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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2005
Commission File Number: 0-16284
TECHTEAM GLOBAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 38-2774613
(State or other jurisdiction (I.R.S. Employer
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
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name on each exchange on which registered
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Common Stock, $.01 par value NASDAQ(R) National Stock Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
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 aggregate market value of the Registrant's common stock held by
non-affiliates of the registrant as of June 30, 2005 was approximately
$123,072,000 (based on the June 30, 2005 closing sales price of $12.94 of the
Registrant's common stock, as reported on the NASDAQ(R) National Stock Market).
For the sole purpose of making this calculation, the term "non-affiliates" has
been interpreted to exclude directors and executive officers of the Company.
Such interpretation is not intended to be, and should not be construed to be, an
admission by TechTeam Global, Inc. or such directors or executive officers of
the Company that such directors and executive officers of the Company are
"affiliates" of TechTeam Global, Inc., as that term is defined under the
Securities Act of 1934.
The number of shares outstanding of the registrant's common stock as of March
10, 2006 was 10,029,204.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement, to be filed on or
before April 30, 2006, are incorporated by reference into Items 10, 11, 12, 13
and 14 of Part III of this report.
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TECHTEAM GLOBAL, INC.
FORM 10-K
TABLE OF CONTENTS
PAGE
NUMBER
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PART I
Item 1 Business 2
Item 1A Risk Factors 9
Item 1B Unresolved Staff Comments 16
Item 2 Properties 17
Item 3 Legal Proceedings 17
Item 4 Submission of Matters to a Vote of Security Holders 17
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 18
Item 6 Selected Financial Data 19
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 7A Quantitative and Qualitative Disclosures about Market Risk 33
Item 8 Financial Statements and Supplementary Data 34
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 66
Item 9A Controls and Procedures 66
Item 9B Other Information 66
PART III
Item 10 Directors and Executive Officers of the Registrant 67
Item 11 Executive Compensation 67
Item 12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 67
Item 13 Certain Relationships and Related Transactions 68
Item 14 Principal Accountant Fees and Services 68
PART IV
Item 15 Exhibits and Financial Statement Schedules 68
SIGNATURES 72
FINANCIAL STATEMENT SCHEDULE 73
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including "Item 7 -- Management's Discussion
and Analysis of Financial Condition and Results of Operations," contains
forward-looking statements that involve risks and uncertainties, as well as
assumptions that, if they never materialize or prove incorrect, could cause the
results of TechTeam Global, Inc. and its consolidated subsidiaries ("TechTeam")
to differ materially from those expressed or implied by such forward-looking
statements. All statements other than statements of historical fact are
statements that could be deemed forward-looking statements, including any
projections of revenue, gross margin, expenses, earnings or losses from
operations, synergies, or other financial items; any statements of the plans,
strategies, and objectives of management for future operations; any statements
concerning developments or performance relating to our services; any statements
regarding future economic conditions or performance; any statements of
expectation or belief; and any statements of assumptions underlying any of the
foregoing. The risks, uncertainties and assumptions referred to above include
the performance of contracts by suppliers, customers, and partners; employee
management issues; the difficulty of aligning expense levels with revenue
changes; the risks and costs incumbent in a proxy contest where all the
Company's Board of Directors could be replaced; the effects of and the costs
related to the replacement of the Company's president and chief executive
officer; complexities of global political and economic developments; and other
risks that are described herein, including but not limited to the items
discussed in "Item 1A -- Risk Factors," of this report, and that are otherwise
described from time to time in TechTeam's reports filed with the Securities and
Exchange Commission. TechTeam assumes no obligation and does not intend to
update these forward-looking statements.
PART I
ITEM 1. BUSINESS
GENERAL
TECHTEAM GLOBAL, INC. (including its consolidated subsidiaries, "TechTeam" or
the "Company" or "we") is a global provider of information technology ("IT") and
business process outsourcing ("BPO") services to Fortune 1000 companies,
multinational companies, product providers, small and mid-size companies and
government entities. Our periodic reports and current reports filed with the
Securities and Exchange Commission are available free of charge on our website,
located at www.techteam.com.
TechTeam Global, Inc. was incorporated under the laws of the State of Delaware
in 1987. The Company's common stock is traded on the NASDAQ National Stock
Market(R) under the symbol "TEAM". Our client base includes Ford Motor Company,
Canon Europe NV, Deere & Company, MICROS, Inc., United Parcel Service, Essilor
International, Cendant Corporation, DaimlerChrysler AG, and Schering-Plough
Research Institute, as well as Federal government agencies and local government
entities, such as the United States Air National Guard, National Institutes of
Health, Immigration and Naturalization Service, and the Department of Health and
Human Services.
Our subsidiaries are: TechTeam Global NV/SA (Brussels, Belgium), with its
subsidiary TechTeam A.N.E. NV/SA (Gent, Belgium); TechTeam Global Ltd. (United
Kingdom); TechTeam Global GmbH (Germany); TechTeam Global AB (Sweden); S.C.
TechTeam Global SRL (Bucharest, Romania); TechTeam Akela SRL, acquired on
October 3, 2005 (Bucharest, Romania); TechTeam Asia Pacific (Private) Ltd.
(India); TechTeam Government Solutions, Inc. (formerly known as Digital Support
Corporation, Chantilly, Virginia), with its subsidiary Sytel, Inc., acquired on
January 3, 2005, (Bethesda, Maryland); TechTeam Cyntergy, L.L.C.; and TechTeam
Capital Group, L.L.C. (Southfield, Michigan).
2
SERVICES AND INFORMATION ABOUT OPERATING SEGMENTS
We provide services to our customers in five operating segments -- IT
Outsourcing Services, IT Consulting and Systems Integration, Government
Technology Services, Technical Staffing, and Learning Services. Over the past
four years, TechTeam has strategically strengthened its service offerings in the
IT Outsourcing Services and IT Consulting and Systems Integration business
segments through a combination of organic growth, acquisitions, and enhancements
to our business model. We intend to continue this strategy of strengthening and
growing our core servicing offerings through organic growth, acquisitions, and
enhancements to our delivery model.
Information with respect to each of our segments is included in "Item 7 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in Note 12 of the Notes to Consolidated Financial Statements
included in "Item 8 -- Financial Statements and Supplementary Data."
1. IT OUTSOURCING SERVICES
Our IT Outsourcing Services segment provides help desk and infrastructure
support around-the-clock (24x7x365) for our clients, their end-users, and other
constituencies. We maintain and support a full range of our clients' IT and
business process infrastructure from network environments to computing systems,
and from shrink-wrapped applications to advanced proprietary and acquired
application systems. We also provide technical support for our customers'
products in the marketplace, internationally, and in multiple languages. The two
primary elements of this business segment are Help Desk Services and BPO
Services.
Help Desk Services
Our help desk services are principally deployed using a "single point of
contact" ("SPOC") delivery model designed to enable our clients to consolidate
their problem resolution support functions into a centralized help desk, thereby
reducing costs by standardizing responses to incidents, eliminating overlapping
help desks, and reducing the number of incidents that need to be escalated to a
higher-level support function. Our technicians are trained in the client's IT
infrastructure and applications to enable them to diagnose and solve the
end-user's problems and answer technical questions. If the technician is not
able to resolve the problem with the end-user, the call is escalated to the
appropriate resource to resolve the problem.
Bundled together with our help desk services are a wide range of related IT
support services. As a result, we are able to manage first and second level
support for our customers efficiently utilizing our resources. For example,
under the Ford Motor Company ("Ford") Global SPOC Program ("Global SPOC
Program"), TechTeam provides a single point of contact help desk for Ford in
North America, the United Kingdom, and Germany, and Ford Motor Credit
Corporation in North America and the United Kingdom that integrates desk side
support and server maintenance with help desk services.
Our Help desk services are delivered from our facilities in the United States
(Dearborn and Southfield, Michigan; and Davenport, Iowa), our facilities in
Europe (Brussels, Belgium; and Bucharest, Romania), and from our customers'
facilities. Our technicians provide same-client support from multiple delivery
locations through the use of advanced technology tools. Utilizing a
client-specific solution that blends the advantages of each location, we are
able to provide cost-effective service in over 25 languages.
While most of our help desk business is performed as a dedicated desk for a
single client, we have introduced and are continuing to develop a "shared desk"
service offering, where our technicians provide support for more than one
client. This offering is provided from our facilities in Brussels, Belgium;
Southfield, Michigan; and Bucharest, Romania. Over the past year, we have
expanded our shared desk support capability beyond supporting electronic data
capture of drug trial information for a number of international pharmaceutical
clients and providing IT support to the retail, hospitality, and food service
industries to providing IT help desk support bundled with other IT support
services. This shared desk solution provides high-quality support for our
smaller-sized customers where the provision of a dedicated help desk is not cost
effective.
3
BPO Services
Our BPO service clients primarily outsource the technical support aspect of
their customer service business process to us. We provide technical,
"post-sales" support for our clients' products, services, and software. For
example, we provide technical product support to the owners of Canon consumer
products (cameras, printers, etc.) sold in Europe. We also provide non-technical
customer service support for our clients, such as customer enrollments and
marketing promotion support.
In 2004, in order to address the trend toward offshore help desk and BPO
operations and the downward pressure on the pricing of our services, we
established a multi-lingual help desk facility in Bucharest, Romania. As of
December 31, 2005, this Romanian subsidiary had approximately 178 employees
supporting seven different TechTeam clients. While there is increasing
competition for labor within Bucharest, Romania, and the inflation rate within
Romania was 9% during 2005, we believe our Romanian operation continues to
provide us with the ability to manage, at a lower cost per technician, the
multiple variables that affect the pricing of a multi-lingual help desk,
including but not limited to: (a) language distribution, (b) hours of operation,
and (c) technical skills. We anticipate that the lower cost structure in Romania
is a significant asset in securing new global business from the United States,
Europe, or other locations speaking French, Italian, Spanish, Russian, German,
English, or languages of Eastern European countries.
In an effort to offer further value to our help desk and BPO services clients,
TechTeam has invested in the development of an integrated, web-based support
tool, known as the "Support Portal," that encompasses incident management,
knowledge management, data analytics, self-help, and distance learning. This
support offering enables end users to submit inquiries for support and to solve
their incidents through access to focused knowledge articles. Allowing end users
to solve their own incidents and providing them access to open incident
information results in call deflection and lower total cost of ownership to the
client. Our tools also provide our clients with real-time access to their
project's performance statistics. This data analytic capability allows our
clients to be proactive in addressing changes in their environment.
2. IT CONSULTING AND SYSTEMS INTEGRATION
Within this business segment, we provide customers with IT infrastructure (such
as personal computers, printers, phone systems, networks, servers, and switches)
design, development, technology deployment, and implementation services from
project planning and implementation to full-scale network, server and
workstation installations, and maintenance. We offer customers a wide spectrum
of IT services, ranging from technology consulting, security, application
integration, and storage, to application development. We follow our
implementation with a full range of services ranging from maintenance, help
desk, and desk side support to network monitoring in order to assist companies
in managing their IT infrastructure. In 2005, we continued to expand our
capabilities within this segment with the addition of TechTeam Akela SRL, which
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.
Through our TechTeam Cyntergy, L.L.C. subsidiary, we offer deployment, technical
support, and training services to companies in the hospitality, retail, and food
service industries throughout the United States. TechTeam Cyntergy employees
provide on-site services to implement technology and train the customers'
personnel in the use of point-of-sale and property management software.
3. GOVERNMENT TECHNOLOGY SERVICES
During the past two years, we have entered the government technology services
market through the acquisition of Digital Support Corporation and Sytel, Inc.
("Sytel"). In an effort to focus our brand, we have renamed Digital Support
Corporation as TechTeam Government Solutions, Inc. ("TTGSI"). The services
provided in this business segment mirror the services offered in our other
business segments, but are provided to various departments of the United States
Government including, but not limited to, the Department of Defense, National
Institutes of Health, Export-Import Bank, U.S. Geological Service, Department of
Health and Human Services, and Department of Justice, and to local governmental
entities in the United States, and the European Union (see information included
in "Risks Inherent in Government Technology Services" located in "Item 1A --
Risk Factors").
4
Our purchase of Digital Support Corporation and Sytel and their corresponding
past performance, contracts base, and customer relationships has provided
TechTeam with a significant footprint in the government information technology
services market. At December 31, 2005, this represented approximately $55.6
million in revenue, or 33.4% of our total revenue. While this provides us with a
more diversified market position, it also positions us within a large and
growing market segment. The U.S. Federal Government IT services market is
expected to grow at a compounded annual growth rate ("CAGR") of approximately 4%
over the next five years. We are seeking to take advantage of the increase of IT
outsourcing occurring within the federal, state and local markets we serve
through partnerships and multiple-award, task-order-based
indefinite-quantity/indefinite-delivery ("IDIQ") contract opportunities that
have been used extensively to meet government outsourcing demands.
The majority of our revenue from this business segment is earned through
long-term contracts through which we provide either managed network services in
the form of a monthly service or services on a time and materials basis. For our
managed network services customers, we provide complete life cycle support for a
customer's IT infrastructure ranging from their desktops to their data and voice
networks. We provide design, implementation, operation, and maintenance (help
desk and desk side support) services. For example, TTGSI provides systems
administration support, database administration and engineering support, and
other IT technical support services to a widely distributed division of the
U.S. Department of Defense.
With respect to the advance enterprise solutions business, we assist our
customers in the design, development, and implementation of enterprise-level
technology solutions, ranging from databases and applications to enterprise
portals, which seek to enable government agencies to maximize efficiency of key
business processes by utilizing the internet and other advanced technologies.
4. TECHNICAL STAFFING
Our Technical Staffing business segment consists of providing on-site technical
support services including help desk technicians, software developers, and
network support technicians. We strive to recruit a technically proficient
employee base. We enhance our employees' proficiency by providing access to
technical training programs, which includes training in new technologies,
advanced operating systems like Windows XP and Unix, and sophisticated
applications such as Oracle. This training allows us to provide our customers
with highly-skilled professionals that are trained and certified in the latest
technologies. Most of our technical staffing placements are long-term
assignments.
Further, our technical staffing business assists us in offering qualified
employees with a diverse career path. As help desk technicians learn new
technologies and utilize our internal training programs, they often migrate to
technical staffing positions where they can increase their knowledge and
compensation.
5. LEARNING SERVICES
We provide custom training and documentation solutions that include a wide
spectrum of offerings, including computer-based training, distance learning,
course catalogs, registration, instructional design consultants, customized
course materials, certified trainers, evaluation options, desk side tutorials,
and custom reports. We provide customized training programs for many of our
customers' proprietary applications.
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. Ford accounted for 27.4% of the Company's total revenue in 2005, as
compared to 37.4% in 2004 and 52.9% in 2003. The United States Government
accounted for 30.0% of the Company's total revenue in 2005, as compared to 16.7%
in 2004 and 0% in 2003. No single agency or department of the United States
Government comprised 10% or greater of the Company's total revenue for any of
these three years.
5
Ford Motor Company
Our business with Ford consists of help desk and desk side 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. Revenue generated through our business
with Ford decreased in 2005 to $45.7 million from $47.9 in 2004 and was $45.4
million in 2003.
At present, Ford is under significant financial pressures, which is reflected in
Ford's long-term debt rating being lowered to "below investment grade" status by
Standard & Poor's Rating Services. In order to address these financial
pressures, Ford has embarked on a major restructuring plan that will reduce
costs through a variety of methods, including the reduction of employees and
manufacturing facilities.
On December 1, 2005, we successfully renewed the Ford Global SPOC Program, our
largest single contract with Ford, for three years through November 2008. Under
the Global SPOC Program, we provide a set of infrastructure support services
under specific service level metrics, and we invoice Ford based upon the number
of seats we support. Under the renewed contract, the standard global support
model has been modified in order to satisfy Ford's requirement for a reduction
in the price of the service provided, and maintain the gross margin performance
of the Global SPOC Program. As a result, Ford has agreed to reduced service
levels and a restructuring of our service delivery. The initial price reduction
occurred on December 1, 2005; a second reduction took place in February 2006;
and a third reduction will occur following the launch of a significant new
project that is scheduled to launch in mid-March 2006 in the United Kingdom.
This project will largely offset the revenue lost as a result of the price
reductions given to Ford under the new contract.
As Ford implements its restructuring plan, we expect to see a reduction in the
number of seats that we support. The number of seats supported will be
determined bi-annually on December 1 and June 1 of each year. If certain
contractual conditions are met, Ford and TechTeam will have the right during
each six month period to request one out-of-cycle seat adjustment. Although we
are unable to predict the pace of Ford's restructuring plan, we estimate that
our total revenue from Ford will decline approximately 3-5% in 2006 from 2005.
We anticipate that, due to Ford's financial condition, Ford will continue to
seek price concessions on services that we perform on their behalf outside of
the Global SPOC Program. However, we do not believe that Ford's financial
condition will otherwise 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 bankruptcy filing by Ford 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.
COMPETITION
We are engaged in a highly competitive business. While there are many companies
that provide similar services, no one company dominates our industry. We
frequently find ourselves competing with global IT outsourcing companies, such
as IBM, EDS, and Computer Science Corporation, our customer's internal staff,
and regional service providers. The markets for our services have been under
significant price pressure as customers scrutinize their IT spending and
globalization increases the number of low-cost providers able to provide similar
services. Many of our competitors are able to provide a wider range of services
through a global network of service providers; many have more resources; and
many have stronger brand recognition.
6
We believe that we have a strong overall value proposition when one considers
our price, quality, focus on customer satisfaction, and flexibility of our
service offerings. Accordingly, we compete principally on the basis of service
excellence, the ability to provide best-in-class help desk services, price,
experience and reputation in the industry, technological capabilities, ISO
quality practices, responsiveness to client needs, and referrals from existing
clients.
As noted previously, we have implemented an offshore outsourcing strategy in
Romania. We anticipate that our Romanian offering will enhance our overall IT
outsourcing offering because of the technicians' technical and multi-lingual
capabilities, which are provided at a cost that is currently appreciably lower
than in the United States and Western Europe.
SALES AND MARKETING
Our sales and marketing objective is to leverage our expertise and global
presence to develop long-term relationships with existing and potential clients
both domestically and internationally. Our marketing and business development
initiatives are designed to build stronger brand identity within our current
vertical markets and the overall IT outsourcing marketplace. We believe that our
client base provides excellent opportunities for further marketing and cross
selling of our services. Our plans for increasing our visibility include market
focused advertising, consultative personal visits with potential and existing
clients, participation in market specific trade shows and seminars, speaking
engagements, articles and white papers, and our website. Further we intend to
invest in establishing and growing our network of channel and alliance partners
who are able to sell our services in a cooperative and mutually beneficial way.
Our sales force is focused on both new customer acquisition and growth of
business at our existing accounts.
As we continue to diversify our business through acquisitions, we work to
integrate the service offerings of our acquisitions into our global service
offerings and integrate the sales forces into one integrated global sales force.
Inorganic growth also may provide us the opportunity to broaden our set of
service offerings, segment penetration, and industry presence.
SEASONALITY
There is limited seasonality to our business. We invoice our customers for
services primarily in three different ways: as a managed service, on a time and
materials basis, or on per-incident or per-call-handled basis. Approximately,
35% of our revenue is invoiced on a managed service basis where we provide a
prescribed service for a monthly fee, which does not vary materially on a
monthly basis. Another 36% of our services are provided on a time and materials
basis, and within this revenue stream there is variation in revenue based upon
the number of billable days during a quarter. We invoice approximately 25% of
our revenue on a per-incident or per-call-handled basis. There are fluctuations
in the call volumes received on a monthly basis depending upon the customer
supported. While our customers are required to provide us with anticipated call
volumes, we often are not able to reduce our labor expense to match the decline
in incident and call volume. The third quarter tends to be slower than the other
quarters due to the summer holiday season in Europe, particularly in Sweden, and
the fourth quarter may be negatively affected by the seasonal holidays.
INTELLECTUAL PROPERTY
We rely upon a combination of contract provisions and trade secret laws to
protect the proprietary technology we use in our operations. We also rely on a
combination of copyright, trademark and trade secret laws to protect our
proprietary software. We attempt to further protect our trade secrets and other
proprietary information through agreements with employees and consultants. We do
not hold any material patents and do not have any patent applications pending.
There can be no assurance that the steps we have taken to protect our
proprietary technology will be adequate to deter misappropriation of our
proprietary rights or third-party development of similar proprietary software.
We hold a registered trademark for TechTeam(R).
7
EMPLOYEES
We had a total of 2,172 employees worldwide as of December 31, 2005, comprised
of 1,980 technicians and operational staff, 40 sales and marketing employees,
and 152 administrative employees. Our employees, with the exception of
approximately 357 employees in Europe, are not represented by a labor union and
we have never suffered an interruption of business as a result of a labor
dispute. We consider our relations with our employees to be good.
EUROPEAN OPERATIONS
We service our clients in Europe through seven wholly-owned subsidiaries:
TechTeam Global Ltd., TechTeam Global NV/SA, TechTeam A.N.E. NV/SA (wholly-owned
by TechTeam Global NV/SA), TechTeam Global GmbH, TechTeam Global AB, S.C.
TechTeam Global SRL, and TechTeam Akela SRL. We offer services from each of our
business segments in Europe. However, the majority of the revenue is currently
generated in our IT Outsourcing Services segment.
TechTeam Global Ltd., TechTeam Global GmbH, and TechTeam Global AB provide Ford
and its subsidiaries with help desk services and technical staffing. TechTeam
Global NV/SA and S.C. TechTeam Global SRL provide our clients primarily with
multi-lingual help desk support. A significant portion of our business in Europe
is driven by our client base in the United States. Ford and its subsidiaries are
currently the only clients of TechTeam Global GmbH and TechTeam Global AB.
A summary of our international revenue and long-lived assets is set forth in
Note 12 to our Consolidated Financial Statements in "Item 8 -- Financial
Statements and Supplementary Data," which is incorporated herein by reference.
Our international business is subject to risks customarily encountered in
foreign operations, including changes in a specific country or region's
political or economic conditions, trade protection measures, import or export
licensing requirements, the overlap of different tax structures, unexpected
changes in regulatory requirements, and natural disasters. We are also exposed
to foreign currency exchange rate risk inherent in our sales commitments,
anticipated sales, and assets and liabilities denominated in currencies other
than the U.S. dollar or the local currency of the subsidiary delivering the
service. However, the majority of our revenue is received in same currency in
which we pay our expenses. While these risks are believed to be manageable, no
assurances can be given in this regard.
DISCONTINUED OPERATIONS -- LEASING
TechTeam Capital Group, L.L.C. ("Capital Group"), a subsidiary of the Company,
previously wrote leases for computer, telecommunications, and other types of
capital equipment, with initial lease terms ranging from two to five years.
Capital Group ceased writing new leases in March 2000 and is in the final stages
of running out its lease portfolio. Our future revenue stream from contractually
committed leases is expected to be inconsequential to our results of operations.
The activity that remains in winding-down the leasing operation is the
collection of accounts receivable, including older accounts receivable related
to terminated leases. As a result, Capital Group has been presented as a
discontinued operation in accordance with Statement of Financial Accounting
Standards No. 144, "Accounting for the Disposal or Impairment of Long-Lived
Assets." Under this statement, the operating results of Capital Group are
presented separately from continuing operations in the accompanying financial
statements for all periods presented. Capital Group previously was reported as a
separate operating segment called Leasing Operations.
During 2003, we determined that we would not be able to obtain the value
previously expected from the sale of off-lease equipment inventories and that
certain estimated residual values of leased equipment were overstated due to a
significant decline in the fair market value of the equipment in the secondary
market. In recognition of the deterioration in these market prices, we recorded
non-cash charges to earnings totaling approximately $1,677,000 during 2003 to
increase our reserve for inventories and residual values. No such charges were
recorded in 2005 and 2004.
8
ITEM 1A. RISK FACTORS
FACTORS INFLUENCING FUTURE RESULTS
Because of the following factors, as well as other variables affecting our
operating results which are not set forth below, past financial performance may
not be a reliable indicator of future performance, and historical trends should
not be used to anticipate results or trends in future periods.
OUR REVENUE, GROSS PROFIT, AND EXPENSES MAY SUFFER IF WE ARE NOT ABLE TO
MAINTAIN OUR RELATIONSHIP WITH A LARGE AUTOMOBILE MANUFACTURER AND OTHER
SIGNIFICANT CUSTOMERS FOR WHOM WE HAVE CONTRACTS UP FOR RENEWAL.
As set forth in "Item 1 -- Business," we continue to depend upon Ford and its
subsidiaries for a substantial portion of our revenue. The past three years have
been difficult financially for this client, and further deterioration of its
financial condition could have a material adverse impact on our business as they
may seek further price concessions or the termination of projects. Similarly,
the loss of any significant customer or a further reduction in economic activity
in the automotive industry would have a material adverse impact on our business,
financial condition, and results of operations.
During 2006, we have contracts worth less than 10% of our business up for
renewal. The most significant contract is the contract to provide support to
Canon Europe NV, which is scheduled for renewal at the end of March 2006. We
believe that we are well positioned to renew this contract due to our
performance, but there can be no assurance in this regard. See also discussion
of risks inherent in government technology services.
THE COMPETITIVE PRESSURES WE FACE COULD HARM OUR REVENUE, GROSS MARGIN, AND
BUSINESS PROSPECTS.
We face intense competition in all of our markets and for all of our services.
Many competitors have substantially greater resources, including more locations,
greater financial resources, a larger client base, and greater name and brand
recognition. These competitors may be willing to provide the same services that
we do at a loss or at a lower gross margin in order to attain other, more
lucrative business from our customers. Due to this competition, it may be
difficult for us to retain our current customers or grow our revenue outside of
our current customer base.
The intense competition may result in our customers being able to demand reduced
pricing in order for us to remain a preferred vendor. These pressures will
likely increase due to the trend to move outsourcing services offshore to
countries with lower labor costs, such as India, Malaysia, and the Philippines.
Our inability to continue to execute upon our strategy to address the
globalization of the support services market could have a material adverse
impact on our ability to maintain and grow our customer base. Further, we may
have to continue to lower the prices of our services to stay competitive, while
at the same time trying to maintain or improve revenue and gross margin. If we
cannot proportionately decrease our cost structure on a timely basis in response
to competitive price pressures, our gross margin and therefore our profitability
could be adversely affected. Any of these circumstances could have a material
adverse effect on our business, financial condition, and results of operations.
Moreover, the process to win new business tends to be long. Our IT outsourcing
services business models require significant changes to our customers' business
processes and each customer may have significant internal political difficulties
with local environments giving up decentralized control of the support function.
The decision makers are rarely involved in the early details of the selection
process so there are often multiple sales efforts -- to the team charged with
selection and then to the Chief Information Officer/Chief Executive
Officer/Board -- that have to occur. Our results are dependent on our ability to
successfully manage the sales process and strong competition in these markets.
WE ARE SUBJECT TO CONTRACT RISKS INHERENT IN OUR BUSINESS.
The great majority of our contracts, including our Ford Global SPOC contract,
may be terminated without cause on short notice, often upon as little as 90
days' notice. Terminations and non-renewals of major contracts could have a
material adverse impact upon our business, financial condition, and results of
operations.
9
A portion of our IT outsourcing services business is billed on a managed service
basis (where the fee is fixed to perform specified services) as opposed to time
and materials. The onset of problems in our customers' infrastructure, such as
computer viruses, may require us to deploy additional resources to solve these
problems. In many instances, we would not receive any additional revenue for the
work performed, thereby adversely impacting our profitability.
To the extent we provide service on a per-incident or per-minute basis, our
financial performance is dependent upon the volume of service requests that we
receive on the project. Some of our contracts do not contain minimum guaranteed
volume, so we may not always receive enough volume to pay for our costs relating
to a specific contract. Even where volume guarantees exist we may not receive
enough volume to make a profit for the time period when the guarantee is
enforced. Also, many of our contracts contain financial penalties for our
failure to meet the contractual performance service levels. If the volume is too
high, we may not be able to meet the service levels. In the United States, we
are able to manage this risk through changes in our staffing, but due to labor
laws, our European entities do not have as much flexibility in staffing. Due to
the competitive market, we often must agree to a price for providing service
based primarily on information provided to us by our prospective customer.
Sometimes this information is not correct, and it is difficult to increase our
price because the prospective customer has a limited budget. Our inability to
estimate accurately the resources and related expenses required for the project
or our failure to complete our contractual obligations in a manner consistent
with their terms could materially and adversely affect our results of
operations..
WE ARE SUBJECT TO RISKS INHERENT IN THE PROVISION OF TECHNOLOGY SERVICES TO
GOVERNMENTAL ENTITIES.
We derive an increasing amount of our revenues from government contracts that
typically are awarded through competitive processes and span a one-year base
period and one or more option years. The unexpected termination or non-renewal
of one or more of our significant contracts could result in significant revenue
shortfalls. Our clients generally have the right not to exercise the option
periods. In addition, our contracts typically contain provisions permitting an
agency to terminate the contract on short notice, with or without cause.
Following the expiration of the contract term, if the client requires further
services of the type provided in the contract, there is frequently a competitive
re-bidding process. We may not win any particular re-bid or be able to
successfully bid on new contracts to replace those that have been terminated.
Many of the systems we support involve managing and protecting information
involved in the U.S. Department of Defense and other sensitive government
functions. A security breach in one of these systems could cause serious harm to
our business, could result in negative publicity and could prevent us from
having further access to such critically sensitive systems or other similarly
sensitive areas for other governmental clients. Losses that we could incur from
such a security breach could exceed the policy limits that we have for "errors
and omissions" insurance.
Some of our government contracts require us, and certain of our employees, to
maintain security clearances. If we lose or are unable to obtain security
clearances, the client can terminate the contract or decide not to renew it upon
its expiration. As a result, to the extent we cannot obtain the required
security clearances for our employees working on a particular engagement, we may
not derive the revenue anticipated from the engagement, which could negatively
impact our operating results.
Federal government agencies routinely audit government contracts. These agencies
review a contractor's performance on its contract, pricing practices, cost
structure and compliance with applicable laws, regulations and standards. An
audit could result in an adjustment to our revenues because any costs found to
be improperly allocated to a specific contract will not be reimbursed, while
improper costs already reimbursed must be refunded. If a government audit
uncovers improper or illegal activities, we may be subject to civil and criminal
penalties and administrative sanctions, including termination of contracts,
forfeiture of profits, suspension of payments, fines and suspension or debarment
from doing business with federal government agencies. In addition, we could
suffer harm to our reputation if allegations of impropriety were made against
us.
We must comply with and are affected by U.S. federal government regulations
relating to the formation, administration, and performance of government
contracts. These regulations affect how we do business with our clients and may
impose added costs on our business. Any failure to comply with applicable laws
and regulations could result in contract termination, U.S. price or fee
reductions or suspension or debarment from contracting with the federal
10
government. Further, the federal government may reform its procurement practices
or adopt new contracting methods relating to the General Services Administration
schedule or other government-wide contract vehicles. To the extent that we are
unable to successfully comply with these regulations, our Government Technology
Services business could be negatively impacted.
IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO RECRUIT ADDITIONAL QUALIFIED
PERSONNEL, OUR BUSINESS AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED.
The success of the Company is highly dependent upon the efforts, direction, and
guidance of its senior management. The only employment agreements that we
currently have with the executive officers of the Company are with the President
and Chief Executive Officer, the Vice President of Sales and Marketing EMEA, and
Vice President of Operations EMEA. Except for Employment Agreements Relating to
a Change of Control, which only apply to a change in the control of the Company,
we do not have any other employment agreements with other members of our
executive officer team. The loss of any of these senior executives or our
inability to attract, retain, or replace key management personnel in the future,
could have a material adverse effect on our business, financial condition, and
results of operations.
OUR INABILITY TO ATTRACT AND RETAIN QUALIFIED EMPLOYEES COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.
Our business involves the delivery of professional services and is very labor
intensive. Our success depends in large part upon our ability to attract,
develop, motivate, and retain highly skilled technical, clerical, and
administrative employees. Qualified personnel, especially in Washington, D.C.,
Bucharest, Romania, and Gothenburg Sweden, are in high demand. Accordingly, we
expect to experience increased compensation costs that may not be offset through
either increased productivity or higher customer pricing. Moreover, no
assurances can be given that we will be able to attract and retain sufficient
numbers of qualified employees in the future, especially when we need to expand
our services in a short time period. We attempt to implement a career path model
where our helpdesks are located, thereby enabling our employees to move to new
jobs that require higher skill levels and pay more money. Our inability to
effectively implement this business model in these locations could negatively
affect our employee retention rates. Our failure to attract and retain employees
could have a material adverse effect on our business, financial condition, and
results of operations.
IMPLEMENTATION OF OUR STRATEGY TO GROW THROUGH COMPLEMENTARY BUSINESS
ACQUISITIONS IS SUBJECT TO NUMEROUS RISKS AND DIFFICULTIES.
Our business strategy includes seeking to make complementary business
acquisitions. In order to pursue a growth by acquisition strategy successfully,
we must identify suitable candidates for these transactions, complete these
transactions, and manage post-closing issues such as the integration of acquired
companies. Integration issues are complex, time-consuming and potentially
expensive and, without proper planning and implementation, could significantly
disrupt our business, including, but not limited to, the diversion of
management's attention, the loss of key business and/or personnel from the
acquired company, unanticipated events, legal liabilities, and dilutive effect
of the issuance of additional securities, and possible impairment of intangible
assets. Moreover, the financial risks continue after the integration of the
company. If the implicit value of the business declines, there could be a
non-cash partial or full write-off of the goodwill attributed to the
acquisition. Transactions may result in significant costs and expenses and
charges to earnings, including those related to severance pay, early retirement
costs, employee benefit costs, asset impairment charges, charges from the
elimination of duplicative facilities and contracts, in-process research and
development charges, inventory adjustments, legal, accounting and financial
advisory fees, and required payments to executive officers and key employees
under retention plans. Any of these possible difficulties could have a material
adverse effect on our business, financial condition, and results of operations.
WE ARE SUBJECT TO NUMEROUS RISKS RELATING TO OUR INTERNATIONAL OPERATIONS.
We operate businesses in many countries outside the United States, all of which
are currently located throughout Europe. As part of our business strategy, we
plan to further expand our global reach to be able to deliver services from Asia
and South America. As a result, we expect to continue expansion through start-up
operations and
11
acquisitions in additional countries. Expansion of our existing international
operations and entry into additional countries will require management attention
and financial resources.
Our future revenue, gross margin, expenses, and financial condition also could
suffer due to a variety of international factors, including the following:
- changes in a country's or region's economic or political conditions,
including inflation, recession, interest rate fluctuations, and
unanticipated military conflicts;
- currency fluctuations, particularly in the European euro, which
contribute to variations in sales of services in impacted
jurisdictions and also affect our reported results expressed in U.S.
dollars;
- longer accounts receivable cycles and financial instability among
customers;
- local labor conditions and regulations;
- differences in cultures and languages, which impair our ability to
work as an effective global team;
- differing political and social systems;
- changes in the regulatory or legal environment;
- differing technology standards or customer requirements;
- difficulties associated with repatriating cash generated or held
abroad in a tax-efficient manner and changes in tax laws; and
- natural and man-made disasters.
To the extent that the Company does not manage its international operations
successfully, its business could be adversely affected and its revenues or
earnings could be reduced.
In addition, there has been an increasing amount of political discussion and
debate related to worldwide outsourcing, particularly from the United States to
offshore locations. There is federal and state legislation currently pending
related to this issue, and such legislation, if enacted, could potentially have
an adverse effect on the Company's results of operations and financial
condition.
THERE ARE SUBSTANTIAL RISKS ASSOCIATED WITH EXPANDING OUR BUSINESS INTO OFFSHORE
MARKETS.
The outsourcing industry trend to move business towards offshore markets could
result in excess operating capacity in the United States and Belgium, thereby
increasing competition for customers. Moreover, there are no assurances that we
will be able to successfully expand into and conduct business in offshore
markets. The success of any offshore operation is subject to numerous
contingencies, some of which are beyond management control, including general
and regional economic conditions, prices for our services, competition, changes
in regulation, and other risks. Any failure in our strategy could have a
material adverse effect on our business, financial condition, and results of
operations. See the discussion above regarding the risks associated with
international operations.
Our customers are primarily attracted to a reduction in cost of our services as
a result of delivery from an offshore location, and they are looking to enter
into long-term contracts to provide monthly services with a price that does not
adjust significantly with inflation. When a number of service providers enter
these offshore locations, the competition for employees increases, causing
turnover and increasing labor costs. In these circumstances, the Company bears
the risk of inflation, which could result in our costs increasing faster than we
can improve technician productivity.
WE ARE SUBJECT TO CURRENCY RISKS AS A RESULT OF OUR EUROPEAN OPERATIONS.
We serve an increasing number of our U.S.-based customers using helpdesks in
Europe. Some of these contracts are priced in U.S. dollars, while a substantial
portion of our costs are incurred in Romanian lei or the European euro. Thus, we
are subject to a foreign currency exchange risk. Although we enter into
contracts to limit potential foreign currency exposure, the Company does not
fully hedge this exposure. As a result, our gross profit may be reduced on these
contracts.
12
OUR INABILITY TO PROPERLY MANAGE PROJECTS AND CAPACITY COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.
The Company's ability to profit from the global trend toward outsourcing depends
in part on how effectively it manages its helpdesk capacity. There are several
factors and trends that have intensified the challenge of resource management.
In order to create the additional capacity necessary to accommodate new or
expanded outsourcing projects, the Company must consider opening new helpdesk
facilities. The opening or expansion of a helpdesk facility may result, at least
in the short term, in idle capacity until any new or expanded program is
implemented fully. The Company periodically assesses the expected long-term
capacity utilization of its helpdesk facilities. As a result, it may, if deemed
necessary, consolidate, close or partially close under-performing helpdesk
facilities in order to maintain or improve targeted utilization and margins.
There can be no assurance that the Company will be able to achieve or maintain
optimal utilization of its helpdesk capacity. If the Company does not
effectively manage its capacity, its results of operations could be adversely
affected.
With the inclusion of our Romanian helpdesk facility, we have significantly
increased the amount of business that we are performing for the same customers
from more than one location. Multi-site and multi-lingual delivery increases the
complexity of the service provided, including but not limited to managing call
volume and resources. The inability of the Company to manage the different
cultures and personnel to deliver consistent quality from different sites could
reduce the Company's profitability and results of operation.
Further, our work in the IT Consulting and Systems Integration business segment
requires the efficient management of human resources. There is a risk that we
may not have sold new business to replace projects as they are completed.
Because we may not be able to maintain a steady or increasing demand for our
services, we could suffer fluctuations in our revenue, the number of employees,
and results of operations.
WE ARE HIGHLY DEPENDENT UPON TECHNOLOGY, AND OUR INABILITY TO KEEP UP WITH
TECHNOLOGICAL ADVANCES IN OUR INDUSTRY, OR OUR FAILURE OR INABILITY TO PROTECT
AND MAINTAIN OUR EXISTING SYSTEMS, COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS AND RESULTS OF OPERATIONS.
Our success depends in part on our ability to develop IT solutions that keep
pace with continuing changes in the IT industry, evolving industry standards,
and changing client preferences. There can be no assurance that we will be
successful in adequately addressing these developments on a timely basis or
that, if these developments are addressed, we will be successful in the
marketplace. For example, our Support Portal offering is comprised of our
proprietary incident management tool and software developed and sold by software
companies. We have integrated this software into the Support Portal. During this
time, there have been other tools developed by other competitors and software
vendors that can match the functionality of the Support Portal. If these other
tools can provide similar or better functionality at a lower effective cost, or
if our software vendors go out of business, we could have a product and service
offering that will lose its marketability. The cost to update our incident
management tool and change the third party software comprising the Support
Portal could be significant. Our inability to effectively keep pace with
continuing changes in the IT industry could have a material adverse effect on
our business, financial condition, and results of operations.
Moreover, experienced computer programmers and hackers may be able to penetrate
our network security, or that of our customers, and misappropriate our
confidential information, create system disruptions, or cause shutdowns. As a
result, we could incur significant expenses in addressing problems created by
security breaches of our network. Moreover, we could lose existing or potential
customers for information technology outsourcing services or other information
technology solutions, or incur significant expenses in connection with our
customers' system failures. In addition, sophisticated hardware and operating
system software and applications that we produce or procure from third parties
may contain defects in design and manufacture, including "bugs" and other
problems that can unexpectedly interfere with the operation of our systems. The
costs to eliminate or alleviate security problems, viruses, worms, and bugs
could be significant, and the efforts to address these problems could result in
interruptions, delays, or cessation of service.
13
Our operations are dependent upon our ability to protect our helpdesk facility
and our information databases against damages that may be caused by fire and
other disasters, power failure, telecommunications failures, unauthorized
intrusion, computer viruses, and other emergencies. The temporary or permanent
loss of such systems could have a material adverse effect on our business,
financial condition, and results of operations. Notwithstanding precautions we
have taken to protect ourselves and our clients from events that could interrupt
delivery of our services, there can be no assurance that a fire, natural
disaster, human error, equipment malfunction or inadequacy, computer virus,
firewall breach, or other event would not result in a prolonged interruption in
our ability to provide support services to our clients. As we commence
delivering services from an offshore location, the risks attendant to
interruption of telecommunications increase. Any interruption to our data or
voice telecommunications networks could have a material adverse effect on our
business, financial condition, and our results of operations.
OUR BUSINESS IS DEPENDENT UPON GENERAL ECONOMIC CONDITIONS, WHICH MAY AFFECT OUR
FINANCIAL PERFORMANCE AND THE PRICE OF OUR COMMON STOCK.
Our revenue and gross profit depend significantly on general economic conditions
and the demand for our services in the markets in which we compete. Softened
demand for our services caused by economic weakness and constrained information
technology spending over the past several years has resulted, and may result in
the future, in decreased revenue, gross profit, earnings, or growth rates and
problems with our ability to realize customer receivables. In addition, customer
financial difficulties have resulted, and could in the future result, in
increases in bad debt write-offs and additions to reserves in our receivables
portfolio. Uncertainty about future economic conditions makes it difficult to
forecast operating results and to make decisions about future investments.
Further delays or reductions in information technology spending could have a
material adverse effect on demand for our products and services and consequently
our results of operations, prospects, and stock price.
RISING HEALTH CARE AND OTHER BENEFIT COSTS COULD ADVERSELY IMPACT OUR
PROFITABILITY.
Health care and other benefit costs continue to increase. Our business is labor
intensive, and therefore we have exposure to these increasing healthcare benefit
costs. While we attempt to compensate for these escalating costs in our business
cost models and customer pricing and have passed along some of these increased
costs to our employees, we have long-term, generally fixed-price pricing
agreements with our customers.
WE MAY BE SUBJECT TO RISKS ASSOCIATED WITH TERRORIST ACTS OR OTHER EVENTS BEYOND
OUR CONTROL.
Terrorist acts or acts of war (wherever located around the world) may cause
damage or disruption to TechTeam, our employees, facilities, partners,
suppliers, distributors, resellers, or customers, which could adversely impact
our revenue, costs and expenses, and financial condition.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH OUR USE OF INTELLECTUAL PROPERTY.
We rely upon a combination of nondisclosure and other contractual arrangements
and trade secrets, copyright, and trademark laws to protect our proprietary
rights and the proprietary rights of third parties from whom we license
intellectual property. We enter into confidentiality agreements with our
employees, customers, and suppliers and limit distribution of proprietary
information. There can be no assurance, however, that the steps taken by us in
this regard will be adequate to deter misappropriation of proprietary
information or that we will be able to detect unauthorized use of such
information and take appropriate steps to enforce our intellectual property
rights.
Although we believe our services and/or software do not infringe upon the
intellectual property rights of others and that we have all of the rights
necessary to utilize the intellectual property employed in our business, we are
subject to the risk of litigation alleging infringement of third-party
intellectual property rights. Any such claims could require us to spend
significant sums of money in litigation, pay damages, develop non-infringing
intellectual property, or acquire licenses of the intellectual property, which
may be the subject of asserted infringement.
14
WE MAY EXPERIENCE VOLATILITY IN OUR STOCK PRICE THAT COULD AFFECT YOUR
INVESTMENT.
The price of our common stock has been, and may continue to be, highly volatile
in response to various factors, many of which are beyond our control, including:
- the depth and liquidity of the trading market for our common stock;
- general economic conditions;
- developments in the industries or markets in which we operate;
- announcements by competitors;
- actual or anticipated variations in quarterly or annual operating
results;
- speculation in the press or investment community;
- sales of large blocks of our common stock or sales of our common stock
by insiders;
- regulation actions or litigation; and
- departures of our key personnel.
Our common stock's market price may also be affected by our inability to meet
analyst and investor expectations and failure to achieve projected financial
results. Any failure to meet such expectations or projected financial results,
even if minor, could cause the market price of our common stock to decline.
Volatility in our stock price may result in your inability to sell your shares
at or above the price at which you purchased them.
In addition, stock markets have generally experienced a high level of price and
volume volatility, and the market prices of equity securities of many companies
have experienced wide price fluctuations not necessarily related to the
operating performance of such companies. These broad market fluctuations may
adversely affect the market price of our common stock. In the past, securities
class action lawsuits frequently have been instituted against such companies
following periods of volatility in the market price of such companies'
securities. If any such litigation is instigated against us, it could result in
substantial costs and a diversion of management's attention and resources, which
could have a material adverse effect on our business, results of operations, and
financial condition.
CERTAIN PROVISIONS OF OUR ORGANIZATIONAL DOCUMENTS AND RIGHTS AGREEMENT, AS WELL
AS APPLICABLE DELAWARE CORPORATE LAW, COULD IMPEDE AN ATTEMPT TO REPLACE OR
REMOVE OUR MANAGEMENT, PREVENT THE SALE OF OUR COMPANY, OR PREVENT OR FRUSTRATE
ANY ATTEMPT BY STOCKHOLDERS TO CHANGE THE DIRECTION OF OUR COMPANY, EACH OF
WHICH COULD DIMINISH THE VALUE OF OUR COMMON STOCK.
Our certificate of incorporation and bylaws, each as amended and/or restated, as
well as applicable Delaware corporate law, contain provisions that could impede
an attempt to replace or remove our management or prevent the sale of our
company that, in either case, stockholders might consider to be in their best
interests. For example, our bylaws limit the ability of stockholders to call
special meetings of the stockholders and establish certain advance notice
procedures for nomination of candidates for election as directors and for
stockholder proposals to be considered at stockholders' meetings. Our
certificate of incorporation also authorizes our Board of Directors to determine
the rights, preferences and restrictions of unissued series of preferred stock,
without any vote or action by our stockholders. In addition, our Board of
Directors has adopted a Rights Agreement, dated May 6, 1997, as amended, that
may have anti-takeover effects by delaying, deferring or preventing an
unsolicited acquisition proposal, even if the proposal may be beneficial to the
interests of our stockholders. Further, certain anti-takeover provisions of the
Delaware General Corporation Law could make it more difficult for an unsolicited
bidder to acquire us. These provisions of our certificate of incorporation and
bylaws and Delaware law may discourage potential acquisition proposals and may
delay, deter, or prevent a change of control of our company, including through
transactions, and in particular unsolicited transactions, that some or all of
our stockholders might consider to be desirable.
15
WE MAY BECOME ENGAGED IN A PROXY CONTEST RELATING TO THE ELECTION OF OUR BOARD
OF DIRECTORS, WHICH CONTEST COULD ADVERSELY AFFECT OUR BUSINESS.
Costa Brava Partnership III, L.P. ("Costa Brava"), the holder of approximately
8.8% of our outstanding shares of Common Stock, has notified us that it will be
submitting a slate of seven nominees to stand for election as our board of
directors. The Company's Board of Directors has announced its intention to
nominate its own slate for election as our directors. As a result, the Company
may be engaged in a proxy contest with respect to the election of the board of
directors at its upcoming 2006 annual meeting of stockholders to be held on May
31, 2006 (the "Proxy Contest").
The uncertainty created by the Proxy Contest could be disruptive to our
operations, possibly distracting management and impacting our ability to attract
new customers. Further, the Board of Directors has retained the services of
various professionals to assist in conducting the Proxy Contest, the costs of
which are expected to impact our financial results for 2006. Moreover, if Costa
Brava is successful, it could result in a default under the terms of our
business loan agreements with LaSalle Bank Midwest, N.A., which we do not
believe will cause the loans to become due and payable, but there can be no
assurances in this regard. As a result of the foregoing, the Proxy Contest could
potentially have a material adverse affect on our business, financial condition
and results of operations, at least in the short term.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
16
ITEM 2. PROPERTIES
Our world headquarters and principal executive offices are located in
Southfield, Michigan. The following table sets forth certain information
regarding the principal properties used by TechTeam, all of which are leased:
LEASE TERM BEGINNING SQUARE
LOCATION FUNCTION AND END (MM/DD/YR) FOOTAGE
-------- ------------------------------------------- -------------------- -------
Southfield, MI World Headquarters and Helpdesk Facility 11/01/93 - 06/30/11 69,840
Brussels, Belgium European Headquarters and Helpdesk Facility 08/01/97 - 12/31/13 50,882
Dearborn, MI Helpdesk Facility and Training Center 04/01/97 - 09/30/08 30,184
Bucharest, Romania Helpdesk Facility 09/01/04 - 08/31/14 30,139
Davenport, IA Helpdesk Facility 10/15/99 - 10/14/09 17,346
Chantilly, VA Headquarters of Digital Support Corporation 06/12/04 - 06/30/11 17,597
Bethesda, MD Headquarters of Sytel, Inc. 06/01/01 - 05/31/06 17,338
Herndon, VA Office Space 02/18/99 - 08/31/06 12,003
Gent, Belgium Headquarters of TechTeam A.N.E. NV/SA 01/01/06 - 11/30/14 3,963
Portsmouth, RI Sales and Administrative Office 06/01/01 - 05/31/09 4,200
Gothenburg, Sweden Sales and Administrative Office 09/01/02 - 09/30/06 1,829
Germantown, MD Sales and Administrative Office 03/01/04 - 02/28/07 1,405
We believe the facilities we occupy are well maintained and in good operating
condition. We believe these locations are adequate to meet our needs for the
foreseeable future. These facilities include general office space and computer
training classrooms. Because some of our services are performed at client sites,
the cost of maintaining multiple offices is minimized. Certain leases listed
above expire during 2006 and are not expected to be renewed.
ITEM 3. LEGAL PROCEEDINGS
Costa Brava
On January 27, 2006, Costa Brava Partnership III, L.P ("Costa Brava"), owner of
8.8% of the Company's outstanding shares, filed a complaint in the State of
Delaware Court of Chancery seeking to inspect certain books and records of the
Company. Costa Brava subsequently filed an amended complaint seeking to inspect
a broader list of the Company's books and records. The Company has answered the
amended complaint stating in part that the request did not state a proper
purpose for inspection, as required under Delaware law. Costa Brava does not
seek monetary relief.
General
The Company is a party to various legal proceedings that are routine and
incidental to its business. Although the consequences of these proceedings are
not presently determinable, in the opinion of management, they will not have a
material adverse affect on our liquidity, financial condition, or results of
operations, although no assurances can be given in this regard.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2005.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the NASDAQ National Stock Market(R) under
the symbol "TEAM." The following table sets forth the reported high and low
sales prices of our common stock for the quarters indicated as reported by the
NASDAQ National Stock Market(R).
YEAR AND QUARTER HIGH LOW
---------------- ------ ------
2005
First Quarter ... $12.00 $ 9.82
Second Quarter .. 15.34 10.02
Third Quarter ... 14.99 10.75
Fourth Quarter .. 12.76 7.50
2004
First Quarter ... $ 8.22 $ 6.79
Second Quarter .. 9.45 6.63
Third Quarter ... 10.89 8.56
Fourth Quarter .. 10.38 8.35
The Company has never paid any dividends on its common stock and has no present
intention to pay dividends in the foreseeable future. Any future decision as to
payment of dividends will be made at the discretion of our Board of Directors
and will depend upon our earnings, financial position, capital requirements, and
such other factors as the Board of Directors deems relevant.
TechTeam had approximately 398 shareholders of record as of March 1, 2006.
The following table sets forth the information with respect to purchases made by
the Company of shares of its common stock during the fourth quarter of 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(a) PER SHARE ANNOUNCED PROGRAMS THE PROGRAMS
------ ------------ ---------- ------------------- -------------------
October 1, 2005 to October 31, 2005 2,210 $12.36 -- --
November 1, 2005 to November 30, 2005 4,757 $ 9.02 -- --
December 1, 2005 to December 31, 2005 2,808 $ 9.78 -- --
(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.
Information regarding the Company's equity compensation plans is contained in
"Item 12 - Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters."
18
ITEM 6. SELECTED FINANCIAL DATA
The following table presents information derived from our consolidated financial
statements for the five years ended December 31, 2005. This information should
be read in conjunction with "Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Item 8 -- Financial
Statements and Supplementary Data." The results of operations presented below
are not necessarily indicative of the results of operations that may be achieved
in the future.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
STATEMENTS OF OPERATIONS DATA 2005 2004 2003 2002 2001
----------------------------- -------- -------- ------- ------- -------
(In thousands, except per share data)
Revenue
IT outsourcing services ..................... $ 73,777 $ 74,608 $65,614 $57,675 $50,048
Government technology services .............. 55,592 25,712 2,055 1,431 1,268
IT consulting and systems integration ....... 28,118 19,668 8,195 7,197 6,918
Technical staffing .......................... 8,243 7,445 9,090 10,153 14,522
Learning services ........................... 767 555 879 1,077 2,005
-------- -------- ------- ------- -------
Total revenue .................................. $166,497 $127,988 $85,833 $77,533 $74,761
======== ======== ======= ======= =======
Income (loss) before income taxes .............. $ 7,796 $ 7,175(c) $ 1,248 $ 2,601 $(1,519)
Income tax provision ........................ 2,402 2,547 1,438 1,483 587
-------- -------- ------- ------- -------
Income (loss) from continuing operations ....... 5,394 4,628 (190) 1,118 (2,106)
Income (loss) from discontinued operations .. 74 97 (856) 280 (1,472)
Cumulative effect of accounting change (d) .. -- -- -- (1,123) --
-------- -------- ------- ------- -------
Net income (loss) .............................. $ 5,468 $ 4,725 $(1,046) $ 275 $(3,578)
======== ======== ======= ======= =======
Diluted earnings (loss) per common share
Income (loss) from continuing operations .... $ 0.54 $ 0.48 $ (0.02) $ 0.10 $ (0.20)
Income (loss) from discontinued operations .. 0.01 0.01 (0.09) 0.03 (0.14)
Cumulative effect of accounting change (d) .. -- -- -- (0.10) --
-------- -------- ------- ------- -------
Net income (loss) per share ................. $ 0.54(a) $ 0.49(b) $ (0.10) $ 0.02 $ (0.33)
======== ======== ======= ======= =======
Weighted average common shares and
common share equivalents outstanding ........ 9,832(e) 8,904 10,066 11,103 10,771
======== ======== ======= ======= =======
Weighted average preferred shares outstanding .. 244(e) 690 503 -- --
======== ======== ======= ======= =======
(a) On January 3, 2005, the Company acquired 100% of the outstanding stock of
Sytel, Inc.
(b) On December 31, 2003, the Company acquired 100% of the outstanding stock of
Digital Support Corporation.
(c) In the fourth quarter of 2004, the Company recorded an asset impairment
charge of $485,000 related to a software asset.
(d) Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets," and
recorded an impairment charge for goodwill related to discontinued
operations.
(e) In May 2005, the holder of preferred stock converted all outstanding shares
of preferred stock into 689,656 shares of common stock.
AS OF DECEMBER 31,
------------------------------------------------
BALANCE SHEET DATA 2005 2004 2003 2002 2001
------------------ -------- ------- ------- ------- -------
(In thousands)
Total assets ......................... $123,010 $88,987 $77,700 $82,301 $87,121
Long-term obligations ................ 14,115 1,699 408 376 805
Redeemable convertible preferred stock -- 5,000 5,000 -- --
Total shareholders' equity ........... $ 78,240 $66,660 $60,770 $73,320 $74,570
19
ITEM 7. 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.
In 2005, we furthered our business strategy of the past four years by
strategically strengthening the Company's service offerings in the IT
Outsourcing Services and IT Consulting and Systems Integration business segments
through a combination of organic growth, acquisitions, and enhancements to our
business model, and we have added government technology services as a new
industry vertical through acquisition. On February 6, 2006, we announced the
Company's new President and Chief Executive Officer, William C. "Chris" Brown.
We expect that under Mr. Brown's leadership we will seek to accelerate and
enhance (1) the drive to optimize our business delivery model; (2) the
strengthening of our core business offerings and vertical expertise through
organic growth and strategic and accretive acquisitions; and (3) the
implementation of an aggressive sales and marketing strategy to sell the
Company's services.
The overall performance of our IT Outsourcing Services business in 2005 showed a
1.1% decline in revenue from 2004 primarily due to the previously reported loss
of business with DaimlerChrysler AG ("DaimlerChrysler") in the fourth quarter of
2004 and Liberty Mutual Insurance Company ("Liberty Mutual") in the first
quarter of 2005. While year-over-year performance of this segment was down from
2004, we believe we made significant progress during 2005 in strengthening our
IT Outsourcing Services business segment, as well as our IT Consulting and
Systems Integration business segment. First, within these segments, we
solidified our vertical expansion in the government technology services and
retail and hospitality markets.
In government technology services, we acquired Sytel, Inc. ("Sytel") on January
3, 2005, which was a significant driver of the Company's financial performance
in 2005, especially during the first three quarters of the year when it
accounted for 19.9% of the Company's total revenue and 40.3% of the Company's
operating income. We worked to substantially integrate TechTeam Government
Solutions, Inc. (formerly known as Digital Support Corporation) and Sytel in
order to maximize the value of our government technology services segment. The
integration plan includes the merging of all administrative functions, joining
the operational resources into four distinct business lines -- U.S. Department
of Defense; civilian health care; civilian enterprise systems, and state, local
and commercial services -- and enhancing the segment's sales resources and
channel partners. We ended 2005 with the implementation of this plan well under
way. However, we do not anticipate the financial benefit of the integration to
begin to manifest until the second half of 2006 after the reduction in
facilities is concluded.
We made progress in establishing the retail and hospitality industry as one of
our major business vertical markets. During 2005, the systems implementation and
training business performed by our TechTeam Cyntergy subsidiary was a
significant contributor to the financial performance of the IT Consulting and
Systems Integration business segment, as we further developed our subcontractor
relationship with MICROS, Inc. and developed a new relationship with Galaxy
Systems, LLC, a subsidiary of Starwood Hotels. As these services are
project-based and the established projects that helped drive our performance in
2005 will be concluding during the first half of 2006, we are seeking projects
with new customers to replace the anticipated decrease in revenue in 2006 from
2005.
We also significantly increased our help desk business for the retail market by
adding two new, large retail customers. These two new contracts announced in the
fourth quarter of 2005 are expected to represent annual revenue in excess of $6
million. The launch of one of these customers is complete, while the launch of
the second, and largest, of these two customers is not expected to be completed
until the end of the second quarter of 2006. Accordingly, due to the expenses
related to the launch of these customers, we anticipate that these contracts
will begin to be profitable over the second quarter of 2006.
20
Second, we have further expanded our service offerings in the IT Consulting and
Systems Integration business segment through the acquisition of Akela
Informatique SRL (now known as TechTeam Akela SRL, "Akela") on October 3, 2005.
Akela 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.
Over 2005, we continued to optimize our business delivery model. Specifically,
we received a three-year extension to the Ford Global SPOC Program contract in
December 2005. In light of the significant price pressures faced by the Company
from Ford during the contract renegotiation, we demonstrated the flexibility to
redesign the program and implement significant modifications that allowed Ford
to balance its need for a reduced cost of service while maintaining IT
productivity and end-user satisfaction. The renewal price for the service will
reduce the per seat revenue that we earn from the Global SPOC Program. However,
we do not expect that the redesigned program with its reduced service levels
will result in a reduction in the gross margin earned from the program at least
for the foreseeable future.
We have also made significant progress in developing our Romanian help desk as a
means of providing low cost multi-lingual support to new and existing customers.
Inasmuch as we are able to provide lower cost help desk support in French,
German, Italian, Spanish and English from Romania, we are utilizing Romania as
part of a solution that blends resources from different help desk locations
within the Company for existing customers that require multi-lingual support. We
anticipate that this trend will continue during 2006 at a faster pace.
During 2005, we further increased our capabilities of delivering help desk
solutions in a shared environment, where we support more than one customer. We
deployed a shared environment for an IT support help desk where our agents
provide help desk and network support for multiple customers. We also have
implemented a strategy to provide our shared support environment for
pharmaceutical companies in the electronic data capture of their drug trials
from three sites -- Southfield, Michigan; Brussels, Belgium; and Bucharest,
Romania. As this business has significant quality and documentation
requirements, we have developed integrated and detailed processes that enable us
to provide consistent repeatable service while maximizing the efficiency of our
operations.
We also developed a methodology necessary to optimize our delivery of help desk
services together with other IT services. During 2005, we successfully launched
desk side support services for a major business unit of Deere & Co. As a result
of the additional IT support business within Deere, we have been able to move
our help desk resources that have substantial expertise in the Deere environment
to new positions within Deere. This enables us to provide our resources with
career advancement and to replace them with less expensive resources. We will
continue to strongly pursue this SPOC business model within our existing
customer base and in our new sales efforts.
The optimization of our operating model is constantly evolving due to intense
global competition. The effects of this intense competition can be seen in
Romania. Over the past year, a number of companies, including outsourcing
competitors, have decided to open call centers in Bucharest. As a result of the
increased competition for multi-lingual resources, we expect our labor costs to
continue to increase at a rate greater than the Company experiences in other
regions. In an effort to address this risk, we are evaluating other regions
within Romania to establish new operations. Further, we are evaluating expansion
to the Far East in an effort to expand our multi-lingual capabilities and to
provide English language services at a lower cost.
During 2005, we embarked on a sales and marketing strategy that focused on
enhancing our sales force and pursuing relationships with other companies to
help sell our services. With the four contracts announced in the fourth quarter,
we began to see some additional traction from our added sales force and our
channel partners. However, we are concerned about the slowed growth in Europe,
where despite good growth in the business from a revenue perspective, we did not
sign any significant conracts with any new customers in Europe during 2005. We
look to aggressively increase our partnerships with other companies during 2006
or later. However, our sales cycle remains lengthy and we may not see the
benefits of our efforts until the second half of 2006. Furthermore, to the
extent that we are successful in obtaining large IT Outsourcing customers during
the year, our experience indicates that there is a lag time between the launch
of the project and when it produces a profit, the length of which is dependent
upon the size of the customer and the project's launch schedule.
21
Further, in our competitive business lines, we are faced with continued price
pressure from our customers and inflationary pressures relating primarily to
labor. In the global market for help desk and BPO services, large customers have
pricing power as they have a number of vendors who present different value
propositions based upon different delivery models (e.g., shared vs. dedicated
desk) and locations from which they provide service (e.g., United States vs.
Romania). We have begun to see increased competition for labor in a few of our
markets, including Romania and Sweden. In Romania during 2005, the general
inflation rate was 9%, and the local currency appreciated in value against the
European euro. Taken with the increased number of companies vying for the same
labor, the increase in labor costs has exceeded our expectations. However, our
turnover rates remain lower than industry standards, and we do not believe that
these inflationary pressures will have a material impact on our financial
performance in 2006.
Our global operational strategy requires us to blend resources from multiple
locations around the world to deliver efficient services for our customers. We
must rely on sophisticated technology in order to run multi-site projects. In
2005, we launched our global human resource management tool. We started in 2005,
and will continue in 2006, to implement a new generation phone switch that will
better enable us to manage the help desk call volume among our different
locations. We must continue to invest in our technology to enable us to optimize
our operational performance.
RECENT DEVELOPMENTS
As mentioned previously, William C. ("Chris") Brown replaced William F. Coyro,
Jr. as our President and Chief Executive Officer on February 16, 2006.
Costa Brava Partnership III, L.P., an owner of 8.8% of the outstanding common
stock of the Company, has notified us that it will be submitting a slate of
seven nominees to stand for election to the Company's board of directors. The
Company has announced its intention to nominate its own state and to contest
Costa Brava's slate. We have retained the services of appropriate professionals
to assist us in this potential proxy contest. As a result, we anticipate
incurring an unknown level of expense that will impact the Company's financial
performance in the first and second quarters of 2006.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2005 COMPARED TO THE YEAR ENDED DECEMBER 31, 2004
YEAR ENDED DECEMBER 31,
----------------------- INCREASE %
2005 2004 (DECREASE) CHANGE
-------- -------- ---------- ------
(In thousands)
REVENUE
IT outsourcing services ................ $ 73,777 $ 74,608 $ (831) (1.1)%
Government technology services ......... 55,592 25,712 29,880 116%
IT consulting and systems integration .. 28,118 19,668 8,450 43.0%
Technical staffing ..................... 8,243 7,445 798 10.7%
Learning services ...................... 767 555 212 38.2%
-------- -------- -------
TOTAL REVENUE ............................. $166,497 $127,988 $38,509 30.1%
======== ======== =======
The majority of the overall revenue growth of 30.1% to $166.5 million in 2005,
from $128.0 million in 2004, is attributable to growth in government technology
services from our acquisition of Sytel, and growth in IT consulting and systems
integration services from TechTeam Cyntergy, which provides deployment,
training, and implementation services to companies in the hospitality, retail,
food service, and other industries throughout the United States. Revenue growth
was also favorably impacted by our acquisition of Akela on October 3, 2005, and
having a full year of activity from TechTeam A.N.E. ("A.N.E."), which we
acquired on May 13, 2004. Excluding the acquisitions of Sytel, Akela, and A.N.E.
for both periods, total revenue increased 3.1% to $127.7 million in 2005, from
$123.9 million in 2004, primarily due to the aforementioned revenue growth from
IT consulting and
22
systems integration services, which was partially offset by decreases in revenue
from IT outsourcing services and government technology services, as more fully
discussed below.
IT Outsourcing Services
Revenue from our IT outsourcing services decreased 1.1% to $73.8 million in
2005, from $74.6 million in 2004, as a result of 24.1% revenue growth from our
blended service delivery solution in Belgium and Romania, offset by a decline in
revenue from IT outsourcing services of 13.0% in the United States. The growth
in Belgium and Romania is primarily due to customer contracts launched in 2005.
The decrease in revenue in the United States is due to the decline in revenue
from the loss of business from DaimlerChrysler and Liberty Mutual Insurance
Company ("Liberty Mutual"), which was partially offset by new customer
contracts. Revenue in 2005 also declined from 2004 from a decrease in global IT
outsourcing revenue from Ford of 4.6% to $37.4 million in 2005, from $39.2
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
restructure its operations and reduce its worldwide workforce. Please refer to
our discussion of Ford in the "Overview" section of MD&A.
Although our 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 began 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, the vast majority of our Southfield, Michigan, facility will
be utilized.
Government Technology Services
Revenue from government technology services increased 116% to $55.6 million in
2005, from $25.7 million in 2004, due to our acquisition of Sytel on January 3,
2005. Excluding Sytel, revenue from government technology services decreased
4.0% to $24.7 million in 2005, from $25.7 million in 2004, due to a decrease in
equipment resales of $2.9 million from the absence of a large sale that occurred
in the third quarter of 2004. Excluding Sytel and equipment resales, revenue
from government technology services increased 9.2% from the comparable period in
2004 primarily from additional business with existing customers.
Although revenue grew substantially in 2005, revenue from this business segment
decreased 17.6% in the fourth quarter of 2005, from the third quarter of 2005,
due to the previously reported loss of a contract at Sytel with the United
States Department of State (see "Note 3 -- Acquisitions" contained in "Item 8 --
Financial Statements and Supplementary Data"). Revenue from this contract was
$4.57 million in 2005.
IT Consulting and Systems Integration Services
Revenue from IT consulting and systems integration increased 43.0% to $28.1
million in 2005, from $19.7 million in 2004, due to revenue growth at TechTeam
Cyntergy and our acquisition of A.N.E. on May 13, 2004. Excluding A.N.E. for
both periods, revenue from IT consulting and systems integration increased 36.9%
to $21.3 million in 2005, from $15.5 million in 2004, primarily due to
additional business from new and existing customers at TechTeam Cyntergy. As the
services provided by TechTeam Cyntergy are project-based and the established
projects that helped drive our performance in 2005 will be concluding during the
first half of 2006, we are seeking projects with new customers to replace the
anticipated decrease in revenue in 2006 from 2005.
Geographic Discussion
Total revenue generated in the United States increased 34.2% to $116.5 million
in 2005, from $86.8 million in 2004, due to our acquisition of Sytel. Excluding
revenue contributed by Sytel, revenue generated in the United States decreased
1.7% to $85.4 million in 2005, from $86.8 million in 2004, primarily due to the
decline in revenue from DaimlerChrysler and Liberty Mutual, which was partially
offset by new customer contracts in IT outsourcing services and revenue growth
in IT consulting and systems integration services from TechTeam Cyntergy.
Revenue generated in Europe increased 21.4% to $50.0 million in 2005, from $41.2
million in 2004, primarily due to growth in business in Belgium and Romania from
new customer contracts, and our acquisitions of A.N.E and Akela. Excluding
revenue contributed by A.N.E and Akela., revenue generated in Europe increased
14.4% to
23
$42.4 million in 2005, from $37.0 million in 2004. If revenue in Europe for each
quarter in 2005 were translated into U.S. dollars at the average exchange rate
for each comparable quarter in 2004, reported revenue would be reduced by
approximately $143,000. 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 and is
not material. Although the impact of exchange rate fluctuations did not have a
significant affect on reported revenue for 2005, the estimated impact on revenue
was significant on a quarter-by-quarter basis. Reported revenue in the first and
second quarters of 2005 was favorably affected by approximately $1.38 million,
while reported revenue in the third and fourth quarters of 2005 was negatively
affected by approximately $1.24 million, most of which occurred in the fourth
quarter as the U.S. dollar strengthened relative to the European euro and, to a
lesser extent, the British pound sterling and Swedish kroner.
YEAR ENDED DECEMBER 31,
---------------------------------------
2005 2004
------------------ ------------------
GROSS GROSS INCREASE %
AMOUNT MARGIN % AMOUNT MARGIN % (DECREASE) CHANGE
------- -------- ------- -------- ---------- ------
(In thousands, except percentages)
GROSS PROFIT
IT outsourcing services ................ $18,399 24.9% $19,560 26.2% $(1,161) (5.9)%
Asset impairment loss .................. -- -- (485) (485) (100)%
------- ------- -------
Total IT outsourcing services ....... 18,399 24.9% 19,075 25.6% (676) (3.5)%
Government technology services ......... 15,948 28.7% 6,749 26.2% 9,199 136%
IT consulting and systems integration .. 5,915 21.0% 3,358 17.1% 2,557 76.1%
Staffing ............................... 1,622 19.7% 1,301 17.5% 321 24.7%
Learning services ...................... 199 25.9% 104 18.7% 95 91.3%
------- ------- -------
TOTAL GROSS PROFIT ........................ $42,083 25.3% $30,587 23.9% $11,496 37.6%
======= ======= =======
Consistent with revenue, the majority of the overall gross profit growth of
37.6% to $42.1 million in 2005, from $30.6 million in 2004, is attributable to
growth in government technology services from our acquisition of Sytel, and
growth in IT consulting and systems integration services from TechTeam Cyntergy.
Gross profit growth was also favorably impacted by our acquisition of Akela on
October 3, 2005, and having a full year of activity from TechTeam A.N.E., which
we acquired on May 13, 2004. Excluding the acquisitions of Sytel, Akela, and
A.N.E. for both periods, total gross profit increased 8.0% to $32.4 million in
2005, from $30.0 million in 2004, primarily due to revenue growth from IT
consulting and systems integration services and government technology services,
which was partially offset by decreases in revenue from IT outsourcing services,
as more fully discussed below.
IT Outsourcing Services
Gross profit from IT outsourcing services decreased 3.5% to $18.4 million in
2005, from $19.1 million in 2004. Gross margin (defined as gross profit divided
by revenue) from IT outsourcing services decreased to 24.9% in 2005, from 25.6%
in 2004. In 2004, gross profit includes an asset impairment charge related to
certain software that would not be utilized to deliver services to our customers
or be used for any other purpose. Excluding the asset impairment charge, gross
margin decreased to 24.9% in 2005 from 26.2% 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 gross
profit and gross margin on our Ford business in Europe. The resulting
underutilization of our facility in Southfield, Michigan, resulting from the
loss of business from DaimlerChrysler and Liberty Mutual 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
and from our Ford business in the United States.
24
Government Technology Services
Gross profit from government technology services increased 136% to $15.9 million
in 2005, from $6.75 million in 2004. Gross margin from government technology
services increased to 28.7% in 2005, from 26.2% 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 12.1% to $7.57 million in 2005, and gross margin increased to
30.7% from 26.2%. Excluding Sytel and equipment resales for both periods, gross
profit from government technology services increased 14.6% to $7.33 million in
2005, from $6.39 million in 2004, and gross margin increased to 32.7% from
31.2%.
Although gross profit, like revenue, grew substantially in 2005, gross profit
from this business segment decreased 16.5% in the fourth quarter of 2005, from
the third quarter of 2005, due to the previously reported loss of a contract at
Sytel with the United States Department of State.
IT Consulting and Systems Integration Services
Gross profit from IT consulting and systems integration increased 76.1% to $5.92
million in 2005, from $3.36 million in 2004. Gross margin from IT consulting and
systems integration increased to 21.0% in 2005, from 17.1% 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 74.7% to $4.88 million in 2005, from $2.79 million in 2004, and
gross margin increased to 22.9% from 18.0%. As discussed, we expect revenue from
TechTeam Cyntergy to decrease in 2006 as certain projects will slow or be
completed during the spring and summer, and gross profit is expected to decline
accordingly.
YEAR ENDED DECEMBER 31,
----------------------- INCREASE %
2005 2004 (DECREASE) CHANGE
------- ------- ---------- ------
(In thousands)
OPERATING EXPENSES AND OTHER
Selling, general, and administrative expense .. $34,892 $24,040 $10,852 45.1%
Net interest income ........................... $ 390 $ 719 $ (329) (45.8)%
Foreign currency transaction gain (loss) ...... $ 215 $ (91) $ 306 (336)%
Income tax provision .......................... $ 2,402 $ 2,547 $ (145) (5.7)%
Selling, general, and administrative ("SG&A") expense increased 45.1% to $34.9
million, or 21.0% of total revenue in 2005, from $24.0 million, or 18.8% of
total revenue in 2004. This increase of approximately $10.9 million in SG&A
expense can be primarily attributed to: (1) the acquisitions of Sytel, A.N.E.,
and Akela ($7.07 million), (2) costs related to the Company's compliance with
Section 404 of the Sarbanes-Oxley Act of 2002 ($1.30 million), (3) deployment of
a new global human capital management system ($733,000), and (4) a favorable
adjustment made to the Company's fourth quarter 2004 results related to Michigan
Single Business Tax, which had the effect of making the Company's 2004 SG&A
expense appear less than it would otherwise have been ($387,000). Other
increases resulted from fees related to the replacement of the Company's chief
executive officer and the search for other management positions, additional
personnel and facility costs associated with the establishment of the Company's
permanent facility in Romania, reinstatement of the Company's 401(k) plan
matching contribution in November 2004, and higher sales commissions and other
sales and marketing expenses from the expansion of our North American sales
force. These increases were partially offset by lower expense in 2005 under the
Company's incentive compensation plans as certain performance targets were not
met.
25
In 2006, we expect SG&A expense to remain near the 2005 level of 21% of revenue
as we continue to invest in our global sales and marketing capabilities, we
invest in technology infrastructure including a new telecommunications system,
and we undertake efforts to expand the technical certifications of the Company
and its employees in areas such as the Information Technology Infrastructure
Library ("ITIL"). We also expect to incur an unknown level of expense related to
the proxy contest for control of the Company's Board of Directors.
As noted above, we incurred approximately $1.3 million in 2005 related to the
Company's compliance with Section 404 of the Sarbanes-Oxley Act, which requires
us to certify our system of internal control over financial reporting and
disclosure. We expect to incur between $800,000-$1.0 million of expense in 2006
to continue our compliance efforts with 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 from time to
time. In addition, significant time and effort of management is required.
Net interest income decreased to $390,000 in 2005, from $719,000 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) increased to a gain of $215,000 in 2005
from a loss of $(91,000) in 2004, primarily due to the U.S. dollar strengthening
relative to the European euro and British pound sterling in 2005, whereas the
U.S. dollar weakened relative to those currencies in 2004. Furthermore, the
Company had a higher level of foreign assets denominated in U.S. dollars in 2005
than 2004.
In 2005, the consolidated effective tax rate of 30.8% 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 utilization of foreign tax loss
carryforwards. In 2004, the consolidated effective tax rate of 35.5% differs
from the statutory tax rate of 34% primarily due to state income taxes and the
unfavorable tax effect of providing a valuation allowance against the future tax
benefit of operating loss carryforwards in certain foreign tax jurisdictions.
These items are partially offset by recognizing a favorable tax benefit from the
expected recovery of taxes paid in prior years and a change in estimate
regarding the Company's tax liabilities for prior years.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004 COMPARED TO THE YEAR ENDED DECEMBER 31, 2003
YEAR ENDED DECEMBER 31,
----------------------- INCREASE %
2004 2003 (DECREASE) CHANGE
-------- ------- ---------- ------
(In thousands)
REVENUE
IT outsourcing services ................ $ 74,608 $65,614 $ 8,994 13.7%
Government technology services ......... 25,712 2,055 23,657 1151%
IT consulting and systems integration .. 19,668 8,195 11,473 140%
Technical staffing ..................... 7,445 9,090 (1,645) (18.1)%
Learning services ...................... 555 879 (324) (36.9)%
-------- ------- -------
TOTAL REVENUE ............................. $127,988 $85,833 $42,155 49.1%
======== ======= =======
Revenue from our IT outsourcing services increased 13.7% to $74.6 million in
2004, from $65.6 million in 2003, primarily due to growth at our Belgian and
Swedish subsidiaries, and the strengthening of the European euro, British pound
sterling, and Swedish kroner relative to the U.S. dollar. These increases were
partially offset by a contractual price reduction granted to Ford effective
August 1, 2004. Revenue from IT consulting and systems integration increased
140% to $19.7 million in 2004, from $8.20 million in 2003, due to our
acquisitions of DSC and A.N.E. and additional business from new and existing
customers at TechTeam Cyntergy. Excluding revenue contributed by DSC and A.N.E.,
IT consulting and systems integration revenue increased 28.3% to $10.5 million
in 2004, from $8.20 million in 2003. Revenue from technical staffing decreased
18.1% to $7.45 million in 2004, from $9.09 million in 2003, primarily due to
staffing reductions in the United States that were partially offset by
26
additional business received in Europe. The increase in revenue from government
technology services was attributable to our acquisition of DSC on December 31,
2003.
Revenue generated in the United States increased 49.8% to $86.8 million in 2004,
from $58.0 million in 2003, due to our acquisition of DSC. Excluding revenue
contributed by DSC, revenue generated in the United States increased 1.2% to
$58.7 million in 2004, from $58.0 million in 2003, primarily due to additional
business from new and existing customers, which was partially offset by a
contractual price reduction to Ford effective August 1, 2004, and reduced
volumes from established and stable help desks.
Revenue generated in Europe increased 47.8% to $41.2 million in 2004, from $27.9
million in 2003, primarily due to growth in business at our Belgian and Swedish
subsidiaries, our acquisition of A.N.E., and the strengthening of European
currencies relative to the U.S. dollar, which were partially offset by the
contractual price reduction to Ford. Excluding revenue contributed by A.N.E.,
revenue generated in Europe increased 32.9% to $37.0 million in 2004, from $27.9
million in 2003. If revenue in Europe for 2004 was translated at the average
exchange rate for 2003, reported revenue would have been reduced by
approximately $3.45 million in 2004. Within Europe, revenue from our Belgian
operation increased 62.9% to $27.3 million in 2004, from $16.8 million in 2003,
primarily due to additional business from new customers, the strengthening of
the European euro relative to the U.S. dollar, and our acquisition of A.N.E.
Excluding revenue contributed by A.N.E., revenue generated from our Belgian
operation increased 38.3% to $23.2 million in 2004, from $16.8 million in 2003.
If revenue from our Belgian operation in 2004 was translated at the average
exchange rate for 2003, reported revenue would have been reduced by
approximately $2.10 million in 2004. Since most of the Company's international
operating expenses are also incurred in the same foreign currencies in which the
associated revenue is denominated, the net impact of exchange rate fluctuations
on gross profit and operating income is considerably less than the estimated
impact on revenue.
YEAR ENDED DECEMBER 31,
---------------------------------------
2004 2003
------------------ ------------------
GROSS GROSS INCREASE %
AMOUNT MARGIN % AMOUNT MARGIN % (DECREASE) CHANGE
------- -------- ------- -------- ---------- ------
(In thousands, except percentages)
GROSS PROFIT
IT outsourcing services ................ $19,560 26.2% $13,627 20.8% $ 5,933 43.5%
Asset impairment loss .................. (485) -- (485)
------- ------- -------
Total IT outsourcing services ....... 19,075 25.6% 13,627 20.8% 5,448 40.0%
Government technology services ......... 6,749 26.2% 534 26.0% 6,215 1164%
IT consulting and systems integration .. 3,358 17.1% 1,871 22.8% 1,487 79.5%
Staffing ............................... 1,301 17.5% 1,789 19.7% (488) (27.3)%
Learning services ...................... 104 18.7% 63 7.2% 41 65.1%
------- ------- -------
TOTAL GROSS PROFIT ........................ $30,587 23.9% $17,884 20.8% $12,703 71.0%
======= ======= =======
Gross profit from our IT outsourcing services increased 40.0% to $19.1 million
in 2004, from $13.6 million in 2003. Gross margin from IT outsourcing services
increased to 25.6% in 2004, from 20.8% in 2003. The increases in gross profit
and gross margin from IT outsourcing services were primarily due to realization
of operational efficiencies from re-aligning our cost structure, expanding our
help desk capabilities in Europe, and increased business with new and existing
customers, which were partially offset by an asset impairment charge of $485,000
related to customization costs for certain software that we determined would not
be utilized to deliver services to our customers or be used for any other
purpose. As there are no expected future cash flows related to the
customization, we recorded an impairment charge representing the net book value
of these costs. Excluding the impairment charge, gross margin from IT
outsourcing services increased to 26.2% in 2004, from 20.8% in 2003. This
improvement in gross margin was also partially offset by the impact of
reductions in revenue under our Ford contract, as discussed above. Based on
historical trends, we estimate that the combination of a reduced price per
27
seat and the reduced number of seats being supported on our Ford contract
reduced our gross margin on IT outsourcing services by 70-90 basis points and
our overall gross margin by 40-60 basis points in 2004.
Gross profit from IT consulting and systems integration increased 79.5% to $3.36
million in 2004, from $1.87 million in 2003. Gross margin from IT consulting and
systems integration decreased to 17.1% in 2004, from 22.8% in 2003. The increase
in gross profit and decrease in gross margin was primarily due to our
acquisitions of DSC and A.N.E. and lower margin hardware sales of $3.96 million
at these subsidiaries. Excluding the total gross profit contributed by DSC and
A.N.E., gross profit increased 44.3% to $2.70 million, from $1.87 million in
2003, and gross margin increased to 25.7% in 2004, from 22.8% in 2003, primarily
due to additional business from new and existing customers at TechTeam Cyntergy.
The increase in gross profit from government technology services of $6.22
million to $6.75 million in 2004, from $534,000 in 2003, is attributable
primarily to our acquisition of DSC on December 31, 2003. Gross margin from
government technology services of 26.2% in 2004 was negatively impacted by lower
margin hardware sales of $5.22 million. Excluding these hardware sales, gross
margin from government technology services increased to 31.2% in 2004 from 26.0%
in 2003.
Gross profit from technical staffing decreased 27.3% to $1.30 million in 2004,
from $1.79 million in 2003, which is consistent with the decrease in technical
staffing revenue.
YEAR ENDED DECEMBER 31,
----------------------- INCREASE %
2004 2003 (DECREASE) CHANGE
------- ------- ---------- ------
(In thousands)
OPERATING EXPENSES AND OTHER
Selling, general, and administrative expense .. $24,040 $18,695 $ 5,345 28.6%
Net interest income ........................... $ 719 $ 1,139 $ (420) (36.9)%
Foreign currency transaction gain ............. $ (91) $ 920 $(1,011) (109.9)%
Income tax provision .......................... $ 2,547 $ 1,438 $ 1,109 77.1%
Selling, general, and administrative expense increased 28.6% to $24.0 million,
or 18.8% of total revenue, in 2004, from $18.7 million, or 21.8% of total
revenue, in 2003, primarily due to our acquisition of DSC and A.N.E. and expense
related to the Company's incentive compensation plans. Excluding revenue and
expenses contributed by DSC and A.N.E., selling, general, and administrative
expense increased 6.7% to $19.9 million, or 20.8% of total revenue, in 2004,
from $18.7 million, or 21.8% of total revenue, in 2003. Expenses have increased
to support revenue growth and expansion in Romania, but expenses as a percentage
of revenue have decreased due to efforts to control costs and reduced
amortization expense of $315,000 in 2004 from 2003, as certain assets have
become fully amortized. Under the Company's incentive compensation plans that
became effective January 1, 2004, certain members of management are entitled to
bonuses as a result of our meeting specific revenue and operating income targets
for 2004. We incurred approximately $1.07 million of expense under these plans
in 2004, of which $239,000 was recorded to cost of services delivered.
Net interest income decreased to $719,000 in 2004, from $1.14 million in 2003,
primarily due to lower average cash balances maintained in 2004, and interest
income received in 2003 related to a tax refund.
Foreign currency transaction gain (loss) decreased to a loss of $(91,000) in
2004 from a gain of $920,000 in 2003, primarily due to the U.S. dollar weakening
relative to the European euro and British pound sterling to a greater extent in
2003 than in 2004 and lower foreign-denominated balances subject to transaction
gains and losses in 2004 than in 2003.
In 2004, the consolidated effective tax rate of 35.5% differs from the statutory
tax rate of 34% primarily due to state income taxes and the unfavorable tax
effect of providing a valuation allowance against the future tax benefit of
operating loss carryforwards in certain foreign tax jurisdictions. These items
are partially offset by recognizing a favorable tax benefit from the expected
recovery of taxes paid in prior years and a change in estimate regarding the
Company's tax liabilities for prior years. In 2003, the consolidated effective
tax rate of 115% differs from the statutory rate primarily due to the
unfavorable tax effect of providing a valuation allowance against the future tax
28
benefit of operating loss carryforwards in certain foreign tax jurisdictions and
the existence of nondeductible expenses.
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. Ford accounted for 27.4% of the Company's total revenue in 2005, as
compared to 37.4% in 2004 and 52.9% in 2003. The United States Government
accounted for 30.0% of the Company's total revenue in 2005, as compared to 16.7%
in 2004 and 0% in 2003. No single agency or department of the United States
Government comprised 10% or greater of the Company's total revenue for all
periods presented.
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, and was downgraded further on March 13, 2006, by Fitch Ratings Services.
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
bankruptcy filing by Ford would have a material adverse effect on the
collectibility of our accounts receivable from Ford and 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.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 123R,
"Share-Based Payment," which replaces SFAS 123 and supersedes APB 25. SFAS 123R
eliminates the ability to account for share-based compensation transactions
using 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 will 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. Adoption of SFAS 123R will
result in approximately $18,000 of aggregate compensation expense, net of tax,
in fiscal years subsequent to 2005 for non-vested stock options outstanding at
December 31, 2005. However, to the extent the Company grants additional stock
options in future periods, the Company's compensation expense in future periods
will increase.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $34.8 million at December 31, 2005, as compared
to $40.4 million at December 31, 2004. Cash and cash equivalents decreased $5.68
million in 2005 primarily due to $5.93 million in cash used to acquire Sytel
(net of debt borrowings of $15.0 million used to finance the acquisition), $7.12
million in payments to reduce long-term debt, $3.67 million in cash used for
capital expenditures, and $1.20 million in payments to the former shareholders
of DSC, partially offset by $11.0 million in cash provided by operations and
$3.01 million in proceeds from the issuance of common stock upon exercise of
stock options.
29
Cash provided by operations of $11.0 million in 2005 was generated primarily by
income prior to non-cash charges for depreciation and amortization of $11.0
million and increased 9.7% from $10.0 million in 2004, primarily due to an
increase in net income.
We experienced a significant increase in accounts receivable and accounts
payable during 2005, due to our acquisition of Sytel. Under various 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 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 and possibly the Far East,
enhancements of existing technologies, possible repurchases of our common stock,
additional consideration that is or may become 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.
MATERIAL COMMITMENTS
The Company has the following contractual obligations outstanding at December
31, 2005:
OPERATING
MATURITIES OF CONTRACTUAL OBLIGATIONS DEBT LEASES
------------------------------------- ------- ---------
Less than one year.................... $ -- $ 4,530
1-3 years............................. -- 11,423
4-5 years............................. 10,937 4,818
Thereafter............................ -- 3,052
------- -------
Total................................. $10,937 $23,823
======= =======
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our financial statements in conformity with United States generally
accepted accounting principles ("GAAP"). The preparation of these consolidated
financial statements under GAAP requires management to make estimates and
judgments that affect the reported amount of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expense during the
reporting period. On an ongoing basis, management evaluates its estimates
including those related to uncollectible accounts receivable, contingent
liabilities, revenue recognition, goodwill, and other intangible assets.
Management bases its estimates on historical experience and on various other
factors that are believed to be reasonable at the time the estimates are made.
Actual results may differ from these estimates under different assumptions or
conditions. Management believes that our critical accounting policies that
require more significant judgments and estimates in the preparation of our
consolidated financial statements are revenue recognition, deferred income
taxes, accounts receivable, goodwill impairment, long-lived assets and
identifiable intangible asset impairment, and business combinations.
REVENUE RECOGNITION:
Under all situations, revenue is not recognized until earned, which is when
persuasive evidence of an arrangement exists, services have been provided, the
revenue terms are fixed and determinable, and collectibility is reasonably
assured.
30
We earn revenue under our IT outsourcing services operating segment under one of
the following four models: (1) time and material contracts under which we bill
an agreed rate for each help desk agent based on the number of units (i.e.,
hours or days) the individual agent worked during the month; (2) per-transaction
contracts under which we bill an agreed rate per incident or call handled during
a month or per minute for the length of the telephone call for the incident; (3)
fixed monthly fee contracts under which we agree to provide all of the
agreed-upon scheduled services on a monthly basis for a fixed monthly fee; and
(4) per-seat contracts under which we agree to provide agreed-upon scheduled
services for a monthly fee that is determined by multiplying the number of users
supported at the customer by the monthly per-seat fee. Within the IT outsourcing
services operating segment, greater than 99% of our services are delivered as a
"monthly service" and not over multiple periods. We also refer to our fixed-fee
and per-seat contracts as "managed service" contracts. Many of our contracts
that we bill on a per-transaction basis contain a minimum monthly fee, which is
derived by multiplying the agreed-upon forecast of anticipated incidents by an
agreed-upon minimum percentage. Under this arrangement, we receive a minimum
revenue amount for having committed to provide a specific level of staff to
support the services projected during a month. Since we invoice the customer for
the minimum fee and do not reduce future billings, we recognize the minimum fee
as revenue in the month in which the incidents are below the customer's minimum
forecast. Incident resolution usually occurs in the same month that incidents
are reported. Under our managed service contracts, we generally do not incur
material costs in a future month to complete a service obligation that arose in
a prior month. In those instances where our service obligation is not complete
for a month and we expect to incur more than immaterial costs in a future month,
we will defer an amount of revenue that represents the fair value of that
service obligation.
Revenue from all other services that we provide under our other operating
segments -- government technology services, IT consulting and systems
integration, technical staffing, and learning services -- may be categorized
into two primary types: time and material and fixed price. For the year ended
December 31, 2005, approximately 66% of the Company's revenue in these business
segments were time and material and 27% were fixed price (a substantial majority
of which are fixed price level of effort contracts).
Revenue is recognized under time and materials contracts as time is spent at
hourly rates, which are negotiated with the customer, plus the cost of any
allowable material costs and out-of-pocket expenses. Revenue is recognized under
the majority of fixed price contracts, which are predominantly level of effort
contracts, using the cost-to-cost method for all services provided. In addition,
we evaluate contracts for multiple deliverables, which may require the
segmentation of each deliverable into separate accounting units for proper
revenue recognition.
Our contracts with agencies of the U.S. federal government are subject to
periodic funding by the respective contracting agency. Funding for a contract
may be provided in full at inception of the contract or ratably throughout the
term of the contract as the services are provided. From time to time the Company
may proceed with work on unfunded portions of existing contracts based on
customer direction pending finalization and signing of formal funding documents.
All revenue recognition is deferred during periods in which funding is not
received. Allowable contract costs incurred during such periods are deferred if
the receipt of funding is assessed as probable. In evaluating the probability of
funding being received, we consider our previous experience with the customer,
communications with the customer regarding funding status, and our knowledge of
available funding for the contract or program. If funding is not assessed as
probable, costs are expensed as incurred.
We recognize revenue under cost-based U.S. federal government contracts based on
allowable contract costs, as mandated by the federal government's cost
accounting standards. The costs the Company incurs under federal government
contracts are subject to regulation and audit by certain agencies of the federal
government. Contract cost disallowances, resulting from government audits, have
not historically been significant.
DEFERRED INCOME TAXES:
Deferred income taxes represent temporary differences in the recognition of
certain items for income tax and financial reporting purposes. Realization of
deferred tax assets depends upon sufficient levels of future taxable income. If
at any time we believe that current or future taxable income does not support
the realization of deferred tax assets, a valuation allowance is provided.
Based on historical losses in Belgium and Romania, we have provided a valuation
allowance against the deferred tax asset related to our net operating loss
carryforward in these countries. We anticipate providing a valuation allowance
for any future losses incurred in Belgium and Romania. No valuation allowance
has been recognized
31
against other deferred tax assets, which are in the United States, as we believe
it is more likely than not that these deferred tax assets will be realized based
on estimates of future taxable income, which have considered, among other
factors, the future benefits of our recent acquisitions.
ACCOUNTS RECEIVABLE:
We periodically review our accounts receivable balances for collectibility based
on a combination of historical experience and existing economic conditions. The
definition of "delinquent accounts" is based on the governing contractual terms.
Delinquent accounts and balances are reserved when we determine they are more
likely than not to become uncollectible. Our customers are generally large,
well-capitalized entities. We generally do not require collateral and do not
charge interest on past due balances.
Our experience with delinquent accounts was adversely impacted by the bankruptcy
of three customers in the third and fourth quarters of 2003. One customer was a
former reseller of our leased equipment related to our discontinued operations,
one customer was related to our IT outsourcing services business segment, and
one customer was indebted to the Company as a result of a note receivable
acquired with our acquisition of certain assets of Cyntergy Corporation in 2001.
We are not aware of major financial difficulties at any major customer and do
not anticipate large uncollectible accounts in the future. However, Ford's
long-term debt rating was lowered to "below investment grade" status by Standard
& Poor's Rating Services during 2005, and was downgraded further on March 13,
2006, by Fitch Ratings Services. 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 bankruptcy filing by Ford would have
a material adverse effect on the collectibility of our accounts receivable from
Ford and the Company's operating results and liquidity.
GOODWILL IMPAIRMENT:
Goodwill relating to our acquisitions represents the excess of cost over the
fair value of net tangible and separately identifiable intangible assets
acquired, and has a carrying amount of approximately $22.1 million and $4.77
million at December 31, 2005 and 2004, respectively. The majority of the
increase in goodwill in 2005 was related to the acquisitions of Sytel and Akela
in January and October 2005, respectively.
We completed our annual impairment analyses at October 1, 2005 and 2004, noting
no indications of impairment for any of our reporting units. At December 31,
2005, there have been no events or circumstances that would indicate an
impairment test should be performed sooner than our annual test as of October 1,
2006.
LONG-LIVED ASSETS AND IDENTIFIABLE INTANGIBLE ASSET IMPAIRMENT:
The carrying amount of long-lived assets and identifiable intangible assets was
approximately $19.7 million and $12.5 million at December 31, 2005 and 2004,
respectively. The majority of the increase in 2005 was related to the
acquisitions of Sytel and Akela in January and October 2005, respectively.
We continually evaluate whether events and circumstances have occurred that
indicate the remaining estimated useful lives of long-lived and identifiable
intangible assets may warrant revision or that the remaining balances may not be
recoverable. When factors or events indicate that such costs should be evaluated
for possible impairment, we estimate the undiscounted cash flows of the assets
over their remaining lives to evaluate whether the costs are recoverable. Such
events could include, but are not limited to, the loss of a significant customer
or contract, decreases in U.S. federal government funding of certain programs,
or other similar events.
In the fourth quarter of 2004, we determined that customization costs for
certain software related to our help desk operations would not be utilized to
deliver services to our customers or be used for any other purpose. Since we
expected no future cash flows related to the customization, we recorded an
impairment loss of $485,000 in our IT outsourcing services operating segment,
which represented the net book value of these costs. We did not record an
impairment loss in any other period presented.
32
BUSINESS COMBINATIONS:
We apply the provisions of SFAS No. 141, "Business Combinations," whereby the
net tangible and separately identifiable intangible assets acquired and
liabilities assumed are recognized at their estimated fair market values at the
acquisition date. The purchase price in excess of the estimated fair market
value of the net tangible and separately identifiable intangible assets acquired
represents goodwill. The allocation of the purchase price related to our
business combinations involves significant estimates and management judgment
that may be adjusted during the allocation period, but in no case beyond one
year from the acquisition date. Costs incurred related to successful business
combinations are capitalized as costs of business combinations, while costs
incurred by us for unsuccessful or terminated acquisition opportunities are
expensed when we determine that such opportunities will no longer be pursued.
Costs incurred related to probable business combinations are deferred.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, we are subject to market exposure from changes
in foreign currency exchange rates. We do not have any material market risk
related to interest rates as our debt obligations have fixed interest rates. We
are subject to the risk of changes in foreign currency exchange rates due to our
global operations as we provide services in the United States and Europe. As a
result, our financial results and position could be significantly affected by
factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets in which we provide services.
Our operating results are primarily exposed to changes in exchange rates between
the U.S. dollar and European currencies; specifically the European euro, British
pound sterling, Swedish kroner, and Romanian lei. As currency exchange rates
change, translation of the statements of operations of our international
subsidiaries into U.S. dollars affects year-over-year comparability of operating
results. We do not hedge operating translation risks because cash flows from
international operations are generally reinvested locally. Also, certain of our
trade receivables at our international subsidiaries are denominated in
currencies other than the local currency of the TechTeam entity that delivers
the service. As currency exchange rates change, our operating results will be
affected by foreign currency transaction gains or losses on the receivable
balance until it is collected. We generally do not enter into derivatives or
similar instruments to manage the Company's exposure to fluctuations in exchange
rates related to trade receivables. However, in December 2004, we entered into a
foreign currency option contract for certain receivables. Under the option
contract, we were entitled to sell an aggregate of $2,300,000 (notional amount)
in monthly transactions through December 2005, at our option, and purchase euros
at a fixed exchange rate. We did not purchase any euros under the contract
during 2005. We do not enter into derivatives or similar instruments for trading
or speculative purposes.
At December 31, 2005 and 2004, our net current assets (defined as current assets
less current liabilities) subject to foreign currency translation risk were
$15.6 million and $16.6 million, respectively. The potential decrease in net
current assets from a hypothetical 10% adverse change in quoted foreign currency
exchange rates would be $1.56 million and $1.66 million at December 31, 2005 and
2004, respectively. Approximately $1.45 million and $866,000 of our trade
receivables at our international subsidiaries at December 31, 2005 and 2004,
respectively, are denominated in currencies other than the local currency of the
TechTeam entity that delivers the service. The potential loss on trade
receivables from a hypothetical 10% adverse change in quoted foreign currency
exchange rates would be $145,000 and $87,000 at December 31, 2005 and 2004,
respectively. The sensitivity analysis presented assumes a parallel shift in
foreign currency exchange rates yet exchange rates rarely move in the same
direction. This assumption may overstate the impact of changing exchange rates
on individual assets and liabilities denominated in a foreign currency.
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of TechTeam Global, Inc. and
Subsidiaries are included in this Item 8:
PAGE
----
Management Report on Internal Control over Financial Reporting........... 35
Report of Independent Registered Public Accounting Firm -- Internal
Control over Financial Reporting...................................... 35
Report of Independent Registered Public Accounting Firm -- Financial
Statements............................................................ 37
Consolidated Statements of Operations -- Years Ended December 31, 2005,
2004, and 2003........................................................ 38
Consolidated Statements of Comprehensive Income (Loss) -- Years Ended
December 31, 2005, 2004, and 2003..................................... 39
Consolidated Balance Sheets -- As of December 31, 2005 and 2004.......... 40
Consolidated Statements of Shareholders' Equity -- Years Ended
December 31, 2005, 2004, and 2003..................................... 42
Consolidated Statements of Cash Flows -- Years Ended December 31, 2005,
2004, and 2003........................................................ 43
Notes to the Consolidated Financial Statements........................... 44
The following financial statement schedule of TechTeam Global, Inc. and
Subsidiaries is included pursuant to the requirements of Item 15(c):
Schedule II -- Valuation and Qualifying Accounts for the years ended December
31, 2005, 2004, and 2003
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission and for which the
information is not already included in the financial statements are not required
under the related instructions or are not applicable and, therefore, have been
omitted.
34
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of
the Exchange Act). Our management, with the participation of our chief executive
officer, chief financial officer, and chief accounting officer, assessed the
effectiveness of our internal control over financial reporting based on the
framework in "Internal Control--Integrated Framework," issued by the Committee
of Sponsoring Organizations of the Treadway Commission ("COSO Framework").
Management excluded from its assessment the internal control over financial
reporting of Sytel, Inc., which we acquired January 3, 2005. As of and for the
year ended December 31, 2005, total assets of $35.8 million and total revenue of
$31.1 million included in the consolidated financial statements of the Company
were subject to Sytel, Inc.'s internal control over financial reporting. Based
on our assessment under the COSO Framework, our management concluded that our
internal control over financial reporting was effective as of December 31, 2005.
Our independent registered public accounting firm, Ernst & Young LLP, issued an
attestation report on management's assessment of the effectiveness of our
internal control over financial reporting as of December 31, 2005, which appears
below.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of TechTeam Global, Inc.
We have audited management's assessment, included in the accompanying Management
Report on Internal Control over Financial Reporting, that TechTeam Global, Inc.
maintained effective internal control over financial reporting as of December
31, 2005, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). TechTeam Global, Inc.'s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
35
As indicated in the accompanying Management Report on Internal Control over
Financial Reporting, management's assessment of and conclusion on the
effectiveness of internal control over financial reporting did not include the
internal controls of Sytel, Inc., which is included in the 2005 consolidated
financial statements of TechTeam Global, Inc. and constituted $35.8 million and
$23.2 million of total and net assets, respectively, as of December 31, 2005,
and $31.1 million and $1.62 million of revenue and net income, respectively, for
the year then ended. Management did not assess the effectiveness of internal
control over financial reporting at Sytel, Inc., which TechTeam Global, Inc.
acquired on January 3, 2005. Our audit of internal control over financial
reporting of TechTeam Global, Inc. also did not include an evaluation of the
internal control over financial reporting of Sytel, Inc.
In our opinion, management's assessment that TechTeam Global, Inc. maintained
effective internal control over financial reporting as of December 31, 2005, is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, TechTeam Global, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2005,
based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the 2005 financial statements of
TechTeam Global, Inc. and our report dated March 14, 2006 expressed an
unqualified opinion thereon.
/s/ Ernst & Young LLP
Detroit, Michigan
March 14, 2006
36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders TechTeam Global, Inc.
We have audited the accompanying consolidated balance sheets of TechTeam Global,
Inc. and subsidiaries as of December 31, 2005 and 2004, and the related
consolidated statements of operations, comprehensive income (loss),
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2005. Our audits also included the financial statement
schedule listed in the Index at Item 15. These financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of TechTeam Global,
Inc. and subsidiaries at December 31, 2005 and 2004, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2005, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of TechTeam
Global, Inc.'s internal control over financial reporting as of December 31,
2005, based on criteria established in Internal Control--Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 14, 2006 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Detroit, Michigan
March 14, 2006
37
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
YEAR ENDED DECEMBER 31,
------------------------------
2005 2004 2003
-------- -------- --------
REVENUE
IT outsourcing services ........................................ $ 73,777 $ 74,608 $65,614
Government technology services ................................. 55,592 25,712 2,055
IT consulting and systems integration .......................... 28,118 19,668 8,195
Technical staffing ............................................. 8,243 7,445 9,090
Learning services .............................................. 767 555 879
-------- -------- -------
TOTAL REVENUE ..................................................... 166,497 127,988 85,833
-------- -------- -------
COST OF SERVICES DELIVERED
Cost of services delivered ..................................... 124,414 96,916 67,949
Asset impairment loss .......................................... -- 485 --
-------- -------- -------
TOTAL COST OF SERVICES DELIVERED .................................. 124,414 97,401 67,949
-------- -------- -------
GROSS PROFIT ...................................................... 42,083 30,587 17,884
Selling, general, and administrative expense ................... 34,892 24,040 18,695
-------- -------- -------
OPERATING INCOME (LOSS) ........................................... 7,191 6,547 (811)
Net interest income ............................................ 390 719 1,139
Foreign currency transaction gain (loss) ....................... 215 (91) 920
-------- -------- -------
INCOME FROM BEFORE INCOME TAXES ................................... 7,796 7,175 1,248
Income tax provision ........................................... 2,402 2,547 1,438
-------- -------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS .......................... 5,394 4,628 (190)
Income (loss) from discontinued operations, net of tax provision
(credit) of $46 in 2005, $50 in 2004, and $(1,028) in 2003 .. 74 97 (856)
-------- -------- -------
NET INCOME (LOSS) ................................................. $ 5,468 $ 4,725 $(1,046)
======== ======== =======
BASIC EARNINGS (LOSS) PER COMMON SHARE
Income (loss) from continuing operations ....................... $ 0.55 $ 0.49 $ (0.02)
Income (loss) from discontinued operations ..................... 0.01 0.01 (0.09)
-------- -------- -------
Net income (loss) per common share ............................. $ 0.56 $ 0.51 $ (0.10)
======== ======== =======
BASIC EARNINGS PER PREFERRED SHARE
Income from continuing operations .............................. $ 0.55 $ 0.49 $ --
Income from discontinued operations ............................ 0.01 0.01 --
-------- -------- -------
Net income per preferred share ................................. $ 0.56 $ 0.51 $ --
======== ======== =======
DILUTED EARNINGS (LOSS) PER COMMON SHARE
Income (loss) from continuing operations ...................... $ 0.54 $ 0.48 $ (0.02)
Income (loss) from discontinued operations .................... 0.01 0.01 (0.09)
-------- -------- -------
Net income (loss) per common share ............................ $ 0.54 $ 0.49 $ (0.10)
======== ======== =======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND COMMON SHARE EQUIVALENTS OUTSTANDING
Basic--common .................................................. 9,508 8,660 10,066
Basic--preferred ............................................... 244 690 503
Diluted--common ................................................ 9,832 8,904 10,066
See accompanying notes.
38
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
YEAR ENDED DECEMBER 31,
--------------------------
2005 2004 2003
------- ------ -------
NET INCOME (LOSS), AS SET FORTH IN THE CONSOLIDATED
STATEMENTS OF OPERATIONS ....................... $ 5,468 $4,725 $(1,046)
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustment ........ (3,277) 2,193 526
------- ------ -------
COMPREHENSIVE INCOME (LOSS) ....................... $ 2,191 $6,918 $ (520)
======= ====== =======
See accompanying notes.
39
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
DECEMBER 31,
-------------------
ASSETS 2005 2004
------ -------- --------
CURRENT ASSETS
Cash and cash equivalents .............................. $ 34,756 $ 40,436
Accounts receivable (less allowances of $757 and $912
at December 31, 2005 and 2004, respectively) ........ 43,696 28,888
Prepaid expenses and other ............................. 2,467 2,288
Deferred income taxes .................................. 141 --
Net current assets of discontinued operations .......... 130 97
-------- --------
TOTAL CURRENT ASSETS ................................... 81,190 71,709
-------- --------
PROPERTY, EQUIPMENT, AND PURCHASED SOFTWARE
Computer equipment and office furniture ................ 23,577 22,768
Software ............................................... 12,885 11,545
Leasehold improvements ................................. 5,047 4,822
Transportation equipment ............................... 425 321
-------- --------
41,934 39,456
Less -- Accumulated depreciation and amortization ...... (33,871) (31,074)
-------- --------
NET PROPERTY, EQUIPMENT, AND PURCHASED SOFTWARE ........ 8,063 8,382
-------- --------
OTHER ASSETS
Goodwill ............................................... 22,104 4,768
Intangible assets, net ................................. 11,213 3,672
Other .................................................. 440 456
-------- --------
TOTAL OTHER ASSETS ..................................... 33,757 8,896
-------- --------
TOTAL ASSETS .............................................. $123,010 $ 88,987
======== ========
See accompanying notes.
40
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
DECEMBER 31,
------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 2005 2004
------------------------------------ -------- -------
CURRENT LIABILITIES
Accounts payable ................................................ $ 12,753 $ 3,707
Accrued payroll, related taxes, and withholdings ................ 10,020 7,485
Accrued expenses ................................................ 7,248 2,217
Accrued income taxes ............................................ 331 644
Deferred revenue ................................................ 303 1,380
Other current liabilities ....................................... -- 195
-------- -------
TOTAL CURRENT LIABILITIES ....................................... 30,655 15,628
-------- -------
LONG-TERM LIABILITIES
Long-term debt .................................................. 10,937 --
Deferred income taxes ........................................... 2,614 1,285
Other long-term liabilities ..................................... 564 414
-------- -------
TOTAL LONG-TERM LIABILITIES ..................................... 14,115 1,699
-------- -------
REDEEMABLE CONVERTIBLE PREFERRED STOCK, 4,310,344 and 5,000,000
shares authorized, 0 and 689,656 shares issued and outstanding
at December 31, 2005 and 2004, respectively ..................... -- 5,000
-------- -------
SHAREHOLDERS' EQUITY
Common stock, $0.01 par value, 45,000,000 shares authorized,
9,943,262 and 8,767,037 shares issued and outstanding
at December 31, 2005 and 2004, respectively .................. 99 88
Additional paid-in capital ...................................... 69,148 59,437
Unamortized deferred compensation ............................... (866) (533)
Retained earnings ............................................... 10,261 4,793
Accumulated other comprehensive income (loss) ................... (402) 2,875
-------- -------
TOTAL SHAREHOLDERS' EQUITY ...................................... 78,240 66,660
-------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......................... $123,010 $88,987
======== =======
See accompanying notes.
41
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
ACCUMULATED
ADDITIONAL UNAMORTIZED OTHER TOTAL
COMMON PAID-IN DEFERRED RETAINED COMPREHENSIVE SHAREHOLDERS'
STOCK CAPITAL COMPENSATION EARNINGS INCOME (LOSS) EQUITY
------ ---------- ------------ -------- ------------- -------------
BALANCE AT JANUARY 1, 2003 ................ $107 $ 71,943 $ -- $ 1,114 $ 156 $ 73,320
Proceeds from issuance of shares
under stock option plans ............ 1 543 -- -- -- 544
Common stock issued directors .......... -- 52 -- -- -- 52
Purchase of common stock ............... (20) (12,525) -- -- -- (12,545)
Net loss for 2003 ...................... -- -- -- (1,046) -- (1,046)
Foreign currency translation
adjustment .......................... -- -- -- -- 526 526
Other .................................. -- (81) -- -- -- (81)
---- -------- ----- ------- ------- --------
BALANCE AT DECEMBER 31, 2003 .............. 88 59,932 -- 68 682 60,770
Proceeds from issuance of shares
under stock option plans ............ 3 1,384 -- -- -- 1,387
Common stock issued to directors ....... -- 65 -- -- -- 65
Purchase of common stock ............... (3) (2,741) -- -- -- (2,744)
Issuance of restricted stock ........... -- 533 (533) -- -- --
Net income for 2004 .................... -- -- -- 4,725 -- 4,725
Foreign currency translation
adjustment .......................... -- -- -- -- 2,193 2,193
Other .................................. -- 264 -- -- -- 264
---- -------- ----- ------- ------- --------
BALANCE AT DECEMBER 31, 2004 .............. 88 59,437 (533) 4,793 2,875 66,660
Proceeds from issuance of shares
under stock option plans ............ 4 3,030 -- -- -- 3,034
Common stock issued to directors ....... -- 70 -- -- -- 70
Issuance of restricted stock ........... -- 440 (440) -- -- --
Conversion of preferred stock into
common stock ........................ 7 4,993 -- -- -- 5,000
Equity instruments issued in
connection with acquisitions ........ -- 842 -- -- -- 842
Amortization of deferred compensation .. -- -- 107 -- -- 107
Net income for 2005 .................... -- -- -- 5,468 -- 5,468
Foreign currency translation
adjustment .......................... -- -- -- -- (3,277) (3,277)
Other .................................. -- 336 -- -- -- 336
---- -------- ----- ------- ------- --------
BALANCE AT DECEMBER 31, 2005 .............. $ 99 $ 69,148 $(866) $10,261 $ (402) $ 78,240
==== ======== ===== ======= ======= ========
See accompanying notes.
42
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
-----------------------------
2005 2004 2003
-------- ------- --------
OPERATING ACTIVITIES
Net income (loss) ............................................. $ 5,468 $ 4,725 $ (1,046)
Other adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation ............................................ 3,670 4,369 3,826
Amortization ............................................ 1,819 478 793
Non-cash expense related to stock options and issuance
of common stock and restricted common stock .......... 513 329 150
Provision (credit) for deferred income taxes ............ (809) 1,186 (21)
Provision (credit) for uncollectible accounts ........... (286) 220 600
Other ................................................... 39 12 8
Changes in operating assets and liabilities-
Accounts receivable .................................. (4,867) (4,172) (3,957)
Prepaid expenses and other assets .................... (21) (779) (408)
Accounts payable ..................................... 1,475 (102) 340
Accrued payroll, related taxes, and withholdings ..... 1,096 2,383 342
Refundable and accrued income taxes .................. (671) (368) 2,389
Deferred revenue ..................................... (1,132) 624 273
Accrued expenses and other liabilities ............... 4,726 33 (426)
(Income) loss from discontinued operations .............. (74) (97) 856
Net operating cash flow from discontinued operations .... 65 1,193 4,593
-------- ------- --------
Net cash provided by operating activities .................. 11,011 10,034 8,312
-------- ------- --------
INVESTING ACTIVITIES
Purchases of property, equipment, and software ................ (3,669) (2,465) (4,353)
Cash paid for acquisitions, net of cash acquired .............. (25,232) (1,036) (6,504)
Purchases of securities available for sale .................... -- -- (15,163)
Proceeds from sales of securities available for sale .......... -- -- 21,655
Other ......................................................... -- -- 49
Net investing cash flow from discontinued operations .......... -- -- 21
-------- ------- --------
Net cash used in investing activities ...................... (28,901) (3,501) (4,295)
-------- ------- --------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt ...................... 18,033 -- --
Proceeds from issuance of common stock ........................ 3,006 1,387 544
Payments on long-term debt .................................... (7,122) (885) --
Purchase of Company common stock .............................. -- (2,744) (12,545)
Proceeds from issuance of preferred stock ..................... -- -- 4,820
Net financing cash flow from discontinued operations .......... (11) (219) (468)
-------- ------- --------
Net cash provided by (used in) financing activities ........ 13,906 (2,461) (7,649)
-------- ------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ..... (1,696) 1,169 (608)
-------- ------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................. (5,680) 5,241 (4,240)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ................... 40,436 35,195 39,435
-------- ------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR ......................... $ 34,756 $40,436 $ 35,195
======== ======= ========
See accompanying notes.
43
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND BASIS OF PRESENTATION:
TechTeam Global, Inc. ("TechTeam" or the "Company" or "we") is a global provider
of information technology and business process outsourcing support services to
Fortune 1000 companies, multinational companies, product providers, small and
mid-size companies, and government entities. TechTeam also offers other
services, including technology deployment and migration services, consulting,
systems integration, training, and technical staffing. TechTeam provides support
services globally through our wholly-owned subsidiaries: TechTeam Global NV/SA
and its subsidiary TechTeam A.N.E. NV/SA; TechTeam Global Ltd.; TechTeam Global
GmbH; TechTeam Global AB; S.C. TechTeam Global SRL; TechTeam Akela SRL; TechTeam
Cyntergy, L.L.C.; Digital Support Corporation; Sytel, Inc.; and TechTeam Asia
Pacific (Private) Ltd. Our other wholly-owned subsidiary is TechTeam Capital
Group, L.L.C. ("Capital Group"), an equipment leasing business that is winding
down its operations and which has been presented as a discontinued operation in
the accompanying consolidated financial statements for all periods presented
(see Note 15).
The consolidated financial statements include the accounts of TechTeam Global,
Inc. and its subsidiaries. Intercompany accounts and transactions have been
eliminated.
USE OF ESTIMATES:
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenue and expense during the reporting
period. Actual results could differ from these estimates. Our significant
estimates include realization of deferred tax assets, reserves for uncollectible
accounts receivable, and assumptions used in testing goodwill and other
long-lived assets for impairment.
CASH AND CASH EQUIVALENTS:
Cash includes both interest bearing and non-interest bearing deposits, which are
available on demand. Cash equivalents include all liquid investments with
maturities of three months or less when purchased, including money market funds
held at banks and other financial institutions.
In connection with our credit agreement with LaSalle Bank, N.A. (formerly known
as Standard Federal Bank, N.A.), outstanding borrowings are collateralized by a
compensating balance cash deposit required to be held at the bank equal to the
amount of any outstanding borrowings. At December 31, 2005, the Company held
compensating balance cash deposits totaling $11,200,000 under the agreement.
There were no borrowings or compensating balance cash deposits outstanding at
December 31, 2004.
ACCOUNTS RECEIVABLE:
We periodically review our accounts receivable balances for collectibility based
on a combination of historical experience and existing economic conditions. The
definition of "delinquent accounts" is based on the governing contractual terms.
Delinquent accounts and balances are reserved when we determine they are more
likely than not to become uncollectible. Most of our customers are large,
well-capitalized entities. We do not require collateral and generally do not
charge interest on past due balances.
44
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
PROPERTY, EQUIPMENT, AND PURCHASED SOFTWARE:
Property, equipment, and purchased software for internal use are stated at cost.
Computer equipment, office furniture, and transportation equipment are
depreciated using the straight-line method over their estimated useful lives,
ranging from three to ten years. Leasehold improvements are amortized on a
straight-line basis over the shorter of the estimated useful lives of the
improvements or the term of the lease. Software is amortized over three to seven
years.
We continually evaluate whether events and circumstances have occurred that
indicate the remaining estimated useful lives of long-lived assets may warrant
revision or that the remaining balances may not be recoverable. When factors
indicate that such costs should be evaluated for possible impairment, we
estimate the undiscounted cash flows of the long-lived assets over their
remaining lives to evaluate whether the costs are recoverable. In the fourth
quarter of 2004, we determined that customization costs for certain software
related to our help desk operations would not be utilized to deliver services to
our customers or be used for any other purpose. Since we expect no future cash
flows related to the customization, we recorded an impairment loss of $485,000
in our IT outsourcing services operating segment, which represented the net book
value of these costs. We did not record an impairment loss in any other period
presented.
GOODWILL AND OTHER INTANGIBLE ASSETS:
On October 3, 2005 we acquired all of the outstanding capital stock of Akela
Informatique SRL. The goodwill resulting from the acquisition has been assigned
to our IT consulting and systems integration operating segment.
On January 3, 2005, we acquired all of the outstanding capital stock of Sytel,
Inc. ("Sytel"). On December 31, 2003, we acquired all of the outstanding capital
stock of Digital Support Corporation ("DSC"). The goodwill resulting from the
acquisitions of Sytel and DSC has been assigned to our government technology
services operating segment.
On May 13, 2004, TechTeam Global NV/SA, the Company's wholly-owned subsidiary in
Belgium, completed the acquisition of all of the outstanding stock of Advanced
Network Engineering NV/SA ("A.N.E."). The goodwill resulting from the
acquisition has been assigned to our IT consulting and systems integration
operating segment.
Goodwill is not amortized, but instead is subject to an annual impairment test
on October 1. In connection with the Company's goodwill impairment evaluation,
the Company identifies its reporting units and determines the carrying value of
each reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to these reporting units. The Company
determines the estimated fair value of each reporting unit and compares it to
the carrying amount of the reporting unit. As a result of this comparison, there
was no indication that the reporting units' fair values were less than their
carrying values and, therefore, we did not record an impairment loss in any
period presented.
In the future, to the extent the carrying amount of a reporting unit exceeds the
fair value of a reporting unit, an indication would exist that a reporting
unit's goodwill may be impaired, and the Company would be required to perform
the second step of the impairment test. In the second step, the Company must
compare the implied fair value of the reporting unit goodwill with the carrying
amount of the reporting unit goodwill. The implied fair value of goodwill is
determined by allocating the fair value of the reporting unit to all of the
assets (recognized and unrecognized) and liabilities of the reporting unit in a
manner similar to a purchase price allocation in an acquisition. The residual
fair value after this allocation is the implied fair value of the reporting unit
goodwill.
45
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Changes in the carrying amount of goodwill consist of the following:
IT
IT GOVERNMENT CONSULTING
OUTSOURCING TECHNOLOGY AND SYSTEMS
SERVICES SERVICES INTEGRATION TOTAL
----------- ---------- ----------- -------
(In thousands)
Balance as of January 1, 2003 ....... $371 $ -- $ -- $ 371
Goodwill acquired ................ -- 1,728 -- 1,728
---- ------- ------ -------
Balance as of December 31, 2003 ..... 371 1,728 -- 2,099
Goodwill acquired ................ -- 2,102 512 2,614
Effect of exchange rate changes .. -- -- 55 55
---- ------- ------ -------
Balance as of December 31, 2004 ..... 371 3,830 567 4,768
Goodwill acquired ................ -- 15,840 1,567 17,407
Effect of exchange rate changes .. -- -- (71) (71)
---- ------- ------ -------
Balance as of December 31, 2005 ..... $371 $19,670 $2,063 $22,104
==== ======= ====== =======
Other intangible assets consist of the following:
DECEMBER 31, 2005 WEIGHTED DECEMBER 31, 2004 WEIGHTED
---------------------- AVERAGE ---------------------- AVERAGE
ACCUMULATED MORTIZATION ACCUMULATED MORTIZATION
COST AMORTIZATION PERIOD COST AMORTIZATION PERIOD
------- ------------ ----------- ------- ------------ -----------
(In thousands) (In thousands)
Customer-related assets... $12,644 $2,448 7.8 years $4,583 $911 8.8 years
Noncompete agreement...... 901 187 4.3 years -- -- --
Trademark and name........ 392 89 3.9 years -- -- --
------- ------ ------ ----
$13,937 $2,724 $4,583 $911
======= ====== ====== ====
Intangible assets acquired in a business combination are recognized only if such
assets arise from a contractual or other legal right and are separable, that is,
capable of being sold, transferred, licensed, rented, or exchanged. Intangible
assets acquired in a business combination that do not meet these criteria are
considered a component of goodwill. The useful life of amortizable intangible
assets is determined based on the period from which we expect to realize cash
flows from these assets and considers, among other items, ability and cost to
renew contracts with similar terms and conditions and historical customer
retention rates.
We re-evaluate amortizable intangible assets based on undiscounted operating
cash flows whenever significant events or changes occur that might indicate
impairment of recorded costs. If undiscounted cash flows are insufficient to
recover recorded costs, we write down the carrying value of the assets to fair
value based on discounted cash flows or market values. We did not record an
impairment loss for amortizable intangible assets in any period presented.
Our expected amortization expense for intangible assets held at December 31,
2005 is as follows: $2,005,000 for 2006, $1,916,000 for 2007, $1,910,000 for
2008, $1,630,000 for 2009, and $1,483,000 for 2010.
46
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
REVENUE RECOGNITION:
Under all situations, revenue is not recognized until earned, which is when
persuasive evidence of an arrangement exists, services have been provided, the
revenue terms are fixed and determinable, and collectibility is reasonably
assured.
We earn revenue under our IT outsourcing services operating segment under one of
the following four models: (1) time and material contracts under which we bill
an agreed rate for each help desk agent based on the number of units (i.e.,
hours or days) the individual agent worked during the month; (2) per-transaction
contracts under which we bill an agreed rate per incident or call handled during
a month or per minute for the length of the telephone call for the incident; (3)
fixed monthly fee contracts under which we agree to provide all of the
agreed-upon scheduled services on a monthly basis for a fixed monthly fee; and
(4) per-seat contracts under which we agree to provide agreed-upon scheduled
services for a monthly fee that is determined by multiplying the number of users
supported at the customer by the monthly per-seat fee. Within the IT outsourcing
services operating segment, greater than 99% of our services are delivered as a
"monthly service" and not over multiple periods. We also refer to our fixed-fee
and per-seat contracts as "managed service" contracts. Many of our contracts
that we bill on a per-transaction basis contain a minimum monthly fee, which is
derived by multiplying the agreed-upon forecast of anticipated incidents by an
agreed-upon minimum percentage. Under this arrangement, we receive a minimum
revenue amount for having committed to provide a specific level of staff to
support the services projected during a month. Since we invoice the customer for
the minimum fee and do not reduce future billings, we recognize the minimum fee
as revenue in the month in which the incidents are below the customer's minimum
forecast. Incident resolution usually occurs in the same month that incidents
are reported. Under our managed service contracts, we generally do not incur
material costs in a future month to complete a service obligation that arose in
a prior month. In those instances where our service obligation is not complete
for a month and we expect to incur more than immaterial costs in a future month,
we will defer an amount of revenue that represents the fair value of that
service obligation.
Revenue from all other services that we provide under our other operating
segments -- government technology services, IT consulting and systems
integration, technical staffing, and learning services -- may be categorized
into two primary types: time and material and fixed price. For the year ended
December 31, 2005, approximately 66% of the Company's revenue in these business
segments were time and material and 27% were fixed price (a substantial majority
of which are fixed price level of effort contracts).
Revenue is recognized under time and materials contracts as time is spent at
hourly rates, which are negotiated with the customer, plus the cost of any
allowable material costs and out-of-pocket expenses. Revenue is recognized under
the majority of fixed price contracts, which are predominantly level of effort
contracts, using the cost-to-cost method for all services provided. In addition,
we evaluate contracts for multiple deliverables, which may require the
segmentation of each deliverable into separate accounting units for proper
revenue recognition.
Our contracts with agencies of the U.S. federal government are subject to
periodic funding by the respective contracting agency. Funding for a contract
may be provided in full at inception of the contract or ratably throughout the
term of the contract as the services are provided. From time to time the Company
may proceed with work on unfunded portions of existing contracts based on
customer direction pending finalization and signing of formal funding documents.
All revenue recognition is deferred during periods in which funding is not
received. Allowable contract costs incurred during such periods are deferred if
the receipt of funding is assessed as probable. In evaluating the probability of
funding being received, we consider our previous experience with the customer,
communications with the customer regarding funding status, and our knowledge of
available funding for the contract or program. If funding is not assessed as
probable, costs are expensed as incurred.
47
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
We recognize revenue under cost-based U.S. federal government contracts based on
allowable contract costs, as mandated by the federal government's cost
accounting standards. The costs the Company incurs under federal government
contracts are subject to regulation and audit by certain agencies of the federal
government. Contract cost disallowances, resulting from government audits, have
not historically been significant.
STOCK-BASED COMPENSATION:
We account for stock-based compensation awards granted to employees using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations. The effect on net income (loss) and earnings (loss) per share
had compensation costs been recognized based on the fair value method prescribed
by Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," is as follows:
YEAR ENDED DECEMBER 31,
---------------------------
2005 2004 2003
------- ------- -------
(In thousands, except per
share data)
Reported net income (loss) ................................. $ 5,468 $ 4,725 $(1,046)
Add: Total stock-based compensation expense included
in reported net income (loss), net of tax ............... 117 43 43
Deduct: Total stock-based compensation expense determined
under the fair value method for all awards, net of tax .. (1,247) (1,073) (468)
------- ------- -------
Pro forma net income (loss) ................................ $ 4,338 $ 3,695 $(1,471)
======= ======= =======
Basic earnings (loss) per common share:
As reported ............................................. $ 0.56 $ 0.51 $ (0.10)
Pro forma ............................................... $ 0.44 $ 0.40 $ (0.15)
Diluted earnings (loss) per common share:
As reported ............................................. $ 0.54 $ 0.49 $ (0.10)
Pro forma ............................................... $ 0.43 $ 0.39 $ (0.15)
The fair value of stock-based compensation was estimated at the date of grant
using the Black-Scholes option pricing model with the following assumptions for
options granted in 2003 through 2005: risk-free interest rates of 1.21% to
4.52%; weighted average volatility factor of the expected market price of our
common stock of 39% in 2005, 53% in 2004, and 52% in 2003; and weighted average
expected life of 3.1 years in 2005, 3.4 years in 2004, and 4.0 years in 2003.
Pro forma compensation cost is generally recognized on an accelerated basis.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
our employee stock options have characteristics significantly different from
those of traded options, and because changes in the assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of the
Company's employee stock-based compensation.
48
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 will 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. Adoption of SFAS 123R will
result in approximately $18,000 of aggregate compensation expense, net of tax,
in fiscal years subsequent to 2005 for non-vested stock options outstanding at
December 31, 2005. However, to the extent the Company grants additional stock
options in future periods, the Company's compensation expense in future periods
will increase.
DEFERRED INCOME TAXES:
Deferred income taxes represent temporary differences in the recognition of
certain items for income tax and financial reporting purposes. Realization of
deferred tax assets depends upon sufficient levels of future taxable income. If
at any time we believe that current or future taxable income does not support
the realization of deferred tax assets, a valuation allowance is provided.
No provision has been made with respect to approximately $7,400,000 of
undistributed earnings of foreign subsidiaries at December 31, 2005, since we
consider these earnings to be permanently reinvested.
FOREIGN CURRENCY TRANSLATION:
We translate the assets and liabilities of our non-U.S. subsidiaries into U.S.
dollars based on the prevailing exchange rate at each respective balance sheet
date. We translate revenue and expenses into U.S. dollars based on the average
exchange rate for the period. Cumulative translation adjustments are included as
a separate component of shareholders' equity as accumulated other comprehensive
income. Currency transaction gains or losses are generally derived from
receivables and payables stated in a currency other than the local currency, and
are recognized as income or expense in the accompanying consolidated statements
of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
At December 31, 2005, the Company's financial instruments consists of accounts
receivable, accounts payable, and notes payable. The carrying values of these
financial instruments approximate their fair values due to their short maturity
periods, market interest rates, or quoted market prices for equivalent
instruments.
Certain of our trade receivables are denominated in currencies other than the
local currency of the TechTeam entity that delivers the service. In December
2004, we entered into a foreign currency option contract to manage the Company's
exposure to fluctuations in the exchange rate between the U.S. dollar and
European euro. Under the option contract, we were entitled to sell an aggregate
of $2,300,000 (notional amount) in monthly transactions through December 2005,
at our option, and purchase euros at a fixed exchange rate. We did not purchase
any euros under the contract during 2005. We do not enter into derivatives or
similar instruments for trading or speculative purposes.
49
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest expense totaled $176,000 in 2005, $20,000 in 2004, and
$8,000 in 2003. Cash paid for income taxes totaled $3,720,000 in 2005,
$1,260,000 in 2004, and $546,000 in 2003.
RECLASSIFICATIONS:
Certain reclassifications have been made to our 2004 and 2003 financial
statements in order to conform to the 2005 financial statement presentation.
NOTE 2 -- EARNINGS PER SHARE
Earnings per share is computed using the two-class method as required by SFAS
No. 128, "Earnings Per Share." The two-class method is an earnings allocation
formula that determines earnings per share separately for common stock and
participating securities according to dividends declared (or accumulated) and
participation rights in undistributed earnings. Between April 2003 and May 2005,
the Company had outstanding redeemable convertible preferred stock, which 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. As a result, the entire loss from continuing
operations and net loss for 2003 were allocated to common shareholders. 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.
During 2005 and 2004, 134,000 and 506,400 stock options, respectively, were
excluded from the computation of diluted earnings per common share because the
exercise prices of the options were higher than the average market price of the
Company's common stock for the respective year. During 2003, 1,213,018 stock
options were excluded from the computation of diluted earnings per common share
due to the net loss for the year.
50
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 2 -- EARNINGS PER SHARE (continued)
The following table reconciles the numerators and denominators of the basic and
diluted earnings per common share computations for income (loss) from continuing
operations:
YEAR ENDED DECEMBER 31,
-------------------------
2005 2004 2003
------ ------ -------
(In thousands, except per
share data)
Income (loss) from continuing operations ................ $5,394 $4,628 $ (190)
Less -- Income from continuing operations allocated to
preferred shareholders ............................... 135 342 --
------ ------ -------
Income (loss) from continuing operations available to
common shareholders .................................. $5,259 $4,286 $ (190)
====== ====== =======
Basic weighted average common shares .................... 9,508 8,660 10,066
Common stock equivalents from stock options ............. 324 244 --
------ ------ -------
Diluted weighted average common shares .................. 9,832 8,904 10,066
====== ====== =======
Weighted average preferred shares ....................... 244 690 503
====== ====== =======
Earnings (loss) per share from continuing operations
Basic earnings (loss) per common share ............... $ 0.55 $ 0.49 $ (0.02)
Basic earnings per preferred share ................... $ 0.55 $ 0.49 $ --
Diluted earnings (loss) per common share ............. $ 0.54 $ 0.48 $ (0.02)
NOTE 3 -- ACQUISITIONS
AKELA INFORMATIQUE SRL
On October 3, 2005, TechTeam Global, Inc. completed the acquisition of all of
the outstanding stock of Akela Informatique SRL ("Akela") for 2,450,000 European
euro (1 European euro = $1.203 on October 3, 2005) in cash, shares of TechTeam
common stock equal to 250,000 European euro, and acquisition costs of
approximately $141,000. The aggregate purchase price was paid at closing except
that 135,000 European euro were paid in January 2006 and 135,000 European euro
is payable in October 2006, provided there are no claims asserted by us based
upon the representations and warranties of the sellers in the Share Purchase
Agreement. In addition to the initial purchase price, the Selling Shareholders
may be paid additional amounts during 2006 and 2007 based upon Akela's gross
profit. If Akela's gross profit exceeds 1,330,000 European euro in 2006, the
Company will pay the Selling Shareholders additional purchase price
consideration of 100,000 European euro. If Akela's gross profit exceeds
2,100,000 European euro in 2007, the Company will pay the Selling Shareholders
additional purchase price consideration of 200,000 European euro. If Akela's
aggregate gross profit for 2006 and 2007 exceeds 4,100,000 European euro, the
Company will pay the Selling Shareholders additional purchase price
consideration of 50,000 European euro, and certain key employees of Akela will
share compensation of 100,000 European euro.
51
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 3 -- ACQUISITIONS (continued)
Akela is 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 acquisition was
accounted for using the purchase method of accounting and, accordingly, the
operating results of Akela are included in the consolidated operating results of
TechTeam since the acquisition date. Amortizable intangible assets acquired
consist primarily of customer relationship assets and are being amortized over
their estimated weighted average useful life of 7.6 years. Goodwill acquired is
not deductible for federal income tax purposes and has been assigned to our IT
consulting and systems integration operating segment. Subsequent to the
acquisition, Akela's name was changed to TechTeam Akela SRL.
SYTEL, INC.
On January 3, 2005, TechTeam Global, Inc., through its wholly-owned subsidiary
Digital Support Corporation, completed the acquisition of all of the outstanding
stock of Sytel, Inc. for an initial purchase price of $21,590,000. The purchase
price consists of initial consideration paid by the Company of $19,823,000,
acquisition costs of $725,000, a noncompete payment of $500,000, 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 gross profit in 2005, no
additional purchase price will be paid for Sytel's operating performance in
2005.
Sytel is 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. Sytel is complementary to our existing government technology
services business. The acquisition was accounted for using the purchase method
of accounting and, accordingly, the operating results of Sytel are included in
the consolidated operating results of TechTeam since the acquisition date.
Amortizable intangible assets acquired consist primarily of customer
relationship assets and a noncompete agreement and are being amortized over
their estimated weighted average useful life of 6.6 years. The majority of the
goodwill acquired is not deductible for federal income tax purposes and has been
assigned to our government technology services operating segment.
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 in 2005 was $4,568,000. 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.
52
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 3 -- ACQUISITIONS (continued)
ACQUISITIONS FROM PRIOR YEARS
In connection with the Company's acquisition of Advanced Network Engineering
NV/SA on May 13, 2004, an additional 150,000 euro is payable on May 13, 2007,
provided a cumulative operating income target is met for the three-year period
ending April 30, 2007. The additional consideration paid to selling shareholders
will be recorded as additional goodwill when it is earned.
In connection with the Company's acquisition of Digital Support Corporation on
December 31, 2003, additional amounts up to a maximum of $2,500,000 were payable
to the selling shareholders and certain key employees provided specific
performance conditions and operating income targets were met in 2005 and 2004.
DSC exceeded its operating income targets in 2005 and 2004 and satisfied the
specific performance conditions (the renewal of DSC's largest contract) during
2005. As a result, selling shareholders received an additional $1,200,000 for
2005 ($500,000 is not paid and is accrued at December 31, 2005) and $500,000 for
2004, and key employees will receive $400,000 for 2005 and have received
$100,000 for 2004. Amounts paid to selling shareholders has been recorded as
goodwill while amounts paid to key employees has been recorded as compensation
expense.
SUMMARY OF ACQUISITION PURCHASE PRICE:
The following table summarizes the allocation of the cumulative purchase price
for Akela, Sytel, A.N.E., and DSC through December 31, 2005, including
additional payments earned and accrued during 2005:
AKELA SYTEL A.N.E. DSC
------ -------- ------- -------
(In thousands)
Goodwill .......................................... $1,567 $ 14,640 $ 512 $ 5,030
Amortizable intangible assets ..................... 1,569 7,853 449 3,367
Property, equipment and software .................. 94 169 72 330
Other current and non-current assets,
excluding cash acquired ........................ 358 11,700 1,367 3,803
Accounts payable and accrued liabilities assumed .. (307) (12,886) (1,117) (3,411)
Accrued purchase price ............................ -- -- -- (500)
Notes payable assumed ............................. -- -- (191) (710)
Issuance of equity instruments .................... (301) (542) -- --
------ -------- ------- -------
Net cash used ..................................... $2,980 $ 20,934 $ 1,092 $ 7,909
====== ======== ======= =======
53
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 3 -- ACQUISITIONS (continued)
PRO FORMA RESULTS OF OPERATIONS:
The unaudited pro forma condensed combined results of operations are presented
below as though Sytel had been acquired on January 1, 2004, and DSC had been
acquired on January 1, 2003. The pro forma results of operations for the
acquisitions of Akela and A.N.E. are not materially different than reported
results and are not presented.
SYTEL DSC
---------- -----------
YEAR ENDED DECEMBER 31,
-----------------------
2004 2003
-------- --------
(In thousands, except
per share data)
Revenue
As reported ......................... $127,988 $ 85,833
Pro forma ........................... $156,741 $104,507
Income (loss) from continuing operations
As reported ......................... $ 4,628 $ (190)
Pro forma ........................... $ 5,175 $ 347
Net income (loss)
As reported ......................... $ 4,725 $ (1,046)
Pro forma ........................... $ 5,272 $ (509)
Diluted earnings (loss) per common share
As reported ......................... $ 0.49 $ (0.10)
Pro forma ........................... $ 0.55 $ (0.05)
NOTE 4 -- NOTES PAYABLE AND LINE OF CREDIT
The Company has a business loan agreement with LaSalle Bank Midwest, 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 December 31, 2006, and
up to $15,000,000 under a term loan facility due January 3, 2010. The line of
credit and term loan facilities 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.
At December 31, 2005, $10,937,000 in notes payable were outstanding under the
term note facility, which are payable in full on January 3, 2010, and $470,000
in standby letters of credit were outstanding. No borrowings were outstanding
under the business loan agreement at December 31, 2004.
54
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 5 -- INCOME TAXES
The income tax provision from continuing operations consists of the following:
YEAR ENDED DECEMBER 31,
------------------------
2005 2004 2003
------ ------ ------
(In thousands)
Current:
U.S. federal ........................................ $1,980 $ -- $ 799
State ............................................... 255 310 39
Foreign ............................................. 976 1,051 621
------ ------ ------
Total current provision ................................ 3,211 1,361 1,459
Deferred ............................................... (809) 1,186 (21)
------ ------ ------
Total income tax provision from continuing operations .. $2,402 $2,547 $1,438
====== ====== ======
The income tax provision from continuing operations was calculated based on the
following components of income (loss) from continuing operations before income
taxes:
YEAR ENDED DECEMBER 31,
------------------------
2005 2004 2003
------ ------ ------
(In thousands)
Domestic income ........................................... $4,055 $4,408 $1,449
Foreign income (loss) ..................................... 3,741 2,767 (201)
------ ------ ------
Income from continuing operations before income taxes .. $7,796 $7,175 $1,248
====== ====== ======
A reconciliation of the income tax provision and the amount computed by applying
the federal statutory income tax rate to income from continuing operations
before income taxes is as follows:
YEAR ENDED DECEMBER 31,
------------------------
2005 2004 2003
------ ------ ------
(In thousands)
Income tax provision at federal statutory rate of 34% ..... $2,651 $2,440 $ 424
State taxes, net of federal benefit ....................... 168 204 39
Permanent differences ..................................... 53 24 296
Foreign operating losses not benefited .................... 14 346 668
Utilization of operating loss carryforwards ............... (160) -- --
Effect of foreign tax rates ............................... (174) (208) (40)
Recovery of taxes paid in prior years ..................... -- (216) --
Other ..................................................... (150) (43) 51
------ ------ ------
Total income tax provision from continuing operations .. $2,402 $2,547 $1,438
====== ====== ======
55
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 5 -- INCOME TAXES (continued)
The principal components of deferred income taxes are as follows:
DECEMBER 31,
-------------------------------------------
2005 2004
-------------------- --------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
(In thousands)
Net operating loss carryforwards ............. $1,332 $ -- $ 765 $ --
Accruals and reserves ........................ 475 -- 138 --
Alternative minimum tax credit carryforward .. -- -- 752 --
Intangible assets (other than goodwill) ...... -- 3,514 -- 1,167
Prepaid expenses ............................. -- 317 -- 295
Accelerated tax depreciation ................. -- 83 -- 854
Other ........................................ 140 -- -- 15
------ ------ ------ ------
Total deferred income taxes .................. 1,947 3,914 1,655 2,331
Less -- Valuation allowance .................. (505) -- (765) --
------ ------ ------ ------
Net deferred income taxes ................. $1,442 $3,914 $ 890 $2,331
====== ====== ====== ======
At December 31, 2005, we had available pre-tax net operating loss carryforwards
of approximately $1,600,000 in Belgium and Romania and $2,200,000 in the United
States, which may be used to offset future taxable income in each respective
jurisdiction. The loss carryforward in the United States expires in 2025 and the
loss carryforward in Belgium does not expire. Based on the historical losses in
Belgium and Romania, we have provided a valuation allowance against the deferred
tax asset related to the net operating loss carryforwards in these countries.
NOTE 6 -- EMPLOYEE RETIREMENT PLAN
TechTeam Global, Inc. and its domestic subsidiaries together have three 401(k)
retirement savings plans that cover substantially all U.S.-based employees.
Under the provisions of the plans, we make discretionary employer matching
contributions. Matching contributions under all plans totaled $762,000 in 2005,
$294,000 in 2004, and $317,000 in 2003. Matching contributions for the plan of
TechTeam Global, Inc. are made only with Company common stock and are credited
to the TechTeam Global Stock Fund for the benefit of each participant. Matching
contributions for the plans of the Company's subsidiaries are made in cash.
NOTE 7 -- LEASES
We lease our call center facilities, corporate and other offices, and certain
office equipment under various operating and month-to-month leases. These leases
are renewable with various options and terms. Total rental expense was
$5,791,000 in 2005, $4,550,000 in 2004, and $4,084,000 in 2003. We sublease a
portion of our facilities to third parties. Total sublease income was $785,000
in 2005, $526,000 in 2004, and $526,000 in 2003.
56
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 7 -- LEASES (continued)
Minimum future payments and receipts under noncancelable operating leases and
subleases with initial terms of one year or more at December 31, 2005 are as
follows:
LEASE SUBLEASE
YEAR PAYMENTS RECEIPTS
---- -------- --------
(In thousands)
2006 ................. $ 4,530 $303
2007 ................. 3,766 --
2008 ................. 4,702 --
2009 ................. 2,955 --
2010 and thereafter .. 7,870 --
------- ----
Total ................ $23,823 $303
======= ====
Certain of our leases for our facilities include periods of free rent or rent
payments that increase over the life of the lease. For these leases, we record
total rent expense for the entire lease on a straight-line basis over the life
of the lease and record either an asset or liability, as appropriate. At
December 31, 2005 and 2004, long-term liabilities include a liability of
$564,000 and $414,000, respectively, for these leases.
NOTE 8 -- STOCK-BASED COMPENSATION
We have stock-based instruments outstanding under four plans -- the 2004
Incentive Stock and Award Plan ("2004 Plan"), the 1996 Non-Employee Directors
Stock Plan ("1996 Plan"), the 1990 Nonqualified Stock Option Plan ("1990 Plan"),
and the Executive Long-Term Incentive Plan ("Long-Term Incentive Plan"). As a
result of the adoption of the 2004 Plan, options may no longer be granted under
the 1990 Plan. Furthermore, the 1996 Plan expired at the end of 2005.
Options outstanding under the 1990 Plan have expiration terms ranging from four
to six years and become exercisable ratably over periods ranging from three to
five years. Options outstanding under the 1996 Plan were granted with ten-year
terms and became exercisable immediately on the date of grant. Non-employee
directors of the Company received 100 shares of common stock for attendance at
each Board meeting and an annual award of 10,000 stock options under the 1996
Plan.
Under the 2004 Plan, the Compensation Committee of the Board of Directors may
issue stock options, performance shares, and restricted stock to employees and
consultants representing up to 1,200,000 shares of our common stock. Stock
options may be granted with terms up to ten years and must have an exercise
price that is equal to or greater than the fair market value of our common stock
on the date of grant. Performance shares and restricted stock awards may be
granted subject to such terms and conditions as the Compensation Committee deems
appropriate, including a condition that one or more performance goals be
achieved for the participant to realize all or a portion of the award. No
performance shares were granted during 2005 and 2004 under the 2004 Plan.
57
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 8 -- STOCK-BASED COMPENSATION (continued)
Under the Long-Term Incentive Plan, awards may be issued under: (1) a restricted
stock program that focuses on retaining high performing executives over a longer
period of time, (2) a performance stock program that focuses on rewarding
extraordinary performing executives, and (3) a non-qualified stock option
program that focuses on the long-term retention of key executives. Awards under
these programs are administered in conjunction with the 2004 Plan whereby shares
available for issuance are funded by the shares available for issuance under the
2004 Plan. Under the restricted stock program, certain members of management are
entitled to an award of restricted stock equal to a percentage of the
participant's salary if certain operating targets are met on a rolling
three-year basis, except that the first year of the plan will be based on the
operating target for only the first year, and the second year of the plan will
be based on the cumulative operating target for the first and second years.
Restricted stock awards do not vest ratably but instead become 100% vested at
the end of five years from the date of grant. For 2005 and 2004, restricted
stock awards totaling $440,000 and $533,000, respectively, were granted to
participants, which have been recorded as unamortized deferred compensation in
the accompanying consolidated statements of shareholders' equity. The deferred
compensation is being amortized to expense on a straight-line basis over a
five-year period.
A summary of stock option activity under the above plans and related information
is as follows:
EMPLOYEES DIRECTORS OTHERS
-------------------- ------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
TOTAL AVERAGE AVERAGE AVERAGE
SHARES SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- -------- -------- -------- ------- --------
Outstanding, January 1, 2003 .... 1,211,120 816,120 $ 6.01 280,000 $ 8.72 115,000 $7.32
Granted ......................... 313,231 221,002 7.00 80,000 6.50 12,229 5.49
Exercised ....................... (130,401) (120,401) 4.26 (10,000) 3.06 -- --
Canceled ........................ (180,932) (168,703) 7.62 -- -- (12,229) 5.49
--------- --------- -------- -------
Outstanding, December 31, 2003 .. 1,213,018 748,018 6.22 350,000 8.37 115,000 7.32
Granted ......................... 401,900 321,900 8.92 80,000 7.96 -- --
Exercised ....................... (292,172) (217,172) 4.33 (50,000) 5.47 (25,000) 6.94
Canceled ........................ (126,502) (36,502) 6.86 -- -- (90,000) 7.43
--------- --------- -------- -------
Outstanding, December 31, 2004 .. 1,196,244 816,244 7.76 380,000 8.67 -- --
Granted ......................... 646,900 566,900 10.59 80,000 11.00 -- --
Exercised ....................... (409,174) (299,174) 7.30 (110,000) 7.74 -- --
Canceled ........................ (31,000) (31,000) 9.16 -- -- -- --
--------- --------- -------- -------
Outstanding, December 31, 2005 .. 1,402,970 1,052,970 $ 9.38 350,000 $ 9.50 -- $ --
========= ========= ======== =======
The weighted average fair value of options issued under all plans was $3.35 in
2005, $3.50 in 2004, and $2.20 in 2003. The weighted-average remaining
contractual life of all options was 7.0 years, 5.1 years, and 3.5 years at
December 31, 2005, 2004, and 2003, respectively.
58
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 8 -- STOCK-BASED COMPENSATION (continued)
The following table summarizes certain information about stock options
outstanding at December 31, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF NUMBER OF AVERAGE AVERAGE PER NUMBER OF AVERAGE PER
PER SHARE OPTIONS REMAINING LIFE SHARE EXERCISE OPTIONS SHARE EXERCISE
EXERCISE PRICES OUTSTANDING IN YEARS PRICE EXERCISABLE PRICE
--------------- ----------- -------------- -------------- ----------- --------------
$ 2.60 - 8.90 476,670 4.4 $ 6.45 429,668 $ 6.48
$ 9.00 - 14.29 876,300 8.8 $10.17 956,300 $10.16
$23.00 - 25.75 50,000 1.4 $24.10 50,000 $24.10
NOTE 9 -- COMMON STOCK
We have reserved for issuance shares of common stock necessary to effect the
conversion of all shares of preferred stock into common stock and exercise of
all outstanding and ungranted stock options.
The Company has acquired shares of its common stock in connection with various
authorized stock repurchase programs. In 2004, we purchased and retired 350,000
shares of common stock from a director of the Company and his immediate family
for $2,744,000, inclusive of commission expense, under a program approved in
2004. In 2003, we purchased and retired 2,000,000 shares of common stock for
$12,545,000, inclusive of commission expense, under a program approved in 2003.
No shares were repurchased in 2005.
NOTE 10 -- PREFERRED STOCK
The Company's preferred stock may be issued from time to time in one or more
series. The Company's Board of Directors is authorized to fix the dividend
rights and dividend rates, any conversion rights or right of exchange, any
voting rights, rights and terms of redemption, payments in the event of
liquidation, and any other rights, preferences, privileges, and restrictions of
any series of preferred stock and the number of shares constituting such series
and their designation.
On April 8, 2003, we completed a private placement of 689,656 shares of newly
authorized Series A convertible preferred stock ("Preferred Stock") for
$5,000,000, or $7.25 per share. 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. The Company has no
present plans to issue any shares of preferred stock.
NOTE 11 -- PREFERRED SHARE PURCHASE RIGHTS
On April 29, 1997, our Board of Directors authorized the distribution of one
Preferred Share Purchase Right ("Right") for each outstanding share of our
common stock under the terms of a Rights Agreement between the Company and U.S.
Stock Transfer Corporation, dated May 6, 1997, and as amended August 24, 2000
and May 5, 2003. Each Right entitles shareholders to buy one one-hundredth of a
share of a new series of preferred stock at a price of $80.
59
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 11 -- PREFERRED SHARE PURCHASE RIGHTS (continued)
As distributed, the Rights trade together with the common stock of the Company
and do not have any separate voting powers. They may be exercised or traded
separately only after the earlier to occur of the following: (1) 10 days after
any person or group of persons acquires 15% or more of our common stock, (2) 10
business days after a person or group of persons announces an offer that, if
completed, would result in its owning 15% or more of our common stock, or (3)
promptly after a declaration by the Board that a person who acquires 15% or more
of our common stock is an "Adverse Person" as defined by the Rights Agreement.
Additionally, if the Company is acquired in a merger or other business
combination, each Right will entitle its holder to purchase, at the Right's
exercise price, shares of the acquiring Company's common stock (or stock of the
Company if it is the surviving corporation) having a market value of twice the
Right's exercise price.
The Rights may be redeemed at the option of the Board of Directors for $0.01 per
Right at any time before a person or group of persons accumulates 15% or more of
our common stock. At any time after a person or group of persons acquires 15%
but before the person or group of persons has acquired 50% of outstanding shares
of our common stock, the Board may exchange each Right for one share of common
stock. The Board may amend the Rights at anytime without shareholder approval.
The Rights will expire by their terms on May 6, 2007.
NOTE 12 -- SEGMENT REPORTING
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or decision-making group, in deciding how to
allocate resources and in assessing performance. Our chief operating
decision-making group is the Senior Management Committee, which is comprised of
the President and the lead executives of each of our functional divisions. The
operating segments are managed separately because each operating segment
represents a strategic business unit that offers different services. Our
reportable operating segments currently include the following:
IT OUTSOURCING SERVICES -- this segment provides corporations and governments
with around-the-clock (24x7x365) technical support for their end-users and other
constituencies. We support the full range of a client's information technology
("IT") and business process infrastructure. We also provide technical support to
customers of our client's products and software.
GOVERNMENT TECHNOLOGY SERVICES -- this segment provides managed network services
and advanced enterprise solutions. For our managed network services customers,
we provide complete life cycle support for a customer's IT infrastructure
ranging from their desktops to their data and voice networks. For our advance
enterprise solutions business, we assist our customers in the design,
development, and implementation of enterprise-level technology solutions. We
also provide design, implementation, operation, and maintenance (helpdesk and
desk side support) services.
IT CONSULTING AND SYSTEMS INTEGRATION -- this segment provides IT infrastructure
support to commercial customers through systems integration, technology
deployment, and implementation services from project planning and maintenance to
full-scale network server and workstation installations. We offer a wide range
of information technology services for the customer, ranging from technology
consulting to desk-side support to network monitoring. We also provide
full-service IT staff and consulting services to companies to help manage their
IT infrastructure.
TECHNICAL STAFFING -- this segment maintains a staff of trained technical
personnel, which we place at our clients' facilities to provide technical
support services including help desk technicians, software developers, and
network support.
60
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 12 -- SEGMENT REPORTING (continued)
LEARNING SERVICES -- this segment provides custom training and documentation
solutions that include computer-based training, distance learning, course
catalogs, registration, instructional design consultants, customized course
materials, certified trainers, evaluation options, desk-side tutorials, and
custom reports. We provide customized training programs for many of our
customers' proprietary applications.
The accounting policies of the operating segments are the same as those
described in Note 1. We evaluate segment performance based on segment gross
profit. We do not allocate assets to operating segments, but we allocate certain
amounts of depreciation and amortization expense to operating segments.
Financial information for our operating segments is as follows:
YEAR ENDED DECEMBER 31,
------------------------------
2005 2004 2003
-------- -------- --------
(In thousands)
REVENUE
IT outsourcing services ............................. $ 73,777 $ 74,608 $ 65,614
Government technology services ...................... 55,592 25,712 2,055
IT consulting and systems integration ............... 28,118 19,668 8,195
Technical staffing .................................. 8,243 7,445 9,090
Learning services ................................... 767 555 879
-------- -------- --------
Total revenue .......................................... $166,497 $127,988 $ 85,833
======== ======== ========
GROSS PROFIT
IT outsourcing services ............................. $ 18,400 $ 19,560 $ 13,627
Asset impairment loss ............................... -- (485) --
-------- -------- --------
Total IT outsourcing services .................... 18,400 19,075 13,627
Government technology services ...................... 15,948 6,749 534
IT consulting and systems integration ............... 5,915 3,358 1,871
Technical staffing .................................. 1,622 1,301 1,789
Learning services ................................... 198 104 63
-------- -------- --------
Total gross profit ..................................... 42,083 30,587 17,884
Other operating expenses ............................ (34,892) (24,040) (18,695)
Net interest income ................................. 390 719 1,139
Foreign currency transaction gain (loss) ............ 215 (91) 920
-------- -------- --------
Income from continuing operations before income taxes .. $ 7,796 $ 7,175 $ 1,248
======== ======== ========
61
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 12 -- SEGMENT REPORTING (continued)
Financial information for our operating segments is as follows:
YEAR ENDED DECEMBER 31,
------------------------
2005 2004 2003
------ ------ ------
(In thousands)
DEPRECIATION AND AMORTIZATION
IT outsourcing services .................... $2,034 $2,722 $3,064
Government technology services ............. 105 79 68
IT consulting and systems integration ...... 209 124 50
Technical staffing ......................... -- -- 2
Learning services .......................... -- -- 7
Unallocated depreciation and amortization .. 3,141 1,922 1,428
------ ------ ------
Total depreciation and amortization ........... $5,489 $4,847 $4,619
====== ====== ======
We attribute revenue to different geographic areas on the basis of the location
providing the services to the customer. Revenue and long-lived assets by
geographic area is presented below:
GEOGRAPHIC INFORMATION
--------------------------------------------------------------------
2005 2004 2003
--------------------- --------------------- --------------------
LONG-LIVED LONG-LIVED LONG-LIVED
REVENUE ASSETS REVENUE ASSETS REVENUE ASSETS
-------- ---------- -------- ---------- ------- ----------
(In thousands)
United States ...... $116,508 $33,543 $ 86,814 $12,135 $57,966 $12,538
Europe:
Belgium ......... 35,631 3,601 27,335 4,095 16,781 3,131
Rest of Europe .. 14,358 4,676 13,839 1,034 11,086 99
-------- ------- -------- ------- ------- -------
Total Europe ....... 49,989 8,277 41,174 5,129 27,867 3,230
-------- ------- -------- ------- ------- -------
Total .............. $166,497 $41,820 $127,988 $17,264 $85,833 $15,768
======== ======= ======== ======= ======= =======
We provide corporate services for major companies on an international scale.
Revenue from customers that comprise 10% or greater of our total revenue in any
period presented are as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2005 2004 2003
---- ---- ----
United States Government .. 30.0% 16.7% --
Ford Motor Company ........ 27.4% 37.4% 52.9%
DaimlerChrysler ........... 2.9% 7.7% 13.8%
---- ---- ----
Total ..................... 60.3% 61.8% 66.7%
==== ==== ====
62
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 12 -- SEGMENT REPORTING (continued)
We earn revenue from Ford in our IT Outsourcing Services, IT Consulting and
Systems Integration, and Technical Staffing operating segments. All revenue from
the United States Government is earned in our Government Technology Services
operating segment.
At December 31, 2005 and 2004, amounts due from the United States Government and
Ford Motor Company accounted for 66.4% and 59.7% of total accounts receivable,
respectively.
NOTE 13 -- RELATED PARTY TRANSACTIONS
The Company and a major customer are engaged in a pilot program testing software
that is intended to evaluate and motivate help desk agents. The software is
owned by an affiliate of the Chairman of the Board of the Company. The pilot
program involves personnel of the Company but no significant out-of-pocket
expense to the Company. If the pilot program is successful, the Company may
negotiate a contract with the Chairman's affiliate for use of the software.
In February 2004, we purchased 350,000 shares of our common stock from a
director of the Company and his immediate family for $7.84 per share. The
closing price of our common stock on February 26, 2004 was $7.88.
We paid consulting fees of $22,000 in 2003 to a director of the Company for
services rendered to TechTeam. No such payments were made in 2004 and 2005.
NOTE 14 -- CONTINGENCIES
EMPLOYMENT AGREEMENTS:
In February 2006, the Board of Directors of the Company named William C.
("Chris") Brown as President and Chief Executive Officer replacing Dr. William
F. Coyro, Jr., who continues to serve as a director of the Company and remains
an employee of the Company. Under the terms of Dr. Coyro's employment agreement,
Dr. Coyro is entitled to his salary and benefits through April 30, 2008, if his
employment with the Company is terminated without cause. Although Dr. Coyro
remains a director and an employee of the Company, further negotiations between
the Company and Dr. Coyro may result in the Company having to record a charge to
expense related to his current employment agreement. Dr. Coyro's annual salary
is $360,000 per year.
COSTA BRAVA:
On January 27, 2006, Costa Brava Partnership III, L.P ("Costa Brava"), owner of
8.8% of the Company's outstanding shares, filed a complaint in Delaware state
court seeking to inspect certain books and records of the Company. Costa Brava
subsequently filed an amended complaint seeking to inspect a broader list of the
Company's books and records. The Company has answered the amended complaint
stating in part that the request did not state a proper purpose for inspection,
as required under Delaware law. Costa Brava does not seek monetary relief.
63
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 14 -- CONTINGENCIES (continued)
OTHER LEGAL PROCEEDINGS:
The Company is a party to various legal proceedings that are routine and
incidental to its business. Although the consequences of these proceedings are
not presently determinable, in the opinion of management, they will not have a
material adverse affect on our liquidity, financial condition, or results of
operations, although no assurances can be given in this regard.
NOTE 15 -- DISCONTINUED OPERATIONS
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
expected to be inconsequential to our results of operations. The activity that
remains in winding-down the leasing operation is the collection of accounts
receivable, including older accounts receivable related to terminated leases. As
a result, Capital Group has been presented as a discontinued operation in
accordance with SFAS No. 144, "Accounting for the Disposal or Impairment of
Long-Lived Assets." Under this statement, the operating results of Capital Group
are presented separately from continuing operations in the accompanying
financial statements for all periods presented. Capital Group previously was
reported as a separate operating segment called Leasing Operations.
During 2003, we determined that we would not be able to obtain the value
previously expected from the sale of off-lease equipment inventories and that
certain estimated residual values of leased equipment were overstated due to a
significant decline in the fair market value of the equipment in the secondary
market. In recognition of the deterioration in these market prices, we recorded
charges totaling approximately $1,677,000 during 2003 to increase our reserve
for inventories and residual values. No such charges were recorded in 2005 or
2004.
Summarized information for Capital Group is as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2005 2004 2003
---- ---- -------
(In thousands, except
per share data)
Revenue............................. $87 $483 $ 2,256
Income (loss) before income taxes... $74 $147 $(1,885)
64
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 16 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly condensed consolidated results of operations are summarized as
follows:
QUARTER ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(In thousands, except per share data)
2005
Revenue .............................. $42,038 $42,285 $41,314 $40,860
Gross profit ......................... 10,708 11,001 10,343 10,031
Income from continuing operations .... 1,695 1,577 1,226 896
Income from discontinued operations .. 55 1 3 15
Net income ........................... $ 1,750 $ 1,578 $ 1,229 $ 911
Earnings per share from continuing
operations
Basic per common .................. $ 0.18 $ 0.16 $ 0.12 $ 0.09
Basic per preferred ............... $ 0.18 $ 0.16 N/A N/A
Diluted per common ................ $ 0.17 $ 0.16 $ 0.12 $ 0.09
Earnings per share
Basic per common .................. $ 0.18 $ 0.16 $ 0.12 $ 0.09
Basic per preferred ............... $ 0.18 $ 0.16 N/A N/A
Diluted per common ................ $ 0.18 $ 0.16 $ 0.12 $ 0.09
QUARTER ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(In thousands, except per share data)
2004
Revenue .............................. $30,164 $30,483 $34,025 $33,316
Gross profit ......................... 7,157 7,989 7,891 7,550(1)
Income from continuing operations .... 628 1,058 1,496 1,446(2)
Income (loss) from discontinued
operations ........................ (4) 19 22 60
Net income ........................... $ 624 $ 1,077 $ 1,518 $ 1,506(2)
Earnings per share from continuing
operations
Basic per common .................. $ 0.07 $ 0.11 $ 0.16 $ 0.15(2)
Basic per preferred ............... $ 0.07 $ 0.11 $ 0.16 $ 0.15(2)
Diluted per common ................ $ 0.07 $ 0.11 $ 0.16 $ 0.15(2)
Earnings per share
Basic per common .................. $ 0.07 $ 0.12 $ 0.16 $ 0.16
Basic per preferred ............... $ 0.07 $ 0.12 $ 0.16 $ 0.16
Diluted per common ................ $ 0.07 $ 0.11 $ 0.16 $ 0.16(2)
(1) Includes the pre-tax loss of $485 from the write-down of a software asset.
(2) Includes the after-tax loss of $320 from the write-down of a software
asset, the after-tax benefit of $250 from the recovery of non-income-based
taxes recorded as a reduction of selling, general, and administrative
expenses, and $395 from the recovery of income taxes paid in prior years
and the reduction of tax liabilities related to prior years.
65
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in accountants, disagreements, or other events requiring
reporting under this Item.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of December 31, 2005, our management, with the participation of our chief
executive officer, chief financial officer, and chief accounting officer,
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act). Based on this evaluation, our chief executive officer, chief
financial officer, and chief accounting officer concluded that, as of December
31, 2005, our disclosure controls and procedures were (1) designed to ensure
that material information relating to us, including our consolidated
subsidiaries, is made known to our chief executive officer, chief financial
officer, and chief accounting officer by others within those entities,
particularly during the period in which this report was being prepared and (2)
effective, in that they provide reasonable assurance that information required
to be disclosed by us in the reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the U.S. Securities and Exchange Commission's rules and forms.
It should be noted that any system of controls, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system will be met. In addition, the design of any control
system is based in part upon certain assumptions about the likelihood of certain
events. Because of these and other inherent limitations of control systems,
there is only reasonable assurance that our controls will succeed in achieving
their goals under all potential future conditions.
Management's report on internal control over financial reporting and Ernst &
Young LLP's report on both management's assessment and on the Company's
internal control over financial reporting are included in Item 8 of this Form
10-K and incorporated herein by reference.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter
ended December 31, 2005, that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
66
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information to be set forth under the caption "Election of Directors and
Management Information" in the Proxy Statement dated on or about April 10, 2006,
relating to the Annual Meeting of Shareholders to be held on May 31, 2006, (the
"Proxy Statement"), is incorporated herein by reference.
The information to be set forth under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement is incorporated herein by
reference.
The information to be set forth under the caption "Code of Ethics" in the Proxy
Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information to be set forth under the caption "Compensation of Executive
Officers" in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information to be set forth under the caption "Election of Directors and
Management Information -- Security Ownership of Certain Beneficial Holders and
Management" in the Proxy Statement is incorporated herein by reference.
EQUITY COMPENSATION PLAN INFORMATION
--------------------------------------------------------------------------
(A) (B) (C)
----------------------- -------------------- -------------------------
NUMBER OF SECURITIES
NUMBER OF SECURITIES REMAINING AVAILABLE FOR
TO BE ISSUED UPON WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
EXERCISE OF OUTSTANDING EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OPTIONS, WARRANTS OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY AND RIGHTS (1) WARRANTS AND RIGHTS EREFLECTED IN COLUMN (A))
------------- ----------------------- -------------------- -------------------------
Equity compensation plans approved
by security holders............... 1,181,300 $9.89 313,075
Equity compensation plans not
approved by security holders...... 221,670 $6.83 --
--------- ----- -------
Total................................ 1,402,970 $9.41 313,075
========= ===== =======
(1) Represents options to purchase shares of the Company's common stock.
67
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information to be set forth under the caption "Compensation of Executive
Officers -- Certain Relationships and Related Transactions" in the Proxy
Statement is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT, FEES, AND SERVICES
The information to be set forth under the caption "Fees of the Independent
Auditors for 2005 and 2004" in the Proxy Statement is incorporated herein by
reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a) Certain documents are filed as part of this Report on Form 10-K.
(1) See "Item 8 -- Financial Statements and Supplementary Data"
beginning at page 34.
(2) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts for the years
ended December 31, 2005, 2004 and 2003
(3) Exhibits.
EXHIBIT
NUMBER EXHIBIT REFERENCE *
------- ------- -----------
2.1 Stock Purchase Agreement dated as of December 31, 2003, by and among *10
TechTeam Global, Inc. and Digital Support Corporation, Peter S.
Brigham, Robert H. Brigham, Christian J. Burneko, Fred O. Cornett,
Jr., David W. Han, Satish Lulla, Raj K. Sachdev, and Digital Support
Corporation 401(K) Plan.
2.2 Share Purchase Agreement, dated May 13, 2004, in respect of the Shares *15
in Advance Network Engineering NV, between Peter De Gendt, Werner
Meynaerts, Pascal Claessens, Wim De Geetere, and Christophe Gesqueire,
as Sellers, and TechTeam Global NV as Purchaser (excluding Exhibits
and Schedules thereto)
2.3 Stock Purchase Agreement, dated January 3, 2005 by and among TechTeam *13
Global, Inc. and Digital Support Corporation and Sytel, Inc., The
Stockholders of Sytel, Inc. and Certain of the Optionholders of Sytel,
Inc.
2.4 Share Purchase Agreement, dated October 3, 2005, by and between *17
TechTeam Global, Inc., TechTeam Global NV/SA and Akela Informatique
SRL, Lucian Ionut Butnaru, Peter Andrei Ungureanu, Sabin Girlea,
Philippe Bouzier, Alain Joseph Maurice Kremer and George Tudor
3.1 Certification of Incorporation of TechTeam Global, Inc. filed with the *8
Delaware Secretary of State on September 14, 1987.
3.2 Certificate of Amendment dated November 27, 1987 to our Certificate of *8
Incorporation.
3.3 Certificate of Amendment dated May 8, 2002 to Certificate of *8
Incorporation
3.4 Bylaws of TechTeam Global, Inc. as Amended and Restated February 13,
2006.
4.1 Rights Agreement dated as of May 6, 1997, between TechTeam Global, *5
Inc. and U.S. Stock Transfer Corporation, as Rights Agent, which
includes as Exhibit A thereto the Form of Certificate of Designations,
as Exhibit B thereto the Form of Right Certificate, and as Exhibit C
thereto the Summary of Rights to Purchase Preferred Stock.
68
EXHIBIT
NUMBER EXHIBIT REFERENCE *
------- ------- -----------
4.2 First Amendment of Rights Agreement dated as of May 6, 1997 *6
4.3 Second Amendment of Rights Agreement dated as of May 6, 1997. *11
10.1 Lease Agreement for office space in Southfield, Michigan known as the *2
Cumberland Tech Center between the Company and Eleven Inkster
Associates dated September 29, 1993.
10.2 Sixth Amendment Lease Agreement dated March 13, 2000 for office space *11
in Southfield, Michigan between Eleven Inkster Associates and the
Company.
10.3 Lease for office space in Dearborn, Michigan between the Company and *4
Dearborn Atrium Associates Limited Partnership dated November 18,
1996.
10.4 Third Amendment to Lease between the Company and Dearborn Tech, L.L.C *15
(owner of interest of Dearborn Atrium Associates Limited Partnership)
dated November 30, 2004.
10.5 Lease Agreement for office space in Davenport, Iowa known as the 1010 *7
Shopping Center between the Company and Partnership 1010, L.L.P. dated
August 28, 1999.
10.6 Office Lease Agreement by and between FJ Dulles Business Park II, *12
L.L.C., as Landlord, and Digital Support Corporation, as Tenant, dated
December 21, 2000.
10.7 Lease Contract between IMMOBILIERE DE LA RUE DE STRASBOURG S.A and *12
TechTeam Global NV/SA, as amended, dated April 4, 2003.
10.8 Office Building Lease for office space in Bethesda, Maryland by and *15
between Sytel, Inc. and Elizabethean Court Associates III L.P. dated
September 27, 1995
10.9 First Amendment to Lease by and between Sytel, Inc. and Elizabethean *15
Court Associates III L.P. dated March 7, 1996
10.10 Lease Extension Agreement by and between Sytel, Inc. and Elizabethean *15
Court Associates III L.P. dated April 11, 2001
10.11 Office Lease Agreement for office space in Herndon, Virginia by and *15
between APA Properties No. 1, L.P. and Sytel, Inc. dated February
18,1999
10.12 First Amendment to Office Lease Agreement by and between APA *15
Properties No. 1, L.P. and Sytel, Inc. dated April 16, 1999
10.13 Lease Agreement for office space in Bucharest, Romania between S.C. *15
Italian-Romanian Industrial Development Enterprises - IRIDE SA and
TechTeam Global SRL dated February 2, 2005
10.14 1996 Nonemployee Directors Stock Plan. *3
10.15 1990 Nonqualified Stock Option Plan. *1
10.16 2004 Incentive Stock and Awards Plan *15
10.17 TechTeam Global, Inc. Executive Annual Incentive Plan.
10.18 TechTeam Global, Inc. Executive Long Term Incentive Program.
10.19 Supplemental Retirement Plan dated October 1, 2000. *7
10.20 Employment Agreement Relating to Change of Control. *12
10.21 Employment Agreement between TechTeam Global, Inc. and William F. *16
Coyro, Jr. dated May 25, 2005.
10.22 Employment Agreement between TechTeam Europe, NV and Christoph Neut *8
dated October 2, 1996.
10.23 Employment Agreement between TechTeam Global, Inc. and Robert W. *17
Gumber, dated September 29, 2005
69
EXHIBIT
NUMBER EXHIBIT REFERENCE *
------- ------- -----------
10.24 Employment Agreement between TechTeam Global, Inc. and William C.
Brown, dated February 3, 2006
10.25 Ford Global SPOC Agreement with Ford Motor Company dated December 1,
2005.
10.26 Amended and Restated Business Loan Agreement, dated January 3, 2005, *14
between TechTeam Global, Inc. and Standard Federal Bank NA
10.27 Promissory Note (Line of Credit), dated September 7, 2004 *13
10.28 Promissory Note (Term Loan), dated January 3, 2005 *14
14.1 TechTeam Global, Inc. Code of Business Conduct.
21 List of subsidiaries of TechTeam Global, Inc.
23.1 Consent of Independent Registered Public Accounting Firm.
31.1 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.3 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.3 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibits 10.15 through 10.24 represent management contracts and compensatory
plans.
70
EXHIBIT
*1 Incorporated by reference to our Annual Report on Form 10-K for the year
ended December 31, 1990, filed as Exhibit 4.14 thereto.
*2 Incorporated by reference to our Annual Report on Form 10-KSB for the year
ended December 31, 1993.
*3 Incorporated by reference to our Registration Statement on Form S-3
(Registration No. 333-10687).
*4 Incorporated by reference to our Annual Report on Form 10-K dated December
31, 1996.
*5 Incorporated by reference to our Registration Statement on Form 8-A dated
May 9, 1997.
*6 Incorporated by reference to our Registration Statement on Form 8-A/A,
dated September 23, 1999.
*7 Incorporated by reference to our Annual Report on Form 10-K dated March 31,
2001.
*8 Incorporated by reference to our Annual Report on Form 10-K dated March 18,
2003.
*9 Incorporated by reference to our Report on Form 10-Q dated August 14, 2003.
*10 Incorporated by reference to our Report on Form 8-K dated January 14, 2004.
*11 Incorporated by reference to our Registration Statement on form 8-A12G/A,
dated May 22, 2003.
*12 Incorporated by reference to our Report on Form 10-K dated March 24, 2004.
*13 Incorporated by reference to our Report on Form 8-K dated September 21,
2004.
*14 Incorporated by reference to our Report on Form 8-K dated January 5, 2005.
*15 Incorporated by reference to our Annual Report on Form 10-K dated March 18,
2005.
*16 Incorporated by reference to our Report on Form 8-K dated June 1, 2005.
*17 Incorporated by reference to our Report on Form 8-K dated October 5, 2005.
71
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TECHTEAM GLOBAL, INC.
Date: March 16, 2006 By: /s/ William C. Brown William C. Brown
----------------------------- President and Chief Executive
Officer (Principal Executive
Officer)
By: /s/ David W. Morgan David W. Morgan
----------------------------- Chief Financial Officer and
Treasurer (Principal Financial
Officer)
By: /s/ Marc J. Lichtman Marc J. Lichtman
----------------------------- Chief Accounting Officer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities indicated on March
16, 2006.
/s/ Kim A. Cooper Director
-------------------------------------
Kim A. Cooper
/s/ William F. Coyro, Jr. Director
-------------------------------------
William F. Coyro, Jr.
/s/ G. Ted Derwa Director
-------------------------------------
G. Ted Derwa
/s/ Wallace D. Riley Director
-------------------------------------
Wallace D. Riley
/s/ Gregory C. Smith Director
-------------------------------------
Gregory C. Smith
/s/ Richard G. Somerlott Director
-------------------------------------
Richard G. Somerlott
/s/ Richard R. Widgren Director
-------------------------------------
Richard R. Widgren
72
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
CHARGED TO
BALANCE AT (REDUCTION OF) BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- ---------- -------------- ---------- ---------
(In thousands)
2005
Allowance for doubtful accounts ........... $ 912 $(287) $132 $757
Valuation allowance for deferred taxes .... $ 765 $(260) $ -- $505
2004
Allowance for doubtful accounts ........... $ 637 $ 220 $ 55 $912
Valuation allowance for deferred taxes .... $ 668 $ 97 $ -- $765
2003
Allowance for doubtful accounts ........... $ 181 $ 492 $(36) $637
Valuation allowance for deferred taxes .... $ -- $ 668 $ -- $668
73
INDEX OF EXHIBITS
EXHIBIT
NUMBER EXHIBIT
------- -------
3.4 Bylaws of TechTeam Global, Inc. as Amended and Restated February 13,
2006.
10.17 TechTeam Global, Inc. Executive Annual Incentive Plan.
10.18 TechTeam Global, Inc. Executive Long Term Incentive Program.
10.24 Employment Agreement between TechTeam Global, Inc. and William C.
Brown, dated February 3, 2006
10.25 Ford Global SPOC Agreement with Ford Motor Company dated December 1,
2005.
14.1 TechTeam Global, Inc. Code of Business Conduct.
21 List of subsidiaries to TechTeam Global, Inc.
23.1 Consent of Independent Registered Public Accounting Firm.
31.1 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.3 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.3 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
74