussed below, there may be a
decline in revenue after the fourth quarter of 2005;
- Our European business has some seasonality that affects our third
quarter results, primarily because the summer and holiday seasons
affect the volume of incidents that we handle, particularly in Sweden.
This seasonality can be masked by growth in the business, which did
not occur to the same extent in 2005 as in the previous two years;
- We are continuing the process of migrating a portion of our existing
multilingual help desk business from our help desk in Brussels,
Belgium, to Bucharest, Romania. As a result of this migration, there
may be reductions in the number of employees required within our
Belgian operation, and while our profitability is expected to improve,
our revenue may decline to the extent these customers expect a lower
price in connection with the reduced cost structure;
17
- There are two contracts -- one contract performed from our Belgian and
Romanian facilities and one contract performed from our Belgian
facility -- with aggregate revenue of $8.18 million for the nine
months ended September 30, 2005, that expire in 2006 and that we will
be seeking to retain; and
- The revenue from our European operations may decline as a direct
result of the strengthening of the U.S. dollar relative to the
functional currencies of our subsidiaries, primarily the euro. 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 net income should be considerably less than the impact on revenue.
Although we have improved our overall gross margin performance, our operating
income declined for the three months ended September 30, 2005, from the
comparable period in 2004, due to increases in the Company's selling, general,
and administrative expense ("SG&A"). Specifically, we are making investments in
our global infrastructure to support our growth and we are incurring costs
associated with our efforts to adopt the provisions of Section 404 of the
Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley 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 $1.2-$1.4 million
of incremental expense in 2005 to implement this section of the Sarbanes-Oxley
Act. These costs may increase if it is determined that significant efforts will
be required to remediate control deficiencies that may be identified during
implementation. In addition, significant time and effort of management is
required. Investments that we are making to support our growth include
implementing a new global human capital management system during 2005 and 2006,
expanding our marketing efforts and North American sales force, and establishing
our permanent facility in Romania.
We expect the above challenges and others to continue to impact our
profitability in future periods, including making investments necessary to
establish operations in new countries from time to time. Also, the previously
reported loss of a contract at Sytel with the United States Department of State
(see "Note 10 -- Acquisitions" contained in "Item 1 -- Financial Statements") is
expected to negatively impact the performance of the government technology
services business segment in future periods. Revenue from this contract for the
three and nine months ended September 30, 2005 was $1.41 million and $4.57
million, respectively.
RECENT DEVELOPMENTS
On November 4, 2005, the Company's Board of Directors decided to commence a
search for a chief executive officer to succeed the Company's current President
and Chief Executive Officer, William F. Coyro, Jr., to enhance the Company's
ability to manage its aggressive growth. Dr. Coyro has not been terminated for
cause. Rather, he will remain in his current position at least until his
successor has been named. The Company expects to honor the financial terms of
Dr. Coyro's employment agreement, which is scheduled to expire on April 30,
2008. The Company does not expect to record any accelerated expense as a result
of this action while Dr. Coyro remains employed in his current position. As a
result of this action, we anticipate that there will be a fee paid to the
executive search firm.
On October 3, 2005, TechTeam Global, Inc. completed the acquisition of all of
the outstanding stock of Akela Informatique SRL ("Akela"), a provider of custom
software solutions headquartered in Bucharest, Romania, that provides
application development, migration, implementation, and maintenance support
services to clients in Romania, France, the United Kingdom, Switzerland,
Belgium, Italy, Sweden, and the United States (see "Note 12 --- Subsequent
Event" contained in "Item 1 -- Financial Statements"). The acquisition of Akela
provides TechTeam with an entrance into the off-shore software development
market and outsourcing technology services sector. The continued expansion of
TechTeam's IT consulting and systems integration business segment, which will
occur as
18
a result of the Akela acquisition, will complement our other established
business segments.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO SEPTEMBER 30, 2004
THREE MONTHS ENDED
SEPTEMBER 30,
------------------ INCREASE %
2005 2004 (DECREASE) CHANGE
------- ------- ---------- ------
(In thousands, except percentages)
REVENUE
Diversified IT outsourcing services .... $17,892 $18,624 $ (732) (3.9)%
Government technology services ......... 14,482 7,837 6,645 84.8%
IT consulting and systems integration .. 6,758 5,650 1,108 19.6%
Technical staffing ..................... 1,967 1,781 186 10.4%
Learning services ...................... 215 133 82 61.7%
------- ------- ------
TOTAL REVENUE ............................. $41,314 $34,025 $7,289 21.4%
======= ======= ======
The majority of the overall revenue growth of 21.4% to $41.3 million for the
three months ended September 30, 2005, from $34.0 million for the comparable
period in 2004, is attributable to our acquisition of Sytel and revenue growth
at our subsidiary, TechTeam Cyntergy, which is included in IT consulting and
systems integration services. Excluding the acquisition of Sytel, total revenue
declined 2.3% to $33.2 million for the three months ended September 30, 2005,
from the comparable period in 2004, primarily due to a decrease in revenue from
diversified IT outsourcing services and government technology services, as more
fully discussed below.
Total revenue generated in the United States increased 28.2% to $29.7 million
for the three months ended September 30, 2005, from $23.2 million for the
comparable period in 2004, due to our acquisition of Sytel. Excluding revenue
contributed by Sytel, revenue generated in the United States decreased 6.6% to
$21.7 million for the three months ended September 30, 2005, from $23.2 million
for the comparable period in 2004, primarily due to the decline in revenue from
the aforementioned loss of business from DaimlerChrysler and Liberty Mutual and
the absence of a large volume of equipment resales that occurred in 2004, which
was partially offset by new customer contracts in diversified IT outsourcing
services and IT consulting and systems integration.
Revenue generated in Europe increased 6.9% to $11.6 million for the three months
ended September 30, 2005, from $10.8 million for the comparable period in 2004,
primarily due to revenue growth from our blended service delivery solution in
Belgium and Romania from a new customer contract. Fluctuations in foreign
currency exchange rates did not have a significant impact on reported revenue
and net income for the three months ended September 30, 2005, from the
comparable period in 2004.
Diversified IT Outsourcing Services
Revenue from diversified IT outsourcing services decreased 3.9% to $17.9 million
for the three months ended September 30, 2005, from $18.6 million for the
comparable period in 2004, as a result of a decline in revenue from diversified
IT outsourcing services of 14.5% in the United States, partially offset by 16.1%
revenue growth from our blended service delivery solution in Belgium and
Romania. The growth in Belgium and Romania is primarily due to a new customer
contract. The decrease in revenue in the United States is primarily due to the
decline in revenue from the loss of business from DaimlerChrysler and Liberty
Mutual, which was partially offset by new customer contracts. Revenue for the
three months ended September 30, 2005 also declined from the comparable period
in 2004 from a decrease in global diversified IT outsourcing revenue from Ford
of 3.9% to $9.06 million for the three months ended September 30, 2005, from
$9.42 million for the comparable period in 2004. Revenue from Ford decreased
primarily due to a reduction in the number of seats supported as Ford continues
to reduce its worldwide workforce.
19
Although our diversified IT outsourcing revenue in the United States declined
from 2004, we recently announced that the Company has signed contracts with four
major companies to provide specialized IT support services. The estimated
aggregate value of the contracts is approximately $21 million over the
three-year length of each contract. The Company will begin providing services to
these customers during the fourth quarter of 2005, with the last phase of the
largest program launch expected to be completed during the second quarter of
2006. Once these programs are fully launched, our Southfield, Michigan, facility
will no longer be underutilized.
Government Technology Services
Revenue from government technology services increased 84.8% to $14.5 million for
the three months ended September 30, 2005, from $7.84 million for the comparable
period in 2004, due to our acquisition of Sytel on January 3, 2005. Excluding
Sytel, revenue from government technology services decreased 16.1% to $6.58
million for the three months ended September 30, 2005, from $7.84 million for
the comparable period in 2004, due to the absence in 2005 of a large volume of
equipment resales that occurred in 2004. Excluding Sytel and all equipment
resales, revenue from government technology services increased 10.9% for the
three months ended September 30, 2005, from the comparable period in 2004,
primarily from additional business with existing customers.
IT Consulting and Systems Integration Services
Revenue from IT consulting and systems integration increased 19.6% to $6.76
million for the three months ended September 30, 2005, from $5.65 million for
the comparable period in 2004, primarily due to additional business from new and
existing customers at TechTeam Cyntergy, which provides IT deployment, training,
and implementation services to companies in the hospitality, retail, food
service, and other industries throughout the United States. The increase in
revenue was partially offset by a decrease in revenue from equipment resales, a
project installing personal computers at Ford that is subcontracted
through Dell Inc., and the completion of other projects.
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------
2005 2004
------------------ -----------------
GROSS GROSS INCREASE %
AMOUNT MARGIN % AMOUNT MARGIN % (DECREASE) CHANGE
------- -------- ------ -------- ---------- ------
(In thousands, except percentages)
GROSS PROFIT
Diversified IT outsourcing
services ................. $ 4,550 25.4% $4,796 25.8% $ (246) (5.1)%
Government technology
services ................. 4,010 27.7% 1,826 23.3% 2,184 120%
IT consulting and systems
integration .............. 1,337 19.8% 947 16.8% 390 41.2%
Technical staffing .......... 406 20.6% 300 16.8% 106 35.3%
Learning services ........... 40 18.6% 22 16.5% 18 81.8%
------- ------ ------
TOTAL GROSS PROFIT ............. $10,343 25.0% $7,891 23.2% $2,452 31.1%
======= ====== ======
20
Consistent with revenue, the majority of the overall growth in gross profit of
31.1% to $10.3 million for the three months ended September 30, 2005, from the
comparable period in 2004, is attributable to our acquisition of Sytel and
growth at TechTeam Cyntergy. Excluding the acquisition of Sytel, total gross
profit grew 5.2% to $8.30 million for the three months ended September 30, 2005,
from the comparable period in 2004.
Gross profit from diversified IT outsourcing services decreased 5.1% to $4.55
million for the three months ended September 30, 2005, from $4.80 million for
the comparable period in 2004. Gross margin from diversified IT outsourcing
services decreased to 25.4% for the three months ended September 30, 2005, from
25.8% for the comparable period in 2004. The decrease in gross profit and gross
margin is a result of the aforementioned decline in revenue from DaimlerChrysler
and Liberty Mutual in the United States and lower margin on our Ford business in
Europe. The resulting underutilization of our facility in Southfield, Michigan,
negatively impacted our gross margin. These declines were partially offset by
growth and margin improvement from our blended service delivery solution in
Belgium and Romania.
Gross profit from government technology services increased 120% to $4.01 million
for the three months ended September 30, 2005, from $1.83 million for the
comparable period in 2004. Gross margin from government technology services
increased to 27.7% for the three months ended September 30, 2005, from 23.3% for
the comparable period in 2004. The increase in gross profit is primarily due to
our acquisition of Sytel and new business from existing customers. The increase
in gross margin is primarily due to our acquisition of Sytel, more revenue from
higher margin service projects, and the absence of a large volume of lower
margin equipment resales that occurred in 2004. Excluding Sytel, gross profit
from government technology services increased 10.4% to $2.02 million for the
three months ended September 30, 2005, and gross margin increased to 30.7% from
23.3%. Excluding Sytel and all equipment resales, gross profit from government
technology services increased 19.8% for the three months ended September 30,
2005, and gross margin increased to 34.3% from 31.7%.
Gross profit from IT consulting and systems integration increased 41.2% to $1.34
million for the three months ended September 30, 2005, from $947,000 for the
comparable period in 2004. Gross margin from IT consulting and systems
integration increased to 19.8% for the three months ended September 30, 2005,
from 16.8% for the comparable period in 2004. The increase in gross profit and
gross margin is primarily due to additional business from new and existing
customers at TechTeam Cyntergy.
THREE MONTHS ENDED
SEPTEMBER 30,
------------------ INCREASE %
2005 2004 (DECREASE) CHANGE
------ ------ ---------- ------
(In thousands, except percentages)
OPERATING EXPENSES AND OTHER
Selling, general, and administrative expense... $8,606 $5,779 $2,827 48.9%
Net interest income............................ $ 151 $ 177 $ (26) (14.7)%
Foreign currency transaction gain (loss)....... $ (99) $ (50) $ (49) 98.0%
Income tax provision........................... $ 563 $ 743 $ (180) (24.2)%
Selling, general, and administrative expense increased 48.9% to $8.61 million,
or 20.8% of total revenue, for the three months ended September 30, 2005, from
$5.78 million, or 17.0% of total revenue, for the comparable period in 2004.
Excluding the revenue and expenses contributed by Sytel, selling, general, and
administrative expense increased 24.9% to $7.22 million, or 21.7% of total
revenue, for the three months ended September 30, 2005, from $5.78 million, or
17.0% of total revenue, for the comparable period in 2004. The year-over-year
increase in expense primarily resulted from incremental costs associated with
our continuing compliance efforts with Section 404 of the Sarbanes-Oxley Act of
2002, our continued deployment of a new global human capital management
system, additional personnel and facility costs associated with the
establishment of the Company's permanent facility in Romania, due diligence
expenses associated with an acquisition that the Company elected
21
not to pursue during the third quarter, and increased sales and marketing
expenses primarily resulting from the expansion of our North American sales
force and higher sales commissions. TechTeam incurred approximately $261,000 of
expense associated with the Company's preparatory activities for its compliance
this year with Section 404 of the Sarbanes-Oxley Act of 2002 for the three
months ended September 30, 2005. This compares with $25,000 and $525,000 in such
expense incurred by the Company in the first and second quarters of 2005,
respectively, and no such expense in 2004.
Net interest income decreased to $151,000 for the three months ended September
30, 2005, from $177,000 for the comparable period in 2004, as a result of the
Company borrowing $15.0 million on January 3, 2005 under a term loan to
partially finance the acquisition of Sytel, and from reduced interest income on
cash and cash equivalents being held as collateral for the term loan in a
non-interest-bearing account.
The foreign currency transaction loss of $(99,000) for the three months ended
September 30, 2005, is primarily due to a loss on a forward foreign exchange
contract that settled on September 30, 2005, to purchase euros in connection
with our acquisition of Akela Informatique SRL on October 3, 2005.
For the three months ended September 30, 2005, the consolidated effective tax
rate of 31.5% differs from the statutory tax rate of 34% primarily due to the
tax benefit of tax rates in certain foreign countries that are lower than 34%
and the tax benefit of certain permanent deductions. For the three months ended
September 30, 2004, the consolidated effective tax rate of 33.2% 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.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO SEPTEMBER 30, 2004
NINE MONTHS ENDED
SEPTEMBER 30,
------------------ INCREASE %
2005 2004 (DECREASE) CHANGE
-------- ------- ---------- ------
(In thousands, except percentages)
REVENUE
Diversified IT outsourcing services..... $ 55,631 $55,401 $ 230 0.4%
Government technology services.......... 43,662 19,720 23,942 121%
IT consulting and systems integration... 19,690 13,345 6,345 47.5%
Technical staffing...................... 6,099 5,767 332 5.8%
Learning services....................... 555 440 115 26.1%
-------- ------- -------
TOTAL REVENUE.............................. $125,637 $94,673 $30,964 32.7%
======== ======= =======
The majority of the overall revenue growth of 32.7% to $125.6 million for the
nine months ended September 30, 2005, from $94.7 million for the comparable
period in 2004, is attributable to our acquisitions of Sytel and A.N.E. and
revenue growth at TechTeam Cyntergy. Excluding the acquisitions of Sytel and
A.N.E., total revenue grew 3.6% to $95.7 million for the nine months ended
September 30, 2005, from $92.5 million for the comparable period in 2004,
primarily due to an increase in revenue from IT consulting and systems
integration services, which was partially offset by a decrease in revenue from
government technology services, as more fully discussed below.
Total revenue generated in the United States increased 35.0% to $88.7 million
for the nine months ended September 30, 2005, from $65.7 million for the
comparable period in 2004, due to our acquisition of Sytel. Excluding revenue
contributed by Sytel, revenue generated in the United States decreased 3.1% to
$63.7 million for the nine months ended September 30, 2005, from $65.7 million
for the comparable period in 2004, primarily due to the aforementioned decline
in revenue from DaimlerChrysler and Liberty Mutual, which was partially offset
by new customer contracts in diversified IT outsourcing services and IT
consulting and systems integration.
22
Revenue generated in Europe increased 27.4% to $36.9 million for the nine months
ended September 30, 2005, from $29.0 million for the comparable period in 2004,
primarily due to growth in business in Belgium and Romania from new customer
contracts, our acquisition of A.N.E., and the strengthening of European
currencies relative to the U.S. dollar. Excluding revenue contributed by A.N.E.,
revenue generated in Europe increased 19.9% to $32.1 million for the nine months
ended September 30, 2005, from $26.8 million for the comparable period in 2004.
If revenue and expenses in Europe for the nine months ended September 30, 2005
were translated at the average exchange rate for the comparable period in 2004,
reported revenue and net income would have been reduced by approximately $1.02
million and $38,000, respectively. 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 net income is considerably less than the estimated impact on revenue.
Diversified IT Outsourcing Services
Revenue from our diversified IT outsourcing services increased 0.4% to $55.6
million for the nine months ended September 30, 2005, from $55.4 million for the
comparable period in 2004, as a result of 33.0% revenue growth from our blended
service delivery solution in Belgium and Romania, offset by a decline in revenue
from diversified IT outsourcing services of 14.1% in the United States. The
growth in Belgium and Romania is primarily due to new customer contracts. The
decrease in revenue in the United States is primarily due to the decline in
revenue from the loss of business from DaimlerChrysler and Liberty Mutual, which
was partially offset by new customer contracts. Revenue for the nine months
ended September 30, 2005 also declined from the comparable period in 2004 from a
decrease in global diversified IT outsourcing revenue from Ford of 4.1% to $28.4
million for the nine months ended September 30, 2005, from $29.6 million for the
comparable period in 2004. Revenue from Ford decreased primarily due to a
reduction in the number of seats supported as Ford continues to reduce its
worldwide workforce.
Although our diversified IT outsourcing revenue in the United States declined
from 2004, we recently announced that the Company has signed contracts with four
major companies to provide specialized IT support services. The estimated
aggregate value of the contracts is approximately $21 million over the
three-year length of each contract. The Company will begin providing services to
these customers during the fourth quarter of 2005, with the last phase of the
largest program launch expected to be completed during the second quarter of
2006. Once these programs are fully launched, our Southfield, Michigan, facility
will no longer be underutilized.
Government Technology Services
Revenue from government technology services increased 121% to $43.7 million for
the nine months ended September 30, 2005, from $19.7 million for the comparable
period in 2004, due to our acquisition of Sytel on January 3, 2005. Excluding
Sytel, revenue from government technology services decreased 4.5% to $18.8
million for the nine months ended September 30, 2005, from $19.7 million for the
comparable period in 2004, due to a decrease in equipment resales. Excluding
Sytel and all equipment resales, revenue from government technology services
increased 11.8% from the comparable period in 2004 primarily from additional
business with existing customers.
IT Consulting and Systems Integration Services
Revenue from IT consulting and systems integration increased 47.5% to $19.7
million for the nine months ended September 30, 2005, from $13.3 million for the
comparable period in 2004, due to our acquisition of A.N.E. on May 13, 2004 and
revenue growth at TechTeam Cyntergy. Excluding A.N.E., revenue from IT
consulting and systems integration increased 33.3% to $14.8 million for the nine
months ended September 30, 2005, from $11.1 million for the comparable period in
2004, primarily due to additional business from new and existing customers at
TechTeam Cyntergy. The increase in revenue was partially offset by a decrease in
revenue from equipment resales, a project installing personal computers at Ford
that is subcontracted through Dell Inc., and the completion of other projects.
23
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
2005 2004
------------------ ------------------
GROSS GROSS INCREASE %
AMOUNT MARGIN % AMOUNT MARGIN % (DECREASE) CHANGE
------- -------- ------- -------- ---------- ------
(In thousands, except percentages)
GROSS PROFIT
Diversified IT outsourcing services .... $13,991 25.2% $14,506 26.2% $ (515) (3.6)%
Government technology services ......... 12,601 28.9% 5,052 25.6% 7,549 149%
IT consulting and systems integration... 3,964 20.1% 2,246 16.8% 1,718 76.5%
Technical staffing ..................... 1,349 22.1% 1,142 19.8% 207 18.1%
Learning services ...................... 147 26.5% 92 21.1% 55 59.8%
------- ------- ------
TOTAL GROSS PROFIT ........................ $32,052 25.5% $23,038 24.3% $9,014 39.1%
======= ======= ======
Consistent with revenue, the majority of the overall gross profit growth of
39.1% to $32.1 million for the nine months ended September 30, 2005, from the
comparable period in 2004, is attributable to our acquisitions of Sytel and
A.N.E. and growth at TechTeam Cyntergy. Excluding the acquisitions of Sytel and
A.N.E., total gross profit grew 7.8% for the nine months ended September 30,
2005, from the comparable period in 2004.
Gross profit from diversified IT outsourcing services decreased 3.6% to $14.0
million for the nine months ended September 30, 2005, from $14.5 million for the
comparable period in 2004. Gross margin from diversified IT outsourcing services
decreased to 25.2% for the nine months ended September 30, 2005, from 26.2% for
the comparable period in 2004. The decrease in gross profit and gross margin is
a result of the aforementioned decline in revenue from DaimlerChrysler and
Liberty Mutual in the United States and lower margin on our Ford business in
Europe. The resulting underutilization of our facility in Southfield, Michigan,
negatively impacted our gross margin. These declines were partially offset by
growth and margin improvement from our blended service delivery solution in
Belgium and Romania.
Gross profit from government technology services increased 149% to $12.6 million
for the nine months ended September 30, 2005, from $5.05 million for the
comparable period in 2004. Gross margin from government technology services
increased to 28.9% for the nine months ended September 30, 2005, from 25.6% for
the comparable period in 2004. The increase in gross profit is primarily due to
our acquisition of Sytel and new business from existing customers. The increase
in gross margin is primarily due to our acquisition of Sytel, more revenue from
higher margin service projects, and the absence in 2005 of a large volume of
lower margin equipment resales that occurred in 2004. Excluding Sytel, gross
profit from government technology services increased 14.9% to $5.80 million for
the nine months ended September 30, 2005, and gross margin increased to 30.8%
from 25.6%. Excluding Sytel and all equipment resales, gross profit from
government technology services increased 18.5% for the three months ended
September 30, 2005, and gross margin increased to 33.1% from 31.2%.
Gross profit from IT consulting and systems integration increased 76.5% to $3.96
million for the nine months ended September 30, 2005, from $2.25 million for the
comparable period in 2004. Gross margin from IT consulting and systems
integration increased to 20.1% for the nine months ended September 30, 2005,
from 16.8% for the comparable period in 2004. The increase in gross profit and
gross margin was primarily due to additional business from new and existing
customers at TechTeam Cyntergy and, to a lesser extent, our acquisition of
A.N.E. Excluding the gross profit contributed by A.N.E., gross profit increased
69.0% to $3.24 million for the nine months ended September 30, 2005, from the
comparable period in 2004, and gross margin increased to 21.9% from 17.2%.
24
NINE MONTHS ENDED
SEPTEMBER 30,
------------------ INCREASE %
2005 2004 (DECREASE) CHANGE
------- ------- ---------- ------
(In thousands, except percentages)
OPERATING EXPENSES AND OTHER
Selling, general, and administrative expense... $25,767 $17,928 $7,839 43.7%
Net interest income............................ $ 314 $ 502 $ (188) (37.5)%
Foreign currency transaction gain (loss)....... $ (3) $ (268) $ 265 (98.9)%
Income tax provision........................... $ 2,098 $ 2,162 $ (64) (3.0)%
Selling, general, and administrative expense increased 43.7% to $25.8 million,
or 20.5% of total revenue, for the nine months ended September 30, 2005, from
$17.9 million, or 18.9% of total revenue, for the comparable period in 2004.
Excluding the revenue and expenses contributed by Sytel and A.N.E., selling,
general, and administrative expense increased 18.0% to $20.8 million, or 21.7%
of total revenue, for the nine months ended September 30, 2005, from $17.6
million, or 19.0% of total revenue, for the comparable period in 2004. The
year-over-year increase in expense primarily resulted from our deployment of a
new global human capital management system, costs associated with our compliance
efforts with Section 404 of the Sarbanes-Oxley Act of 2002, additional personnel
and facility costs associated with the establishment of the Company's permanent
facility in Romania, severance costs associated with the termination of two
managers, reinstatement of the Company's 401(k) plan matching contribution,
increased investor relations activity, and increased sales and marketing
expenses primarily resulting from the expansion of our North American sales
force and higher sales commissions. TechTeam has incurred approximately $806,000
of expense associated with the Company's preparatory activities for its
compliance this year with Section 404 of the Sarbanes-Oxley Act of 2002 for the
nine months ended September 30, 2005, as compared to no such expense in 2004.
Net interest income decreased to $188,000 for the nine months ended September
30, 2005, from $502,000 for the comparable period in 2004, as a result of the
Company borrowing $15.0 million on January 3, 2005 under a term loan to
partially finance the acquisition of Sytel, and reduced interest income from
cash and cash equivalents being held as collateral for the term loan in a
non-interest-bearing account.
Foreign currency transaction gain (loss) decreased to a loss of $(3,000) for the
nine months ended September 30, 2005, from a loss of $(268,000) for the
comparable period in 2004, primarily due to the U.S. dollar strengthening
relative to the euro and British pound sterling to a greater extent in 2005 than
the comparable period in 2004, combined with a higher level of foreign assets
denominated in U.S. dollars.
For the nine months ended September 30, 2005, the consolidated effective tax
rate of 31.8% differs from the statutory tax rate of 34% primarily due to the
tax benefit of tax rates in certain foreign countries that are lower than 34%
and the tax benefit of certain permanent deductions. For the nine months ended
September 30, 2004, the consolidated effective tax rate of 40.5% differs from
the statutory tax rate of 34% primarily due to providing a valuation allowance
against the future tax benefit of operating loss carryforwards in certain tax
jurisdictions.
25
IMPACT OF BUSINESS WITH MAJOR CLIENTS
We conduct business under multiple contracts with various entities within the
Ford organization and with various agencies and departments of the United States
Government. For the three and nine months ended September 30, 2005, Ford
accounted for 26.4% and 27.4%, respectively, of the Company's total revenue, as
compared to 33.8% and 37.8%, respectively, for the comparable periods in 2004.
For the three and nine months ended September 30, 2005, the United States
Government accounted for 29.5% and 29.7%, respectively, of the Company's total
revenue, as compared to 11.5% and 12.3%, respectively, for the comparable
periods in 2004. No single agency or department of the United States Government
comprised 10% or greater of the Company's total revenue for all periods
presented except for the nine months ended September 30, 2004, whereby one
customer within the United States Government comprised 10.0% of the Company's
total revenue.
Ford Motor Company
Our business with Ford consists of help desk services, technical staffing,
network management, support services provided to Volvo Car Corporation, a
subsidiary of Ford, and a specific project installing personal computers
subcontracted through Dell Inc. Ford's long-term debt rating was lowered to
"below investment grade" status by Standard & Poor's Rating Services on May 5,
2005. At this time, we do not expect this downgrade to negatively affect our
business with Ford or the collectibility of our accounts receivable from Ford.
However, any loss of (or failure to retain a significant amount of business
with) Ford or a bankruptcy filing would have a material adverse effect on the
Company's operating results and liquidity.
United States Government
The U.S. Government's fiscal year ends on September 30 of each year. It is not
uncommon for government agencies to award extra tasks or complete other contract
actions in the weeks before the end of the fiscal year in order to avoid the
loss of unexpended fiscal year funds. Moreover, in years when the U.S.
Government does not complete its budget process before the end of its fiscal
year, government operations typically are funded pursuant to a "continuing
resolution" that authorizes agencies of the government to continue to operate,
but traditionally does not authorize new spending initiatives. When the
government operates pursuant to a continuing resolution, delays can occur in
procurement of products and services, and such delays can affect the Company's
revenue, profit, and cash flow during the period of delay.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $36.5 million at September 30, 2005, as compared
to $40.4 million at December 31, 2004. During the nine months ended September
30, 2005, cash and cash equivalents decreased $3.92 million primarily due to
$5.99 million in cash used to acquire Sytel (net of debt borrowings of $15.0
million used to finance the acquisition), $5.20 million in payments to reduce
long-term debt, $2.34 million in cash used for capital expenditures, and
$700,000 in payments to the former shareholders of Digital Support Corporation,
partially offset by $8.45 million in cash provided by operations and $2.97
million in proceeds from the issuance of common stock upon exercise of stock
options.
Cash provided by operations of $8.45 million for the nine months ended September
30, 2005 was generated primarily by income prior to non-cash charges for
depreciation and amortization of $8.66 million. Cash flow from operations
decreased 12.4% to $8.45 million for the nine months ended September 30, 2005,
from $9.65 million for the comparable period in 2004, primarily due to an
increase in net working capital.
We experienced a significant increase in accounts receivable and accounts
payable during the nine months ended September 30, 2005, due to our acquisition
of Sytel. Under six task order contracts with the United States Department of
Homeland Security ("DHS"), Sytel serves as the prime contractor and Electronic
Data Systems Corporation ("EDS") serves as its subcontractor. EDS performs in
excess of 95% of the work under the contract and creates the invoices, which
Sytel forwards to the DHS. Under the subcontract agreement between Sytel and
26
EDS, Sytel does not pay EDS' invoices until Sytel receives payment from the DHS.
As a result, there has been an increase in our accounts receivable and accounts
payable but a minimal impact on cash flow.
Long-term cash requirements, other than for normal operating expenses, are
anticipated for the continued expansion in Europe, enhancements of existing
technologies, possible repurchases of our common stock, additional consideration
that is payable to the selling shareholders of Sytel, DSC, A.N.E., and Akela if
specific performance conditions and operating targets are met in 2005-2007,
possible global expansion activities, the possible payment of Company dividends,
and the possible acquisition of businesses complementary to the Company's
existing businesses. We believe that positive cash flows from operations,
together with existing cash balances, will continue to be sufficient to meet our
ongoing operational requirements for the next twelve months and foreseeable
future. We have historically not paid dividends.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS No. 123R, "Share-Based
Payment," which replaces SFAS 123 and supersedes APB 25. SFAS 123R eliminates
the ability to account for share-based compensation transactions using APB 25,
and requires instead that such transactions be accounted for using a
fair-value-based method. SFAS 123R is effective for awards that are granted,
modified, or settled in periods beginning after December 15, 2005, or the
Company's fiscal year beginning January 1, 2006. The Company intends to adopt
SFAS 123R on January 1, 2006. As we use the fair value method of accounting
under the original provisions of SFAS 123 for pro forma disclosure purposes, we
are also required to apply the provisions of SFAS 123R in recognizing
compensation cost for any portion of awards granted or modified after December
15, 1994, that are not yet vested at the date SFAS 123R is adopted. Based on the
number of non-vested stock options the Company has outstanding at September 30,
2005 adoption of SFAS 123R will result in approximately $18,000 of aggregate
compensation expense, net of tax, in fiscal years subsequent to 2005 and will
not have a material affect on our financial position or operating results.
MATERIAL COMMITMENTS
As a result of the Company's acquisition of Sytel on January 3, 2005, the
Company's outstanding contractual obligations have changed to include operating
lease commitments of Sytel and $15.0 million the Company borrowed under a term
loan with a bank to partially finance our acquisition of Sytel.
The Company has the following contractual obligations outstanding at September
30, 2005:
OPERATING
MATURITIES OF CONTRACTUAL OBLIGATIONS DEBT LEASES
------------------------------------- ------ ---------
Less than one year................... $ -- $ 1,569
1-3 years............................ -- 9,321
4-5 years............................ 9,843 5,546
Thereafter........................... -- 4,440
------ -------
Total................................ $9,843 $20,876
====== =======
In October 2005, we borrowed $3.03 million under our line of credit with a bank
due January 2, 2006 to finance our acquisition of Akela.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no changes in the selection and application of critical
accounting policies and estimates disclosed in Item 7 of our Annual Report on
Form 10-K for the year ended December 31, 2004.
27
FACTORS INFLUENCING FUTURE RESULTS
Refer to Item 7 of our Annual Report on Form 10-K for the year ended December
31, 2004.
ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in reported market risks since December 31,
2004.
ITEM 4 -- CONTROLS AND PROCEDURES
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected.
As of September 30, 2005, an evaluation was performed under the supervision and
with the participation of the Company's management, including the Chief
Executive Officer, Chief Financial Officer, and Chief Accounting Officer, of the
effectiveness of the design and operations of the Company's disclosure controls
and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934. Based upon that evaluation, the Company's management,
including the Chief Executive Officer, Chief Financial Officer, and Chief
Accounting Officer, concluded that the Company's disclosure controls and
procedures were effective as of September 30, 2005.
As required by Rule 13(a)-15d under the Securities Exchange Act of 1934, the
Company's management, including our Chief Executive Officer, Chief Financial
Officer, and Chief Accounting Officer, also conducted an evaluation of the
Company's internal control over financial reporting to determine whether any
changes occurred during the quarter ended September 30, 2005 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting. There were no changes
in internal control over financial reporting, as described above, during the
quarter ended September 30, 2005.
28
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
The Company is a party to various legal proceedings that are routine and
incidental to its business. Although the consequences of these proceedings are
not presently determinable, in the opinion of management, they will not have a
material adverse affect on our liquidity, financial condition, or results of
operations, although no assurances can be given in this regard.
ITEM 2 -- UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no sales of unregistered equity securities of the Company during the
three months ended September 30, 2005.
The following table sets forth the information with respect to purchases made by
the Company of shares of its common stock during the second quarter of 2005:
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
------ ------------ ---------- ------------------- -------------------
July 1, 2005 to July 31, 2005 1,935 (a) $13.44 -- --
August 1, 2005 to August 31, 2005 2,302 (a) $12.54 -- --
September 1, 2005 to September 30, 2005 2,103 (a) $12.87 -- --
----------
(a) All purchases of shares were made for the purpose of contributing the
purchased shares to the TechTeam Global Retirement Savings Plan (one of the
Company's 401(k) plans) for employer matching contributions. The purchases
were not made pursuant to publicly announced plans and were made in the
open market.
ITEM 6 -- EXHIBITS
The following exhibits are filed as part of this report on Form 10-Q:
31.1 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act
of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act
of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.3 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act
of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.3 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TechTeam Global, Inc.
(Registrant)
Date: November 14, 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)
30
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
31.1 Certification Pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.3 Certification Pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.3 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.