SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission file number 0-16284
TECHTEAM GLOBAL, INC.
-------------------------------
(Name of issuer in its charter)
DELAWARE 38-2774613
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
27335 West 11 Mile Road, Southfield, MI 48034
---------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 357-2866
Registrant's Internet address: www.techteam.com
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer.
Yes [ ] No [X]
The number of shares of the registrant's common stock outstanding at April 30,
2004 was 8,538,800.
1
TECHTEAM GLOBAL, INC.
FORM 10-Q
INDEX
PAGE
NUMBER
------
PART I -- FINANCIAL INFORMATION
ITEM 1
Condensed Consolidated Statements of Operations -- Three Months Ended March 31, 2004 and 2003 3
Condensed Consolidated Statements of Financial Position -- March 31, 2004 and December 31, 2003 4 - 5
Condensed Consolidated Statements of Cash Flows -- Three Months Ended March 31, 2004 and 2003 6
Notes to the Condensed Consolidated Financial Statements 7 - 11
ITEM 2
Management's Discussion and Analysis of Financial Condition and Results of Operations 12 - 16
ITEM 4
Controls and Procedures 16
PART II -- OTHER INFORMATION
ITEM 1
Legal Proceedings 17
ITEM 2
Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 17
ITEM 6
Exhibits and Reports on Form 8-K 17
SIGNATURES 18
EXHIBITS 19
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 MARCH 31,
----------------------------
2004 2003
---- ----
REVENUE
Corporate services
Corporate help desk services ................ $ 19,039 $ 16,009
Systems integration ......................... 8,962 2,138
Technical staffing .......................... 2,029 2,366
Training programs ........................... 135 218
-------- --------
Total corporate services ....................... 30,165 20,731
Leasing operations ............................. 105 1,032
-------- --------
TOTAL REVENUE ...................................... 30,270 21,763
-------- --------
COST OF SERVICES DELIVERED..........................
Cost of corporate services ..................... 23,007 16,041
Cost of leasing operations ..................... 110 1,063
-------- --------
TOTAL COST OF SERVICES DELIVERED ................... 23,117 17,104
-------- --------
GROSS PROFIT ....................................... 7,153 4,659
Selling, general, and administrative expense ....... 5,963 4,655
-------- --------
OPERATING INCOME ................................... 1,190 4
-------- --------
OTHER INCOME (EXPENSE)
Interest income, net ........................... 165 209
Foreign currency transaction gain (loss) ....... (199) 52
-------- --------
TOTAL OTHER INCOME (EXPENSE) ....................... (34) 261
-------- --------
INCOME BEFORE INCOME TAXES ......................... 1,156 265
Income tax provision ............................... 532 206
-------- --------
NET INCOME ......................................... $ 624 $ 59
======== ========
BASIC EARNINGS PER SHARE ........................... $ 0.07 $ 0.01
======== ========
DILUTED EARNINGS PER SHARE ......................... $ 0.07 $ 0.01
======== ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING
Basic .......................................... 8,735 10,695
Net effect of dilutive stock options ........... 155 161
Effect of redeemable convertible preferred stock 690 --
-------- --------
Diluted ........................................ 9,580 10,856
======== ========
See accompanying notes.
3
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(In thousands)
MARCH 31, DECEMBER 31,
ASSETS 2004 2003
------ ---- ----
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents .............................................. $36,145 $35,195
Accounts receivable -- corporate services (less allowance of $668 at
March 31, 2004 and $637 at December 31, 2003) ....................... 23,613 22,434
Accounts receivable -- leasing (less allowance of $750 at March 31, 2004
and $740 at December 31, 2003) ...................................... 382 713
Prepaid expenses and other ............................................. 1,697 1,696
Deferred income taxes .................................................. 562 562
------- -------
TOTAL CURRENT ASSETS ................................................... 62,399 60,600
PROPERTY, EQUIPMENT, AND PURCHASED SOFTWARE
Computer equipment and office furniture ................................ 20,619 20,610
Purchased software ..................................................... 11,523 11,093
Leasehold improvements ................................................. 4,460 4,522
Transportation equipment ............................................... 269 269
------- -------
36,871 36,494
Less -- accumulated depreciation and amortization ...................... 27,401 26,590
------- -------
NET PROPERTY, EQUIPMENT, AND PURCHASED SOFTWARE ........................ 9,470 9,904
OTHER ASSETS
Intangible assets, net ................................................. 3,527 3,634
Goodwill ............................................................... 2,206 2,099
Deferred income taxes .................................................. 862 862
Assets of leasing operations, net ...................................... 288 457
Other .................................................................. 211 144
------- -------
TOTAL OTHER ASSETS ..................................................... 7,094 7,196
------- -------
TOTAL ASSETS ............................................................... $78,963 $77,700
======= =======
See accompanying notes.
4
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (continued)
(In thousands, except share amounts)
MARCH 31, DECEMBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2004 2003
------------------------------------ ---- ----
(Unaudited)
CURRENT LIABILITIES
Notes payable ............................................................ $ 173 $ 906
Accounts payable ......................................................... 4,767 2,785
Accrued payroll, related taxes, and withholdings ......................... 6,025 4,692
Accrued expenses ......................................................... 1,033 1,471
Accrued income taxes ..................................................... 827 922
Deferred revenue ......................................................... 2,059 746
------- -------
TOTAL CURRENT LIABILITIES ................................................ 14,884 11,522
LONG-TERM LIABILITIES ........................................................ 348 408
REDEEMABLE CONVERTIBLE PREFERRED STOCK, 5,000,000 shares authorized, 689,656
shares issued and outstanding; liquidation preference of $5,000 at
March 31, 2004 and December 31, 2003 .................................... 5,000 5,000
SHAREHOLDERS' EQUITY
Common stock, par value $0.01, 45,000,000 shares authorized, 8,513,800 and
8,817,265 shares issued and outstanding at
March 31, 2004 and December 31, 2003, respectively .................... 85 88
Additional paid-in capital ............................................... 57,409 59,932
Retained earnings ........................................................ 692 68
Accumulated other comprehensive income -- cumulative foreign
currency translation adjustment ....................................... 545 682
------- -------
TOTAL SHAREHOLDERS' EQUITY ............................................... 58,731 60,770
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................... $78,963 $77,700
======= =======
See accompanying notes.
5
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
---- ----
OPERATING ACTIVITIES
Net income ..................................................... $ 624 $ 59
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ............................ 1,044 1,640
Non-cash expense related to stock options and common stock
issued to 401(k) plan and directors .................. 74 28
Other .................................................... 15 667
Changes in current assets and liabilities ................ 3,296 (2,590)
Changes in long-term assets and liabilities .............. (29) (20)
------- -------
Net cash provided by (used in) operating activities ......... 5,024 (216)
------- -------
INVESTING ACTIVITIES
Purchase of property, equipment, and software .................. (564) (986)
Cash paid for acquisition ...................................... (201) --
Purchase of marketable securities available for sale ........... -- (152)
Other .......................................................... -- 63
------- -------
Net cash used in investing activities ....................... (765) (1,075)
------- -------
FINANCING ACTIVITIES
Proceeds from issuance of common stock ......................... 144 105
Payments on long-term borrowings ............................... (715) (194)
Purchase of Company common stock ............................... (2,744) --
------- -------
Net cash used in financing activities ....................... (3,315) (89)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS ....... 6 189
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................... 950 (1,191)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................... 35,195 39,435
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ......................... $36,145 $38,244
======= =======
See accompanying notes.
6
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared by TechTeam Global, Inc. ("TechTeam" or the "Company" or "We") in
accordance with accounting principles generally accepted in the United States
for interim financial information and the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included, and
such adjustments are of a normal recurring nature. Operating results for the
three months ended March 31, 2004 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2004. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2003.
Certain reclassifications have been made to the 2003 financial statements in
order to conform to the 2004 financial statement presentation.
NOTE 2 -- EARNINGS PER SHARE
Earnings per share is computed using the weighted average number of common
shares and common share equivalents outstanding. Common share equivalents
consist of stock options and convertible preferred stock.
The weighted average number of diluted shares fell from 10,065,916 at December
31, 2003 to 9,579,635 at March 31, 2004 primarily due to Company common shares
repurchased during the first quarter of 2004 under the Company's stock
repurchase program.
During the first quarter of 2004 and 2003, 360,000 and 645,477 stock options,
respectively, were excluded from the computation of diluted earnings per share
because the options' exercise prices were higher than the average market price
of the common shares during the respective period.
NOTE 3 -- COMPREHENSIVE INCOME
Comprehensive income consists of net income and foreign currency translation
adjustments. A summary of comprehensive income is as follows:
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
---- ----
(In thousands)
COMPREHENSIVE INCOME
Net income ............................................ $ 624 $ 59
Other comprehensive income --
Foreign currency translation adjustment, net of tax (137) 189
----- -----
Comprehensive income .................................. $ 487 $ 248
===== =====
7
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 4 -- INCOME TAXES
The consolidated effective tax rate of 46% 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.
NOTE 5 -- STOCK-BASED COMPENSATION
We account for stock-based compensation awards granted to employees using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations. The effect on net income and earnings per share had
compensation costs been recognized based on the fair value method prescribed by
SFAS No. 123, "Accounting for Stock-Based Compensation," is as follows:
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
---- ----
(In thousands)
Reported net income ........................................ $ 624 $ 59
Add -- total stock-based compensation expense included
in reported net income, net of tax ..................... -- 4
Deduct -- total stock-based compensation expense determined
under the fair value method for all awards, net of tax.. (240) (209)
------- -------
Pro forma net income (loss) ................................ $ 384 $ (146)
======= =======
Basic earnings (loss) per share:
As reported ............................................ $ 0.07 $ 0.01
Pro forma .............................................. $ 0.04 $ (0.01)
Diluted earnings (loss) per share:
As reported ............................................ $ 0.07 $ 0.01
Pro forma .............................................. $ 0.04 $ (0.01)
NOTE 6 -- STOCK REPURCHASE PROGRAM
In February 2004, we announced a new stock repurchase program to repurchase up
to 1,000,000 shares of the Company's common stock. Under this program, we
purchased 350,000 shares of our common stock from a director of the Company and
his immediate family for $7.84 per share, inclusive of sales commission expense,
during the first quarter of 2004.
NOTE 7 -- SEGMENT REPORTING
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or decision-making group, in deciding how to
allocate resources and in assessing performance. Our chief operating
decision-making group is the Senior Management Committee, which is comprised of
the President and the lead executives of each of our functional divisions. The
operating segments are managed separately because each operating segment
represents a strategic business unit that offers different services.
8
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 7 -- SEGMENT REPORTING (continued)
Our reportable operating segments include corporate help desk services, systems
integration, technical staffing, and training programs (collectively referred to
as corporate services) and leasing operations.
CORPORATE HELP DESK SERVICES -- this segment provides corporations and
governments with around-the-clock (24x7x365) technical and customer
support for their end-users and other constituencies. We support the full
range of a client's information technology ("IT"), client service, and
business process infrastructure. We also provide technical support to
customers of our client's products and software.
SYSTEMS INTEGRATION -- this segment provides IT infrastructure (personal
computers, printers, phone systems, networks, servers, switches, etc.)
support through systems integration, technology deployment, and
implementation services from project planning and maintenance to
full-scale network server and workstation installations. We offer a wide
range of information technology services for the customer, ranging from
technology consulting to desk-side support to network monitoring. We also
provide full-service IT staff and consulting services to companies to help
manage their IT infrastructure.
TECHNICAL STAFFING -- this segment maintains a staff of trained technical
personnel, which we place at our clients' facilities to provide technical
support services including help desk technicians, software developers, and
network support.
TRAINING PROGRAMS -- this segment provides custom training and
documentation solutions that include computer-based training, distance
learning, course catalogs, registration, instructional design consultants,
customized course materials, certified trainers, evaluation options,
desk-side tutorials, and custom reports. We provide customized training
programs for many of our customers' proprietary applications.
LEASING OPERATIONS -- this segment previously wrote leases for computer,
telecommunications, and other types of capital equipment. Effective March
31, 2000, we ceased looking for new leasing opportunities and are
currently running out our lease portfolio.
The accounting policies of the operating segments are the same as those
described in Note 1 to the Company's consolidated financial statements contained
in the Company's Annual Report on Form 10-K for the year ended December 31,
2003. We evaluate segment performance based on segment gross profit.
Financial information for our operating segments is as follows:
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
---- ----
(In thousands)
REVENUE
Corporate services:
Corporate help desk services.............................. $ 19,039 $ 16,009
Systems integration....................................... 8,962 2,138
Technical staffing........................................ 2,029 2,366
Training programs......................................... 135 218
---------- ----------
Total corporate services...................................... 30,165 20,731
Leasing operations............................................ 105 1,032
---------- ----------
Total revenue................................................. $ 30,270 $ 21,763
========== ==========
9
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 7 -- SEGMENT REPORTING (continued)
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
---- ----
(In thousands)
GROSS PROFIT (LOSS)
Corporate services:
Corporate help desk services.............................. $ 4,943 $ 3,595
Systems integration....................................... 1,810 557
Technical staffing........................................ 390 499
Training programs......................................... 15 39
---------- ----------
Total corporate services...................................... 7,158 4,690
Leasing operations............................................ (5) (31)
---------- ----------
Total gross profit............................................ 7,153 4,659
Selling, general, and administrative expense.............. (5,963) (4,655)
Interest income, net...................................... 165 209
Foreign currency transaction gain (loss).................. (199) 52
---------- ----------
Income before income taxes.................................... $ 1,156 $ 265
========== ==========
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 MARCH 31,
----------------------------
2004 2003
---- ----
(In thousands)
REVENUE
United States................................................. $ 21,523 $ 16,097
Europe:
Belgium................................................... 5,136 3,365
United Kingdom............................................ 1,516 1,313
Other..................................................... 2,095 988
------------- -------------
Total Europe.................................................. 8,747 5,666
------------- -------------
Total revenue................................................. $ 30,270 $ 21,763
============= =============
We provide corporate services for major companies on an international scale.
Revenue from Ford Motor Company comprised 40.1% and 53.4% of total Company
revenue for the three months ended March 31, 2004 and 2003, respectively.
Revenue from DaimlerChrysler comprised 9.4% and 15.4% of total Company revenue
for the three months ended March 31, 2004 and 2003, respectively. At March 31,
2004 and December 31, 2003, aggregate amounts due from these two customers
accounted for 44.5% and 53.4% of total accounts receivable, respectively.
10
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 8 -- CONTINGENCIES
DIGITAL SUPPORT CORPORATION:
Digital Support Corporation ("DSC") provides services to the Air National Guard
and other departments within the Department of Defense ("DoD"). A Facility
Security Clearance ("FSC") is required as a condition for DSC to perform its
services for the DoD. As the acquiring entity, TechTeam also needs to obtain an
FSC. We have applied for an FSC, but as of the date of the filing of this
document, we have not received a response from the DoD. It is reasonably
possible that we will not be deemed eligible for an FSC due to foreign
ownership, control or influence of the Company; specifically, the beneficial
ownership of over 5% of our capital stock by ChrysCapital II, LLC, a Mauritius
entity ("ChrysCapital"), and ChrysCapital's right to appoint a member of our
Board of Directors. If we are not able to receive an FSC, we will be required to
negate the foreign ownership, control, or influence. We have applied to the DoD
for a Security Control Agreement ("SCA") between DSC and the DoD in order to
negate the foreign interest. The SCA, if approved, would negate the foreign
interest without affecting TechTeam's ability to integrate DSC into the TechTeam
group of companies.
LEGAL PROCEEDINGS:
The Company is a party to various legal proceedings that are routine and
incidental to its business. Although the consequences of these proceedings are
not presently determinable, in the opinion of management, they will not have a
material adverse affect on our liquidity, financial condition, or results of
operations, although no assurances can be given in this regard.
NOTE 9 -- PRO FORMA INFORMATION
TechTeam acquired 100% of the outstanding capital stock of DSC on December 31,
2003. The unaudited pro forma condensed consolidated results of operations for
the three months ended March 31, 2003 are presented below as though DSC had been
acquired as of January 1, 2003.
THREE MONTHS
ENDED
MARCH 31,
2003
----
(In thousands)
Revenue
As reported.............................................. $ 21,763
Pro forma................................................ $ 26,129
Net income
As reported.............................................. $ 59
Pro forma................................................ $ 224
Basic and diluted earnings per share
As reported.............................................. $ 0.01
Pro forma................................................ $ 0.02
11
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 or 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
As an IT and business process support services provider, we provide our
customers with assistance in designing, implementing, managing, and maintaining
their IT infrastructure and computer systems through our provision of technical
help desk services, systems integration, technical staffing, professional
services, and training programs.
Our 2004 results to date reflect the early realization of certain operating
efficiencies from initiatives implemented in 2003 and gradually improving global
and domestic economies. However, we remain cautiously optimistic about
indicators of improving economies insofar as they relate to our future
expectations. During 2003, we also explored the advantages and disadvantages of
establishing an "offshore" presence in various countries given the increasing
prevalence of "offshore" help desk service providers and the need to improve
operating performance to maintain our competitiveness. We concluded that
establishing operations in Romania presented the best opportunity for increasing
our operating performance because (1) the technical support personnel in Romania
have established and proven skills, (2) Romanians can provide support services
in the major Western European languages, (3) developing a blended solution with
our Belgian operation would provide operational efficiencies, thereby improving
the gross margin of our existing business, and (4) the cost of conducting
business in Romania was comparable to other possible offshore locations we
explored. Our Romanian call center began providing support services in the
French, English, Spanish, Italian, and German languages in April 2004.
As part of our long-term strategic plan, we are also committed to further
expanding our footprint in the IT systems integration sector. We believe the
further development of infrastructure support services is an important aspect of
our sales strategy as it provides services that have a shorter sales cycle than
help desk services. In December 2003, we purchased Digital Support Corporation
("DSC"), a provider of diversified information technology services and
solutions, including network infrastructure, information assurance, enterprise
application, healthcare technology, systems integration, and hardware services
and solutions to various governmental and commercial customers. DSC made a
positive earnings contribution to TechTeam during the three months ended March
31, 2004 as discussed below.
12
Total revenue grew 39.1% to $30.3 million for the three months ended March 31,
2004, from $21.8 million for the comparable period in 2003. Excluding revenue
contributed by DSC, revenue grew 7.6% to $23.4 million for the three months
ended March 31, 2004, from the comparable period in 2003. We achieved 45.5%
revenue growth from corporate services (total Company revenue less revenue from
leasing operations) to $30.2 million for the three months ended March 31, 2004,
from $20.7 million for the comparable period in 2003. Excluding revenue
contributed by DSC, revenue from corporate services increased 12.5% to $23.3
million for the three months ended March 31, 2004, from the comparable period in
2003.
Gross profit improved 53.5% to $7.15 million for the three months ended March
31, 2004, from $4.66 million for the comparable period in 2003. Excluding the
gross profit contributed by DSC, gross profit improved 26.5% to $5.89 million
for the three months ended March 31, 2004, from the comparable period in 2003.
The Company's gross margin (gross profit expressed as a percentage of revenue)
improved to 23.6% for the three months ended March 31, 2004, from 21.4% for the
comparable period in 2003 and from 18.3% for the three months ended December 31,
2003. Excluding the results contributed from DSC, the Company's gross margin
improved to 25.2% for the three months ended March 31, 2004. As more fully
discussed below, the improvement in gross margin is primarily due to realization
of the aforementioned operational efficiencies, increased business with new and
existing customers, and the wind down of our leasing operations, which had an
adverse effect on our gross margin in 2003.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO MARCH 31, 2003
THREE MONTHS ENDED MARCH 31,
---------------------------- INCREASE %
2004 2003 (DECREASE) CHANGE
---- ---- ---------- ------
(In thousands)
REVENUE
Corporate services:
Corporate help desk services.................. $ 19,039 $ 16,009 $ 3,030 18.9%
Systems integration........................... 8,962 2,138 6,824 319.2%
Technical staffing............................ 2,029 2,366 (337) (14.2)%
Training programs............................. 135 218 (83) (38.1)%
------------- ------------- -------------
Total corporate services.......................... 30,165 20,731 9,434 45.5%
Leasing operations................................ 105 1,032 (927) (89.8)%
------------- ------------- -------------
Total revenue..................................... $ 30,270 $ 21,763 $ 8,507 39.1%
============= ============= =============
Revenue from corporate help desk services increased 18.9% to $19.0 million for
the three months ended March 31, 2004, from $16.0 million for the comparable
period in 2003, primarily due to additional business from existing customers in
Europe and the strengthening of the euro and British pound sterling relative to
the U.S. dollar. Revenue from systems integration services increased 319.2% to
$8.96 million for the three months ended March 31, 2004, from $2.14 million for
the comparable period in 2003, due to our acquisition of DSC. Excluding revenue
contributed by DSC, systems integration revenue slightly decreased 0.9% to $2.12
million for the three months ended March 31, 2004, from the comparable period in
2003. Revenue from technical staffing services decreased 14.2% to $2.03 million
for the three months ended March 31, 2004, from $2.37 million for the comparable
period in 2003, primarily due to price concessions granted to Ford Motor Company
("Ford"), our largest customer, during the second half of 2003 and staffing
reductions, which were only partially offset by additional business received
from Ford in Europe.
Revenue from leasing operations decreased 89.8% to $105,000 for the three months
ended March 31, 2004, from $1.03 million for the comparable period in 2003. The
decline in leasing operations revenue was the result of our decision in March
2000 to discontinue actively seeking new leasing business and to commence the
wind down of our lease portfolio. The trend of reduced revenue from our leasing
operations will continue over the next year depending on the size and duration
of renewals.
13
Revenue generated in the United States increased 33.7% to $21.5 million for the
three months ended March 31, 2004, from $16.1 million for the comparable period
in 2003, due to our acquisition of DSC. Excluding revenue contributed by DSC,
revenue generated in the United States decreased 8.8% to $14.7 million for the
three months ended March 31, 2004, from the comparable period in 2003, primarily
due to price concessions granted to existing customers in second half of 2003,
the maturation of help desks leading to reduced volumes, and a decrease in
revenue from our leasing operations to $105,000 from $1.03 million. Revenue
generated in Europe increased 54.4% to $8.75 million for the three months ended
March 31, 2004, from $5.67 million for the comparable period in 2003, primarily
due to growth in Belgium and the strengthening of the euro and British pound
sterling relative to the U.S. dollar. Revenue from our Belgian operation
increased 52.6% to $5.14 million for the three months ended March 31, 2004, from
$3.37 million for the comparable period in 2003, primarily due to growth in our
existing customer base and the strengthening of the euro relative to the U.S.
dollar. The strengthening of the euro and pound sterling relative to the U.S.
dollar positively impacted revenue in Europe by approximately $1.00 million for
the three months ended March 31, 2004, relative to the comparable period in
2003.
THREE MONTHS ENDED MARCH 31,
---------------------------- INCREASE %
2004 2003 (DECREASE) CHANGE
---- ---- ---------- ------
(In thousands)
GROSS PROFIT
Corporate services:
Corporate help desk services.................. $ 4,943 $ 3,595 $ 1,348 37.5%
Systems integration........................... 1,810 557 1,253 225.0%
Technical staffing............................ 390 499 (109) (21.8)%
Training programs............................. 15 39 (24) (61.5)%
------------- ------------- -------------
Total corporate services.......................... 7,158 4,690 2,468 52.6%
Leasing operations................................ (5) (31) 26 83.9%
------------- ------------- -------------
Total gross profit................................ $ 7,153 $ 4,659 $ 2,494 53.5%
============= ============= =============
Gross profit from corporate help desk services increased 37.5% to $4.94 million
for the three months ended March 31, 2004, from $3.60 million for the comparable
period in 2003. Gross margin from corporate help desk services increased to
26.0% for the three months ended March 31, 2004, from 22.5% for the comparable
period in 2003. The increase in gross profit dollars and margin was primarily
due to realization of the aforementioned operational efficiencies from
re-aligning our cost structure and expanding our help desk capabilities in
Belgium, and increased business with new and existing customers. Gross profit
from systems integration services increased 225.0% to $1.81 million for the
three months ended March 31, 2004, from $557,000 for the comparable period in
2003. Gross margin from systems integration services decreased to 20.2% for the
three months ended March 31, 2004, from 26.1% for the comparable period in 2003.
The increase in gross profit dollars and decrease in gross margin was due to our
acquisition of DSC. Excluding the gross profit contributed by DSC, gross profit
slightly decreased 1.1% to $551,000 and gross margin decreased to 26.0% for the
three months ended March 31, 2004, from the comparable period in 2003. Gross
profit and gross margin from DSC were $1.26 million and 18.4%, respectively, for
the three months ended March 31, 2004. DSC's gross margin excluding $1.55
million of low-margin equipment sales was 22.6% for the three months ended March
31, 2004. DSC's revenue from equipment sales will fluctuate from period to
period depending on the nature of DSC's contracts. Gross profit from technical
staffing decreased 21.8% to $390,000 for the three months ended March 31, 2004,
from $499,000 for the comparable period in 2003. Gross margin from technical
staffing decreased to 19.2% for the three months ended March 31, 2004, from
21.1% for the comparable period in 2003. The decrease in gross profit dollars
and margin was primarily due to price concessions granted to Ford during the
second half of 2003 and staffing reductions, which were only partially offset by
additional business received from Ford in Europe.
14
THREE MONTHS ENDED MARCH 31,
---------------------------- INCREASE %
2004 2003 (DECREASE) CHANGE
---- ---- ---------- ------
(In thousands)
OPERATING EXPENSES AND OTHER
Selling, general, and administrative expense...... $ 5,963 $ 4,655 $ 1,308 28.1%
Net interest income............................... $ 165 $ 209 $ (44) (21.1)%
Foreign currency transaction gain (loss).......... $ (199) $ 52 $ (251) (482.7)%
Income tax provision.............................. $ 532 $ 206 $ 326 158.2%
Selling, general, and administrative expense increased 28.1% to $5.96 million,
or 19.7% of total revenue, for the three months ended March 31, 2004, from $4.66
million, or 21.4% of total revenue, for the comparable period in 2003, primarily
due to our acquisition of DSC. Excluding the revenue and expenses contributed by
DSC, selling, general, and administrative expense was $5.07 million, or 21.6% of
total revenue, for the three months ended March 31, 2004. Expenses have
increased to support revenue growth and expansion in Romania, but expenses as a
percentage of revenue have remained stable due to internal cost containment
efforts in all areas of the Company. Operating expenses incurred in Romania for
the three months ended March 31, 2004 totaled $232,000 and were consistent with
expectations.
Net interest income decreased to $165,000 for the three months ended March 31,
2004, from $209,000 for the comparable period in 2003, due to higher average
cash balances maintained in 2003.
Foreign currency transaction gain (loss) decreased to a loss of $(199,000) for
the three months ended March 31, 2004, from a gain of $52,000 for the comparable
period in 2003, primarily due to the U.S. dollar strengthening since December
31, 2003 relative to the euro and British pound sterling whereas the U.S. dollar
weakened relative to the euro and pound sterling in the three months ended March
31, 2003. In addition, our European subsidiaries had higher average liabilities
denominated in currencies other than the local currency, principally in U.S.
dollars, during the three months ended March 31, 2004 as compared to the
comparable period in 2003.
The consolidated effective tax rate of 46% 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $36.1 million at March 31, 2004, as compared to
$35.2 million at December 31, 2003. During the three months ended March 31,
2004, cash and cash equivalents increased $950,000 primarily due to $5.02
million in cash provided by operations offset by $2.74 million in cash used to
repurchase 350,000 shares of our common stock under our stock repurchase
program, $201,000 in cash used to pay expenses related to our acquisition of
DSC, $564,000 in cash used for capital expenditures, and $715,000 in payments on
long-term debt. Our payments on long-term debt include repayment of a $647,000
note payable acquired in our acquisition of DSC.
A significant source of operating cash flow for the three months ended March 31,
2004 resulted from increased working capital as accounts payable and accrued
liabilities increased $4.30 million whereas current assets only increased $1.00
million. Additional sources of operating cash flow for the three months ended
March 31, 2004 primarily included net income of $624,000 and depreciation and
amortization expense of $1.04 million.
In February 2004, we announced a new stock repurchase program to repurchase up
to 1,000,000 shares of the Company's common stock. Under this program, we
purchased 350,000 shares of our common stock from a director of the Company and
his immediate family for $7.84 per share, inclusive of sales commission expense,
during the first quarter of 2004.
15
Long-term cash requirements, other than for normal operating expenses, are
anticipated for the continued expansion in Europe, enhancements of existing
technologies, possible repurchases of our common stock, additional consideration
that is payable to the selling shareholders of DSC if specific performance
conditions and operating targets are met in 2004 and 2005, and the possible
acquisition of businesses complementary to the Company's existing business. We
believe that positive cash flows from operations, together with existing cash
balances, will continue to be sufficient to meet our ongoing requirements for
working capital, capital expenditures, and possible stock repurchases for the
next twelve months and foreseeable future. We have historically not paid
dividends and intend to continue our policy of retaining earnings to finance
future growth.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no changes in the selection and application of critical
accounting policies and estimates disclosed in Item 7 of our Annual Report on
Form 10-K for the year ended December 31, 2003.
FACTORS INFLUENCING FUTURE RESULTS
Refer to Item 7 of our Annual Report on Form 10-K for the year ended December
31, 2003.
ITEM 4 -- CONTROLS AND PROCEDURES
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected.
During the first quarter of 2004, the Company converted its accounting and
financial reporting system in Europe, with the exception of Romania, to a
pre-existing common information technology platform that had been deployed in
the United States in prior periods. There have been no significant changes in
the Company's internal controls or in other factors that could significantly
affect internal controls subsequent to December 31, 2003. As of March 31, 2004,
an evaluation was performed under the supervision and with the participation of
the Company's management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operations of the
Company's disclosure controls and procedures. Based upon that evaluation, the
Company's management, including the CEO and CFO, concluded that the Company's
disclosure controls and procedures were effective as of March 31, 2004.
16
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 -- CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
The Company purchased shares of its common stock during the three months ended
March 31, 2004 as follows:
TOTAL NUMBER MAXIMUM
OF SHARES NUMBER OF
PURCHASED SHARES THAT
AS PART OF MAY YET BE
TOTAL NUMBER AVERAGE PUBLICLY PURCHASED
OF SHARES PRICE PAID ANNOUNCED UNDER THE
PERIOD PURCHASED PER SHARE PROGRAMS PROGRAMS
------ --------- --------- -------- --------
January 1, 2004 to January 31, 2004 -- -- -- --
February 1, 2004 to February 29, 2004 350,000 $7.84 350,000 650,000
March 1, 2004 to March 31, 2004 -- -- -- 650,000
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
(i) Announcement of the acquisition of Digital Support Corporation on
December 31, 2003.
(ii) Filing of the Stock Purchase Agreement related to our acquisition
Digital Support Corporation on December 31, 2003.
(iii) Announcement of a new stock repurchase program.
(iv) Announcement on February 26, 2004 of the Company's earnings for 2003
and the three months ended December 31, 2003.
(v) Announcement on February 26, 2004 of the Company's purchase of
350,000 shares of Company common stock from a director of the
Company and his immediate family.
(vi) Filing of the financial statements of a business acquired related to
our acquisition Digital Support Corporation on December 31, 2003.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: May 10, 2004 By: /s/William F. Coyro, Jr.
-----------------------------------
William F. Coyro, Jr.
President and Chief
Executive Officer
Date: May 10, 2004 By: /s/ David W. Morgan
-----------------------------------
David W. Morgan
Vice President, Chief Financial
Officer and Treasurer
18
EXHIBIT INDEX
Exhibit No Description
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002