UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2005
Commission File Number: 0-16284
TECHTEAM GLOBAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 38-2774613
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation)
27335 WEST 11 MILE ROAD, SOUTHFIELD, MI 48034
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 357-2866
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer.
Yes [ ] No [X]
The number of shares of the registrant's common stock outstanding at July 31,
2005 was 9,881,657.
1
TECHTEAM GLOBAL, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
NUMBER
------
PART I - FINANCIAL INFORMATION
Item 1 Condensed Consolidated Statements of Operations -
Three and Six Months Ended June 30, 2005 and 2004 3
Condensed Consolidated Balance Sheets -
As of June 30, 2005 and December 31, 2004 4-5
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2005 and 2004 6
Notes to Condensed Consolidated Financial Statements 7-15
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 16-26
Item 3 Quantitative and Qualitative Disclosures About Market Risk 26
Item 4 Controls and Procedures 26
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 27
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 27
Item 4 Submission of Matters to a Vote of Security Holders 27-28
Item 6 Exhibits 28
SIGNATURES 29
2
PART 1 -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2005 2004 2005 2004
------- -------- ------- -------
REVENUE
Diversified IT outsourcing services ................. $18,640 $18,339 $37,739 $36,777
Government technology services ...................... 14,218 5,327 29,180 11,883
IT consulting and systems integration ............... 7,080 4,689 12,931 7,695
Technical staffing .................................. 2,116 1,957 4,132 3,986
Learning services ................................... 231 171 341 307
------- ------- ------- -------
TOTAL REVENUE .......................................... 42,285 30,483 84,323 60,648
Cost of revenue ..................................... 31,284 22,493 62,614 45,501
------- ------- ------- -------
GROSS PROFIT ........................................... 11,001 7,990 21,709 15,147
Selling, general, and administrative expense ........ 8,871 6,244 17,162 12,149
------- ------- ------- -------
OPERATING INCOME ....................................... 2,130 1,746 4,547 2,998
Interest income, net ................................ 80 158 163 325
Foreign currency transaction gain (loss) ............ 120 (18) 97 (217)
------- ------- ------- -------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES .. 2,330 1,886 4,807 3,106
Income tax provision ................................ 753 828 1,535 1,420
------- ------- ------- -------
INCOME FROM CONTINUING OPERATIONS ...................... 1,577 1,058 3,272 1,686
Income from discontinued operations, net of tax ..... 1 19 56 14
------- ------- ------- -------
NET INCOME ............................................. $ 1,578 $ 1,077 $ 3,328 $ 1,700
======= ======= ======= =======
BASIC EARNINGS PER COMMON SHARE
Income from continuing operations ................... $ 0.16 $ 0.11 $ 0.34 $ 0.18
Income from discontinued operations ................. -- -- 0.01 --
------- ------- ------- -------
Total basic earnings per common share ............... $ 0.16 $ 0.12 $ 0.34 $ 0.18
======= ======= ======= =======
BASIC EARNINGS PER PREFERRED SHARE
Income from continuing operations ................... $ 0.16 $ 0.11 $ 0.34 $ 0.18
Income from discontinued operations ................. -- -- 0.01 --
------- ------- ------- -------
Total basic earnings per preferred share ............ $ 0.16 $ 0.12 $ 0.34 $ 0.18
======= ======= ======= =======
DILUTED EARNINGS PER COMMON SHARE
Income from continuing operations ................... $ 0.16 $ 0.11 $ 0.33 $ 0.18
Income from discontinued operations ................. -- -- 0.01 --
------- ------- ------- -------
Total basic earnings per common share ............... $ 0.16 $ 0.11 $ 0.33 $ 0.18
======= ======= ======= =======
WEIGHTED NUMBER OF COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING
Basic -- common ..................................... 9,406 8,550 9,097 8,642
Basic -- preferred .................................. 299 690 591 690
Diluted -- common ................................... 9,772 8,703 9,436 8,794
See accompanying notes.
3
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
JUNE 30, DECEMBER 31,
2005 2004
----------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents .......................... $ 31,163 $ 40,436
Accounts receivable (less allowance of $991 at
June 30, 2005 and $912 at December 31, 2004) .... 47,130 28,888
Prepaid expenses and other ......................... 3,166 2,288
Deferred income taxes .............................. 288 --
Net current assets of discontinued operations ...... 56 97
-------- --------
TOTAL CURRENT ASSETS ............................... 81,803 71,709
-------- --------
PROPERTY, EQUIPMENT, AND PURCHASED SOFTWARE
Computer equipment and office furniture ............ 22,956 22,768
Purchased software ................................. 11,942 11,545
Leasehold improvements ............................. 5,058 4,822
Transportation equipment ........................... 333 321
-------- --------
40,289 39,456
Less -- accumulated depreciation and amortization .. (32,488) (31,074)
-------- --------
NET PROPERTY, EQUIPMENT, AND PURCHASED SOFTWARE .... 7,801 8,382
-------- --------
OTHER ASSETS
Goodwill ........................................... 20,074 4,768
Intangible assets, net ............................. 10,595 3,672
Net noncurrent assets of discontinued operations ... -- 15
Other .............................................. 631 441
-------- --------
TOTAL OTHER ASSETS ................................. 31,300 8,896
-------- --------
TOTAL ASSETS .......................................... $120,904 $ 88,987
======== ========
See accompanying notes.
4
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(In thousands, except share and per share amounts)
JUNE 30, DECEMBER 31,
2005 2004
----------- ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ................................................ $ 10,485 $ 3,707
Accrued payroll, related taxes, and withholdings ................ 9,146 7,485
Accrued expenses ................................................ 9,019 2,244
Accrued income taxes ............................................ 273 644
Deferred revenue ................................................ 330 1,380
Deferred income taxes ........................................... -- 156
Current liabilities of discontinued operations .................. 6 12
-------- -------
TOTAL CURRENT LIABILITIES ....................................... 29,259 15,628
-------- -------
LONG-TERM LIABILITIES
Long-term debt .................................................. 11,779 --
Deferred income taxes ........................................... 3,191 1,285
Other long-term liabilities ..................................... 579 414
-------- -------
TOTAL LONG-TERM LIABILITIES ..................................... 15,549 1,699
-------- -------
REDEEMABLE CONVERTIBLE PREFERRED STOCK, 5,000,000 shares authorized,
0 and 689,656 shares issued and outstanding at June 30, 2005 and
December 31, 2004, respectively ................................. -- 5,000
SHAREHOLDERS' EQUITY
Common stock, $0.01 par value, 45,000,000 shares authorized,
9,880,657 and 8,767,037 shares issued and outstanding at
June 30, 2005 and December 31, 2004, respectively ............ 99 88
Additional paid-in capital ...................................... 68,091 59,437
Unamortized deferred compensation ............................... (486) (533)
Retained earnings ............................................... 8,120 4,793
Accumulated other comprehensive income .......................... 272 2,875
-------- -------
TOTAL SHAREHOLDERS' EQUITY ...................................... 76,096 66,660
-------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......................... $120,904 $88,987
======== =======
See accompanying notes.
5
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
SIX MONTHS ENDED JUNE 30,
-------------------------
2005 2004
-------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .............................................................. $ 3,328 $ 1,700
Income from discontinued operations ..................................... (56) (14)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ..................................... 2,772 2,028
Non-cash expense related to stock options, restricted stock awards,
and common stock issued to 401(k) plan and directors ........... 375 176
Other ............................................................. (179) 73
Changes in current assets and liabilities ......................... (4,311) 790
Changes in long-term assets and liabilities ....................... (1,127) (45)
Net operating cash flow from discontinued operations .............. 67 865
-------- -------
Net cash provided by operating activities ............................ 869 5,573
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, equipment, and software ........................... (1,677) (902)
Cash paid for acquisitions, net of cash acquired ........................ (21,687) (1,036)
-------- -------
Net cash used in investing activities ................................ (23,364) (1,938)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt ................................ 15,000 --
Proceeds from issuance of common stock .................................. 2,795 423
Payments on long-term debt .............................................. (3,247) (810)
Purchase of Company common stock ........................................ -- (2,744)
Net financing cash flow from discontinued operations .................... (11) (139)
-------- -------
Net cash provided by (used in) financing activities .................. 14,537 (3,270)
-------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ............... (1,315) 106
-------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................... (9,273) 471
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........................... 40,436 35,195
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................. $ 31,163 $35,666
======== =======
See accompanying notes.
6
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared by TechTeam Global, Inc. ("TechTeam" or the "Company" or "we") in
accordance with United States generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by United States generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included, and such
adjustments are of a normal recurring nature. Operating results for the three
and six months ended June 30, 2005 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2005. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2004.
Certain reclassifications have been made to the 2004 financial statements in
order to conform to the 2005 financial statement presentation. The Company has
reclassified certain revenue and cost of revenue reported by operating segment
for the three and six months ended June 30, 2004, from the classifications
contained in the Company's earnings release of July 28, 2005 for the quarter
ended June 30, 2005. The reclassification of revenue and cost of revenue had no
impact on total revenue, gross profit, operating income, net income, or earnings
per share.
NOTE 2 -- COMPREHENSIVE INCOME
Comprehensive income consists of net income and foreign currency translation
adjustments. A summary of comprehensive income is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2005 2004 2005 2004
------- ------ ------- ------
(In thousands)
COMPREHENSIVE INCOME
Net income.................................. $ 1,578 $1,077 $ 3,328 $1,700
Other comprehensive income (loss) --
Foreign currency translation adjustment.. (1,536) 9 (2,603) (127)
------- ------ ------- ------
Comprehensive income........................ $ 42 $1,086 $ 725 $1,573
======= ====== ======= ======
NOTE 3 -- EARNINGS PER SHARE
Earnings per share is computed using the two-class method as required by
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share." The two-class method is an earnings allocation formula that determines
earnings per share separately for common stock and participating securities
according to dividends declared (or accumulated) and participation rights in
undistributed earnings. The Company's redeemable convertible preferred stock,
which was issued in April 2003, is a participating security under SFAS 128. The
redeemable convertible preferred stock has rights to undistributed earnings, but
is not required to participate in net losses of the Company.
Earnings per share for common stock is computed using the weighted average
number of common shares and common share equivalents outstanding. Common share
equivalents consist of stock options. Earnings per share for preferred stock is
computed using the weighted average number of preferred shares outstanding.
Earnings are allocated to each class of stock pro rata based on the weighted
average number of shares and share equivalents outstanding for each class of
stock.
7
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 3 -- EARNINGS PER SHARE (continued)
The following table reconciles the numerators and denominators of the basic and
diluted earnings per common share computations for income from continuing
operations:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2005 2004 2005 2004
------ ------ ------ ------
(In thousands, except per share data)
Income from continuing operations ...................... $1,577 $1,058 $3,272 $1,686
Less - Income from continuing operations allocated to
preferred shareholders .............................. 49 79 200 125
------ ------ ------ ------
Income from continuing operations available to common
shareholders ........................................ $1,528 $ 979 $3,072 $1,561
====== ====== ====== ======
Basic weighted average common shares ................... 9,406 8,550 9,097 8,642
Common stock equivalents from stock options ............ 366 153 339 152
------ ------ ------ ------
Diluted weighted average common shares ................. 9,772 8,703 9,436 8,794
====== ====== ====== ======
Weighted average preferred shares ...................... 299 690 591 690
====== ====== ====== ======
Earnings per share from continuing operations:
Basic earnings per common share ..................... $ 0.16 $ 0.12 $ 0.34 $ 0.18
Basic earnings per preferred share .................. $ 0.16 $ 0.12 $ 0.34 $ 0.18
Diluted earnings per common share ................... $ 0.16 $ 0.11 $ 0.33 $ 0.18
During the six months ended June 30, 2005 and 2004, 65,000 and 360,000 stock
options, respectively, were excluded from the computation of diluted earnings
per common share because the exercise prices of the options were higher than the
average market price of the Company's common stock for each respective period.
During the three months ended June 30, 2005 and 2004, 60,000 and 285,000 stock
options, respectively, were excluded from the computation of diluted earnings
per common share because the exercise prices of the options were higher than the
average market price of the Company's common stock for each respective period.
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.
NOTE 4 -- NOTES PAYABLE AND LINE OF CREDIT
In August 2004, we entered into a business loan agreement with Standard Federal
Bank, N.A. whereby the Company may borrow up to $5,000,000 under a line of
credit. On January 3, 2005, we amended the agreement to allow for additional
borrowings of $15,000,000 under a term loan due January 3, 2010. We used the
proceeds from the term loan to partially finance the acquisition of Sytel, Inc.
(see "Note 10 -- Acquisitions"). The term loan bears interest at 0.5% per annum
and is collateralized by a compensating balance cash deposit required to be held
at the bank equal to the amount of the outstanding principal.
8
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 5 -- GOODWILL AND OTHER INTANGIBLE ASSETS
On January 3, 2005, we acquired all of the outstanding capital stock of Sytel,
Inc. ("Sytel," see "Note 10 -- Acquisitions"). The goodwill resulting from the
acquisition relates to our government technology services operating segment.
Goodwill is not amortized, but instead is subject to an annual impairment test.
We did not record an impairment loss for goodwill in any period presented.
Changes in the carrying amount of goodwill since December 31, 2004 consist of
the following:
DIVERSIFIED IT GOVERNMENT IT CONSULTING
OUTSOURCING TECHNOLOGY AND SYSTEMS
SERVICES SERVICES INTEGRATION TOTAL
-------------- ---------- ------------- --------
(In thousands)
Balance as of January 1, 2005 ....... $371 $ 3,830 $567 $ 4,768
Goodwill acquired ................ -- 15,369 -- 15,369
Effect of exchange rate changes .. -- -- (63) (63)
---- ------- ---- -------
Balance as of June 30, 2005 ......... $371 $19,199 $504 $20,074
==== ======= ==== =======
Other intangible assets consist of the following at June 30, 2005:
WEIGHTED
AVERAGE
ACCUMULATED AMORTIZATION
COST AMORTIZATION PERIOD
------- ------------ ------------
(In thousands)
Customer-related assets.............. $11,325 $1,650 7.7 Years
Noncompete agreement................. 712 89 4.0 Years
Trademark and name................... 339 42 4.0 Years
------- ------
$12,376 $1,781
======= ======
The useful life of amortizable intangible assets is determined based on the
period from which we expect to realize cash flows from these assets and
considers, among other factors, the ability and cost to renew contracts with
similar terms and conditions, historical customer retention rates, and the
contractual life of the assets.
We re-evaluate the carrying value of intangible assets based on undiscounted
operating cash flows whenever significant events or changes occur that might
indicate a possible impairment of capitalized costs. If undiscounted cash flows
are insufficient to recover recorded costs, we write down the carrying value of
the assets to fair value based on discounted cash flows or market values. We did
not record an impairment loss for intangible assets in any period presented.
Our expected future amortization expense for intangible assets held at June 30,
2005 is as follows: $874,000 for the remainder of 2005, $1,750,000 in 2006,
$1,660,000 in 2007, $1,660,000 in 2008, and $1,390,000 in 2009.
9
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 6 -- STOCK-BASED COMPENSATION
We account for stock-based compensation awards granted to employees using the
intrinsic value method prescribed in Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
The effect on net income and earnings per share had compensation costs been
recognized based on the fair value method prescribed by SFAS 123, "Accounting
for Stock-Based Compensation," is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2005 2004 2005 2004
------ ------ ------ ------
(In thousands, except per
share amounts)
Reported net income ................................. $1,578 $1,077 $3,328 $1,700
Add -- total stock-based compensation expense
included in reported net income, net of tax ...... 29 12 56 23
Deduct -- total stock-based compensation expense
determined under the fair value method for all
awards, net of tax ............................... (351) (35) (623) (275)
------ ------ ------ ------
Pro forma net income ................................ $1,256 $1,054 $2,761 $1,448
====== ====== ====== ======
Basic earnings per share:
As reported ...................................... $ 0.16 $ 0.12 $ 0.34 $ 0.18
Pro forma ........................................ $ 0.13 $ 0.11 $ 0.28 $ 0.16
Diluted earnings per share:
As reported ...................................... $ 0.16 $ 0.11 $ 0.33 $ 0.18
Pro forma ........................................ $ 0.12 $ 0.11 $ 0.28 $ 0.15
The Financial Accounting Standards Board ("FASB") has issued SFAS No. 123R,
"Share-Based Payment," which replaces SFAS 123 and supersedes APB 25. SFAS 123R
eliminates the ability to account for share-based compensation transactions
using APB 25, and requires instead that such transactions be accounted for using
a fair-value-based method. SFAS 123R is effective for awards that are granted,
modified, or settled in periods beginning after December 15, 2005, or the
Company's fiscal year beginning January 1, 2006. The Company intends to adopt
SFAS 123R on January 1, 2006. As we use the fair value method of accounting
under the original provisions of SFAS 123 for pro forma disclosure purposes, we
are also required to apply the provisions of SFAS 123R in recognizing
compensation cost for any portion of awards granted or modified after December
15, 1994, that are not yet vested at the date SFAS 123R is adopted. Based on the
number of non-vested stock options the Company has outstanding at June 30, 2005
adoption of SFAS 123R will result in approximately $18,000 of aggregate
compensation expense, net of tax, in fiscal years subsequent to 2005 and will
not have a material affect on our financial position or operating results.
10
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 7 -- INCOME TAXES
For the three and six months ended June 30, 2005, the consolidated effective tax
rate of 32.3% and 31.9%, respectively, differs from the statutory tax rate of
34% primarily due to the tax benefit of tax rates in certain foreign countries
that are lower than 34% and the tax benefit of certain permanent deductions. For
the three and six months ended June 30, 2004, the consolidated effective tax
rate of 43.9% and 45.7%, respectively, differs from the statutory tax rate of
34% primarily due to providing a valuation allowance against the future tax
benefit of operating loss carryforwards in certain tax jurisdictions.
No provision has been made with respect to approximately $6.2 million of
undistributed earnings of foreign subsidiaries at June 30, 2005, since we
consider these earnings to be permanently reinvested. In December 2004, the FASB
issued FASB Staff Position ("FSP") No. 109-2, "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004," which provides guidance under SFAS No. 109,
"Accounting for Income Taxes," with respect to recording the potential impact of
the repatriation provisions of the American Jobs Creation Act of 2004 ("Jobs
Act") on an enterprise's income tax expense and deferred taxes. The Jobs Act was
enacted on October 22, 2004. FSP 109-2 states that an enterprise is allowed time
beyond the financial reporting period of enactment to evaluate the effect of the
Jobs Act on its plan for reinvestment or repatriation of foreign earnings for
purposes of applying SFAS 109. We have not yet evaluated the impact of the
repatriation provisions. Accordingly, as provided for in FSP 109-2, we have not
adjusted income tax expense or deferred taxes to reflect potential utilization
of the repatriation provisions of the Jobs Act.
NOTE 8 -- SEGMENT REPORTING
Operating segments are defined as components of an enterprise for which separate
financial information is available that is evaluated regularly by the chief
operating decision maker, or decision-making group, in deciding how to allocate
resources and in assessing performance. Our chief operating decision-making
group is the Senior Management group, which is comprised of the President, Vice
Presidents, and the lead executives of each of our major subsidiaries. The
operating segments are managed separately because each operating segment
represents a strategic business unit that offers services different from the
others.
As a result of acquiring three companies over a 13-month period since December
31, 2003, we have strategically added the government technology services
vertical market to our business and have expanded this segment. In order to
better describe our business following these changes, during the fourth quarter
of 2004, we modified our four reporting business segments into five reporting
segments -- diversified IT outsourcing services, government technology services,
IT consulting and systems integration, technical staffing, and learning
services. Prior year amounts have been reclassified to reflect the current
presentation.
The accounting policies of the operating segments are the same as those
described in Note 1 to the Company's consolidated financial statements contained
in the Company's Annual Report on Form 10-K for the year ended December 31,
2004. We evaluate segment performance based on segment gross profit. We do not
allocate assets to operating segments, but we allocate certain amounts of
depreciation and amortization expense to operating segments.
11
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 8 -- SEGMENT REPORTING (continued)
Financial information for our operating segments is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2005 2004 2005 2004
------- ------- ------- -------
(In thousands)
REVENUE
Diversified IT outsourcing ........................... $18,640 $18,339 $37,739 $36,777
Government technology services ....................... 14,218 5,327 29,180 11,883
IT consulting and systems integration ................ 7,080 4,689 12,931 7,695
Technical staffing ................................... 2,116 1,957 4,132 3,986
Learning services .................................... 231 171 341 307
------- ------- ------- -------
Total revenue ........................................... $42,285 $30,483 $84,323 $60,648
======= ======= ======= =======
GROSS PROFIT
Diversified IT outsourcing ........................... $ 4,528 $ 4,948 $ 9,441 $ 9,710
Government technology services ....................... 4,256 1,631 8,592 3,226
IT consulting and systems integration ................ 1,588 904 2,626 1,299
Technical staffing ................................... 538 451 942 841
Learning services .................................... 91 56 108 71
------- ------- ------- -------
Total gross profit ...................................... 11,001 7,990 21,709 15,147
Selling, general, and administrative expense ......... 8,871 6,244 17,162 12,149
Interest income, net ................................. 80 158 163 325
Foreign currency transaction gain (loss) ............. 120 (18) 97 (217)
------- ------- ------- -------
Income from continuing operations before income taxes ... $ 2,330 $ 1,886 $ 4,807 $ 3,106
======= ======= ======= =======
We attribute revenue to different geographic areas on the basis of the location
providing the services to the customer. Revenue by geographic area is presented
below:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
2005 2004 2005 2004
------- ------- ------- -------
(In thousands)
REVENUE
United States ........................................ $29,550 $21,063 $58,945 $42,481
Europe:
Belgium ........................................... 9,361 5,832 18,266 10,968
Other ............................................. 3,374 3,588 7,112 7,199
------- ------- ------- -------
Total Europe ......................................... 12,735 9,420 25,378 18,167
------- ------- ------- -------
Total revenue ........................................... $42,285 $30,483 $84,323 $60,648
======= ======= ======= =======
12
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 8 -- SEGMENT REPORTING (continued)
Revenue from customers, or groups of customers under common control, that
comprise 10% or greater of our total revenue in any period presented are as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2005 2004 2005 2004
---- ---- ---- ----
United States Government .............. 29.6% 12.5% 29.8% 12.7%
Ford Motor Company and Subsidiaries ... 27.5% 40.0% 27.9% 40.3%
---- ---- ---- ----
Total ................................. 57.1% 52.5% 57.7% 53.0%
==== ==== ==== ====
We conduct business under multiple contracts with various entities within the
Ford Motor Company organization and with various agencies and departments of the
United States Government. No single agency or department of the United States
Government comprised 10% or greater of the Company's total revenue for all
periods presented except for the six months ended June 30, 2004, whereby one
customer within the United States Government comprised 10.0% of the Company's
total revenue.
NOTE 9 -- CONTINGENCIES
MINORITY FOREIGN OWNERSHIP, CONTROL, OR INFLUENCE:
On December 31, 2003, TechTeam acquired 100% of the outstanding stock of Digital
Support Corporation ("DSC"). DSC acquired 100% of the outstanding capital stock
of Sytel on January 3, 2005. DSC and Sytel provide services to various
departments within the United States Department of Defense ("DoD") and the
United States Department of State ("DoS"). Both DSC and Sytel require facility
security clearances in order to perform their services for one or more of their
DoD and DoS customers. At the time of these acquisitions, ChrysCapital II, LLC
("ChrysCapital"), a Mauritius entity, was the beneficial owner of over 5% of
TechTeam's capital stock and, as a result, TechTeam was considered to be under
minority foreign ownership, control, or influence ("FOCI") for purposes of the
National Industrial Security Program Operating Manual ("NISPOM"), and was
required to mitigate the minority FOCI in order to maintain its facility
security clearances. On May 5, 2005, we entered into a Security Control
Agreement with the DoD, which is a recognized measure under NISPOM for
mitigation of minority FOCI. During May 2005, ChrysCapital sold 100% of its
ownership in the Company, thereby eliminating any minority FOCI issues.
Accordingly, the DoD and DSC have terminated the Security Control Agreement, and
DSC and Sytel's facility security clearances remain in effect.
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.
13
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 10 -- ACQUISITIONS
On January 3, 2005, TechTeam Global, Inc., through its wholly-owned subsidiary
DSC, completed the acquisition of all of the outstanding stock of Sytel, Inc., a
diversified information technology services and solutions company headquartered
in Bethesda, Maryland, that provides managed network services and advanced
enterprise solutions -- including network design, management, and support;
network security services; help desk support; program design and implementation;
and e-government and e-learning solutions -- to several departments of the
United States Government. The total purchase price of $21,560,000 consists of
initial consideration paid by the Company of $18,500,000, acquisition costs of
$695,000, a noncompete agreement of $500,000, a working capital payment of
$1,323,000, and stock options with a fair value of $542,000 to purchase 160,900
shares of the Company's common stock. The stock options were valued using the
Black-Scholes valuation model using the following assumptions -- risk-free
interest rate of 3.28%, volatility factor of the expected market price of our
common stock of 43%, expected life of 3 years, and dividend yield of 0%. 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 Department of State (see below).
Of the initial consideration, $2,475,000 was placed into an escrow account,
which consists of $825,000 related to potential working capital adjustments and
$1,650,000 related to representations and warranties of the selling shareholders
contained in the purchase agreement. In July 2005, the working capital portion
of the escrow account was distributed to the selling shareholders and the
Company based upon Sytel's final net working capital position at January 3,
2005, as defined, from which the Company received $244,000 of the escrow
distribution.
When acquired, Sytel had been providing managed network services to the
Department of State under a contract extension through March 29, 2005. A
subsequent contract 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. Although a final
award decision has not yet been made by the customer, the Section 8(a) vendor
with whom Sytel teamed was informed on July 28, 2005 that its proposal will no
longer be considered for award. Revenue on this contract for the six months
ended June 30, 2005 was $3.16 million. We have not been informed of the plans
for transitioning this business to the vendor yet to be awarded the new
contract. As a result of the pending loss of this contract, the aforementioned
potential additional purchase price payment of $2,000,000 for the renewal of the
contract will not be paid.
The following table summarizes the current allocation of the purchase price and
net cash used in the acquisition.
(In thousands)
--------------
Goodwill .............................................. $ 14,669
Other intangible assets ............................... 7,853
Property, equipment, and purchased software ........... 169
Other current and non-current assets, net of cash
acquired of $31 .................................... 11,703
Accounts payable, accrued liabilities, and deferred
tax liabilities assumed ............................ (12,865)
--------
Total purchase price, net of cash acquired ............ 21,529
Issuance of stock options ............................. (542)
--------
Net cash used ......................................... $ 20,987
========
14
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 10 -- ACQUISITIONS (continued)
The operating results of Sytel are included in the consolidated results of
operations of the Company from January 3, 2005. The unaudited pro forma
condensed consolidated results of operations for the three and six months ended
June 30, 2004 are presented below as though Sytel had been acquired as of
January 1, 2004.
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2004 2004
------------ ----------
(In thousands, except per
share data)
Revenue
As reported ........... $30,483 $60,648
Pro forma ............. $37,162 $74,531
Net income
As reported ........... $ 1,077 $ 1,700
Pro forma ............. $ 1,110 $ 1,867
Diluted earnings per share
As reported ........... $ 0.11 $ 0.18
Pro forma ............. $ 0.12 $ 0.20
NOTE 11 -- DISCONTINUED OPERATIONS
TechTeam Capital Group, LLC ("Capital Group"), a subsidiary of the Company,
previously wrote leases for computer, telecommunications, and other types of
capital equipment, with initial lease terms ranging from two to five years.
Capital Group ceased writing new leases in March 2000 and is in the final stages
of running out its lease portfolio. Our future revenue stream from contractually
committed leases is inconsequential to our results of operations. The primary
activity that remains in closing down the leasing operation is the collection of
accounts receivable, including older accounts receivable related to terminated
leases, which will continue during 2005. As a result, Capital Group has been
presented as a discontinued operation in accordance with SFAS No. 144,
"Accounting for the Disposal or Impairment of Long-Lived Assets." Under SFAS
144, the operating results of Capital Group are presented separately from
continuing operations in the accompanying financial statements for all periods
presented. Capital Group previously was reported as a separate operating
segment.
Summarized information for Capital Group is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2005 2004 2005 2004
---- ---- ---- ----
(In thousands)
Revenue ...................... $1 $197 $68 $302
Income before income taxes ... $1 $ 27 $84 $ 21
15
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Item 2, contains
forward-looking statements that involve risks and uncertainties, as well as
assumptions that, if they never materialize or prove incorrect, could cause the
results of TechTeam Global, Inc. and its consolidated subsidiaries ("TechTeam")
to differ materially from those expressed or implied by such forward-looking
statements. All statements other than statements of historical fact are
statements that could be deemed forward-looking statements, including any
projections of revenue, gross margin, expenses, earnings or losses from
operations, synergies, or other financial items; any statements of the plans,
strategies, and objectives of management for future operations; any statement
concerning developments or performance relating to our services; any statements
regarding future economic conditions or performance; any statements of
expectation or belief; and any statements of assumptions underlying any of the
foregoing. The risks, uncertainties and assumptions referred to above include
the performance of contracts by suppliers, customers, and partners; employee
management issues; the difficulty of aligning expense levels with revenue
changes; complexities of global political and economic developments; and other
risks that are described herein, including but not limited to the items
discussed in "Factors that Could Affect Future Results" set forth in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 2 of this report, and that are otherwise described from time
to time in TechTeam's Securities and Exchange Commission reports filed after
this report. TechTeam assumes no obligation and does not intend to update these
forward-looking statements.
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
TechTeam is a global provider of information technology ("IT") and business
process outsourcing support services to Fortune 1000 companies, multinational
companies, product providers, small and mid-size companies, and government
entities. Our goal is to deliver the best overall value proposition in our
industry -- the best combination of high quality, low cost, flexibility, and
customer satisfaction -- and become a global provider of IT and business process
outsourcing support services with $500 million in annual revenue through a
combination of sustained organic growth coupled with selective, strategic, and
accretive acquisitions.
Our results for the three and six months ended June 30, 2005 reflect the early
success of our acquisition strategy. On January 3, 2005, we acquired Sytel, Inc.
("Sytel"), a diversified information technology services and solutions company
headquartered in Bethesda, Maryland, that provides managed network services and
advanced enterprise solutions -- including network design, management, and
support; network security services; help desk support; program design and
implementation; and e-government and e-learning solutions -- to several
departments of the United States Government. We also acquired Advanced Network
Engineering NV ("A.N.E.") on May 13, 2004, an information technology services
and solutions company in Belgium that provides software application, network
infrastructure, and systems integration services to various global,
pan-European, and Belgian customers. Together, Sytel and A.N.E. contributed
revenue of $10.3 million and $20.5 million for the three and six months ended
June 30, 2005, respectively, which resulted in an increase in total Company
revenue of 38.7% to $42.3 million for the three months ended June 30, 2005, and
an increase of 39.0% to $84.3 million for the six months ended June 30, 2005,
from comparable periods in 2004. Excluding revenue contributed by Sytel and
A.N.E., total revenue increased 7.2% and 6.5% for the three and six months ended
June 30, 2005, respectively, from comparable periods in 2004.
Sytel is reported in our government technology services business segment and
A.N.E. is reported in our IT consulting and systems integration business
segment, and they are drivers behind the revenue growth in these two business
segments. Our IT consulting and systems integration business segment also has
been positively impacted by significant growth in our subsidiary, TechTeam
Cyntergy, which provides IT deployment,
16
training, and implementation services to companies in the hospitality, retail,
food service, and other industries throughout the United States. In addition to
revenue growth, these two business segments reflect improved gross margin
performance (gross profit expressed as a percentage of total revenue) for the
six months ended June 30, 2005, over the comparable period in 2004, as discussed
further in this Item 2.
While we have experienced significant growth in our government technology
services and IT consulting and systems integration business segments, the
results for our diversified IT outsourcing business segment reflect revenue
growth of 1.6% to $18.6 million and 2.6% to $37.7 million for the three and six
months ended June 30, 2005, respectively, from comparable periods in 2004. We
experienced revenue growth of 44.6% from our blended service delivery solution
in Belgium and Romania for the six months ended June 30, 2005, from the
comparable period in 2004, but experienced a decrease in revenue of 13.9% in the
United States primarily from an expected decline in revenue from DaimlerChrysler
AG and Liberty Mutual Insurance Company ("Liberty Mutual"), as previously
reported. Our diversified IT outsourcing business segment also reflects a
decline in gross profit and gross margin performance as a result of the decline
in revenue from DaimlerChrysler and Liberty Mutual and lower gross margin on our
business with Ford Motor Company and its subsidiaries ("Ford") primarily in
Europe. This has resulted in underutilization of our facility in Southfield,
Michigan, which negatively impacted our total gross margin. These declines were
partially offset by revenue growth and gross margin improvement from our blended
service delivery solution in Belgium and Romania. Although our revenue in the
United States declined over 2004, we have experienced a significant increase in
the number of opportunities with current and prospective customers in the United
States to provide diversified IT outsourcing services, as compared to 2004.
We expect certain challenges to continue to impact our profitability in future
periods. We are required to adopt the provisions of Section 404 of the
Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") for the year ended
December 31, 2005, which requires us to certify our system of internal control
over financial reporting and disclosure. We expect to incur between $1.2 million
to $1.4 million of incremental expense in 2005 to implement this section of the
Sarbanes-Oxley Act. These costs may increase if it is determined that
significant efforts will be required to remediate control deficiencies that may
be identified during implementation. In addition, significant time and effort of
management will be required. For the three and six months ended June 30, 2005,
we incurred approximately $525,000 and $545,000, respectively, of third party
expense related to this project.
Next, we are also investing in our global infrastructure to support our growth.
We are implementing a new human capital management system during 2005 and 2006,
which will encompass most aspects of our global human resource functions. We
expect to incur approximately $600,000 to $700,000 of expense in 2005 during
implementation before we begin to realize resulting operational efficiencies in
future periods. For the three and six months ended June 30, 2005, we incurred
approximately $188,000 and $292,000, respectively, of expense related to this
project. As our customers continue to require services delivered globally, we
also expect to make investments necessary to establish operations in new
countries from time to time.
Finally, as more fully discussed in "Note 10 -- Acquisitions" contained in "Item
1 -- Financial Statements," Sytel's contract with the United States Department
of State will not be renewed. Revenue on this contract for the six months ended
June 30, 2005 was $3.16 million.
As a result of acquiring three companies over a 13-month period since December
31, 2003, we have significantly grown our business and strategically added the
government technology services vertical market to our business and expanded this
segment. 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, local government entities, and the European
Union. In order to better describe our business following these changes, during
the fourth quarter of 2004, we modified our four reporting business segments
into five reporting segments -- diversified IT outsourcing services, government
technology services, IT consulting and systems integration, technical staffing,
and learning services. Prior year amounts have been reclassified to reflect the
current presentation. The Company has reclassified certain revenue and cost of
revenue reported by operating segment for the three and six months ended June
30, 2004, from the classifications contained
17
in the Company's earnings release of July 28, 2005 for the quarter ended June
30, 2005. The reclassification of revenue and cost of revenue had no impact on
total revenue, gross profit, operating income, net income, or earnings per
share.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO JUNE 30, 2004
THREE MONTHS ENDED JUNE 30,
--------------------------- INCREASE %
2005 2004 (DECREASE) CHANGE
------- ------- ---------- ------
(In thousands, except percentages)
REVENUE
Diversified IT outsourcing services..... $18,640 $18,339 $ 301 1.6%
Government technology services.......... 14,218 5,327 8,891 167%
IT consulting and systems integration... 7,080 4,689 2,391 51.0%
Technical staffing...................... 2,116 1,957 159 8.1%
Learning services....................... 231 171 60 35.1%
------- ------- -------
TOTAL REVENUE ............................. $42,285 $30,483 $11,802 38.7%
======= ======= =======
The majority of the overall revenue growth of 38.7% to $42.3 million for the
three months ended June 30, 2005, from the comparable period in 2004, is
attributable to our acquisitions of Sytel and A.N.E. and revenue growth from our
blended service delivery solution in Belgium and Romania and at our subsidiary,
TechTeam Cyntergy. Excluding the acquisitions of Sytel and A.N.E., total revenue
grew 7.2% for the three months ended June 30, 2005, from the comparable period
in 2004.
Revenue from diversified IT outsourcing services increased 1.6% to $18.6 million
for the three months ended June 30, 2005, from $18.3 million for the comparable
period in 2004, as a result of 45.5% revenue growth from our blended service
delivery solution in Belgium and Romania, largely offset by a decline in revenue
from diversified IT outsourcing services of 14.2% in the United States. The
growth in Belgium and Romania is primarily due to new customer contracts. The
decrease in revenue in the United States is primarily due to the decline in
revenue from DaimlerChrysler and Liberty Mutual, which was partially offset by
new customer contracts. Although our revenue in the United States declined from
2004, we have experienced a significant increase in the number of opportunities
with current and prospective customers in the United States to provide
diversified IT outsourcing services, as compared to 2004.
Revenue from government technology services increased 167% to $14.2 million for
the three months ended June 30, 2005, from $5.33 million for the comparable
period in 2004, primarily due to our acquisition of Sytel on January 3, 2005.
Excluding Sytel, revenue from government technology services increased 9.4% to
$5.83 million for the three months ended June 30, 2005, from $5.33 million for
the comparable period in 2004, on an increase in revenue from services and a
decrease in hardware resales.
Revenue from IT consulting and systems integration increased 51.0% to $7.08
million for the three months ended June 30, 2005, from $4.69 million for the
comparable period in 2004, due to our acquisition of A.N.E. on May 13, 2004, and
revenue growth at TechTeam Cyntergy. Excluding A.N.E., revenue from IT
consulting and systems integration increased 28.1% to $5.16 million for the
three months ended June 30, 2005, from $4.03 million for the comparable period
in 2004, primarily due to additional business from new and existing customers at
TechTeam Cyntergy, which provides IT deployment, training, and implementation
services to companies in the hospitality, retail, food service, and other
industries throughout the United States.
18
Total revenue generated in the United States increased 40.3% to $29.6 million
for the three months ended June 30, 2005, from $21.1 million for the comparable
period in 2004, due to our acquisition of Sytel. Excluding revenue contributed
by Sytel, revenue generated in the United States increased 0.5% to $21.2 million
for the three months ended June 30, 2005, from $21.1 million for the comparable
period in 2004, primarily due to the aforementioned decline in revenue from
DaimlerChrysler and Liberty Mutual, partially offset by new customer contracts
in diversified IT outsourcing services, government technology services, and IT
consulting and systems integration.
Revenue generated in Europe increased 35.2% to $12.7 million for the three
months ended June 30, 2005, from $9.42 million for the comparable period in
2004, primarily due to revenue growth from our blended service delivery solution
in Belgium and Romania from new customer contracts, our acquisition of A.N.E.,
and the strengthening of European currencies relative to the U.S. dollar.
Excluding revenue contributed by A.N.E., revenue generated in Europe increased
23.5% to $10.8 million for the three months ended June 30, 2005, from $8.76
million for the comparable period in 2004. If revenue and expenses in Europe for
the three months ended June 30, 2005 were translated at the average exchange
rate for the comparable period in 2004, reported revenue and net income would
have been reduced by approximately $523,000 and $15,000, respectively. Since
most of the Company's international operating expenses are also incurred in the
same foreign currencies in which the associated revenue is denominated, the net
impact of exchange rate fluctuations on net income is considerably less than the
estimated impact on revenue.
THREE MONTHS ENDED JUNE 30,
--------------------------------------
2005 2004
------------------ -----------------
GROSS GROSS INCREASE %
AMOUNT MARGIN % AMOUNT MARGIN % (DECREASE) CHANGE
------- -------- ------ -------- ---------- ------
(In thousands, except percentages)
GROSS PROFIT
Diversified IT outsourcing
services .............. $ 4,528 24.3% $4,948 27.0% $ (420) (8.5)%
Government technology
services .............. 4,256 29.9% 1,631 30.6% 2,625 161%
IT consulting and systems
integration ........... 1,588 22.4% 904 19.3% 684 75.7%
Technical staffing ....... 538 25.4% 451 23.0% 87 19.3%
Learning services ........ 91 39.4% 56 32.7% 35 62.5%
------- ------ ------
TOTAL GROSS PROFIT .......... $11,001 26.0% $7,990 26.2% $3,011 37.7%
======= ====== ======
Consistent with revenue, the majority of the overall growth in gross profit of
37.7% to $11.0 million for the three months ended June 30, 2005, from the
comparable period in 2004, is attributable to our acquisitions of Sytel and
A.N.E. and the growth of our blended service delivery solution in Belgium and
Romania and at TechTeam Cyntergy. Excluding the acquisitions of Sytel and
A.N.E., total gross profit grew 6.0% to $8.37 million for the three months ended
June 30, 2005, from the comparable period in 2004.
Gross profit from diversified IT outsourcing services decreased 8.5% to $4.53
million for the three months ended June 30, 2005, from $4.95 million for the
comparable period in 2004. Gross margin from diversified IT outsourcing services
decreased to 24.3% for the three months ended June 30, 2005, from 27.0% for the
comparable period in 2004. The decrease in gross profit and gross margin is a
result of the aforementioned decline in revenue from DaimlerChrysler and Liberty
Mutual in the United States and lower margin on our Ford business in Europe.
This has resulted in underutilization of our facility in Southfield, Michigan,
which also 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.
19
Gross profit from government technology services increased 161% to $4.26 million
for the three months ended June 30, 2005, from $1.63 million for the comparable
period in 2004. Gross margin from government technology services decreased
slightly to 29.9% for the three months ended June 30, 2005, from 30.6% for the
comparable period in 2004. The increase in gross profit and decrease in gross
margin is primarily due to our acquisition of Sytel. Excluding Sytel, gross
profit from government technology services increased 14.4% to $1.87 million for
the three months ended June 30, 2005, and gross margin increased to 32.0% due to
more revenue from higher margin service projects and less revenue from lower
margin hardware resales.
Gross profit from IT consulting and systems integration increased 75.7% to $1.59
million for the three months ended June 30, 2005, from $904,000 for the
comparable period in 2004. Gross margin from IT consulting and systems
integration increased to 22.4% for the three months ended June 30, 2005, from
19.3% for the comparable period in 2004. The increase in gross profit and gross
margin is primarily due to additional business from new and existing customers
at TechTeam Cyntergy and, to a lesser extent, our acquisition of A.N.E.
Excluding the gross profit contributed by A.N.E., gross profit increased 63.0%
to $1.32 million for the three months ended June 30, 2005, from $809,000 for the
comparable period in 2004.
THREE MONTHS ENDED JUNE 30,
--------------------------- INCREASE %
2005 2004 (DECREASE) CHANGE
------ ------ ---------- ------
(In thousands, except percentages)
OPERATING EXPENSES AND OTHER
Selling, general, and administrative expense ... $8,871 $6,244 $2,627 42.1%
Net interest income ............................ $ 80 $ 158 $ (78) (49.4)%
Foreign currency transaction gain (loss) ....... $ 120 $ (18) $ 138 (767)%
Income tax provision ........................... $ 753 $ 828 $ (75) (9.1)%
Selling, general, and administrative expense increased 42.1% to $8.87 million,
or 21.0% of total revenue, for the three months ended June 30, 2005, from $6.24
million, or 20.5% of total revenue, for the comparable period in 2004, due to
our acquisitions of Sytel and A.N.E. and $525,000 of expense associated with the
Company's effort to adopt the provisions of Section 404 of the Sarbanes-Oxley
Act. Excluding the revenue and expenses contributed by Sytel and A.N.E.,
selling, general, and administrative expense increased 17.1% to $7.19 million,
or 22.5% of total revenue, for the three months ended June 30, 2005, from $6.14
million, or 20.6% of total revenue, for the comparable period in 2004, due to
expenses related to the Sarbanes-Oxley Act, reinstatement of the Company's
401(k) matching contribution, and higher expenses related to training, marketing
and investor relations activity, and sales commissions.
Net interest income decreased to $80,000 for the three months ended June 30,
2005, from $158,000 for the comparable period in 2004, as a result of the
Company borrowing $15.0 million on January 3, 2005 under a term loan to
partially finance the acquisition of Sytel, and from reduced interest income on
cash and cash equivalents being held as collateral for the term loan in a
non-interest-bearing account.
Foreign currency transaction gain (loss) increased to a gain of $120,000 for the
three months ended June 30, 2005, from a loss of $(18,000) for the comparable
period in 2004, due to the U.S. dollar strengthening relative to the euro and
British pound sterling to a greater extent in 2005 than the comparable period in
2004, combined with a higher level of foreign assets denominated in U.S.
dollars.
For the three months ended June 30, 2005, the consolidated effective tax rate of
32.3% differs from the statutory tax rate of 34% primarily due to the tax
benefit of tax rates in certain foreign countries that are lower than 34% and
the tax benefit of certain permanent deductions. For the three months ended June
30, 2004, the consolidated effective tax rate of 43.9% differs from the
statutory tax rate of 34% primarily due to providing a valuation allowance
against the future tax benefit of operating loss carryforwards in certain tax
jurisdictions.
20
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO JUNE 30, 2004
SIX MONTHS ENDED JUNE 30,
------------------------- INCREASE %
2005 2004 (DECREASE) CHANGE
------- ------- ---------- ------
(In thousands, except percentages)
REVENUE
Diversified IT outsourcing services ..... $37,739 $36,777 $ 962 2.6%
Government technology services .......... 29,180 11,883 17,297 146%
IT consulting and systems integration ... 12,931 7,695 5,236 68.0%
Technical staffing ...................... 4,132 3,986 146 3.7%
Learning services ....................... 341 307 34 11.1%
------- ------- -------
TOTAL REVENUE .............................. $84,323 $60,648 $23,675 39.0%
======= ======= =======
The majority of the overall revenue growth of 39.0% to $84.3 million for the six
months ended June 30, 2005, from the comparable period in 2004, is attributable
to our acquisitions of Sytel and A.N.E. and revenue growth from our blended
service delivery solution in Belgium and Romania and at TechTeam Cyntergy.
Excluding the acquisitions of Sytel and A.N.E., total revenue grew 6.5% for the
six months ended June 30, 2005, from the comparable period in 2004.
Revenue from our diversified IT outsourcing services increased 2.6% to $37.7
million for the six months ended June 30, 2005, from $36.8 million for the
comparable period in 2004, as a result of 44.6% revenue growth from our blended
service delivery solution in Belgium and Romania, offset by a decline in revenue
from diversified IT outsourcing services of 13.9% in the United States. The
growth in Belgium and Romania is primarily due to new customer contracts. The
decrease in revenue in the United States is primarily due to the decline in
revenue from DaimlerChrysler and Liberty Mutual, which is partially offset by
new customer contracts. As discussed earlier, although our revenue in the United
States declined over 2004, we have experienced a significant increase in the
number of opportunities with current and prospective customers in the United
States to provide diversified IT outsourcing services, as compared to 2004.
Revenue from government technology services increased 146% to $29.2 million for
the six months ended June 30, 2005, from $11.9 million for the comparable period
in 2004, primarily due to our acquisition of Sytel on January 3, 2005. Excluding
Sytel, revenue from government technology services increased 3.2% to $12.3
million for the six months ended June 30, 2005, from $11.9 million for the
comparable period in 2004, on an increase in revenue from services and a
decrease in hardware resales.
Revenue from IT consulting and systems integration increased 68.0% to $12.9
million for the six months ended June 30, 2005, from $7.70 million for the
comparable period in 2004, due to our acquisition of A.N.E. on May 13, 2004 and
revenue growth at TechTeam Cyntergy. Excluding A.N.E., revenue from IT
consulting and systems integration increased 34.1% to $9.44 million for the six
months ended June 30, 2005, from $7.04 million for the comparable period in
2004, primarily due to additional business from new and existing customers at
TechTeam Cyntergy.
Total revenue generated in the United States increased 38.8% to $58.9 million
for the six months ended June 30, 2005, from $42.5 million for the comparable
period in 2004, due to our acquisition of Sytel. Excluding revenue contributed
by Sytel, revenue generated in the United States decreased 1.2% to $42.0 million
for the six months ended June 30, 2005, from $42.5 million for the comparable
period in 2004, primarily due to the aforementioned decline in revenue from
DaimlerChrysler and Liberty Mutual, partially offset by new customer contracts
in diversified IT outsourcing services, government technology services, and IT
consulting and systems integration.
21
Revenue generated in Europe increased 39.7% to $25.4 million for the six months
ended June 30, 2005, from $18.2 million for the comparable period in 2004,
primarily due to growth in business in Belgium and Romania from new customer
contracts, our acquisition of A.N.E., and the strengthening of European
currencies relative to the U.S. dollar. Excluding revenue contributed by A.N.E.,
revenue generated in Europe increased 25.0% to $21.9 million for the six months
ended June 30, 2005, from $17.5 million for the comparable period in 2004. If
revenue and expenses in Europe for the six months ended June 30, 2005 were
translated at the average exchange rate for the comparable period in 2004,
reported revenue and net income would have been reduced by approximately $1.15
million and $45,000, respectively. Since most of the Company's international
operating expenses are also incurred in the same foreign currencies in which the
associated revenue is denominated, the net impact of exchange rate fluctuations
on net income is considerably less than the estimated impact on revenue.
SIX MONTHS ENDED JUNE 30,
---------------------------------------
2005 2004
------------------ ------------------
GROSS GROSS INCREASE %
AMOUNT MARGIN % AMOUNT MARGIN % (DECREASE) CHANGE
------- -------- ------- -------- ---------- ------
(In thousands, except percentages)
GROSS PROFIT
Diversified IT outsourcing
services .................. $ 9,441 25.0% $ 9,710 26.4% $ (269) (2.8)%
Government technology
services .................. 8,592 29.4% 3,226 27.1% 5,366 166%
IT consulting and systems
integration ............... 2,626 20.3% 1,299 16.9% 1,327 102%
Technical staffing ........... 942 22.8% 841 21.1% 101 12.0%
Learning services ............ 108 31.7% 71 23.1% 37 52.1%
------- ------- ------
TOTAL GROSS PROFIT .............. $21,709 25.7% $15,147 25.0% $6,562 43.3%
======= ======= ======
Consistent with revenue, the majority of the overall gross profit growth of
43.3% to $21.7 million for the six months ended June 30, 2005, from the
comparable period in 2004, is attributable to our acquisitions of Sytel and
A.N.E. and growth from our blended service delivery solution in Belgium and
Romania and at our subsidiary, TechTeam Cyntergy. Excluding the acquisitions of
Sytel and A.N.E., total gross profit grew 8.8% for the six months ended June 30,
2005, from the comparable period in 2004.
Gross profit from diversified IT outsourcing services decreased 2.8% to $9.44
million for the six months ended June 30, 2005, from $9.71 million for the
comparable period in 2004. Gross margin from diversified IT outsourcing services
decreased to 25.0% for the six months ended June 30, 2005, from 26.4% for the
comparable period in 2004. The decrease in gross profit and gross margin is a
result of the aforementioned decline in revenue from DaimlerChrysler and Liberty
Mutual in the United States and lower margin on our Ford business in Europe.
This has resulted in underutilization of our facility in Southfield, Michigan,
which also negatively impacted our gross margin. These declines were partially
offset by growth and margin improvement from our blended service delivery
solution in Belgium and Romania.
Gross profit from government technology services increased 166% to $8.59 million
for the six months ended June 30, 2005, from $3.23 million for the comparable
period in 2004. Gross margin from government technology services increased to
29.4% for the six months ended June 30, 2005, from 27.1% for the comparable
period in 2004. The increase in gross profit and gross margin is primarily due
to our acquisition of Sytel and more revenue from higher margin service projects
and less revenue from lower margin hardware resales. Excluding Sytel, gross
profit from government technology services increased 17.4% to $3.79 million for
the six months ended June 30, 2005, from $3.23 million for the comparable period
in 2004.
22
Gross profit from IT consulting and systems integration increased 102% to $2.63
million for the six months ended June 30, 2005, from $1.30 million for the
comparable period in 2004. Gross margin from IT consulting and systems
integration increased to 20.3% for the six months ended June 30, 2005, from
16.9% for the comparable period in 2004. The increase in gross profit and gross
margin was primarily due to additional business from new and existing customers
at TechTeam Cyntergy and, to a lesser extent, our acquisition of A.N.E.
Excluding the gross profit contributed by A.N.E., gross profit increased 73.4%
to $2.09 million for the six months ended June 30, 2005, from $1.20 million for
the comparable period in 2004.
SIX MONTHS ENDED MARCH 31,
-------------------------- INCREASE %
2005 2004 (DECREASE) CHANGE
------- ------- ---------- ------
(In thousands, except percentages)
OPERATING EXPENSES AND OTHER
Selling, general, and administrative expense .. $17,162 $12,149 $5,013 41.3%
Net interest income ........................... $ 163 $ 325 $ (162) (49.8)%
Foreign currency transaction gain (loss) ...... $ 97 $ (217) $ 314 (145)%
Income tax provision .......................... $ 1,535 $ 1,420 $ 115 8.1%
Selling, general, and administrative expense increased 41.3% to $17.2 million,
or 20.4% of total revenue, for the six months ended June 30, 2005, from $12.1
million, or 20.0% of total revenue, for the comparable period in 2004, primarily
due to our acquisitions of Sytel and A.N.E. and $545,000 of expense associated
with the Company's effort to adopt the provisions of Section 404 of the
Sarbanes-Oxley Act. Excluding the revenue and expenses contributed by Sytel and
A.N.E., selling, general, and administrative expense increased 14.2% to $13.7
million, or 21.5% of total revenue, for the six months ended June 30, 2005, from
$12.0 million, or 20.1% of total revenue, for the comparable period in 2004, due
to expenses related to the Sarbanes-Oxley Act, reinstatement of the Company's
401(k) matching contribution, and higher expenses related to training, marketing
and investor relations activity, and sales commissions.
Net interest income decreased to $163,000 for the six months ended June 30,
2005, from $325,000 for the comparable period in 2004, as a result of the
Company borrowing $15.0 million on January 3, 2005 under a term loan to
partially finance the acquisition of Sytel, and reduced interest income from
cash and cash equivalents being held as collateral for the term loan in a
non-interest-bearing account.
Foreign currency transaction gain (loss) increased to a gain of $97,000 for the
six months ended June 30, 2005, from a loss of $(217,000) for the comparable
period in 2004, primarily due to the U.S. dollar strengthening relative to the
euro and British pound sterling to a greater extent in 2005 than the comparable
period in 2004 combined with a higher level of foreign assets denominated in
U.S. dollars.
For the six months ended June 30, 2005, the consolidated effective tax rate of
31.9% differs from the statutory tax rate of 34% primarily due to the tax
benefit of tax rates in certain foreign countries that are lower than 34% and
the tax benefit of certain permanent deductions. For the six months ended June
30, 2004, the consolidated effective tax rate of 45.7% differs from the
statutory tax rate of 34% primarily due to providing a valuation allowance
against the future tax benefit of operating loss carryforwards in certain tax
jurisdictions.
IMPACT OF BUSINESS WITH MAJOR CLIENTS
For the three and six months ended June 30, 2005 and 2004, Ford Motor Company
and the United States Government exceeded the threshold for being reported as a
significant customer, or group of customers under common control. We conduct
business under multiple contracts with various entities within the Ford
organization and with various agencies and departments of the United States
Government. For the three and six months ended June 30, 2005, Ford accounted for
27.5% and 27.9%, respectively, of the Company's total revenue, as compared to
40.0% and 40.3%, respectively, for the comparable periods in 2004. For the three
23
and six months ended June 30, 2005, the United States Government accounted for
29.6% and 29.8%, respectively, of the Company's total revenue, as compared to
12.5% and 12.7%, respectively, for the comparable periods in 2004. No single
agency or department of the United States Government comprised 10% or greater of
the Company's total revenue for all periods presented except for the six months
ended June 30, 2004, whereby one customer within the United States Government
comprised 10.0% of the Company's total revenue.
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. We anticipate that our revenue from Ford will
continue to grow during 2005 and 2006. Our largest contract with Ford for its
Global SPOC Help Desk expired on July 31, 2005, and was extended for 60 days
until the earlier of September 30, 2005, or the date a new contract is executed
with Ford. We are currently in active negotiations with Ford on the renewal of
this contract. We are not aware of any request-for-proposal process that has
been initiated by Ford engaging any other vendor. Accordingly, we believe that
we are well-positioned to win this renewal due to our strong performance,
although no assurances can be given in this regard. We anticipate that the
revenue generated under the Ford Global SPOC Help Desk may decrease due to an
announced reduction in the Ford employee base and potential price reductions
that may result from our contract renewal. However, we also anticipate an
expansion of the services performed under this program. To the extent we
successfully expand our services, we will be able to manage the impact on gross
margin from the decreased revenue for existing SPOC business and price
reductions.
Ford's long-term debt rating was lowered to "below investment grade" status by
Standard & Poor's Rating Services on May 5, 2005. At this time, we do not expect
this downgrade to negatively affect our business with Ford or the collectibility
of our accounts receivable from Ford. However, any loss of (or failure to retain
a significant amount of business with) Ford would have a material adverse effect
on the Company's operating results and liquidity.
The Company continues to seek to diversify its customer base from both a client
and industry perspective. During 2004, we were successful in expanding our
non-Ford-related business, especially through our multilingual help desk
offering and our acquisitions of TechTeam A.N.E. and DSC. During the six months
ended June 30, 2005, we achieved further diversification as a result of our
acquisition of Sytel. While a major facet of our business strategy remains to
diversify our customer base and become less dependent on our business with Ford,
we believe our strong performance and relationship with Ford will continue to
result in increasing revenue from this customer while the percentage of our
total revenue derived from Ford declines, although no assurances can be given in
this regard.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $31.2 million at June 30, 2005, as compared to
$40.4 million at December 31, 2004. During the six months ended June 30, 2005,
cash and cash equivalents decreased $9.27 million primarily due to $5.99 million
in cash used to acquire Sytel (net of debt borrowings of $15.0 million used to
finance the acquisition), $3.26 million in payments to reduce long-term debt,
$1.68 million in cash used for capital expenditures, and $700,000 in payments to
the former shareholders of Digital Support Corporation, partially offset by
$869,000 in cash provided by operations.
Cash provided by operations of $869,000 for the six months ended June 30, 2005
was generated primarily by income prior to non-cash charges for depreciation and
amortization of $6.11 million, offset by an increase in net working capital of
$5.74 million. Cash flow from operations decreased 84.4% to $869,000 for the six
months ended June 30, 2005, from $5.57 million for the comparable period in
2004, primarily due to the aforementioned increase in net working capital.
24
Net working capital increased during the six months ended June 30, 2005
primarily due to (1) an increase in accounts receivable at DSC and TechTeam
Cyntergy of $2.18 million without offsetting increases in related accounts
payable and accrued liabilities, (2) an increase in inventories of $763,000 from
re-sales that were not complete at June 30, 2005, (3) a reduction in deferred
revenue of $864,000 from a customer utilizing a cash prepayment made to the
Company in 2004, and (4) a decrease in accrued and deferred income taxes of
$1.07 million. Accounts receivable at DSC increased from one customer not
remitting payment for services provided in the second quarter due to processing
delays arising from the renewal of the contract in March 2005. In July and
August 2005, we received payment for all amounts due from this customer at June
30, 2005 totaling $4.24 million. Accounts receivable at TechTeam Cyntergy
increased due to the aforementioned growth in the business from 2004. We believe
the increase in accounts receivable is not indicative of a long-term trend of
slower cash collections. We are not aware of any customer disputes or other
issues that could impair our ability to collect outstanding accounts receivable
that are not covered by the existing allowance for doubtful accounts disclosed
on the condensed consolidated balance sheet at June 30, 2005.
We also experienced a significant increase in accounts receivable and accounts
payable during the six months ended June 30, 2005 due to six task order
contracts at Sytel with the United States Department of Homeland Security
("DHS"). Under these contracts, 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, enhancements of existing
technologies, possible repurchases of our common stock, additional consideration
that is payable to the selling shareholders of Sytel, DSC, and A.N.E. if
specific performance conditions and operating targets are met in 2005-2007,
possible global expansion activities, the possible payment of Company dividends,
and the possible acquisition of businesses complementary to the Company's
existing businesses. We believe that positive cash flows from operations,
together with existing cash balances, will continue to be sufficient to meet our
ongoing operational requirements for the next twelve months and foreseeable
future. We have historically not paid dividends.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS No. 123R, "Share-Based
Payment," which replaces SFAS 123 and supersedes APB 25. SFAS 123R eliminates
the ability to account for share-based compensation transactions using APB 25,
and requires instead that such transactions be accounted for using a
fair-value-based method. SFAS 123R is effective for awards that are granted,
modified, or settled in periods beginning after December 15, 2005, or the
Company's fiscal year beginning January 1, 2006. The Company intends to adopt
SFAS 123R on January 1, 2006. As we use the fair value method of accounting
under the original provisions of SFAS 123 for pro forma disclosure purposes, we
are also required to apply the provisions of SFAS 123R in recognizing
compensation cost for any portion of awards granted or modified after December
15, 1994, that are not yet vested at the date SFAS 123R is adopted. Based on the
number of non-vested stock options the Company has outstanding at June 30, 2005
adoption of SFAS 123R will result in approximately $18,000 of aggregate
compensation expense, net of tax, in fiscal years subsequent to 2005 and will
not have a material affect on our financial position or operating results.
MATERIAL COMMITMENTS
As a result of the Company's acquisition of Sytel on January 3, 2005, the
Company's outstanding contractual obligations have changed to include operating
lease commitments of Sytel and $15.0 million the Company borrowed under a term
loan with a bank to partially finance our acquisition of Sytel.
25
The Company has the following contractual obligations outstanding at June 30,
2005:
OPERATING
MATURITIES OF CONTRACTUAL OBLIGATIONS DEBT LEASES
------------------------------------- ------- ---------
Less than one year................... $ -- $ 2,532
1-3 years............................ -- 9,348
4-5 years............................ 11,779 5,550
Thereafter........................... -- 4,445
------- -------
Total .............................. $11,779 $21,875
======= =======
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no changes in the selection and application of critical
accounting policies and estimates disclosed in Item 7 of our Annual Report on
Form 10-K for the year ended December 31, 2004.
FACTORS INFLUENCING FUTURE RESULTS
Refer to Item 7 of our Annual Report on Form 10-K for the year ended December
31, 2004.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in reported market risks since December 31,
2004.
ITEM 4 -- CONTROLS AND PROCEDURES
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected.
As of June 30, 2005, an evaluation was performed under the supervision and with
the participation of the Company's management, including the Chief Executive
Officer, Chief Financial Officer, and Chief Accounting Officer, of the
effectiveness of the design and operations of the Company's disclosure controls
and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934. Based upon that evaluation, the Company's management,
including the Chief Executive Officer, Chief Financial Officer, and Chief
Accounting Officer, concluded that the Company's disclosure controls and
procedures were effective as of June 30, 2005.
As required by Rule 13(a)-15d under the Securities Exchange Act of 1934, the
Company's management, including our Chief Executive Officer, Chief Financial
Officer, and Chief Accounting Officer, also conducted an evaluation of the
Company's internal control over financial reporting to determine whether any
changes occurred during the quarter ended June 30, 2005 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting. On June 27, 2005, we implemented the first
phase of our new human capital management system, which primarily included
changes to the Company's payroll and benefits processing and management at
certain locations. There were no other changes in internal control over
financial reporting, as described above, during the quarter ended June 30, 2005.
26
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
The Company is a party to various legal proceedings that are routine and
incidental to its business. Although the consequences of these proceedings are
not presently determinable, in the opinion of management, they will not have a
material adverse affect on our liquidity, financial condition, or results of
operations, although no assurances can be given in this regard.
ITEM 2 -- UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There were no sales of unregistered equity securities of the Company during the
three months ended June 30, 2005.
The following table sets forth the information with respect to purchases made by
the Company of shares of its common stock during the second quarter of 2005:
TOTAL NUMBER OF MAXIMUM NUMBER OF
TOTAL NUMBER AVERAGE SHARES PURCHASED AS SHARES THAT MAY YET
OF SHARES PRICE PAID PART OF PUBLICLY BE PURCHASED UNDER
PERIOD PURCHASED PER SHARE ANNOUNCED PROGRAMS THE PROGRAMS
------------------------------- ------------ ---------- ------------------- -------------------
April 1, 2005 to April 30, 2005 3,351(a) $ 11.36 -- --
May 1, 2005 to May 31, 2005 1,995(a) $ 12.91 -- --
June 1, 2005 to June 30, 2005 1,939(a) $ 13.69 -- --
(a) All purchases of shares were made for the purpose of contributing the
purchased shares to the TechTeam Global Retirement Savings Plan (one
of the Company's 401(k) plans) for employer matching contributions.
The purchases were not made pursuant to publicly announced plans and
were made in the open market.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on May 25, 2005. The holders
of 7,889,889 shares of the Company's common stock and 689,656 shares of the
Company's Series A senior convertible preferred stock were present in person or
by proxy, representing attendance by at least 87.7% of the outstanding shares
eligible to vote. The following is a summary of the matters voted on at that
meeting.
(a) The following persons were elected to the Company's Board of
Directors. The number of shares cast favor and withheld were as
follows:
Name For Withheld
--------------------- --------- --------
Kim A. Cooper 7,714,300 89,362
William F. Coyro, Jr. 7,794,429 38,475
G. Ted Derwa 7,711,589 121,315
Wallace D. Riley 7,589,998 242,906
Gregory C. Smith 7,589,195 243,709
Richard G. Somerlott 7,791,468 41,435
Richard R. Widgren 7,787,200 45,704
27
(b) Ratification of Ernst & Young as the Company's independent auditors:
For Against
--------- -------
7,820,613 12,290
ITEM 6 -- EXHIBITS
The following exhibits are filed as part of this report on Form 10-Q:
31.1 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.3 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.3 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TechTeam Global, Inc.
(Registrant)
Date: August 12, 2005 By: /s/ William F. Coyro, Jr. William F. Coyro, Jr.
------------------------- President, Chief
Executive Officer, and
Director (Principal
Executive Officer)
By: /s/ David W. Morgan David W. Morgan
------------------------- Chief Financial Officer
and Treasurer (Principal
Financial Officer)
By: /s/ Marc J. Lichtman Marc J. Lichtman
------------------------- Chief Accounting Officer
(Principal Accounting
Officer)
29
EXHIBIT INDEX
EX NO. DESCRIPTION
------ -----------
31.1 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act
of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act
of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.3 Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act
of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.3 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
30