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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2006
Commission File Number: 0-16284
TECHTEAM GLOBAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 38-2774613
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
27335 WEST 11 MILE ROAD, SOUTHFIELD, MI 48033
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 357-2866
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $.01 par value NASDAQ(R) Global Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the Registrant's common stock held by
non-affiliates of the registrant as of June 30, 2006 was approximately
$82,182,125 (based on the June 30, 2006 closing sales price of $9.15 of the
Registrant's common stock, as reported on the NASDAQ(R) Global Market). For the
sole purpose of making this calculation, the term "non-affiliates" has been
interpreted to exclude directors and executive officers of the Company. Such
interpretation is not intended to be, and should not be construed to be, an
admission by TechTeam Global, Inc. or such directors or executive officers of
the Company that such directors and executive officers of the Company are
"affiliates" of TechTeam Global, Inc., as that term is defined under the
Securities Exchange Act of 1934.
The number of shares outstanding of the registrant's common stock as of March 1,
2007 was 10,414,176.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement, to be filed on or
before April 30, 2007, are incorporated by reference into Items 10, 11, 12, 13
and 14 of Part III of this report.
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TECHTEAM GLOBAL, INC.
FORM 10-K
TABLE OF CONTENTS
PAGE
NUMBER
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PART I
Item 1 Business 2
Item 1A Risk Factors 9
Item 1B Unresolved Staff Comments 17
Item 2 Properties 17
Item 3 Legal Proceedings 18
Item 4 Submission of Matters to a Vote of Security Holders 18
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters 19
Item 6 Selected Financial Data 21
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 22
Item 7A Quantitative and Qualitative Disclosures about Market Risk 37
Item 8 Financial Statements and Supplementary Data 38
Item 9 Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure 71
Item 9A Controls and Procedures 71
Item 9B Other Information 71
PART III
Item 10 Directors, Executive Officers and Corporate Governance 72
Item 11 Executive Compensation 72
Item 12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 73
Item 13 Certain Relationships and Related Transactions, and Director
Independence 73
Item 14 Principal Accountant Fees and Services 73
PART IV
Item 15 Exhibits and Financial Statement Schedules 74
SIGNATURES 77
FINANCIAL STATEMENT SCHEDULE 78
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, including "Item 7 -- Management's Discussion
and Analysis of Financial Condition and Results of Operations," contains
forward-looking statements that involve risks and uncertainties, as well as
assumptions that, if they never materialize or prove incorrect, could cause the
results of TechTeam Global, Inc. and its consolidated subsidiaries ("TechTeam")
to differ materially from those expressed or implied by such forward-looking
statements. All statements other than statements of historical fact are
statements that could be deemed forward-looking statements, including any
projections of revenue, gross margin, expenses, earnings or losses from
operations, synergies or other financial items; any statements of the plans,
strategies and objectives of management for future operations; any statements
concerning developments or performance relating to our services; any statements
regarding future economic conditions or performance; any statements of
expectation or belief; and any statements of assumptions underlying any of the
foregoing. The risks, uncertainties and assumptions referred to above include
the performance of contracts by suppliers, customers and partners; employee
management issues; the difficulty of aligning expense levels with revenue
changes; complexities of global political and economic developments; and other
risks that are described herein, including but not limited to the items
discussed in "Item 1A -- Risk Factors" of this report, and that are otherwise
described from time to time in TechTeam's reports filed with the United States
Securities and Exchange Commission. TechTeam assumes no obligation and does not
intend to update these forward-looking statements.
PART I
ITEM 1. BUSINESS
GENERAL
TECHTEAM GLOBAL, INC. (including its consolidated subsidiaries, "TechTeam," the
"Company" or "we") is a global provider of information technology ("IT"),
enterprise support and business process outsourcing ("BPO") services to Fortune
1000 companies, government entities, multinational companies, product and
service providers, and small and medium-sized companies. Our periodic reports
and current reports filed with the United States ("U.S.") Securities and
Exchange Commission are available free of charge on our Web site,
www.techteam.com.
TechTeam Global, Inc. was incorporated under the laws of the State of Delaware
in 1987. Our common stock is traded on the NASDAQ(R) Global Market under the
symbol "TEAM." Our client base includes Ford Motor Company, Canon Europe NV,
Deere & Company, MICROS, Inc., United Parcel Service, Essilor International,
Boehringer Ingelheim, Phillip Morris International, DaimlerChrysler AG and
Schering-Plough Research Institute, as well as U.S. Federal Government agencies
and local government entities, such as the U.S. Air National Guard, National
Institutes of Health, Department of Defense, Department of Homeland Security,
Immigration and Naturalization Service, and Department of Health and Human
Services.
Our subsidiaries are: TechTeam Global NV/SA (Brussels, Belgium), with its
subsidiary TechTeam A.N.E. NV/SA (Gent, Belgium); TechTeam Global Ltd. (United
Kingdom); TechTeam Global GmbH (Germany); TechTeam Global AB (Sweden), with its
subsidiary TechTeam SQM AB (Sweden); S.C. TechTeam Global SRL (Bucharest,
Romania); TechTeam Akela SRL (Bucharest, Romania); TechTeam Global Sp. z o.o.
(Poland); TechTeam Government Solutions, Inc. (formerly known as Digital Support
Corporation, Chantilly, Virginia), with its subsidiary Sytel, Inc., (Bethesda,
Maryland); TechTeam Cyntergy, L.L.C. and TechTeam Capital Group, L.L.C.
(Southfield, Michigan).
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SERVICES AND INFORMATION ABOUT OPERATING SEGMENTS
We provide services to our customers in four operating segments -- IT
Outsourcing Services, IT Consulting and Systems Integration, Government
Technology Services, and Other Services. IT Outsourcing Services, IT Consulting
and Systems Integration, and Other Services comprise our commercial business
segments and Government Technology Services is our government business segment.
Over the past five years, we have strategically strengthened our service
offerings through a combination of organic growth, acquisitions and enhancements
to our business model and intend to continue this strategy of strengthening and
growing our core service offerings.
Information with respect to each of our segments is included in "Item 7 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in Note 12 of the Notes to Consolidated Financial Statements
included in "Item 8 -- Financial Statements and Supplementary Data."
1. IT OUTSOURCING SERVICES
Our IT Outsourcing Services segment provides help desk and infrastructure
support around-the-clock (24x7x365) for our clients, their end-users and other
constituencies. We maintain and support a full range of our clients' IT and
business process infrastructures from network environments to computing systems,
and from shrink-wrapped applications to advanced proprietary and acquired
application systems. We also provide technical support internationally and in
multiple languages for our customers' products in the marketplace. The two
primary elements of this business segment are Enterprise Support Services and
BPO Services, which are supported by a global IT outsourcing delivery model for
help desk services as discussed below.
Enterprise Support Services
Our enterprise support services are principally deployed using a "single point
of contact" ("SPOC") delivery model designed to enable our clients to
consolidate their incident resolution support functions into a centralized help
desk, thereby reducing costs by standardizing responses to incidents, reducing
unnecessary labor costs and reducing the number of incidents that need to be
escalated to a higher-level support function. Our help desk technicians are
trained in the client's IT infrastructure and applications to enable them to
diagnose and solve the end-user's problems and answer technical questions. We
then integrate other infrastructure support services into our delivery
including, but not limited to, desk side support, remote maintenance, asset
management, network monitoring and server maintenance.
By integrating these services with our help desk, we are able to effectively and
efficiently provide standardized infrastructure support services to our
customers. We generally provide these services on a managed service basis, with
the customer paying for the service on a per-incident, per-seat or volume basis.
Our performance is generally measured through service level agreements
negotiated with our customers.
We are focused on expanding the markets for our enterprise support service
model. Historically, we have provided these services to large enterprises. For
example, under the Ford Motor Company ("Ford") Global SPOC Program ("SPOC
Program"), we provide a single point of contact help desk for Ford that
integrates desk side support and server maintenance. During 2006 and the first
quarter of 2007, we began to provide enterprise support to new large enterprise
customers, including Phillip Morris International and Boehringer Ingelheim U.K.
Once we have begun to provide service to a customer, we are regularly able to
expand the scope of our services to that customer because an increased volume of
business allows us to obtain a higher utilization of resources and allows us to
obtain a lower cost that can be passed onto the customer. We believe that we
will continue to see growth in our enterprise support for large businesses.
We also provide enterprise support services for small and medium-sized
businesses. Our enterprise support services provide these businesses a more
economical and higher level of help desk, desk side support and network
management services than they can provide themselves internally. Our flexible
solution design and pricing models enable these businesses to select the level
of support their organization requires, whether from dedicated or shared
resources. As part of our service offering, we initiated a business relationship
with CA, Inc. (formerly known as Computer Associates) under which we license
CA's suite of tools to provide Information Technology Infrastructure Library
("ITIL")-based software and services to our customers. With this arrangement,
our customers are able to obtain our services that leverage the use of CA
technology without purchasing the software
3
from CA. We believe the combination of our integrated infrastructure support and
CA technology provides a unique service solution to the small and medium-sized
business market.
We are strategically expanding the scope of services provided within our
enterprise support business model. In order to enhance the value-added set of
services within our model, we are increasing our expertise in IT services
management through the implementation of the comprehensive set of best practices
set forth in the ITIL, which has been integrated into the ISO standards. In
addition to incident management, our current core service offering, we are
expanding our services to include problem management, change management,
configuration management, availability management and capacity management;
thereby increasing the value of our services to our customers.
BPO Services
Our BPO services provide our clients with a centralized multilingual help desk.
Our clients primarily outsource the technical support aspect of their customer
service business process to us. We provide technical, "post-sales" support for
our clients' products, services and software. For example, we provide technical
product support to European consumers of Canon products (cameras, printers,
etc.). We also provide support for our client's customer-facing applications,
such as United Parcel Service's Web-based portal. Finally, we provide limited
non-technical customer service support for our clients, such as customer
enrollments and marketing promotion support. Our BPO service clients are
primarily centered in Europe.
Global IT Outsourcing Delivery Model
Our help desk services for enterprise support and BPO services are delivered
from our facilities in the United States (Dearborn and Southfield, Michigan; and
Davenport, Iowa), our facilities in Europe (Brussels, Belgium; and Bucharest,
Romania), and from our customers' facilities. Utilizing a client-specific
solution that blends the advantages of each location, we are able to provide
cost-effective service in over 25 languages.
While most of our help desk business is performed as a dedicated desk for a
single client, a growing percentage of our support is provided through a shared
desk service offering, where our technicians provide concurrent support for more
than one client. In addition, we continue to expand our shared desk support
capability to provide IT help desk support bundled with other IT support
services and a shared BPO help desk. This shared service offering is provided
from our facilities in Southfield, Michigan; Davenport, Iowa; Brussels, Belgium;
and Bucharest, Romania.
Our IT Outsourcing Services business has become increasingly global. Several of
our customers are seeking our services in new countries and languages, and they
are sensitive to the price of our services. As a result, we are expanding our
global footprint.
In 2004, we established a multilingual help desk facility in Bucharest, Romania.
While we were one of the first help desk centers established in Bucharest, there
are now major businesses (including Accenture, Hewlett Packard and Microsoft)
vying for resources in the same labor market. We believe our Romanian operation
continues to provide us with the ability to manage, at a lower cost per
technician, the multiple variables that affect the pricing of a global delivery
multilingual help desk including, but not limited to: (a) language distribution,
(b) hours of operation and (c) technical skills.
We are exploring ways to enhance our ability to provide support in the languages
of the Asia Pacific region while lowering our total cost of labor. Accordingly,
during 2007, we anticipate that we will place help desk operations in Asia
Pacific that provide for multilingual capabilities and/or a lower total cost of
labor.
With an increasing number of our help desk sites deployed around the world, we
are increasingly dependent upon technology to assist in maximizing the overall
value and utilization of our technicians. We are in the process of upgrading our
phone switch technology globally to fully enable voice over internet protocol
(VoiP) and the dynamic routing of calls to the available international
resources. We will also be upgrading our workforce management software to allow
us to better optimize the scheduling of resources in light of the anticipated
volume of incidents from our customers. Due to these projects and our investment
in the CA technology noted earlier, we expect our capital expenditures to
increase 20%-30% in 2007, as compared to 2006.
4
3. IT CONSULTING AND SYSTEMS INTEGRATION
Within our IT Consulting and Systems Integration business segment, we provide
customers with IT infrastructure (such as personal computers, printers, phone
systems, networks, servers and switches) design, development, technology
deployment and implementation services, ranging from project planning and
implementation to full-scale network, server and workstation installations, and
maintenance. We offer customers a wide spectrum of IT services, ranging from
technology consulting, security, application integration and storage to
application development. We follow our implementation with a full range of
services ranging from maintenance, help desk and desk side support to network
monitoring in order to assist companies in managing their IT infrastructure. In
2005, we continued to expand our capabilities within this segment with the
addition of TechTeam Akela SRL, which provides application development,
migration, implementation and maintenance support services to clients in
Romania, France, the United Kingdom, Switzerland, Belgium, Italy, Sweden and the
United States.
Through our TechTeam Cyntergy, L.L.C. subsidiary, we offer deployment, technical
support and training services to companies in the hospitality, retail and food
service industries throughout the United States. TechTeam Cyntergy employees
provide on-site services to implement technology and train our customers'
personnel in the use of point-of-sale and property management software.
3. GOVERNMENT TECHNOLOGY SERVICES
Our Government Technology Services are delivered by TechTeam Government
Solutions, Inc. ("TTGSI") and its wholly-owned subsidiary, Sytel, Inc. The types
of IT support services provided in this business segment are similar to the
services offered in our other primary business segments, but are more heavily
focused on supporting the customer's IT network. We provide these services to
various departments and agencies of the U.S. Federal Government including, but
not limited to, the U.S. Air National Guard, National Institutes of Health,
Department of Defense, Department of Homeland Security, Immigration and
Naturalization Service, and Department of Health and Human Services, and to
local governmental entities in the United States (see information included in
"Risks Inherent in Government Technology Services" located in "Item 1A -- Risk
Factors").
Over the past year, the U.S. Federal Government IT services market has become
more difficult. Due to a variety of factors, including changes in the leadership
of the U.S. Congress and the expenditures necessary to support military
operations and the global war on terrorism, we expect a decrease in the total
amount of IT spending by the U.S. Federal Government for the foreseeable future.
At this time, except for the budgets of the Department of Defense and the
Department of Homeland Security whose budgets have been passed, the U.S. Federal
Government is expected to be funded in the 2007 fiscal year at the same levels
as it was in the 2006 fiscal year under a "continuing resolution." Accordingly,
the funds will likely not be available for the growth of some our projects that
we had earlier anticipated.
In light of these trends, we are focusing our new business development: (a) in
areas where we can utilize our expertise to serve the mission-critical IT needs
of our customers; (b) in further developing access to government-wide
acquisition contracting vehicles (framework contracts entered into by the
government without committing to any actual business with the contract holder)
in which we can then sell task-order-based contract opportunities; (c) in
strengthening our relationships with contractors with attractive contracting
vehicles; and (d) in finding opportunities where we can leverage our commercial
sector expertise in providing enterprise support services through a managed
service and thereby providing the customer with measurable cost savings.
The majority of our revenue from this business segment is earned through
long-term contracts through which we provide either managed network services for
a monthly fee or services on a time and materials basis. For our managed network
services customers, we provide complete life cycle support for a customer's IT
infrastructure ranging from their desktops to their data and voice networks. We
provide design, implementation, operation and maintenance (help desk and desk
side support) services. For example, TTGSI provides systems administration
support, network design, database administration, engineering support and other
IT technical support services to the U.S. Air National Guard in all 50 states
and four U.S. territories.
5
4. OTHER SERVICES
We also provide, on a limited basis, technical staffing services and learning
services. We provide on-site technical support services including help desk
technicians, software developers and network support technicians. We strive to
recruit a technically proficient employee base. We enhance our employees'
proficiency by providing access to technical training programs, which include
training in new technologies, advanced operating systems and sophisticated
applications such as Oracle. Most of our technical staffing placements are
long-term assignments.
We also provide custom training and documentation solutions that include a wide
spectrum of offerings, including computer-based training, distance learning,
course catalogs, registration, instructional design consultants, customized
course materials, certified trainers, evaluation options, desk side tutorials
and custom reports. We provide customized training programs for many proprietary
applications.
IMPACT OF BUSINESS WITH MAJOR CLIENTS
We conduct business under multiple contracts with various entities within the
Ford organization and with various agencies and departments of the U.S. Federal
Government. Ford accounted for 26.4% of our total revenue in 2006, as compared
to 27.4% in 2005 and 37.4% in 2004. The U.S. Federal Government accounted for
24.9% of our total revenue in 2006, as compared to 30.0% in 2005 and 16.7% in
2004. No single agency or department of the U.S. Federal Government comprised
10% or greater of our total revenue for any of these three years.
Ford Motor Company
Our business with Ford consists of help desk and desk side services, distributed
server support, technical staffing, network management and a specific project
installing personal computers subcontracted through Dell Inc. Revenue generated
through our business with Ford decreased to $44.1 million in 2006, from $45.7
million in 2005 and $47.9 million in 2004.
Ford has announced a new business plan (the "Way Forward Plan") that will result
in the reduction of its North American salaried work force by approximately 33
percent, the equivalent of about 14,000 positions, 4,000 of which occurred in
2006 and additional reductions occurred in February 2007.
Our largest contract with Ford is our SPOC Program, which is currently scheduled
to expire in November 2008. Under the SPOC Program, we provide a set of
infrastructure support services under specific service level metrics, and we
invoice Ford based upon the number of seats at Ford that we support. The number
of seats supported is determined bi-annually on December 1 and June 1 of each
year. If certain contractual conditions are met, Ford and TechTeam will have the
right during each six-month period to request one out-of-cycle seat adjustment.
Ford continues to seek cost savings on its total cost of IT infrastructure
support, and we continue to support Ford in finding ways to reduce its total
cost. Under the SPOC Program renewal in December 2005, we provided Ford with a
meaningful reduction in the price of our support through the redesign of our
services, the way our services were performed, and the service levels, but our
revenue from the SPOC Program remained relatively constant due to the expansion
of the SPOC Program into new parts of the Ford enterprise, such as Jaguar and
Land Rover. We believe this process will continue throughout 2007. Consequently,
while we will lose seats from areas in Ford where we currently provide service
under the SPOC Program, we anticipate successfully expanding our coverage of the
SPOC Program within Ford to largely offset the decline in revenue caused by the
decline in seats supported.
Although we cannot reliably predict the pace of Ford's restructuring plan or our
ability to expand our scope of work, we estimate that our total revenue from
Ford will decline approximately 4-7% in 2007 from 2006, without a material
change in the gross profit margin earned from the business. Moreover, we do not
believe that Ford's financial condition will otherwise affect our business with
Ford or the collectibility of our accounts receivable from Ford. However, any
failure to retain a significant amount of business with Ford, or bankruptcy
filing or other restructuring by Ford, would have a material adverse effect on
our operating results and liquidity.
6
U.S. Federal Government
We conduct business under multiple contracts with various agencies and
departments of the U.S. Federal Government. Revenue generated through our
business with the U.S. Federal Government decreased to $41.7 million in 2006,
from $50.0 million in 2005. Revenue from the U.S. Federal Government of $21.4
million in 2004 does not include revenue from Sytel, Inc., which we acquired on
January 3, 2005.
The U.S. Federal Government's fiscal year ends on September 30 of each year. It
is not uncommon for government agencies to award extra tasks or complete other
contract actions in the weeks before the end of the fiscal year in order to
avoid the loss of unexpended fiscal year funds. Moreover, in years when the U.S.
Federal Government does not complete its budget process before the end of its
fiscal year, government operations typically are funded pursuant to a
"continuing resolution" that authorizes agencies of the government to continue
to operate, but traditionally does not authorize new spending initiatives. When
the U.S. Federal Government operates pursuant to a continuing resolution, delays
can occur in procurement of products and services, and such delays can affect
our revenue, profit and cash flow during the period of delay.
Our recent contract award from the National Institutes of Health ("NIH"), Office
of Information Technology, contains an expansion of services and positions
beyond 2006 levels. At present, the U.S. Congress has only appropriated budgets
for the Department of Defense and Department of Homeland Security and has not
appropriated the budget for NIH. Therefore, we are not able to commence full
work on the expanded services and positions until such budget is appropriated by
Congress and signed by the President, or until NIH is able to reallocate current
funds to these positions, should it able to do so. As a result, we anticipate a
delay before we are able to generate our full revenue under the expanded portion
of this contract, but we will be able to perform at U.S. Federal Government
fiscal year 2006 funding levels under the congressionally approved continuing
resolution.
COMPETITION
In our commercial business, there are many companies that provide services
similar to ours, but no one company dominates our industry. We compete with
global IT outsourcing companies (such as IBM, EDS and Computer Science
Corporation), our potential customer's internal staff, and regional service
providers. The markets for our services have been under significant price
pressure as customers scrutinize their IT spending and globalization increases
the number of low-cost providers able to provide similar services. Our large
competitors typically provide a wide range of services through a global network
of service providers and have stronger brand recognition.
We compete with a strong combination of quality, attentiveness to customers'
needs, rapid responsiveness, competitive pricing, quality and consistently high
levels of client satisfaction. We provide best-in-class help desk services based
on price, experience and reputation in the industry, technological capabilities,
ISO quality practices, responsiveness to client needs and referrals from
existing clients.
In our government business, the industry is comprised of a large number of
enterprises ranging from small, niche-oriented companies to multi-billion dollar
corporations with a major presence throughout the U.S. Federal Government.
Because of the diverse requirements of U.S. Federal Government customers and the
highly competitive nature of large U.S. federal contracting initiatives,
corporations frequently form teams to pursue contract opportunities. Prime
contractors leading large proposal efforts select team members on the basis of
their relevant capabilities and experience particular to each opportunity. As a
result of these circumstances, companies that are competitors for one
opportunity may be team members for another opportunity.
We have been successful in ensuring our presence on government-wide contracting
vehicles and GSA Schedule contracts as either a prime contractor or
subcontractor. Competition then takes place at the task order level, where
knowledge of the customer and its procurement requirements and environment are
keys to winning the business. We are focusing attention on competing for work
under these contracts. Through the various contractual vehicles at our disposal,
as either a prime contractor or subcontractor, we have the ability to market our
services to many federal agencies. Our size in the market may be disadvantageous
because we are not a small or disadvantaged business, and we may be too small to
successfully compete as a prime contractor on many government-wide contracting
vehicles. However, as a result of our experience in providing services to
federal departments and agencies, we have first-hand knowledge of our customers
and their goals, problems and challenges. We believe this knowledge gives us a
competitive advantage in competing for tasks and positions us well for future
growth.
7
SALES AND MARKETING
Our sales and marketing objective is to leverage our expertise, multilingual
capabilities and global presence to develop long-term relationships with
existing and potential clients domestically and internationally. Our initiatives
are designed to build stronger brand identity within our current vertical
markets and the overall IT outsourcing marketplace. We believe that our client
base provides excellent opportunities for further marketing and cross selling of
our services. Our plans for increasing our visibility include market-focused
advertising, consultative personal visits with potential and existing clients,
participation in market specific trade shows and seminars, speaking engagements,
articles and white papers and our Web site. Further, we intend to invest in
establishing and growing our network of channel and alliance partners, such as
our relationship with CA, who are able to sell our services in a cooperative and
mutually beneficial way. Our sales force and account management team are focused
on both new customer acquisition and growth of business at our existing
accounts.
Within our Government Technology Services business segment, we are focusing our
new business development: (a) in areas where we can utilize our expertise to
serve the mission-critical IT needs of our customers; (b) in further developing
access to government-wide acquisition contracting vehicles (framework contracts
entered into by the government without committing to any actual business with
the contract holder) in which we can then sell task-order-based contract
opportunities; (c) in strengthening our relationships with contractors with
attractive contracting vehicles; and (d) in finding opportunities where we can
leverage our commercial sector expertise in providing enterprise support
services through a managed service and thereby providing the customer with
measurable cost savings.
As we have diversified our business through acquisitions, we expect to integrate
the service offerings of our acquisitions into our global service offerings and
integrate the sales forces into one, integrated global sales force. Growth
through acquisitions may also provide us the opportunity to broaden our set of
service offerings and industry presence.
SEASONALITY
There is limited seasonality to our business. We invoice approximately 60% of
our revenue on (1) a time and materials basis in which there are variations in
revenue based on the number of billable days during a quarter and (2) a
per-incident or per-call-handled basis in which revenue variations are caused by
variations in call volumes and incidents handled. Our third quarter tends to be
slower than the other quarters due to the summer holiday season in Europe,
particularly in Sweden, and the fourth quarter may be negatively affected by the
seasonal holidays.
INTELLECTUAL PROPERTY
We rely upon a combination of contract provisions and trade secret laws to
protect our proprietary technology. We also rely on a combination of copyright,
trademark and trade secret laws to protect our proprietary software. We attempt
to further protect our trade secrets and other proprietary information through
agreements with employees and consultants. We do not hold any patents and do not
have any patent applications pending. There can be no assurance that the steps
we have taken to protect our proprietary technology will be adequate to deter
misappropriation of our proprietary rights or third-party development of similar
proprietary software. We hold a registered trademark for TechTeam(R).
EMPLOYEES
We employed a total of 2,337 employees worldwide as of December 31, 2006,
comprised of 2,137 technicians and operational staff, 41 sales and marketing
employees and 159 administrative employees. Our employees, with the exception of
approximately 373 employees in Europe, are not represented by a labor union, and
we have never suffered an interruption of business as a result of a labor
dispute. We consider our relations with our employees generally to be good.
8
EUROPEAN OPERATIONS
We service our clients in Europe through nine, wholly-owned subsidiaries:
TechTeam Global Ltd., TechTeam Global NV/SA, TechTeam A.N.E. NV/SA (wholly-owned
by TechTeam Global NV/SA), TechTeam Global GmbH, TechTeam Global AB, TechTeam
SQM AB (wholly-owned by TechTeam Global AB), TechTeam Global Sp. z. o.o., S.C.
TechTeam Global SRL and TechTeam Akela SRL. We offer services from each of our
business segments in Europe except Government Technology Services. However, the
majority of our European revenue has historically been generated in our IT
Outsourcing Services segment.
TechTeam Global Ltd., TechTeam Global GmbH and TechTeam Global AB provide Ford
and its subsidiaries with help desk services and technical staffing. TechTeam
Global NV/SA and S.C. TechTeam Global SRL provide our clients primarily with
multilingual IT Outsourcing Services. Ford and its subsidiaries are currently
the only clients of TechTeam Global GmbH.
A summary of our international revenue and long-lived assets is set forth in
Note 12 of the Notes to Consolidated Financial Statements included in "Item 8 --
Financial Statements and Supplementary Data."
Our international business is subject to risks customarily encountered in
foreign operations, including changes in a specific country or region's
political or economic conditions, trade protection measures, import or export
licensing requirements, the overlap of different tax structures, unexpected
changes in regulatory requirements and natural disasters. We are also exposed to
foreign currency exchange rate risk inherent in our sales commitments,
anticipated sales, and assets and liabilities denominated in currencies other
than the U.S. dollar or the local currency of the subsidiary delivering the
service. However, the majority of our revenue is received in the same currency
in which we pay our expenses. While these risks are believed to be manageable,
no assurances can be given in this regard.
DISCONTINUED OPERATIONS -- LEASING
TechTeam Capital Group, L.L.C. ("Capital Group"), a subsidiary of the Company,
previously wrote leases for computer, telecommunications and other types of
capital equipment, with initial lease terms ranging from two to five years.
Capital Group ceased writing new leases in March 2000 and is in the final stages
of running out its lease portfolio. Our future revenue stream from contractually
committed leases is expected to be inconsequential to our results of operations.
The activity that remains in winding-down the leasing operation is the
collection of accounts receivable, including older accounts receivable related
to terminated leases. As a result, Capital Group has been presented as a
discontinued operation in accordance with Statement of Financial Accounting
Standards No. 144, "Accounting for the Disposal or Impairment of Long-Lived
Assets." Under this statement, the operating results of Capital Group are
presented separately from continuing operations in the accompanying financial
statements for all periods presented. Capital Group previously was reported as a
separate operating segment called Leasing Operations.
ITEM 1A. RISK FACTORS
FACTORS INFLUENCING FUTURE RESULTS
Because of the following factors, as well as other variables affecting our
operating results that are not set forth below, past financial performance may
not be a reliable indicator of future performance, and historical trends should
not be used to anticipate results or trends in future periods.
While we describe each risk separately, some of these risks are interrelated and
it is possible that certain risks could trigger the applicability of other risks
described below. Also, the risks and uncertainties described below are not the
only ones that we face. Additional risks and uncertainties not presently known
to us, or that we currently deem immaterial, could also potentially impair our
business, financial condition and results of operations.
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OUR REVENUE AND GROSS PROFIT MAY SUFFER IF WE ARE NOT ABLE TO MAINTAIN OUR
RELATIONSHIP WITH SIGNIFICANT CUSTOMERS FOR WHOM WE HAVE CONTRACTS UP FOR
RENEWAL.
As set forth in "Item 1 -- Business," Ford Motor Company is a significant client
of ours. Ford has recently announced its intent to implement significant cost
reductions and organizational restructurings in response to declining business
activity. A significant reduction in our business levels with Ford would
materially impact our expected levels of operating performance and could slow
our cash flow if payments on accounts receivable were delayed or suspended.
During 2007, we have contracts pending renewal that comprise approximately 15%
of our 2006 revenue. We believe that we are well positioned to renew most of
these contracts due to our overall value proposition, but there can be no
assurance in this regard. See our discussion below of risks inherent in
providing Government Technology Services.
THE COMPETITIVE PRESSURES WE FACE COULD HARM OUR REVENUE, GROSS MARGIN AND
BUSINESS PROSPECTS.
We face intense competition in all of our markets and for all of our services.
Many competitors have substantially greater resources, including more locations,
greater financial resources, a larger client base, and greater name and brand
recognition. These competitors may be willing to provide the same services that
we provide at a loss or at a lower gross margin in order to attain other, more
lucrative business from our customers. Due to this competition, it may be
difficult for us to retain our current customers or grow our revenue outside of
our current customer base.
The intense competition we face may result in our customers demanding reduced
pricing from us in order for us to remain a preferred vendor. These pressures
are likely to continue to increase due to the trend to move outsourcing services
offshore to countries with lower labor costs, such as India, Malaysia and the
Philippines. Our inability to continue to execute upon our strategy to address
the globalization of the support services market could have a material adverse
impact on our ability to maintain and grow our customer base. Further, we may
have to continue to lower the prices of our services to stay competitive, while
at the same time trying to maintain or improve quality, revenue and gross
margin. If we cannot proportionately decrease our cost structure on a timely
basis in response to competitive price pressures, our gross margin, and
therefore our profitability, could be adversely affected. Any of these
circumstances could have a material adverse effect on our business, financial
condition and results of operations.
Moreover, the process to win new business tends to be long. Our IT Outsourcing
Services business models require significant changes to our customers' business
processes, and each customer may have significant internal political
difficulties with local regions surrendering decentralized control of the
support function. The decision makers are rarely involved in the early details
of the selection process so there are often multiple sales efforts -- to the
team charged with selection and then to the Chief Information Officer/Chief
Executive Officer/Board -- that have to occur. Our results are dependent on our
ability to successfully manage the sales process and strong competition in these
markets.
WE ARE SUBJECT TO CONTRACT RISKS INHERENT IN OUR BUSINESS.
The great majority of our contracts, including our Ford Global SPOC contract,
may be terminated without cause on short notice, often upon as little as 90-days
notice. Terminations and non-renewals of major contracts could have a material
adverse impact upon our business, financial condition and results of operations.
A portion of our IT Outsourcing Services business is billed on a managed service
basis (in which the fee is fixed to perform specified services) as opposed to a
time and materials basis. The onset of problems in our customers'
infrastructure, such as computer viruses, may require us to deploy additional
resources to solve these problems. In many instances, we would not receive any
additional revenue for the work performed, thereby adversely impacting our
profitability.
To the extent we provide service on a per-incident, per-call or per-minute
basis, our financial performance is dependent upon the volume of service
requests that we receive on the project. Some of our contracts do not contain
minimum guaranteed volume, so we may not receive enough volume during a month to
pay for our costs relating to a specific contract. Even where volume guarantees
exist, we may not receive enough volume to make a profit for the month the
guarantee is enforced. Also, many of our contracts contain financial penalties
for our failure to
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meet the contractual performance service levels. If the volume is too high, we
may not be able to meet the service levels. In the United States, we are able to
manage this risk through changes in our staffing, but our European entities do
not have as much flexibility in staffing due largely to labor laws. Due to the
competitive market, we often must agree to a price for providing service based
primarily on information provided to us by our prospective customer. Sometimes
this information is not correct, and it is difficult to increase our price
because the prospective customer has a limited budget. Our inability to estimate
accurately the resources and related expenses required for a project, or our
failure to complete our contractual obligations in a manner consistent with
their terms, could materially and adversely affect our business, financial
condition and results of operations.
WE ARE SUBJECT TO RISKS INHERENT IN THE PROVISION OF TECHNOLOGY SERVICES TO
GOVERNMENTAL ENTITIES.
We derive a significant amount of our revenue from U.S. Federal Government
contracts that typically are awarded through competitive processes and span a
one-year base period and one or more option years. When the U.S. Federal
Government budget is under pressure, as it is at the present time, it may be
difficult to develop business with new customers and grow or maintain contracts
with existing customers. The unexpected termination or non-renewal of one or
more of our significant contracts could result in significant revenue
shortfalls. Our clients generally have the right not to exercise the option
periods. In addition, our contracts typically contain provisions permitting an
agency to terminate the contract on short notice, with or without cause.
Following the expiration of the contract term, if the client requires further
services of the type provided in the contract, there is frequently a competitive
re-bidding process. We may not win any particular re-bid or be able to
successfully bid on new contracts to replace those that have been terminated.
Many of the systems we support involve managing and protecting information
involved in the U.S. Department of Defense and other sensitive government
functions. A security breach in one of these systems could cause serious harm to
our business, could result in negative publicity and could prevent us from
having further access to such critically sensitive systems or other similarly
sensitive areas for other governmental clients. Losses that we could incur from
such a security breach could exceed the policy limits that we have for "errors
and omissions" insurance, or it may not apply.
Some of our U.S. Federal Government contracts require us, and certain of our
employees, to maintain security clearances. If we lose or are unable to obtain
security clearances, the client can terminate the contract or decide not to
renew it upon its expiration. As a result, to the extent we cannot obtain the
required security clearances for our employees working on a particular
engagement, we may not derive the revenue anticipated from the engagement, which
could negatively impact our operating results.
U.S. Federal Government agencies routinely audit government contracts. These
agencies review a contractor's performance on its contract, pricing practices,
cost structure and compliance with applicable laws, regulations and standards.
An audit could result in an adjustment to our revenue because any costs found to
be improperly allocated to a specific contract will not be reimbursed, while
improper costs already reimbursed must be refunded. If a government audit
uncovers improper or illegal activities, we may be subject to civil and criminal
penalties and administrative sanctions, including termination of contracts,
forfeiture of profits, suspension of payments, fines and suspension or debarment
from doing business with U.S. Federal Government agencies. In addition, we could
suffer harm to our reputation if allegations of impropriety were made against
us.
We must comply with and are affected by U.S. Federal Government regulations
relating to the formation, administration and performance of government
contracts. These regulations affect how we do business with our clients and
subcontractors, including mandating the percentage of business contracted to us
that we must subcontract to small and minority businesses. These regulations may
impose added costs on our business. Any failure to comply with applicable laws
and regulations could result in contract termination, price or fee reductions,
or suspension or debarment from contracting with the U.S. Federal Government.
Further, the U.S. Federal Government may reform its procurement practices or
adopt new contracting methods relating to the General Services Administration
schedule or other government-wide contract vehicles. To the extent that we are
unable to successfully comply with these regulations, our Government Technology
Services business could be negatively impacted.
IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO RECRUIT ADDITIONAL QUALIFIED
PERSONNEL, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE
ADVERSELY AFFECTED.
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Our success is highly dependent upon the efforts, direction and guidance of our
executive leadership team. We currently have only two employment agreements with
our executive officers (the President and Chief Executive Officer and the Senior
Vice President, EMEA). The loss of any of our senior executives or our inability
to attract, retain or replace key management personnel in the future, could have
a material adverse effect on our business, financial condition and results of
operations.
OUR INABILITY TO ATTRACT AND RETAIN QUALIFIED EMPLOYEES COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our business involves the delivery of professional services and is very labor
intensive. Our success depends in large part upon our ability to attract,
develop, motivate and retain highly skilled technical, clerical and
administrative employees. We can experience high turnover of our personnel and
are often required to recruit and train replacement personnel as a result of a
changing and expanding work force. Qualified personnel, especially in
Washington, D.C., Bucharest, Romania, and Gothenburg Sweden, are in high demand.
Accordingly, we may experience increased compensation costs that may not be
offset through either increased productivity or higher customer pricing.
Moreover, no assurances can be given that we will be able to attract and retain
sufficient numbers of qualified employees in the future, especially when we need
to expand our services in a short time period. While we attempt to implement a
career path model where our helpdesks are located, thereby enabling our
employees to move to new jobs that require higher skill levels and pay more
money, this objective is difficult to achieve in tight labor markets. Our
inability to attract and retain qualified personnel, or increases in wages or
other costs of attracting, training or retaining qualified personnel, could have
a material adverse effect on our business, financial condition and results of
operations.
OUR INABILITY TO ATTRACT AND RETAIN QUALIFIED SALES AND ACCOUNT MANAGEMENT
PERSONNEL COULD HAVE AN ADVERSE EFFECT ON OUR ABILITY TO MEET OUR ORGANIC GROWTH
TARGETS.
Our business involves the delivery of complex services over a distributed IT
environment. It takes time to train new sales people in our business and for
them to build a pipeline of opportunities. Inasmuch as we strive to grow
existing accounts by expanding our services to new locations or adding new
services to our solution, we rely heavily on our account managers to grow our
revenue. In the past year, we experienced significant turnover in our sales
force and account management team. We are in the process of rebuilding these
teams. Our inability to find the right personnel and train them quickly may have
an adverse effect on our ability to meet our organic growth targets.
IMPLEMENTATION OF OUR STRATEGY TO GROW THROUGH COMPLEMENTARY BUSINESS
ACQUISITIONS IS SUBJECT TO NUMEROUS RISKS AND DIFFICULTIES.
Our business strategy includes seeking to make complementary business
acquisitions. In order to pursue a growth by acquisition strategy successfully,
we must identify suitable candidates for these transactions, complete these
transactions and manage post-closing issues such as the integration of acquired
companies. Integration issues are complex, time-consuming and potentially
expensive and, without proper planning and implementation, could significantly
disrupt our business. Integration issues include, but are not limited to, the
diversion of management's attention, the loss of key business and/or personnel
from the acquired company, unanticipated events, legal liabilities, dilutive
effect of the issuance of additional securities and possible impairment of
acquired intangible assets. Moreover, the financial risks continue after the
integration of the acquired company. If the implicit value of the business
declines, there could be a non-cash, partial or full write-off of the acquired
intangible assets, including goodwill, attributed to the acquisition.
Acquisitions also may result in significant costs and expenses and charges to
earnings, including those related to severance pay, early retirement costs,
employee benefit costs, charges from the elimination of duplicative facilities
and contracts, in-process research and development charges, inventory
adjustments, legal, accounting and financial advisory fees, and required
payments to executive officers and key employees under retention plans. Any of
these possible difficulties associated with acquisitions could have a material
adverse effect on our business, financial condition and results of operations.
WE ARE SUBJECT TO NUMEROUS RISKS RELATING TO OUR INTERNATIONAL OPERATIONS.
We operate businesses in many countries outside the United States, all of which
are currently located throughout Europe. As part of our business strategy, we
anticipate expanding our global reach to be able to deliver services
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from the Asia Pacific region and South America. As a result, we expect to
continue expansion through start-up operations and acquisitions in additional
countries. Expansion of our existing international operations and entry into
additional countries will require management attention and financial resources.
Our future revenue, gross margin, expenses and financial condition also could
suffer due to a variety of international factors, including the following:
- changes in a country or region's economic or political conditions,
including inflation, recession, interest rate fluctuations and
unanticipated military conflicts;
- currency fluctuations, particularly in the European euro, which
contribute to variations in the sale of services in impacted
jurisdictions and also affect our reported results expressed in U.S.
dollars;
- longer accounts receivable cycles and financial instability among
customers;
- local labor conditions and regulations;
- differences in cultures and languages, which can impair our ability to
work as an effective global team;
- differing political and social systems;
- changes in the regulatory or legal environment;
- differing technology standards or customer requirements;
- difficulties associated with repatriating cash generated or held
abroad in a tax-efficient manner;
- changes in tax laws in international jurisdictions; and
- natural and man-made disasters.
To the extent we are not able to manage our international operations
successfully, our business could be adversely affected and revenue or earnings
could be reduced.
THERE ARE SUBSTANTIAL RISKS ASSOCIATED WITH EXPANDING OUR BUSINESS INTO OFFSHORE
MARKETS.
The outsourcing industry trend to move business towards offshore markets could
result in excess operating capacity in the United States and Belgium, thereby
increasing competition for customers. Moreover, there are no assurances that we
will be able to successfully expand into and conduct business in offshore
markets. The success of any offshore operation is subject to numerous
contingencies, some of which are beyond management control, including general
and regional economic conditions, prices for our services, competition, changes
in regulation and other risks. Any failure in our strategy could have a material
adverse effect on our business, financial condition and results of operations.
See the discussion above regarding the risks associated with international
operations.
When a number of service providers enter these offshore locations, the
competition for employees increases, causing turnover and increasing labor
costs. In these circumstances, we bear the risk of inflation, especially labor
inflation, which could result in our costs increasing faster than we can improve
technician productivity.
Several of our customers are attracted to the reduction in cost of our services
they may obtain as a result of delivery from an offshore location. They also
wish to enter into contracts that tend to provide them with predictable costs,
while shifting the risk of volume fluctuations to us. Accordingly, we enter into
long-term contracts to provide monthly services with a price that does not
adjust significantly with inflation. Our inability to manage these risks could
have a material adverse effect on our business, financial condition and results
of operations.
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WE ARE SUBJECT TO CURRENCY RISKS AS A RESULT OF OUR INTERNATIONAL OPERATIONS.
We serve an increasing number of our U.S.-based customers using help desks in
Europe. Some of these contracts are priced in U.S. dollars, while a substantial
portion of our costs are incurred in Romanian lei or the European euro. Thus, we
are subject to a foreign currency exchange risk. Although we enter into foreign
exchange contracts from time to time to limit potential foreign currency
exposure, we do not fully hedge this exposure. As a result, unfavorable shifts
in exchange rates may reduce our gross profit on these contracts.
OUR INABILITY TO PROPERLY MANAGE PROJECTS AND CAPACITY COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our ability to profit from the global trend toward outsourcing depends in part
on how effectively we manage our help desk capacity. There are several factors
and trends that have intensified the challenge of resource management. In order
to either create the additional capacity necessary to accommodate new or
expanded outsourcing projects or to manage the risk of labor inflation, we must
consider opening new help desk facilities. The opening or expansion of a help
desk facility may result, at least in the short term, in idle capacity until any
new or expanded program is fully implemented. We periodically assess the
expected long-term capacity utilization of our help desk facilities. As a
result, we may, if deemed necessary, consolidate, close or partially close
under-performing help desk facilities in order to maintain or improve targeted
utilization and margins. There can be no assurance that we will be able to
achieve or maintain optimal utilization of our help desk capacity. If we do not
effectively manage our capacity, our business, financial condition and results
of operations could be adversely affected.
With the addition of our Romanian help desk facility, we have significantly
increased the amount of business that we are performing for the same customer
from more than one location. Multisite and multilingual delivery increases the
complexity of the service provided including, but not limited to, managing call
volume and resources. Our inability to manage the different cultures and
personnel to deliver consistent quality from different sites could have a
material adverse effect on our business, financial condition and results of
operations.
Our customers often ask us to expand our geographic footprint and the languages
that we support. Often, they are seeking to reduce the cost of our support.
Moreover, in order for us to keep our costs in line with the marketplace, our
future success will be dependent upon our ability to find cost-effective
locations in which to operate internationally. There is no assurance that we
will be able to find cost-effective locations, obtain favorable lease terms,
develop subcontractor relationships, establish facilities and train a workforce
in a timely or economic manner.
Further, our work in the IT Consulting and Systems Integration business segment
requires the efficient management of human resources. There is a risk that we
may not have sold new business to replace projects as they are completed.
Because we may not be able to maintain a steady or increasing demand for our
services, we could suffer fluctuations in our revenue, the number of employees
and results of operations.
WE ARE INCREASINGLY SELLING OUR SERVICES THROUGH CHANNEL PARTNERS AND OUR
INABILITY TO EFFECTIVELY MANAGE A CHANNEL PARTNER OR CUSTOMER RELATIONSHIP MAY
HAVE AN ADVERSE AFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
We are focused on developing relationships with channel and alliance partners to
help us sell our services. These channel and alliance partners may be large
companies with complementary services that may hire us to provide services to
their customers. In these relationships, we generally do not control the
customer relationship. Accordingly, we are dependent upon the prime contractor
to appropriately manage our service delivery for the end customer. The failure
of the prime contractor to do so can lead to situations where projects are
delayed, modified or terminated for reasons outside our control. The channel and
alliance partners may be in a different business or we may be their customer,
and therefore we must balance our interest in obtaining new business with the
best value for our purchases. Our inability to manage these relationships could
have a negative effect on our business, financial condition and results of
operations.
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WE ARE HIGHLY DEPENDENT UPON TECHNOLOGY, AND OUR INABILITY TO KEEP PACE WITH
TECHNOLOGICAL ADVANCES IN OUR INDUSTRY, OR OUR FAILURE OR INABILITY TO PROTECT
AND MAINTAIN OUR EXISTING SYSTEMS, COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our success depends in part on our ability to develop IT solutions that keep
pace with continuing changes in the IT industry, evolving industry standards and
changing client preferences. There can be no assurance that we will be
successful in adequately addressing these developments on a timely basis or
that, if these developments are addressed, we will be successful in the
marketplace. We need to continually make significant investments in
sophisticated and specialized communications and computer technology to meet our
clients' needs. We anticipate that it will be necessary to continue to invest in
and develop new and enhanced technology on a timely basis to maintain our
competitiveness. Significant capital expenditures may be required to keep our
technology up-to-date. There can be no assurance that any of our information
systems will be adequate to meet our future needs or that we will be able to
incorporate new technology to enhance and develop our existing services.
Moreover, investments in technology, including future investments in upgrades
and enhancements to software, may not necessarily maintain our competitiveness.
Our future success will also depend in part on our ability to anticipate and
develop information technology solutions that keep pace with evolving industry
standards and changing client demands. Our inability to effectively keep pace
with continuing changes in the IT industry could have a material adverse effect
on our business, financial condition and results of operations.
Moreover, experienced computer programmers and hackers may be able to penetrate
our network security, or that of our customers, and misappropriate confidential
information, create system disruptions or cause shutdowns. If this were to
occur, we could incur significant expenses in addressing problems created by
security breaches of our network. Moreover, we could lose existing or potential
customers for information technology outsourcing services or other information
technology solutions, or incur significant expenses in connection with our
customers' system failures. In addition, sophisticated hardware and operating
system software and applications that we produce or procure from third parties
may contain defects in design and manufacture, including "bugs" and other
problems that can unexpectedly interfere with the operation of our systems. The
costs to eliminate or alleviate security problems, viruses, worms and bugs could
be significant, and the efforts to address these problems could result in
interruptions, delays or cessation of service.
Our operations are dependent upon our ability to protect our help desk
facilities and our information databases against damages that may be caused by
fire and other disasters, power failures, telecommunications failures,
unauthorized intrusion, computer viruses and other emergencies. The temporary or
permanent loss of such systems could have a material adverse effect on our
business, financial condition and results of operations. Notwithstanding
precautions we have taken to protect ourselves and our clients from events that
could interrupt delivery of our services, there can be no assurance that a fire,
natural disaster, human error, equipment malfunction or inadequacy, computer
virus, firewall breach or other event would not result in a prolonged
interruption in our ability to provide support services to our clients.
Moreover, as we commence delivering services from an offshore location, the
risks related to interruption of telecommunications increases. Any interruption
to our data or voice telecommunications networks could have a material adverse
effect on our business, financial condition and results of operations.
OUR BUSINESS IS DEPENDENT UPON GENERAL ECONOMIC CONDITIONS, WHICH MAY AFFECT OUR
FINANCIAL PERFORMANCE AND THE PRICE OF OUR COMMON STOCK.
Our revenue and gross profit depend significantly on general economic conditions
and the demand for our services in the markets in which we compete. Softened
demand for our services caused by economic weakness and constrained information
technology spending over the past several years has resulted, and may result in
the future, in decreased revenue, gross profit, earnings or growth rates and
problems with our ability to realize customer receivables. In addition, customer
financial difficulties have resulted, and could result in the future, in
increases in accounts receivable write-offs and additions to reserves in our
receivables portfolio. Uncertainty about future economic conditions makes it
difficult to forecast operating results and to make decisions about future
investments. Further delays or reductions in information technology spending
could have a material adverse effect on demand for our products and services and
consequently our business, financial condition and results of operations.
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OUR FINANCIAL RESULTS MAY BE ADVERSELY AFFECTED BY INCREASES IN BUSINESS COSTS.
Health care and other benefit costs continue to increase. Our business is labor
intensive, and therefore we have exposure to these increasing health care and
other benefit costs. While we attempt to compensate for these escalating costs
in our business cost models and customer pricing and have passed along some of
these increased costs to our employees, we generally have long-term, fixed-price
pricing agreements with our customers. Accordingly, no assurances can be given
that we will be able to recover increases in our costs through increased service
fees.
WE MAY BE SUBJECT TO RISKS ASSOCIATED WITH TERRORIST ACTS OR OTHER EVENTS BEYOND
OUR CONTROL.
Terrorist acts or acts of war (wherever located around the world) may cause
damage or disruption to TechTeam, our employees, facilities, partners,
suppliers, distributors, resellers or customers, which could adversely impact
our business, financial condition and results of operations.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH OUR USE OF INTELLECTUAL PROPERTY.
We rely upon a combination of nondisclosure and other contractual arrangements
and trade secrets, copyright and trademark laws to protect our proprietary
rights and the proprietary rights of third parties from whom we license
intellectual property. We enter into confidentiality agreements with our
employees, customers and suppliers and limit distribution of proprietary
information. There can be no assurance, however, that the steps taken by us in
this regard will be adequate to deter misappropriation of proprietary
information or that we will be able to detect unauthorized use of such
information and take appropriate steps to enforce our intellectual property
rights.
Although we believe our services and/or software do not infringe upon the
intellectual property rights of others and that we have all of the rights
necessary to utilize the intellectual property employed in our business, we are
subject to the risk of litigation alleging infringement of third-party
intellectual property rights. Any such claims could require us to spend
significant sums of money in litigation, pay damages, develop non-infringing
intellectual property or acquire licenses of the intellectual property that may
be the subject of asserted infringement.
WE MAY EXPERIENCE VOLATILITY IN OUR STOCK PRICE THAT COULD AFFECT YOUR
INVESTMENT.
The price of our common stock has been, and may continue to be, highly volatile
in response to various factors, many of which are beyond our control including,
but not limited to:
- the depth and liquidity of the trading market for our common stock;
- general economic conditions;
- developments in the industries or markets in which we operate;
- announcements by competitors;
- actual or anticipated variations in quarterly or annual operating
results;
- speculation in the press or investment community;
- sales of large blocks of our common stock or sales of our common stock
by insiders;
- regulatory actions or litigation; and
- departures of our key personnel.
The market price of our common stock may also be affected by our inability to
meet analyst and investor expectations or failure to achieve projected financial
results. Any failure to meet such expectations or projected financial results,
even if minor, could cause the market price of our common stock to decline.
Volatility in our stock price may result in your inability to sell your shares
at or above the price at which you purchased them.
In addition, stock markets have generally experienced a high level of price and
volume volatility, and the market prices of equity securities of many companies
have experienced wide price fluctuations not necessarily related to the
operating performance of such companies. These broad market fluctuations may
adversely affect the market price of our common stock. In the past, securities
class action lawsuits frequently have been instituted against such companies
following periods of volatility in the market price of such companies'
securities. If any such litigation is
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instigated against us, it could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse effect
on our business, financial condition and results of operations.
CERTAIN PROVISIONS OF OUR ORGANIZATIONAL DOCUMENTS AND RIGHTS AGREEMENT, AS WELL
AS APPLICABLE DELAWARE CORPORATE LAW, COULD IMPEDE AN ATTEMPT TO REPLACE OR
REMOVE OUR MANAGEMENT, PREVENT THE SALE OF OUR COMPANY OR PREVENT OR FRUSTRATE
ANY ATTEMPT BY STOCKHOLDERS TO CHANGE THE DIRECTION OF OUR COMPANY, EACH OF
WHICH COULD DIMINISH THE VALUE OF OUR COMMON STOCK.
Our certificate of incorporation and bylaws, each as amended and/or restated, as
well as applicable Delaware corporate law, contain provisions that could impede
an attempt to replace or remove our management or prevent the sale of our
company that, in either case, stockholders might consider being in their best
interests. For example, our bylaws limit the ability of stockholders to call
special meetings of stockholders and establish certain advance notice procedures
for nomination of candidates for election as directors and for stockholder
proposals to be considered at stockholders' meetings. Our certificate of
incorporation also authorizes our Board of Directors to determine the rights,
preferences and restrictions of unissued series of preferred stock, without any
vote or action by our stockholders. In addition, our Board of Directors has
adopted a Rights Agreement, dated May 6, 1997, as amended, that may have
anti-takeover effects by delaying, deferring or preventing an unsolicited
acquisition proposal, even if the proposal may be beneficial to the interests of
our stockholders. Further, certain anti-takeover provisions of the Delaware
General Corporation Law could make it more difficult for an unsolicited bidder
to acquire us. These provisions of our certificate of incorporation and bylaws
and Delaware law may discourage potential acquisition proposals and may delay,
deter or prevent a change of control of our company, including through
transactions, and in particular unsolicited transactions, that some or all of
our stockholders might consider to be desirable.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our world headquarters and principal executive offices are located in
Southfield, Michigan. The following table sets forth certain information
regarding the principal properties used by TechTeam as of March 1, 2007, all of
which are leased:
LEASE TERM BEGINNING SQUARE
LOCATION FUNCTION AND END (MM/DD/YR) FOOTAGE
-------- -------- -------------------- -------
Southfield, MI World Headquarters and Help Desk Facility 11/01/93 - 12/31/16 73,622
Brussels, Belgium European Headquarters and Help Desk Facility 08/01/97 - 12/31/13 45,420
Dearborn, MI Help Desk Facility and Training Center 04/01/97 - 09/30/08 30,184
Bucharest, Romania Help Desk Facility 09/01/04 - 08/31/14 30,139
Chantilly, VA Headquarters of TechTeam Government Solutions, Inc. 06/12/04 - 05/31/11 18,000
Davenport, IA Help Desk Facility 10/15/99 - 10/14/09 17,346
Stockholm, Sweden Headquarters of TechTeam SQM AB 02/14/07 - 09/30/09 6,598
Bethesda, MD Sales and Administrative Office 06/01/01 - 12/31/13 5,428
Portsmouth, RI Sales and Administrative Office 06/01/01 - 05/31/09 4,200
Gent, Belgium Headquarters of TechTeam A.N.E. NV/SA 01/01/06 - 11/30/14 4,090
Gothenburg, Sweden Sales and Administrative Office 09/01/02 - 03/31/08 1,022
Gothenburg, Sweden Sales and Administrative Office 02/14/07 - 05/31/07 613
17
We believe the facilities we occupy are well maintained and in good operating
condition. We also believe these locations are adequate to meet our needs for
the foreseeable future. These facilities include general office space and
computer training classrooms. Because some of our services are performed at
client sites, the cost of maintaining multiple offices is minimized.
ITEM 3. LEGAL PROCEEDINGS
In November 2006, we entered into a settlement to resolve previously reported
claims that were brought against us by William F. Coyro, Jr., the Company's
former President and Chief Executive Officer, and David W. Morgan, the Company's
former Vice President of Finance and Business Development, Chief Financial
Officer and Treasurer. The settlement included a full release of any existing
liability of the Company and the dismissal with prejudice of the complaint Mr.
Morgan filed with the U.S. Department of Labor Occupational Safety and Health
Agency asserting that he resigned from employment with the Company due to
actions taken against him as a result of certain activities protected under
Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002,
Title VIII of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1514A. We
recorded pre-tax expense of $650,000 during the third quarter of 2006 to
conclude these settlements.
In addition to the above matter, from time to time we are involved in various
litigation matters arising in the ordinary course of business. None of these
matters, individually or in the aggregate, are material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2006.
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the NASDAQ(R) Global Market under the symbol "TEAM."
The following table sets forth the reported high and low sales prices of our
common stock for the quarters indicated as reported by the NASDAQ(R) Global
Market.
YEAR AND QUARTER HIGH LOW
---------------- ------ ------
2006
First Quarter .... $11.59 $ 9.00
Second Quarter ... 11.23 8.72
Third Quarter .... 9.26 7.07
Fourth Quarter ... 11.30 7.82
2005
First Quarter .... $12.00 $ 9.82
Second Quarter ... 15.34 10.02
Third Quarter .... 14.99 10.75
Fourth Quarter ... 12.76 7.50
The Company has never paid any dividends on its common stock and has no present
intention to pay dividends in the foreseeable future. Any future decision as to
payment of dividends will be made at the discretion of our Board of Directors
and will depend upon our earnings, financial position, capital requirements and
such other factors as the Board of Directors deems relevant.
TechTeam had approximately 366 shareholders of record as of March 1, 2007.
The following table sets forth the information with respect to purchases made by
the Company of shares of its common stock during the fourth quarter of 2006:
TOTAL NUMBER OF MAXIMUM NUMBER OF
TOTAL NUMBER AVERAGE SHARES PURCHASED AS SHARES THAT MAY YET
OF SHARES PRICE PAID PART OF PUBLICLY BE PURCHASED UNDER
PERIOD PURCHASED (A) PER SHARE ANNOUNCED PROGRAMS THE PROGRAMS
------ ------------- ---------- ------------------- -------------------
October 1, 2006 to October 31, 2006 7,220 $ 8.78 -- --
November 1, 2006 to November 30, 2006 6,933 $ 9.45 -- --
December 1, 2006 to December 31, 2006 6,309 $10.38 -- --
(a) All shares were purchased by the TechTeam Global Retirement Savings Plan
(one of the Company's 401(k) plans) using employer matching contributions
made in cash or through the use of plan forfeitures. The purchases were not
made pursuant to publicly announced plans and were made in the open market.
Information regarding our equity compensation plans is contained in "Item 12 --
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters."
On October 3, 2005, we acquired all of the issued and outstanding capital stock
of Akela Informatique SRL for: (i) 2,450,000 European euro (1 European euro =
$1.203 on October 3, 2005) and (ii) 24,570 shares of common stock having a
market value on the acquisition date of $250,000, as determined by multiplying
the number of shares issued by the closing price per share of our common stock
on the date of issuance. The shares may not be sold by the holders prior to
October 3, 2007. The issuance of our common stock pursuant to this transaction
was claimed to be exempt from registration under the Securities Act of 1933, as
amended (the "1933 Act"), pursuant to Section 4(2) of the 1933 Act and/or
Regulation S promulgated under the 1933 Act.
19
PERFORMANCE GRAPH
Set forth below is a graph comparing the cumulative total return on TechTeam's
common stock from January 1, 2001 through December 31, 2006, with that of the
NASDAQ Stock Market -- U.S. Index (the "NASDAQ U.S. Index") and the NASDAQ
Computer & Data Processing Services Stocks Index (the "NASDAQ Computer Index")
over the same period. The graph assumes that the value of the investment in
TechTeam's common stock, the NASDAQ U.S. Index and the NASDAQ Computer Index was
$100 on January 1, 2001, and that all dividends were reinvested.
The graph displayed below is presented in accordance with U.S. Securities and
Exchange Commission requirements. Stockholders are cautioned against drawing any
conclusions from the data contained therein, as past results are not necessarily
indicative of future performance. This graph in no way reflects TechTeam's
forecast of future financial performance.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
(PERFORMANCE GRAPH)
TOTAL RETURN INDEX
DEC 2001 DEC 2002 DEC 2003 DEC 2004 DEC 2005 DEC 2006
-------- -------- -------- -------- -------- --------
NASDAQ U.S. 100% 69% 103% 112% 115% 126%
NASDAQ COMPUTER 100% 69% 91% 100% 104% 116%
TECHTEAM GLOBAL 100% 240% 225% 328% 324% 363%
20
ITEM 6. SELECTED FINANCIAL DATA
The following table presents information derived from our consolidated financial
statements for each of the five years ended December 31, 2006. This information
should be read in conjunction with "Item 7 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Item 8 --
Financial Statements and Supplementary Data." The results of operations
presented below are not necessarily indicative of the results of operations that
may be achieved in the future.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
STATEMENTS OF OPERATIONS DATA 2006 2005 2004 2003 2002
----------------------------- -------- -------- -------- ------- -------
(In thousands, except per share data)
Revenue
IT Outsourcing Services..................... $ 86,461 $ 76,845 $ 77,205 $67,669 $59,106
Government Technology Services.............. 47,393 56,159(a) 28,142(b) -- --
IT Consulting and Systems Integration....... 24,013 24,483 14,641 8,195 7,197
Other Services.............................. 9,497 9,010 8,000 9,969 11,230
-------- -------- -------- ------- -------
Total revenue.................................. $167,364 $166,497 $127,988 $85,833 $77,533
======== ======== ======== ======= =======
Income before income taxes..................... $ 2,750(c) $ 7,796 $ 7,175(d) $ 1,248 $ 2,601
Income tax provision........................ 873 2,402 2,547 1,438 1,483
-------- -------- -------- ------- -------
Income (loss) from continuing operations....... 1,877 5,394 4,628 (190) 1,118
Income (loss) from discontinued operations.. (43) 74 97 (856) 280
Cumulative effect of accounting change...... -- -- -- -- (1,123)(e)
-------- -------- -------- ------- -------
Net income (loss).............................. $ 1,834 $ 5,468 $ 4,725 $(1,046) $ 275
======== ======== ======== ======= =======
Diluted earnings (loss) per common share
Income (loss) from continuing operations.... $ 0.18 $ 0.54 $ 0.48 $ (0.02) $ 0.10
Income (loss) from discontinued operations.. -- 0.01 0.01 (0.09) 0.03
Cumulative effect of accounting change...... -- -- -- -- (0.10)(e)
-------- -------- -------- ------- -------
Net income (loss) per share................. $ 0.18 $ 0.54 $ 0.49 $ (0.10) $ 0.02
======== ======== ======== ======= =======
Weighted average common shares and
common share equivalents outstanding........ 10,176 9,832(f) 8,904 10,066 11,103
======== ======== ======== ======= =======
Weighted average preferred shares outstanding.. --(f) 244(f) 690 503 --
======== ======== ======== ======= =======
(a) On January 3, 2005, we acquired 100% of the outstanding stock of Sytel,
Inc.
(b) On December 31, 2003, we acquired 100% of the outstanding stock of Digital
Support Corporation.
(c) During 2006, we recorded expenses totaling $1.4 million for legal and
professional fees associated with a proxy contest initiated by a
shareholder, an asset impairment charge of $580,000 related to a software
asset and $650,000 for the settlement of claims against the Company by
certain former Company officers.
(d) During 2004, we recorded an asset impairment charge of $485,000 related to
a software asset.
(e) Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," and recorded an
impairment charge for goodwill related to discontinued operations.
(f) In May 2005, the holder of our preferred stock converted all outstanding
shares of preferred stock into 689,656 shares of common stock.
AS OF DECEMBER 31,
-----------------------------------------------------
BALANCE SHEET DATA 2006 2005 2004 2003 2002
------------------ -------- -------- -------- ------- -------
(In thousands)
Total assets................................... $117,930 $123,010 $88,987 $77,700 $82,301
Long-term obligations.......................... 5,426 14,115 1,699 408 376
Redeemable convertible preferred stock......... -- -- 5,000 5,000 --
Total shareholders' equity..................... $ 86,308 $ 78,240 $66,660 $60,770 $73,320
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ("MD&A")
OVERVIEW
We are a global provider of information technology ("IT"), enterprise support
and business process outsourcing services to Fortune 1000 companies, government
entities, multinational companies, product and service providers, and small and
medium-sized companies.
We had a difficult year in 2006 on a number of fronts. First, certain new and
existing customer accounts proved quite challenging to our overall
profitability, particularly during the first half of the year. These accounts
generally improved their performance each quarter. Second, our Government unit
and our hospitality systems implementation and training business experienced a
decline in revenue from the conclusion of certain contracts and wind-down of
projects. Third, we became engaged in a costly and distracting proxy contest
with one of our largest shareholders that ended amicably in May, but
substantially impaired our earnings during the first half of the year. Fourth,
we recorded an asset impairment charge to cost of revenue during the first
quarter. And finally, we concluded the transition of leadership, which included
the appointment of a new President and Chief Executive Officer, restructuring
our executive team and electing a Board of Directors largely comprised of new
members. The combination of these factors caused our net income to decline from
$5.5 million, or $0.54 per share, in 2005 to $1.8 million, or $0.18 per share,
in 2006.
While the financial impact of these items was unfortunate, we believe that our
base business is stable, we have tangible opportunities to grow organically, and
our leadership team is focused on objectives that will improve our business in
the long term. Several positive trends appeared during the second half of the
year, including revenue momentum driven in part by the addition of several new
customers for our enterprise support service model over the last four months of
the year. We are also expanding our services for some existing clients and are
deepening our relationships with them.
We are focused on expanding the markets for our enterprise support service model
for our customers. During 2006 and the first quarter of 2007, we began to
provide enterprise support services to new large enterprise customers, including
Phillip Morris International and Boehringer Ingelheim U.K. Once we begin
providing service to a customer, we are regularly able to further expand the
scope of our services to that customer because an increased volume of business
allows us to obtain a higher utilization of resources and allows us to obtain a
lower cost that can be passed onto the customer. We believe that we will
continue to see growth in our enterprise support for large businesses.
We are also strategically expanding the scope of services provided within our
enterprise support service model. In order to enhance the value-added set of
services within our model, we are increasing our expertise in IT services
management through the implementation of the comprehensive set of best practices
set forth in the Information Technology Infrastructure Library ("ITIL"), which
has been integrated into the ISO standards. In addition to incident management,
our current core service offering, we are expanding our services to include
problem management, change management, configuration management, availability
management and capacity management; thereby increasing the value of our
services.
The growth opportunities available to us will not be free of challenges. In the
early months of a new contract, we can experience downward margin pressure as
clients do not want to bear the full cost of transitioning to a managed service
model of enterprise support. With several, new large-scale customers ramping to
full volume over the first half of 2007, we anticipate reduced margins on these
accounts.
Another challenge is the need to implement a technology platform that enables
the highest quality service across the globe while maximizing the overall value
and utilization of our technicians. We are in the process of upgrading our
global phone switch technology and our workforce management software to help
accomplish this objective. As part of our service offering to small and
medium-sized businesses, we have initiated a business relationship with CA, Inc.
under which we can license CA's suite of tools to provide ITIL-based software
and services to our customers. Due to these and other projects, we expect our
capital expenditures to increase 20%-30% in 2007, as compared to 2006.
Next, Ford Motor Company ("Ford") continues to be a significant customer and is
under significant financial
22
pressure as it implements its Way Forward Plan. We estimate that our total
revenue from Ford under all programs will decline approximately 4-7% in 2007
from 2006. Please refer to our discussion of Ford in the "Impact of Business
with Major Clients" section of MD&A. Also, we have several contract renewals in
2007, which may be challenging as clients seek improved price points together
with an enhanced level of service.
Finally, we expect an increase in selling, general and administrative ("SG&A")
expense in future periods in absolute dollars as we continue to make careful and
considerate investments in areas to support our global growth such as our sales
and marketing capabilities, additional executive talent, human resources and, as
noted above, our technology infrastructure. However, we are maintaining a
proactive focus on spending and cost avoidance and will continue to pursue SG&A
spending levels that are 20% of revenue or less. This is a challenge that will
likely take the next several quarters or longer to achieve as we make
investments to position ourselves for long-term growth.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2006 COMPARED TO THE YEAR ENDED DECEMBER 31, 2005
Our business consists of two main components -- our Commercial Business and our
Government Business. Together, our IT Outsourcing Services segment, IT
Consulting and Systems Integration segment and Other Services segment comprise
our Commercial Business. Our Government Technology Services segment comprises
our Government Business. In addition to managing our business by these service
lines, we also manage our business by geographic market -- the Americas (defined
as North America excluding our government-based subsidiaries), EMEA (Europe,
Middle East and Africa) and Government Solutions (defined as our
government-based subsidiaries). Together, the Americas and EMEA comprise our
Commercial Business.
During the fourth quarter of 2006, we combined two operating segments --
Technical Staffing and Learning Services -- into one operating segment called
Other Services since these segments represent less than 10% of our total
revenue. During the fourth quarter of 2006, we also reclassified certain
projects between our three main service lines -- IT Outsourcing Services,
Government Technology Services and IT Consulting and Systems Integration -- to
allow us to track business unit results more appropriately and to report
consistent with how the services are managed. Prior year amounts have been
reclassified to be consistent with the current year presentation.
Revenue
YEAR ENDED DECEMBER 31,
------------------------ INCREASE %
2006 2005 (DECREASE) CHANGE
-------- -------- ---------- -------
(In thousands)
REVENUE
Commercial Business
IT Outsourcing Services ................ $ 86,461 $ 76,845 $ 9,616 12.5%
IT Consulting and Systems Integration .. 24,013 24,483 (470) (1.9)%
Other Services ......................... 9,497 9,010 487 5.4%
-------- -------- -------
Total Commercial .......................... 119,971 110,338 9,633 8.7%
Government Technology Services ............ 47,393 56,159 (8,766) (15.6)%
-------- -------- -------
TOTAL REVENUE ................................ $167,364 $166,497 $ 867 0.5%
======== ======== =======
As shown in the above table, the moderate increase in revenue to $167.4 million
in 2006 is attributable to growth in IT Outsourcing Services largely from new
customer contracts that was offset by revenue declines from the conclusion of
certain contracts in Government Technology Services and the wind-down of certain
systems implementation and training projects in IT Consulting and Systems
Integration. Excluding revenue from our acquisition of TechTeam Akela SRL
("Akela") on October 3, 2005, revenue decreased slightly to $163.0 million in
2006, from $165.7 million in 2005. Revenue was also positively affected by the
weakening of the U.S. dollar relative to the European euro and other
international currencies in which we conduct business, which increased revenue
by approximately $503,000 over the comparable period in 2006.
IT Outsourcing Services
23
Revenue from IT Outsourcing Services increased 12.5% to $86.5 million in 2006,
from $76.8 million in 2005, as a result of an 18.3% increase in revenue in the
Americas from new customer contracts awarded in 2006 and the fourth quarter of
2005, and a 7.5% increase in revenue in Europe primarily from growth in Ford,
new customer accounts and our shared services offering for our pharmaceutical
clients. The revenue increase in the Americas was partially offset by a decline
in revenue from certain existing customers, including a 8.2% decline in revenue
in Ford. Revenue in EMEA was positively affected by the weakening of the U.S.
dollar relative to the European euro and other international currencies in which
we conduct business. If IT Outsourcing Services revenue in EMEA were translated
into U.S. dollars at the comparable average exchange rate in 2005, reported
revenue would have decreased approximately $167,000 in 2006. Since most of our
international operating expenses are also incurred in the same foreign
currencies in which the associated revenue is denominated, the net impact of
exchange rate fluctuations on gross profit is considerably less than the
estimated impact on revenue and is not significant.
Globally, IT Outsourcing Services revenue generated from Ford declined 3.6% to
$36.1 million in 2006, from $37.4 million in 2005. Revenue from Ford declined in
each country (United States, Germany and Sweden) except the United Kingdom,
where we began providing SPOC services to Jaguar and Land Rover in March 2006.
Revenue from Ford in other regions decreased primarily due to a reduction in the
number of seats supported as Ford continues to restructure its operations and
reduce its worldwide workforce and from lower prices charged under the Global
SPOC Program contract renewal on December 1, 2005. Please refer to our
discussion of Ford in the "Impact of Business with Major Clients" section of
MD&A.
IT Consulting and Systems Integration Services
Revenue from IT Consulting and Systems Integration decreased 1.9% to $24.0
million in 2006, from $24.5 million in 2005, due to the wind-down of certain
systems implementation and training projects from TechTeam Cyntergy, which
provides deployment, training and implementation services to companies in the
hospitality, retail, food service and other industries and drove significant
growth in this segment in 2005. The decline in revenue was partially offset by
our acquisition of Akela in October 2005. Excluding revenue from our acquisition
of Akela, revenue from IT Consulting and Systems Integration decreased 13.3% to
$20.8 million in 2006, from $24.0 million in 2005. While the decline in revenue
from certain project-based work was expected, we were not able to replace the
work prior to the decline in revenue.
Government Technology Services
Revenue from Government Technology Services decreased 15.6% to $47.4 million in
2006, from $56.2 million in 2005, primarily due to the conclusion of two
contracts that provided $6.0 million in incremental revenue in 2005 over 2006,
and the completion of projects at other customers. Most significantly, while our
contract with the U.S. Department of State, which provided $4.5 million of
revenue in 2005, ended in September 2005, in our purchase agreement acquiring
Sytel we held back and retained $2 million of the original purchase price for
this contingency. Certain other contracts that concluded were small-business
contracts that were not renewed because Sytel no longer qualified as a small
business.
We are diligently working to replace the decline in revenue through our pursuit
of new contract vehicles, particularly within the Department of Defense. In this
respect, we recently announced in February 2007 that we are a member of the
Dimensions International, Inc. Team selected as one of the prime contractors on
the U.S. Army's Field and Installation Readiness Support Team ("FIRST")
contract. However, since the FIRST contract is an
indefinite-delivery/indefinite-quantity contract, we may not realize any revenue
under this contract in 2007 or future periods. We also maintained a keen focus
on existing contracts that were scheduled to expire in 2006 in which we had to
recompete for the work and were recently successful in winning several
significant recompete contracts.
24
Gross Profit and Gross Margin
YEAR ENDED DECEMBER 31,
---------------------------------------
2006 2005
------------------ ------------------
GROSS GROSS INCREASE %
AMOUNT MARGIN % AMOUNT MARGIN % (DECREASE) CHANGE
------- -------- ------- -------- ---------- -------
(In thousands, except percentages)
GROSS PROFIT
Commercial
IT Outsourcing Services .... $22,002 25.4% $19,315 25.1% $ 2,687 13.9%
Asset impairment loss ...... (580) -- -- -- (580) --
------- ------- -------
Total IT Outsourcing
Services ............. 21,422 24.8% 19,315 25.1% 2,107 10.9%
IT Consulting and Systems
Integration ............. 5,741 23.9% 6,068 24.8% (327) (5.4)%
Other Services ............. 1,610 17.0% 1,820 20.2% (210) (11.5)%
------- ------- -------
Total Commercial .............. 28,773 24.0% 27,203 24.7% 1,570 5.8%
Government Technology
Services ................... 12,604 26.6% 14,880 26.5% (2,276) (15.3)%
------- ------- -------
TOTAL GROSS PROFIT ............... $41,377 24.7% $42,083 25.3% $ (706) (1.7)%
======= ======= =======
Consistent with revenue, the majority of the overall decline in gross profit is
attributable to the conclusion of certain contracts in Government Technology
Services, the wind-down of certain systems implementation and training projects
in IT Consulting and Systems Integration, and a pre-tax charge to cost of
revenue for the net carrying value of assets of $580,000 related to our decision
to discontinue using certain software. These decreases were partially offset by
gross profit growth in IT Outsourcing Services largely from new customer
accounts.
IT Outsourcing Services
Gross profit from IT Outsourcing Services increased 10.9% to $21.4 million in
2006, from $19.3 million in 2005. Gross margin (defined as gross profit as a
percentage of revenue) decreased to 24.8% in 2006, from 25.1% in 2005. In 2006,
gross profit included an asset impairment loss recorded in the first quarter for
the net carrying value of assets of $580,000 related to our decision to
discontinue using certain software. Excluding the asset impairment loss, gross
margin increased to 25.4% in 2006. This segment experienced an increase in gross
profit and gross margin related to our shared services offering in EMEA for our
pharmaceutical clients where we experienced 45.6% revenue growth and were
successful in enhancing our workforce distribution of the service delivery for
these customers. However, this and other improvements in gross margin have been
largely offset by substandard and delayed profitability on two, new major
customer accounts in the Americas, the largest of which was launched in three
phases over an eight-month period that ended in June 2006. We have been
diligently pursuing improvement programs for these two new customer accounts and
other accounts that have been performing below expectations. While these
accounts experienced an improvement in gross profit and gross margin during the
second half of 2006, they remain below expectations and we believe they can be
further improved.
IT Consulting and Systems Integration Services
Gross profit from IT Consulting and Systems Integration decreased 5.4% to $5.7
million in 2006, from $6.1 million in 2005. Gross margin decreased to 23.9% in
2006, from 24.8% in 2005. The decrease in gross profit and gross margin was
primarily due to the wind-down of certain systems implementation and training
projects in the hospitality industry that drove significant growth in this
segment in 2005, and from a temporary decline in gross profit and gross margin
from our on-going project installing personal computers at Ford subcontracted
through Dell Inc. These declines were partially offset by our acquisition of
Akela in October 2005. Excluding the gross profit contributed by Akela, gross
profit decreased 26.8% to $4.3 million in 2006, from $5.9 million in 2005, and
gross margin decreased to 20.8% from 24.6%.
Government Technology Services
25
Gross profit from our Government Technology Services segment decreased 15.3% to
$12.6 million in 2006, from $14.9 million in 2005. Gross margin increased
slightly to 26.6% in 2006, from 26.5% in 2005. The decrease in gross profit is
primarily due to the conclusion of two contracts that provided $6.0 million in
revenue in 2005, and the completion of projects at other customers. The
inclusion of resale items for both periods had the effect of reducing gross
margin by approximately 50-70 basis points in 2006 and 2005.
Geographic Market Discussion
YEAR ENDED DECEMBER 31,
----------------------- INCREASE %
2006 2005 (DECREASE) CHANGE
-------- -------- ---------- -------
(In thousands)
REVENUE
Commercial
Americas ....... $ 63,494 $ 60,349 $ 3,145 5.2%
EMEA ........... 56,477 49,989 6,488 13.0%
-------- -------- -------
Total Commercial .. 119,971 110,338 9,633 8.7%
Government ........ 47,393 56,159 (8,766) (15.6)%
-------- -------- -------
TOTAL REVENUE ........ $167,364 $166,497 $ 867 0.5%
======== ======== =======
GROSS MARGIN
Commercial
Americas ....... 21.3% 24.5%
EMEA ........... 27.0% 24.8%
-------- --------
Total Commercial .. 24.0% 24.7%
Government ........ 26.6% 26.5%
-------- --------
TOTAL GROSS MARGIN ... 24.7% 25.3%
======== ========
Americas
Revenue generated in the Americas increased 5.2% to $63.5 million in 2006, from
$60.3 million in 2005, primarily due to 18.3% revenue growth from IT Outsourcing
Services resulting from new customer contracts awarded in 2006 and the fourth
quarter of 2005. This increase was partially offset by a decline in revenue from
certain existing customers, including an 8.2% decline in revenue in Ford, and a
17.1% decline in revenue from IT Consulting and Systems Integration from the
wind-down of certain projects.
Gross margin from the Americas decreased to 21.3% in 2006, from 24.5% in 2005.
Gross margin in 2006 includes an asset impairment loss for the net carrying
value of assets of $580,000 related to our decision to discontinue using certain
software. Excluding the asset impairment loss, gross margin decreased to 22.2%
in 2006. The Americas experienced a decrease in gross margin from IT Consulting
and Systems Integration from the wind-down of certain projects and from IT
Outsourcing Services related to the aforementioned substandard and delayed
profitability on two, new major customer accounts, the largest of which was
launched in three phases over an eight-month period that ended in June 2006.
EMEA
Revenue generated in EMEA increased 13.0% to $56.5 million in 2006, from $50.0
million in 2005, primarily due to our acquisition of Akela. Excluding revenue
from Akela, revenue generated in EMEA increased 6.0% to $52.1 million in 2006,
primarily due to revenue growth in IT Outsourcing Services from our shared
services offering for our pharmaceutical clients, Ford and new customer
accounts. Revenue was also positively affected by the weakening of the U.S.
dollar relative to the European euro and other international currencies in which
we conduct business. If revenue in EMEA for each quarter in 2006 were translated
into U.S. dollars at the comparable average exchange rate in 2005, reported
revenue would have decreased approximately $503,000. Since most of our
international operating expenses are also incurred in the same foreign
currencies in which the associated revenue is denominated, the net impact of
exchange rate fluctuations on gross profit is considerably less than the
estimated
26
impact on revenue and is not significant. Although the impact of exchange rate
fluctuations did not have a significant affect on reported revenue for 2006, the
estimated impact on revenue was significant on a quarter-by-quarter basis.
Reported revenue in the first and second quarters of 2006 was negatively
affected by approximately $1.4 million, most of which occurred in the first
quarter, while reported revenue in the third and fourth quarters of 2006 was
favorably affected by approximately $1.9 million, most of which occurred in the
fourth quarter.
Gross margin from EMEA increased to 27.0% in 2006, from 24.8% in 2005. EMEA
experienced an increase in gross margin due to margin improvements on various
existing IT Outsourcing accounts, particularly our shared services offering for
our pharmaceutical clients where we experienced 45.6% revenue growth and were
successful in enhancing our workforce distribution of the service delivery for
these customers. The gross margin improvement on existing accounts is a
combination of focused improvement efforts on certain accounts and
project-based, add-on work that we perform from time-to-time.
Operating Expenses and Other
YEAR ENDED DECEMBER 31,
------------------------ INCREASE %
2006 2005 (DECREASE) CHANGE
-------- -------- ---------- -------
(In thousands)
OPERATING EXPENSES AND OTHER
Selling, general, and administrative expense... $39,217 $34,892 $ 4,325 12.4%
Net interest income............................ $ 776 $ 390 $ 386 99.0%
Foreign currency transaction gain (loss)....... $ (186) $ 215 $ (401) (187)%
Income tax provision........................... $ 873 $ 2,402 $(1,529) (63.7)%
Selling, general, and administrative ("SG&A") expense increased 12.4% to $39.2
million, or 23.4% of total revenue, in 2006, from $34.9 million, or 21.0% of
total revenue, in 2005. The increase in SG&A expense can be primarily attributed
to: (1) legal and professional fees associated with responding to a complaint
filed by a shareholder ("Costa Brava") seeking to inspect certain books and
records of the Company, matters relating to the proxy contest initiated by Costa
Brava related to the election of our Board of Directors, and the Settlement
Agreement with respect to these matters ($1.4 million), (2) costs related to the
settlement of claims previously reported by the Company that were brought
against it by certain former Company officers ($650,000), (3) an increase in
Board of Director fees, including the value of potential equity awards
($439,000), (4) the acquisition of Akela ($1.3 million), (5) stock-based
compensation expense related to our adoption of Statement of Financial
Accounting Standards ("SFAS") No. 123R, "Share-Based Payment," primarily
attributable to stock options issued in 2006 ($314,000), (6) an increase in
401(k) expense related to increased employer matching contributions, more
participants in the plan, and the absence of a benefit from using plan
forfeitures to reduce employer contributions as we were able to do in 2005
($488,000) and (7) increased technology infrastructure costs ($905,000). These
increases were partially offset by a decrease in professional fees related to
our annual audit and tax compliance requirements and ongoing compliance with the
Sarbanes-Oxley Act of 2002 ($714,000), and reduced facility costs as we
consolidated offices and allowed certain leases to expire ($520,000).
Net interest income increased to $776,000 in 2006, from $390,000 in 2005, as a
result of earning higher average rates of return on invested cash equivalents.
The consolidated effective tax rates of 31.7% in 2006 and 30.8% in 2005 differ
from the statutory tax rate in the United States of 34% primarily due to the
utilization of operating loss carryforwards in Europe and the tax benefit of tax
rates in certain foreign countries that are lower than 34%. These favorable
items were partially offset by the unfavorable impact of state income taxes and
nondeductible expenses.
27
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2005 COMPARED TO THE YEAR ENDED DECEMBER 31, 2004
Revenue
YEAR ENDED DECEMBER 31,
----------------------- INCREASE %
2005 2004 (DECREASE) CHANGE
-------- -------- ---------- ------
(In thousands)
REVENUE
Commercial
IT Outsourcing Services................. $ 76,845 $ 77,205 $ (360) (0.5)%
IT Consulting and Systems Integration... 24,483 14,641 9,842 67.2%
Other Services.......................... 9,010 8,000 1,010 12.6%
-------- -------- -------
Total Commercial........................... 110,338 99,846 10,492 10.5%
Government Technology Services............. 56,159 28,142 28,017 99.6%
-------- -------- -------
TOTAL REVENUE................................. $166,497 $127,988 $38,509 30.1%
======== ======== =======
The majority of the overall revenue growth to $166.5 million in 2005 was
attributable to growth in Government Technology Services from our acquisition of
Sytel, Inc. ("Sytel") in January 2005 and growth in IT Consulting and Systems
Integration from TechTeam Cyntergy. Revenue growth was also favorably impacted
by our acquisition of Akela in October 2005 and having a full year of activity
from TechTeam A.N.E. ("A.N.E."), which we acquired in May 2004. Excluding the
acquisitions of Sytel, Akela and A.N.E. for both periods, total revenue
increased 3.1% to $127.7 million in 2005, from $123.9 million in 2004.
IT Outsourcing Services
Revenue from IT Outsourcing Services decreased slightly to $76.8 million in
2005, from $77.2 million in 2004, as a result of 24.1% revenue growth from our
blended service delivery solution in EMEA (Belgium and Romania), which was
offset by a 13.0% decline in revenue in the Americas. The growth in EMEA is
primarily due to new customer contracts launched in 2005. The revenue decrease
in the Americas is due to the reduction in business from DaimlerChrysler and the
conclusion of business with Liberty Mutual Insurance Company, which were
partially offset by new customer contracts.
Globally, IT Outsourcing Services revenue generated from Ford declined 4.6% to
$37.4 million in 2005, from $39.2 million in 2004. Revenue from Ford declined in
each country (United States, Germany and United Kingdom) except Sweden, which
had a moderate increase. Revenue from Ford decreased primarily due to a
reduction in the number of seats supported as Ford continues to restructure its
operations and reduce its worldwide workforce. Please refer to our discussion of
Ford in the "Impact of Business with Major Clients" section of MD&A.
IT Consulting and Systems Integration Services
Revenue from IT Consulting and Systems Integration increased 67.2% to $24.5
million in 2005, from $14.6 million in 2004, due to systems implementation and
training projects in the hospitality industry at TechTeam Cyntergy. Certain of
these projects wound down in 2006 resulting in a decline in revenue in 2006.
Government Technology Services
Revenue from Government Technology Services increased 99.6% to $56.2 million in
2005, from $28.1 million in 2004, due to our acquisition of Sytel in January
2005. Excluding Sytel, revenue decreased 10.3% to $25.2 million in 2005 due to a
decrease in resale items of $2.9 million from the absence of a large sale that
occurred in the third quarter of 2004. Excluding Sytel and resale items, revenue
increased slightly from the comparable period in 2004 primarily from additional
business with existing customers. Although revenue grew substantially in 2005,
revenue decreased 16.9% in the fourth quarter of 2005, from the third quarter of
2005, due to the loss of a contract at Sytel with the U.S. Department of State,
which contributed revenue of $4.6 million in 2005.
28
Gross Profit and Gross Margin
YEAR ENDED DECEMBER 31,
---------------------------------------
2005 2004
------------------ ------------------
GROSS GROSS INCREASE %
AMOUNT MARGIN % AMOUNT MARGIN % (DECREASE) CHANGE
------- -------- ------- -------- ---------- ------
(In thousands, except percentages)
GROSS PROFIT
Total Commercial
IT Outsourcing Services..... $19,315 25.1% $20,119 26.1% $ (804) (4.0)%
Asset impairment loss....... -- -- (485) -- 485 --
------- ------- -------
Total IT Outsourcing
Services.............. 19,315 25.1% 19,634 25.4% (319) (1.6)%
IT Consulting and Systems
Integration.............. 6,068 24.8% 3,262 22.3% 2,806 86.0%
Other Services.............. 1,820 20.2% 1,405 17.6% 415 29.5%
------- ------- -------
Total Commercial............... 27,203 24.7% 24,301 24.3% 2,902 11.9%
Government Technology
Services.................... 14,880 26.5% 6,286 22.3% 8,594 137%
------- ------- -------
TOTAL GROSS PROFIT................ $42,083 25.3% $30,587 23.9% $11,496 37.6%
======= ======= =======
Consistent with revenue, the majority of the overall gross profit growth was
attributable to growth in Government Technology Services from our acquisition of
Sytel, and growth in IT Consulting and Systems Integration services from
TechTeam Cyntergy. Gross profit growth was also favorably impacted by our
acquisition of Akela in October 2005 and having a full year of activity from
A.N.E., which we acquired in May 2004. Excluding the acquisitions of Sytel,
Akela and A.N.E. for both periods, total gross profit increased 8.0% to $32.4
million in 2005, from $30.0 million in 2004.
IT Outsourcing Services
Gross profit from IT Outsourcing Services decreased 4.0% to $19.3 million in
2005, from $19.6 million in 2004. Gross margin decreased to 25.1% in 2005, from
25.4% in 2004. In 2004, gross profit includes an asset impairment charge related
to certain software that would not be utilized to deliver services to our
customers or be used for any other purpose. Excluding the asset impairment
charge, gross margin decreased to 25.1% in 2005, from 26.1% 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 Americas and
lower gross profit on our Ford business in Europe. The resulting
underutilization of our facility in Southfield, Michigan, from the loss of
business from DaimlerChrysler and Liberty Mutual negatively impacted our gross
margin. These declines were partially offset by growth and margin improvement
from our blended service delivery solution in EMEA and from our Ford business in
the United States. The utilization of our Southfield, Michigan, facility
increased significantly in 2006 from the launch of two, major new customers that
we obtained in the fourth quarter of 2005.
IT Consulting and Systems Integration Services
Gross profit from IT Consulting and Systems Integration increased 86.0% to $6.1
million in 2005, from $3.3 million in 2004. Gross margin increased to 24.8% in
2005, from 22.3% in 2004. The increase in gross profit and gross margin was
primarily due to systems implementation and training projects in the hospitality
industry at TechTeam Cyntergy.
29
Government Technology Services
Gross profit from Government Technology Services increased 137% to $14.9 million
in 2005, from $6.3 million in 2004. Gross margin increased to 26.5% in 2005,
from 22.3% in 2004. The increase in gross profit was primarily due to our
acquisition of Sytel and new business from existing customers. The increase in
gross margin was primarily due to our acquisition of Sytel, more revenue from
higher margin service projects, and the absence in 2005 of a large volume of
lower margin resale items that occurred in 2004. Excluding Sytel, gross profit
increased 3.4% to $6.5 million in 2005, and gross margin increased to 25.8%.
Excluding Sytel and resale items for both periods, gross profit increased 5.5%
to $6.3 million in 2005, from $5.9 million in 2004, and gross margin increased
to 27.3% from 25.9%. The inclusion of resale items for both periods had the
effect of reducing gross margin by approximately 50-70 basis points in 2005 and
350-370 basis points in 2004. Although gross profit, like revenue, grew
substantially in 2005, gross profit decreased 14.3% in the fourth quarter of
2005, from the third quarter of 2005, due to the loss of a contract at Sytel
with the U.S. Department of State.
Geographic Market Discussion
YEAR ENDED DECEMBER 31,
------------------------ INCREASE %
2005 2004 (DECREASE) CHANGE
-------- -------- ---------- ------
(In thousands)
REVENUE
Commercial
Americas......... $ 60,349 $ 58,673 $ 1,676 2.9%
EMEA............. 49,989 41,173 8,816 21.4%
-------- -------- -------
Total Commercial.... 110,338 99,846 10,492 10.5%
Government.......... 56,159 28,142 28,017 99.6%
-------- -------- -------
TOTAL REVENUE.......... $166,497 $127,988 $38,509 30.1%
======== ======== =======
GROSS MARGIN
Commercial
Americas......... 24.5% 23.5%
EMEA............. 24.8% 25.6%
-------- --------
Total Commercial.... 24.7% 24.3%
Government.......... 26.5% 22.3%
-------- --------
TOTAL GROSS MARGIN..... 25.3% 23.9%
======== ========
Americas
Revenue generated in the Americas increased 2.9% to $60.3 million in 2005, from
$58.7 million in 2004, primarily due to significant revenue growth in IT
Consulting and Systems Integration from our hospitality business at TechTeam
Cyntergy and moderate revenue growth from new customer accounts in IT
Outsourcing Services. The increase in revenue was partially offset by a
substantial decline in revenue from two customer accounts -- DaimlerChrysler and
Liberty Mutual. Gross margin from the Americas increased to 24.5% in 2005, from
23.5% in 2004, primarily due to the aforementioned revenue growth in IT
Consulting and Systems Integration.
EMEA
Revenue generated in EMEA increased 21.4% to $50.0 million in 2005, from $41.2
million in 2004, primarily due to growth in business in Belgium and Romania from
new customer contracts, and our acquisitions of A.N.E and Akela. Excluding
revenue contributed by A.N.E and Akela for both periods, revenue generated in
Europe increased 14.4% to $42.4 million in 2005, from $37.0 million in 2004.
Revenue was also positively affected by the weakening of the U.S. dollar
relative to the European euro and other international currencies in which we
conduct business. If revenue in EMEA for each quarter in 2005 were translated
into U.S. dollars at the comparable average exchange rate in 2004, reported
revenue would have decreased by approximately $143,000. Since most of our
international operating expenses are also incurred in the same foreign
currencies in which the associated revenue is
30
denominated, the net impact of exchange rate fluctuations on gross profit is
considerably less than the estimated impact on revenue and is not significant.
Although the impact of exchange rate fluctuations did not have a significant
affect on reported revenue for 2005, the estimated impact on revenue was
significant on a quarter-by-quarter basis. Reported revenue in the first and
second quarters of 2005 was favorably affected by approximately $1.4 million,
while reported revenue in the third and fourth quarters of 2005 was negatively
affected by approximately $1.2 million, most of which occurred in the fourth
quarter. Gross margin from EMEA decreased to 24.8% in 2005, from 25.6% in 2004.
EMEA experienced a decrease in gross margin primarily due to a new customer
launch.
Operating Expenses and Other
YEAR ENDED DECEMBER 31,
----------------------- INCREASE %
2005 2004 (DECREASE) CHANGE
------- ------- ---------- ------
(In thousands)
OPERATING EXPENSES AND OTHER
Selling, general, and administrative expense..... $34,892 $24,040 $10,852 45.1%
Net interest income.............................. $ 390 $ 719 $ (329) (45.8)%
Foreign currency transaction gain................ $ 215 $ (91) $ 306 (336)%
Income tax provision............................. $ 2,402 $ 2,547 $ (145) (5.7)%
SG&A expense increased 45.1% to $34.9 million, or 21.0% of total revenue, in
2005, from $24.0 million, or 18.8% of total revenue, in 2004. This increase of
approximately $10.9 million in SG&A expense was primarily attributed to: (1) the
acquisitions of Sytel, A.N.E. and Akela ($7.1 million), (2) costs related to
compliance with Section 404 of the Sarbanes-Oxley Act of 2002 ($1.3 million),
(3) deployment of a new global human capital management system ($733,000) and
(4) a favorable adjustment made to our fourth quarter 2004 results related to
Michigan Single Business Tax, which had the effect of reducing our 2004 SG&A
expense ($387,000). Other increases resulted from fees related to the
replacement of our chief executive officer and the search for other management
positions, additional personnel and facility costs associated with the
establishment of our permanent facility in Romania, reinstatement of our 401(k)
plan matching contribution in November 2004, and higher sales commissions and
other sales and marketing expenses from the expansion of our North American
sales force. These increases were partially offset by lower expense in 2005
under our incentive compensation plans as certain performance targets were not
met.
Net interest income decreased to $390,000 in 2005, from $719,000 in 2004, as a
result of reduced interest income from cash and cash equivalents being held as
collateral in a non-interest-bearing account for a $15.0 million term loan
executed on January 3, 2005, to partially finance our acquisition of Sytel.
In 2005, the consolidated effective tax rate of 30.8% differed from the
statutory tax rate of 34% primarily due to the utilization of tax loss
carryforwards in Europe and the tax benefit of tax rates in certain foreign
countries that were lower than 34%. In 2004, the consolidated effective tax rate
of 35.5% differed from the statutory tax rate of 34% primarily due to state
income taxes and the unfavorable tax effect of providing a valuation allowance
against the future tax benefit of operating loss carryforwards in certain
foreign tax jurisdictions. These items were partially offset by the tax benefit
of tax rates in certain foreign countries that were lower than 34%, recognizing
a favorable tax benefit from the expected recovery of taxes paid in prior years,
and a change in estimate regarding our tax liabilities for prior years.
31
IMPACT OF BUSINESS WITH MAJOR CLIENTS
We conduct business under multiple contracts with various entities within the
Ford organization and with various agencies and departments of the U.S. Federal
Government. Ford accounted for 26.4% of our total revenue in 2006, as compared
to 27.4% in 2005 and 37.4% in 2004. The U.S. Federal Government accounted for
24.9% of our total revenue in 2006, as compared to 30.0% in 2005 and 16.7% in
2004. No single agency or department of the U.S. Federal Government comprised
10% or greater of our total revenue in any period presented.
Ford Motor Company
Our business with Ford consists of help desk and desk side services, distributed
server support, technical staffing, network management, and a specific project
installing personal computers subcontracted through Dell Inc. Revenue generated
through our business with Ford decreased to $44.1 million in 2006, from $45.7
million in 2005 and $47.9 million in 2004.
Ford has announced a new business plan (the "Way Forward Plan") that will result
in the reduction of its North American salaried work force by approximately 33
percent, the equivalent of about 14,000 positions, 4,000 of which occurred in
2006 and additional reductions occurred in February 2007.
Our largest contract with Ford is our Ford Global SPOC Program, which is
currently scheduled to expire in November 2008. Under the SPOC Program, we
provide a set of infrastructure support services under specific service level
metrics, and we invoice Ford based upon the number of seats we support. The
number of seats supported is determined bi-annually on December 1 and June 1 of
each year. If certain contractual conditions are met, Ford and TechTeam will
have the right during each six month period to request one out-of-cycle seat
adjustment.
Ford continues to seek cost savings on its total cost of IT infrastructure
support, and we continue to support Ford in finding ways to reduce its total
cost. Under the SPOC Program renewal in December 2005, we provided Ford with a
meaningful reduction in the price of our support through the redesign of our
services, the way our services were performed, and the service levels, but our
revenue from the SPOC Program remained relatively constant due to the expansion
of the SPOC Program into new parts of the Ford enterprise, such as Jaguar and
Land Rover. We believe this process will continue throughout 2007. Consequently,
while we will lose seats from areas in Ford where we currently provide service
under the SPOC Program, we anticipate successfully expanding our coverage of the
SPOC Program within Ford to largely off-set the decline in revenue caused by
decline in seats supported.
Although we cannot reliably predict the pace of Ford's restructuring plan or our
ability to expand our scope of work, we estimate that our total revenue from
Ford will decline approximately 4-7% in 2007 from 2006, without a material
change in the gross profit margin earned from the business. Moreover, we do not
believe that Ford's financial condition will otherwise affect our business with
Ford or the collectibility of our accounts receivable from Ford. However, any
failure to retain a significant amount of business with Ford, or bankruptcy
filing or other restructuring by Ford, would have a material adverse effect on
our operating results and liquidity.
U.S. Federal Government
We conduct business under multiple contracts with various agencies and
departments of the U.S. Federal Government. Revenue generated through our
business with the U.S. Federal Government decreased to $41.7 million in 2006,
from $50.0 million in 2005. Revenue from the U.S. Federal Government of $21.4
million in 2004 does not include revenue from Sytel, which we acquired on
January 3, 2005.
The U.S. Federal Government's fiscal year ends on September 30 of each year. It
is not uncommon for U.S. Federal Government agencies to award extra tasks or
complete other contract actions in the weeks before the end of the fiscal year
in order to avoid the loss of unexpended fiscal year funds. Moreover, in years
when the U.S. Federal Government does not complete its budget process before the
end of its fiscal year, government operations typically are funded pursuant to a
"continuing resolution" that authorizes agencies of the government to continue
to operate, but traditionally does not authorize new spending initiatives. When
the U.S. Federal Government operates pursuant to a continuing resolution, delays
can occur in procurement of products and services, and such delays can affect
our revenue, profit, and cash flow during the period of delay.
32
Our recent contract award from the National Institutes of Health ("NIH"), Office
of Information Technology, contains an expansion of services and positions
beyond 2006 levels. At present, the U.S. Congress has only appropriated budgets
for the Department of Defense and Department of Homeland Security and has not
appropriated the budget for NIH. Therefore, we are not able to commence full
work on the expanded services and positions until such budget is appropriated by
Congress and signed by the President, or until NIH is able to reallocate current
funds to these positions, should it able to do so. As a result, we anticipate a
delay before we are able to generate our full revenue under the expanded portion
of this contract, but we will be able to perform at U.S. Federal Government
fiscal year 2006 funding levels under the congressionally approved continuing
resolution.
NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value
Measurements." SFAS 157 establishes a framework for measuring fair value and
expands disclosures about fair value measurements. The changes to current
practice resulting from the application of SFAS 157 relate to the definition of
fair value, the methods used to measure fair value and the expanded disclosures
about fair value measurements. SFAS 157 is effective for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. We are
evaluating the impact of SFAS 157 on our financial position and results of
operations.
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48"). FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken in a tax return. FIN 48 also provides
guidance regarding subsequent reversal of a tax position, balance sheet
classification, accounting in interim periods, disclosure, and transition. FIN
48 is effective for fiscal years beginning after December 15, 2006. We have not
completed its analysis of the potential impact of FIN 48 on our financial
position or results of operations.
Effective January 1, 2006, we adopted the provisions of SFAS 123R, "Share-Based
Payment," which requires us to measure and recognize compensation expense for
all share-based payment awards to employees and directors based on estimated
fair values of all awards. SFAS 123R supersedes our previous accounting
methodology using the intrinsic value method under Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," and
related interpretations. Under the intrinsic value method, no share-based
compensation expense has been recognized in our consolidated statements of
operations for stock option awards with an exercise price equal to the fair
value of the underlying stock on the date of grant.
We adopted SFAS 123R using the modified prospective transition method. Under
this transition method, stock-based compensation expense recognized after the
effective date includes: (1) compensation expense for all share-based awards
granted prior to, but not yet vested, as of December 31, 2005, based on the
grant-date fair value estimated in accordance with the original provisions of
SFAS 123, and (2) compensation cost for all share-based awards granted
subsequent to January 1, 2006, based on the grant-date fair value estimated in
accordance with the provisions of SFAS 123R. In accordance with the modified
prospective transition method, our consolidated financial statements from prior
periods have not been restated and do not include the impact of SFAS 123R.
As a result of adopting SFAS 123R, we recorded pre-tax and after-tax amounts of
$314,000 and $207,000, respectively, for share-based compensation expense during
the year ended December 31, 2006, that we otherwise would not have recorded
under our previous accounting methodology.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $30.1 million at December 31, 2006, as compared
to $34.8 million at December 31, 2005. Cash and cash equivalents decreased $4.7
million in 2006 primarily due to $7.8 million in payments to reduce long-term
debt, $4.2 million in cash used for capital expenditures and $500,000 in
earn-out payments to the former shareholders of Digital Support Corporation,
partially offset by $3.4 million in cash provided by operations and $2.5 million
in proceeds from the issuance of common stock upon exercise of stock options.
Cash provided by operations of $3.4 million in 2006 was generated primarily by
income prior to non-cash charges for depreciation and amortization of $7.6
million and decreased 69.2% from $11.0 million in 2005 primarily due to a
decrease in net income of $3.6 million and additional working capital
requirements of $4.7 million.
33
We experienced a significant decrease in accounts payable during 2006. The
decrease in accounts payable was primarily driven by payments made under certain
contracts with the U.S. Department of Homeland Security ("DHS"). Sytel serves as
the prime contractor and Electronic Data Systems Corporation ("EDS") serves as
its subcontractor. EDS performs in excess of 95% of the work under the contract
and creates the invoices, which Sytel forwards to the DHS. Under the subcontract
agreement between Sytel and EDS, Sytel does not pay EDS' invoices until Sytel
receives payment from the DHS. As a result, there may be sizable swings in our
accounts receivable and accounts payable with a minimal impact on cash flow in
the future.
Long-term cash requirements, other than for normal operating expenses, are
anticipated for the continued expansion in Europe and new expansion into the Far
East, enhancements of existing technologies, additional consideration that is or
may become payable to the selling shareholders of previously acquired companies
based on specific performance conditions and operating targets, possible
repurchases of our common stock, possible payment of dividends and the possible
acquisition of businesses complementary to our existing businesses. We believe
that positive cash flows from operations, together with existing cash balances,
will continue to be sufficient to meet our ongoing operational requirements for
the next twelve months and foreseeable future. We have historically not paid
dividends.
MATERIAL COMMITMENTS
Following are contractual obligations outstanding at December 31, 2006:
OPERATING
MATURITIES OF CONTRACTUAL OBLIGATIONS DEBT LEASES
------------------------------------- ------ ---------
Less than one year .................. $ -- $ 4,629
1-3 years ........................... -- 10,469
4-5 years ........................... 3,174 5,381
Thereafter .......................... -- 6,058
------ -------
Total ............................... $3,174 $26,537
====== =======
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our financial statements in conformity with United States generally
accepted accounting principles ("GAAP"). The preparation of these consolidated
financial statements under GAAP requires management to make estimates and
judgments that affect the reported amount of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expense during the
reporting period. On an ongoing basis, management evaluates its estimates
including those related to uncollectible accounts receivable, contingent
liabilities, revenue recognition, goodwill, and other intangible assets.
Management bases its estimates on historical experience and on various other
factors that are believed to be reasonable at the time the estimates are made.
Actual results may differ from these estimates under different assumptions or
conditions. Management believes that our critical accounting policies that
require more significant judgments and estimates in the preparation of our
consolidated financial statements are revenue recognition, deferred income
taxes, accounts receivable, goodwill impairment, long-lived assets and
identifiable intangible asset impairment, and business combinations.
34
REVENUE RECOGNITION:
Under all situations, revenue is not recognized until earned, which is when
persuasive evidence of an arrangement exists, services have been provided, the
revenue terms are fixed and determinable, and collectibility is reasonably
assured.
We earn revenue under our IT Outsourcing Services segment under one of the
following four models: (1) time and material contracts under which we bill an
agreed rate for each help desk agent based on the number of units (i.e., hours
or days) the individual agent worked during the month; (2) per-transaction
contracts under which we bill an agreed rate per incident or call handled during
a month or per minute for the length of the telephone call for the incident; (3)
fixed monthly fee contracts under which we agree to provide all of the
agreed-upon scheduled services on a monthly basis for a fixed monthly fee; and
(4) per-seat contracts under which we agree to provide agreed-upon scheduled
services for a monthly fee that is determined by multiplying the number of users
supported at the customer by the monthly per-seat fee. Within the IT Outsourcing
Services segment, greater than 99% of our services are delivered as a "monthly
service" and not over multiple periods. We also refer to our fixed-fee and
per-seat contracts as "managed service" contracts. Many of our contracts that we
bill on a per-transaction basis contain a minimum monthly fee, which is derived
by multiplying the agreed-upon forecast of anticipated incidents by an
agreed-upon minimum percentage. Under this arrangement, we receive a minimum
revenue amount for having committed to provide a specific level of staff to
support the services projected during a month. Since we invoice the customer for
the minimum fee and do not reduce future billings, we recognize the minimum fee
as revenue in the month in which the incidents are below the customer's minimum
forecast. Incident resolution usually occurs in the same month that incidents
are reported. Under our managed service contracts, we generally do not incur
material costs in a future month to complete a service obligation that arose in
a prior month. In those instances where our service obligation is not complete
for a month and we expect to incur more than immaterial costs in a future month,
we will defer an amount of revenue that represents the fair value of that
service obligation.
Revenue from all other services that we provide under our other operating
segments -- Government Technology Services, IT Consulting and Systems
Integration, and Other Services -- may be categorized into two primary types:
time and material and fixed price. For the year ended December 31, 2006,
approximately 71% of our revenue in these business segments were time and
material and 24% were fixed price (a substantial majority of which are fixed
price level of effort contracts).
Revenue is recognized under time and materials contracts as time is spent at
hourly rates, which are negotiated with the customer, plus the cost of any
allowable material costs and out-of-pocket expenses. Revenue is recognized under
the majority of fixed price contracts, which are predominantly level of effort
contracts, using the cost-to-cost method for all services provided. In addition,
we evaluate contracts for multiple deliverables, which may require the
segmentation of each deliverable into separate accounting units for proper
revenue recognition.
Our contracts with agencies of the U.S. Federal Government are subject to
periodic funding by the respective contracting agency. Funding for a contract
may be provided in full at inception of the contract or ratably throughout the
term of the contract as the services are provided. From time to time we may
proceed with work on unfunded portions of existing contracts based on customer
direction pending finalization and signing of formal funding documents. All
revenue recognition is deferred during periods in which funding is not received.
Allowable contract costs incurred during such periods are deferred if the
receipt of funding is assessed as probable. In evaluating the probability of
funding being received, we consider our previous experience with the customer,
communications with the customer regarding funding status, and our knowledge of
available funding for the contract or program. If funding is not assessed as
probable, costs are expensed as incurred.
We recognize revenue under cost-based U.S. Federal Government contracts based on
allowable contract costs, as mandated by the U.S. Federal Government's cost
accounting standards. The costs we incur under U.S. Federal Government contracts
are subject to regulation and audit by certain agencies of the U.S. Federal
Government. Contract cost disallowances, resulting from government audits, have
not historically been significant.
35
DEFERRED INCOME TAXES:
Deferred income taxes represent temporary differences in the recognition of
certain items for income tax and financial reporting purposes. Realization of
deferred tax assets depends upon sufficient levels of future taxable income. If
at any time we believe that current or future taxable income does not support
the realization of deferred tax assets, a valuation allowance is provided.
Based on historical losses in Belgium and Romania, we have provided a valuation
allowance against the deferred tax asset related to our net operating loss
carryforward in these countries. We anticipate providing a valuation allowance
for any future losses incurred in Belgium and Romania. No valuation allowance
has been recognized against other deferred tax assets, which are in the United
States, as we believe it is more likely than not that these deferred tax assets
will be realized based on estimates of future taxable income, which have
considered, among other factors, the future benefits of our recent acquisitions.
ACCOUNTS RECEIVABLE:
We periodically review our accounts receivable balances for collectibility based
on a combination of historical experience and existing economic conditions. The
definition of "delinquent accounts" is based on the governing contractual terms.
Delinquent accounts and balances are reserved when we determine they are more
likely than not to become uncollectible. Our customers are generally large,
well-capitalized entities. We generally do not require collateral and do not
charge interest on past due balances.
We are not currently aware of major financial difficulties at any major customer
and do not anticipate large uncollectible accounts in the future. However,
Ford's long-term debt rating was lowered to "below investment grade" status by
Standard & Poor's Rating Services during 2005, and was downgraded further on
March 13, 2006, by Fitch Ratings Services. At this time, we do not expect this
downgrade to negatively affect our business with Ford or the collectibility of
our accounts receivable from Ford. However, any bankruptcy filing by Ford would
have a material adverse effect on the collectibility of our accounts receivable
from Ford and our operating results and liquidity.
GOODWILL IMPAIRMENT:
Goodwill relating to our acquisitions represents the excess of cost over the
fair value of net tangible and separately identifiable intangible assets
acquired, and has a carrying amount of approximately $22.5 million and $22.1
million at December 31, 2006 and 2005, respectively. The majority of the
increase in goodwill in 2006 was related to the earn-out payments for Akela and
ANE.
We completed our annual impairment analyses at October 1, 2006 and 2005, noting
no indications of impairment for any of our reporting units. At December 31,
2006, there have been no events or circumstances that would indicate an
impairment test should be performed sooner than our annual test each October
1st.
LONG-LIVED ASSETS AND IDENTIFIABLE INTANGIBLE ASSET IMPAIRMENT:
The carrying amount of long-lived assets and identifiable intangible assets was
approximately $19.1 million and $19.7 million at December 31, 2006 and 2005,
respectively.
We continually evaluate whether events and circumstances have occurred that
indicate the remaining estimated useful lives of long-lived and identifiable
intangible assets may warrant revision or that the remaining balances may not be
recoverable. When factors or events indicate that such costs should be evaluated
for possible impairment, we estimate the undiscounted cash flows of the assets
over their remaining lives to evaluate whether the costs are recoverable. Such
events could include, but are not limited to, the loss of a significant customer
or contract, decreases in U.S. Federal Government funding of certain programs,
or other similar events.
During the first quarter of 2006, we discontinued using certain software related
to our help desk operations. We expected no future cash flows related to the
asset and, therefore, recorded an impairment loss equal to the net book value of
the asset of $580,000. The impairment was recorded in our IT Outsourcing
Services segment.
During the fourth quarter of 2004, we determined that customization costs for
certain software related to our help desk operations would not be utilized to
deliver services to our customers or be used for any other purpose. Since
36
we expected no future cash flows related to the customization, we recorded an
impairment loss of $485,000 in our IT Outsourcing Services segment, which
represented the net book value of these costs.
BUSINESS COMBINATIONS:
We apply the provisions of SFAS No. 141, "Business Combinations," whereby the
net tangible and separately identifiable intangible assets acquired and
liabilities assumed are recognized at their estimated fair market values at the
acquisition date. The purchase price in excess of the estimated fair market
value of the net tangible and separately identifiable intangible assets acquired
represents goodwill. The allocation of the purchase price related to our
business combinations involves significant estimates and management judgment
that may be adjusted during the allocation period, but in no case beyond one
year from the acquisition date. Costs incurred related to successful business
combinations are capitalized as costs of business combinations, while costs
incurred by us for unsuccessful or terminated acquisition opportunities are
expensed when we determine that such opportunities will no longer be pursued.
Costs incurred related to probable business combinations are deferred.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, we are subject to market exposure from changes
in foreign currency exchange rates. We do not have any material market risk
related to interest rates as our debt obligations have fixed interest rates. We
are subject to the risk of changes in foreign currency exchange rates due to our
global operations as we provide services in the United States and Europe. As a
result, our financial results and position could be significantly affected by
factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets in which we provide services.
Our operating results are primarily exposed to changes in exchange rates between
the U.S. dollar and European currencies; specifically the European euro, British
pound sterling, Swedish kroner, and Romanian lei. As currency exchange rates
change, translation of the statements of operations of our international
subsidiaries into U.S. dollars affects year-over-year comparability of operating
results. We do not hedge operating translation risks because cash flows from
international operations are generally reinvested locally. Also, certain of our
trade receivables at our international subsidiaries are denominated in
currencies other than the local currency of the TechTeam entity that delivers
the service. As currency exchange rates change, our operating results will be
affected by foreign currency transaction gains or losses on the receivable
balance until it is collected. We generally do not enter into derivatives or
similar instruments to manage our exposure to fluctuations in exchange rates
related to trade receivables. From time to time, we enter into foreign currency
option or forward contracts to manage our exposure to fluctuations in the
exchange rate between the U.S. dollar and European euro. No derivatives, options
contracts or similar instruments were outstanding at December 31, 2006. We do
not enter into derivatives or similar instruments for trading or speculative
purposes.
At December 31, 2006 and 2005, our net current assets (defined as current assets
less current liabilities) subject to foreign currency translation risk were
$20.8 million and $15.6 million, respectively. The potential decrease in net
current assets from a hypothetical 10% adverse change in quoted foreign currency
exchange rates would be $2.1 million and $1.5 million at December 31, 2006 and
2005, respectively. Approximately $1.5 million and $1.4 million of our trade
receivables at our international subsidiaries at December 31, 2006 and 2005,
respectively, are denominated in currencies other than the local currency of the
TechTeam entity that delivers the service. The potential loss on trade
receivables from a hypothetical 10% adverse change in quoted foreign currency
exchange rates would be $150,000 and $140,000 at December 31, 2006 and 2005,
respectively. The sensitivity analysis presented assumes a parallel shift in
foreign currency exchange rates yet exchange rates rarely move in the same
direction. This assumption may overstate the impact of changing exchange rates
on individual assets and liabilities denominated in a foreign currency.
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of TechTeam Global, Inc. and
Subsidiaries are included in this Item 8:
PAGE
----
Management Report on Internal Control over Financial Reporting........... 39
Report of Independent Registered Public Accounting Firm -- Internal
Control over Financial Reporting...................................... 39
Report of Independent Registered Public Accounting Firm -- Financial
Statements............................................................ 40
Consolidated Statements of Operations -- Years Ended December 31, 2006,
2005 and 2004......................................................... 41
Consolidated Statements of Comprehensive Income -- Years Ended
December 31, 2006, 2005 and 2004...................................... 42
Consolidated Balance Sheets -- As of December 31, 2006 and 2005.......... 43
Consolidated Statements of Shareholders' Equity -- Years Ended
December 31, 2006, 2005 and 2004...................................... 45
Consolidated Statements of Cash Flows -- Years Ended December 31, 2006,
2005 and 2004......................................................... 46
Notes to the Consolidated Financial Statements........................... 47
The following financial statement schedule of TechTeam Global, Inc. and
Subsidiaries is included pursuant to the requirements of Item 15(c):
Schedule II -- Valuation and Qualifying Accounts for the years ended December
31, 2006, 2005 and 2004
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission and for which the
information is not already included in the financial statements are not required
under the related instructions or are not applicable and, therefore, have been
omitted.
38
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of
the Exchange Act). Our management, with the participation of our chief executive
officer and chief financial officer, assessed the effectiveness of our internal
control over financial reporting based on the framework in "Internal
Control--Integrated Framework," issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO Framework"). Based on our
assessment under the COSO Framework, our management concluded that our internal
control over financial reporting was effective as of December 31, 2006.
Our independent registered public accounting firm, Ernst & Young LLP, issued an
attestation report on management's assessment of the effectiveness of our
internal control over financial reporting as of December 31, 2006, which appears
below.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of TechTeam Global, Inc.
We have audited management's assessment, included in the accompanying
Management's Annual Report on Internal Control Over Financial Reporting, that
TechTeam Global, Inc. maintained effective internal control over financial
reporting as of December 31, 2006, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO criteria"). TechTeam Global,
Inc.'s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that TechTeam Global, Inc. maintained
effective internal control over financial reporting as of December 31, 2006, is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, TechTeam Global, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006,
based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
TechTeam Global, Inc. as of December 31, 2006 and 2005, and the related
consolidated statements of operations, comprehensive income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2006, and our report dated March 14, 2007, expressed an unqualified opinion
thereon.
/s/ Ernst & Young LLP
Detroit, Michigan
March 14, 2007
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders TechTeam Global, Inc.
We have audited the accompanying consolidated balance sheets of TechTeam Global,
Inc. and subsidiaries (the "Company") as of December 31, 2006 and 2005, and the
related consolidated statements of operations, comprehensive income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2006. Our audits also included the financial statement
schedule listed in index at Item 15(a). These financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of TechTeam Global,
Inc. and subsidiaries at December 31, 2006 and 2005, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2006, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
As described in Note 8 to the consolidated financial statements, the Company
changed its method of accounting for share based management awards in accordance
with financial accounting standards 123(R) "Share-Based Payments."
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of TechTeam
Global, Inc.'s internal control over financial reporting as of December 31,
2006, based on criteria established in Internal Control--Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 14, 2007, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Detroit, Michigan
March 14, 2007
40
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
YEAR ENDED DECEMBER 31,
------------------------------
2006 2005 2004
-------- -------- --------
REVENUE
IT Outsourcing Services.................................. $ 86,461 $ 76,845 $ 77,205
Government Technology Services........................... 47,393 56,159 28,142
IT Consulting and Systems Integration.................... 24,013 24,483 14,641
Other Services........................................... 9,497 9,010 8,000
-------- -------- --------
TOTAL REVENUE............................................... 167,364 166,497 127,988
-------- -------- --------
COST OF REVENUE
Cost of revenue.......................................... 125,407 124,414 96,916
Asset impairment loss.................................... 580 -- 485
-------- -------- --------
TOTAL COST OF REVENUE....................................... 125,987 124,414 97,401
-------- -------- --------
GROSS PROFIT................................................ 41,377 42,083 30,587
Selling, general, and administrative expense............. 39,217 34,892 24,040
-------- -------- --------
OPERATING INCOME............................................ 2,160 7,191 6,547
Net interest income...................................... 776 390 719
Foreign currency transaction gain (loss)................. (186) 215 (91)
-------- -------- --------
INCOME BEFORE INCOME TAXES.................................. 2,750 7,796 7,175
Income tax provision..................................... 873 2,402 2,547
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS........................... 1,877 5,394 4,628
Income (loss) from discontinued operations, net of tax... (43) 74 97
-------- -------- --------
NET INCOME.................................................. $ 1,834 $ 5,468 $ 4,725
======== ======== ========
BASIC EARNINGS PER COMMON SHARE
Income from continuing operations........................ $ 0.19 $ 0.55 $ 0.49
Income from discontinued operations...................... -- 0.01 0.01
-------- -------- --------
Net income per common share.............................. $ 0.18 $ 0.56 $ 0.51
======== ======== ========
BASIC EARNINGS PER PREFERRED SHARE
Income from continuing operations........................ $ N/A $ 0.55 $ 0.49
Income from discontinued operations...................... N/A 0.01 0.01
-------- -------- --------
Net income per preferred share........................... $ N/A $ 0.56 $ 0.51
======== ======== ========
DILUTED EARNINGS PER COMMON SHARE
Income from continuing operations........................ $ 0.18 $ 0.54 $ 0.48
Income from discontinued operations...................... -- 0.01 0.01
-------- -------- --------
Net income per common share.............................. $ 0.18 $ 0.54 $ 0.49
======== ======== ========
WEIGHTED AVERAGE SHARES AND SHARE EQUIVALENTS OUTSTANDING
Basic--common............................................ 10,092 9,508 8,660
Basic--preferred......................................... -- 244 690
Diluted--common.......................................... 10,176 9,832 8,904
See accompanying notes.
41
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except per share data)
YEAR ENDED DECEMBER 31,
-------------------------
2006 2005 2004
------ ------- ------
NET INCOME, AS SET FORTH IN THE CONSOLIDATED
STATEMENTS OF OPERATIONS................................. $1,834 $ 5,468 $4,725
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustment.................. 2,839 (3,277) 2,193
------ ------- ------
COMPREHENSIVE INCOME........................................ $4,673 $ 2,191 $6,918
====== ======= ======
See accompanying notes.
42
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
DECEMBER 31,
-------------------
2006 2005
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents ............................... $ 30,082 $ 34,756
Accounts receivable (less allowance of $466 and $757
at December 31, 2006 and 2005, respectively) ......... 41,189 43,696
Prepaid expenses and other .............................. 3,798 2,597
Income taxes receivable ................................. 1,143 --
Deferred income taxes ................................... 155 141
-------- --------
TOTAL CURRENT ASSETS .................................... 76,367 81,190
-------- --------
PROPERTY, EQUIPMENT AND PURCHASED SOFTWARE
Computer equipment and office furniture ................. 26,516 23,577
Software ................................................ 13,891 12,885
Leasehold improvements .................................. 5,584 5,047
Transportation equipment ................................ 462 425
-------- --------
46,453 41,934
Less -- Accumulated depreciation and amortization ....... (37,336) (33,871)
-------- --------
NET PROPERTY, EQUIPMENT AND PURCHASED SOFTWARE .......... 9,117 8,063
-------- --------
OTHER ASSETS
Goodwill ................................................ 22,458 22,104
Intangible assets, net .................................. 9,245 11,213
Other ................................................... 743 440
-------- --------
TOTAL OTHER ASSETS ...................................... 32,446 33,757
-------- --------
TOTAL ASSETS ............................................... $117,930 $123,010
======== ========
See accompanying notes.
43
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
DECEMBER 31,
-------------------
2006 2005
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ........................................ $ 8,350 $ 12,753
Accrued payroll, related taxes and withholdings ......... 9,512 10,020
Accrued expenses ........................................ 7,102 7,248
Accrued income taxes .................................... -- 331
Deferred revenue ........................................ 1,232 303
-------- --------
TOTAL CURRENT LIABILITIES ............................... 26,196 30,655
-------- --------
LONG-TERM LIABILITIES
Long-term debt .......................................... 3,174 10,937
Deferred income taxes ................................... 1,690 2,614
Other long-term liabilities ............................. 562 564
-------- --------
TOTAL LONG-TERM LIABILITIES ............................. 5,426 14,115
-------- --------
REDEEMABLE CONVERTIBLE PREFERRED STOCK, 5,000,000 shares
authorized, no shares issued and outstanding ............ -- --
-------- --------
SHAREHOLDERS' EQUITY
Common stock, $0.01 par value, 45,000,000 shares
authorized, 10,385,993 and 9,943,262 shares issued and
outstanding at December 31, 2006 and 2005,
respectively ......................................... 104 99
Additional paid-in capital .............................. 71,672 69,148
Unamortized deferred compensation ....................... -- (866)
Retained earnings ....................................... 12,095 10,261
Accumulated other comprehensive income (loss) ........... 2,437 (402)
-------- --------
TOTAL SHAREHOLDERS' EQUITY .............................. 86,308 78,240
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................. $117,930 $123,010
======== ========
See accompanying notes.
44
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
ACCUMULATED
ADDITIONAL UNAMORTIZED OTHER TOTAL
COMMON PAID-IN DEFERRED RETAINED COMPREHENSIVE SHAREHOLDERS'
STOCK CAPITAL COMPENSATION EARNINGS INCOME (LOSS) EQUITY
------ ---------- ------------ -------- ------------- -------------
BALANCE AT JANUARY 1, 2004 ............ $ 88 $59,932 $ -- $ 68 $ 682 $60,770
Proceeds from issuance of shares
under stock option plans ........ 3 1,384 -- -- -- 1,387
Common stock issued to directors ... -- 65 -- -- -- 65
Purchase of common stock ........... (3) (2,741) -- -- -- (2,744)
Issuance of restricted stock ....... -- 533 (533) -- -- --
Net income for 2004 ................ -- -- -- 4,725 -- 4,725
Foreign currency translation
adjustment ...................... -- -- -- -- 2,193 2,193
Other .............................. -- 264 -- -- -- 264
---- ------- ----- ------- ------- -------
BALANCE AT DECEMBER 31, 2004 .......... 88 59,437 (533) 4,793 2,875 66,660
Proceeds from issuance of shares
under stock option plans ........ 4 3,030 -- -- -- 3,034
Common stock issued to directors ... -- 70 -- -- -- 70
Issuance of restricted stock ....... -- 440 (440) -- -- --
Conversion of preferred stock into
common stock .................... 7 4,993 -- -- -- 5,000
Equity instruments issued in
connection with acquisitions .... -- 842 -- -- -- 842
Amortization of deferred
compensation .................... -- -- 107 -- -- 107
Net income for 2005 ................ -- -- -- 5,468 -- 5,468
Foreign currency translation
adjustment ....................... -- -- -- -- (3,277) (3,277)
Other .............................. -- 336 -- -- -- 336
---- ------- ----- ------- ------- -------
BALANCE AT DECEMBER 31, 2005 .......... 99 69,148 (866) 10,261 (402) 78,240
Proceeds from issuance of shares
under stock option plans ........ 4 2,538 -- -- -- 2,542
Common stock issued to directors ... -- 19 -- -- -- 19
Issuance of restricted stock ....... 1 (1) -- -- -- --
Share-based compensation ........... -- 443 -- -- -- 443
Reclassification of deferred
compensation .................... -- (866) 866 -- -- --
Net income for 2006 ................ -- -- -- 1,834 -- 1,834
Foreign currency translation
adjustment ...................... -- -- -- -- 2,839 2,839
Other .............................. -- 391 -- -- -- 391
---- ------- ----- ------- ------- -------
BALANCE AT DECEMBER 31, 2006 .......... $104 $71,672 $ -- $12,095 $ 2,437 $86,308
==== ======= ===== ======= ======= =======
See accompanying notes.
45
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED DECEMBER 31,
----------------------------
2006 2005 2004
------- -------- -------
OPERATING ACTIVITIES
Net income.................................................. $ 1,834 $ 5,468 $ 4,725
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.......................................... 3,146 3,670 3,884
Amortization.......................................... 2,002 1,819 478
Asset impairment loss................................. 580 -- 485
Non-cash expense related to stock options and issuance
of common stock and restricted common stock........ 462 513 329
Provision (credit) for deferred income taxes.......... (938) (809) 1,186
Provision (credit) for uncollectible accounts......... 232 (286) 220
Other................................................. 30 39 12
Changes in operating assets and liabilities-
Accounts receivable................................ 3,690 (4,867) (4,172)
Prepaid expenses and other assets.................. (1,455) (21) (779)
Accounts payable................................... (4,628) 1,475 (102)
Accrued payroll, related taxes and withholdings.... (905) 1,096 2,383
Income taxes receivable and accrued income taxes... (1,629) (671) (368)
Deferred revenue................................... 918 (1,132) 624
Accrued expenses and other liabilities............. (53) 4,726 33
(Income) loss from discontinued operations............ 43 (74) (97)
Net operating cash flow from discontinued operations.. 62 65 1,193
------- -------- -------
Net cash provided by operating activities................ 3,391 11,011 10,034
------- -------- -------
INVESTING ACTIVITIES
Purchases of property, equipment, and software.............. (4,182) (3,669) (2,465)
Cash paid for acquisitions, net of cash acquired............ (494) (25,232) (1,036)
------- -------- -------
Net cash used in investing activities.................... (4,676) (28,901) (3,501)
------- -------- -------
FINANCING ACTIVITIES
Proceeds from issuance of common stock...................... 2,542 3,006 1,387
Tax benefit from stock options.............................. 497 -- --
Payments on long-term debt.................................. (7,763) (7,122) (885)
Proceeds from issuance of long-term debt.................... -- 18,033 --
Purchase of Company common stock............................ -- -- (2,744)
Net financing cash flow from discontinued operations........ -- (11) (219)
------- -------- -------
Net cash provided by (used in) financing activities...... (4,724) 13,906 (2,461)
------- -------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS... 1,335 (1,696) 1,169
------- -------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............... (4,674) (5,680) 5,241
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................. 34,756 40,436 35,195
------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR....................... $30,082 $ 34,756 $40,436
======= ======== =======
See accompanying notes.
46
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND BASIS OF PRESENTATION
TechTeam Global, Inc. ("TechTeam" or the "Company") is a global provider of
information technology and business process outsourcing services to Fortune 1000
companies, government entities, multinational companies, product and service
providers and small and mid-size companies. TechTeam also offers other services,
including technology deployment and migration services, consulting, systems
integration, training and technical staffing.
TechTeam provides support services globally through its wholly-owned
subsidiaries: TechTeam Global NV/SA and its subsidiary TechTeam A.N.E. NV/SA;
TechTeam Global Ltd.; TechTeam Global GmbH; TechTeam Global AB; S.C. TechTeam
Global SRL; TechTeam Akela SRL; TechTeam Global Sp. z o.o.; TechTeam Cyntergy,
L.L.C.; TechTeam Government Solutions, Inc. (formerly Digital Support
Corporation) and its subsidiary Sytel, Inc.; and TechTeam Asia Pacific (Private)
Ltd. TechTeam's other wholly-owned subsidiary is TechTeam Capital Group, L.L.C.
("Capital Group"), an equipment leasing business that has ceased operations and
which has been presented as a discontinued operation in the accompanying
consolidated financial statements for all periods presented (see Note 16).
In 2007, the Company acquired TechTeam SQM AB (formerly SQM Sverige AB) in
Sweden, which is a wholly-owned subsidiary of TechTeam Global AB.
The consolidated financial statements include TechTeam Global, Inc. and its
subsidiaries. Intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenue and expense during the reporting
period. Actual results could differ from these estimates. Significant estimates
include realization of deferred tax assets, reserves for uncollectible accounts
receivable and assumptions used in testing goodwill and other long-lived assets
for impairment.
CASH AND CASH EQUIVALENTS
Cash includes both interest bearing and non-interest bearing deposits, which are
available on demand. Cash equivalents include all liquid investments with
maturities of three months or less when purchased and are primarily comprised of
time deposits and certificates of deposit. The Company's cash equivalents are
subject to credit risk. The Company mitigates credit risk by investing in only
investment grade securities.
In connection with the Company's credit agreement with LaSalle Bank Midwest,
N.A., outstanding borrowings are collateralized by a compensating balance cash
deposit required to be held at the bank equal to the amount of any outstanding
borrowings. At December 31, 2006 and 2005, the Company held compensating balance
cash deposits totaling $3,439,000 and $11,200,000, respectively.
47
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
ACCOUNTS RECEIVABLE
Accounts receivable balances are periodically reviewed for collectibility based
on a combination of historical experience and existing economic conditions. The
definition of "delinquent accounts" is based on the governing contractual terms.
Delinquent accounts and balances are reserved when it is determined they are
more likely than not to become uncollectible. Most of the Company's customers
are large, well-capitalized entities. Generally, no collateral is required and
no interest is charged on past due balances.
PROPERTY, EQUIPMENT AND PURCHASED SOFTWARE
Property, equipment and purchased software for internal use are stated at cost.
Computer equipment, office furniture and transportation equipment are
depreciated using the straight-line method over their estimated useful lives,
ranging from three to ten years. Leasehold improvements are amortized on a
straight-line basis over the shorter of the estimated useful lives of the
improvements or the term of the lease. Software is amortized over three to seven
years.
Long-lived assets are evaluated for impairment when events occur or
circumstances indicate that the remaining estimated useful lives may warrant
revision or that the remaining balances may not be recoverable. When this
occurs, an estimate of undiscounted cash flows is used to determine if the
remaining balances are recoverable. In the first quarter of 2006, the Company
determined that certain software would no longer be used. Since no future cash
flows related to the software asset were expected, an impairment loss of
$580,000 was recorded to cost of revenue in the IT Outsourcing Services segment.
In the fourth quarter of 2004, the Company determined that customization costs
for certain software would not be utilized to deliver services to customers or
be used for any other purpose. Since no future cash flows were expected related
to the customization, an impairment loss of $485,000 was recorded to cost of
revenue in the IT Outsourcing Services segment.
GOODWILL AND OTHER INTANGIBLE ASSETS
On October 3, 2005 the Company acquired all of the outstanding capital stock of
Akela Informatique SRL ("Akela"). On May 13, 2004, TechTeam Global NV/SA, the
Company's wholly-owned subsidiary in Belgium, acquired all of the outstanding
stock of Advanced Network Engineering NV/SA ("A.N.E."). Goodwill resulting from
these acquisitions is not deductible for federal income tax purposes and has
been assigned to the IT Consulting and Systems Integration segment.
On January 3, 2005, the Company acquired all of the outstanding capital stock of
Sytel, Inc. ("Sytel"). Goodwill resulting from this acquisition is not
deductible for federal income tax purposes and has been assigned to the
Government Technology Services segment.
Goodwill is not amortized, but instead is subject to an annual impairment test
on October 1. In connection with the Company's goodwill impairment evaluation,
the Company identifies its reporting units and determines the carrying value of
each reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to these reporting units. The Company
determines the estimated fair value of each reporting unit and compares it to
the carrying amount of the reporting unit. As a result of this comparison, there
was no indication that the reporting units' fair values were less than their
carrying values and, therefore, no goodwill impairment loss was recorded in any
period presented.
48
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In the future, to the extent the carrying amount of a reporting unit exceeds the
fair value of a reporting unit, an indication would exist that a reporting
unit's goodwill may be impaired, and the Company would be required to perform
the second step of the impairment test. In the second step, the Company must
compare the implied fair value of the reporting unit goodwill with the carrying
amount of the reporting unit goodwill. The implied fair value of goodwill is
determined by allocating the fair value of the reporting unit to all of the
assets (recognized and unrecognized) and liabilities of the reporting unit in a
manner similar to a purchase price allocation in an acquisition. The residual
fair value after this allocation is the implied fair value of the reporting unit
goodwill.
Changes in the carrying amount of goodwill consist of the following:
IT
IT GOVERNMENT CONSULTING
OUTSOURCING TECHNOLOGY AND SYSTEMS
SERVICES SERVICES INTEGRATION TOTAL
----------- ---------- ----------- ---------
(In thousands)
Balance as of January 1, 2004 ....... $371 $ 1,728 $ -- $ 2,099
Goodwill acquired ................ -- 2,102 512 2,614
Effect of exchange rate changes .. -- -- 55 55
---- ------- ------ -------
Balance as of December 31, 2004 ..... 371 3,830 567 4,768
Goodwill acquired ................ -- 15,840 1,567 17,407
Effect of exchange rate changes .. -- -- (71) (71)
---- ------- ------ -------
Balance as of December 31, 2005 ..... 371 19,670 2,063 22,104
Goodwill acquired ................ -- -- 297 297
Effect of exchange rate changes .. -- -- 57 57
---- ------- ------ -------
Balance as of December 31, 2006 ..... $371 $19,670 $2,417 $22,458
==== ======= ====== =======
Other intangible assets consist of the following:
DECEMBER 31, 2006 WEIGHTED DECEMBER 31, 2005 WEIGHTED
---------------------- AVERAGE ---------------------- AVERAGE
ACCUMULATED AMORTIZATION ACCUMULATED AMORTIZATION
COST AMORTIZATION PERIOD COST AMORTIZATION PERIOD
------- ------------ ------------ ------- ------------ ------------
(In thousands) (In thousands)
Customer-related assets.. $12,702 $4,139 7.8 years $12,644 $2,448 7.8 years
Noncompete agreement..... 885 399 4.3 years 901 187 4.3 years
Trademark and name....... 384 188 3.9 years 392 89 3.9 years
------- ------ ------- ------
$13,971 $4,726 $13,937 $2,724
======= ====== ======= ======
Intangible assets acquired in a business combination are recognized only if such
assets arise from a contractual or other legal right and are separable, that is,
capable of being sold, transferred, licensed, rented or exchanged. Intangible
assets acquired in a business combination that do not meet these criteria are
considered a component of goodwill. The useful life of amortizable intangible
assets is determined based on the period from which cash flows are expected to
be realized from these assets and considers, among other items, ability and cost
to renew contracts with similar terms and conditions and historical customer
retention rates.
49
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Amortizable intangible assets are evaluated based on undiscounted operating cash
flows whenever significant events or changes occur that might indicate
impairment of recorded costs. If undiscounted cash flows are insufficient to
recover recorded costs, the carrying value of the assets is reduced to fair
value based on discounted cash flows or market values. No impairment loss for
amortizable intangible assets was recorded for any period presented.
Expected amortization expense for intangible assets held at December 31, 2006 is
as follows: $1,908,000 in 2007, $1,898,000 in 2008, $1,597,000 in 2009,
$1,476,000 in 2010 and $1,439,000 in 2011.
REVENUE RECOGNITION
Under all situations, revenue is not recognized until earned, which is when
persuasive evidence of an arrangement exists, services have been provided, the
revenue terms are fixed and determinable, and collectibility is reasonably
assured.
The Company earns revenue under the IT Outsourcing Services segment under one of
the following four models: (1) time and material contracts that are billed at an
agreed rate for each help desk agent based on the number of units (i.e., hours
or days) the individual agent worked during the month; (2) per-transaction
contracts that are billed at an agreed rate per incident or call handled during
a month or per minute for the length of the telephone call for the incident; (3)
fixed monthly fee contracts that are billed a fixed fee monthly for agreed-upon
scheduled services; and (4) per-seat contracts under which agreed-upon scheduled
services are provided for a monthly fee that is determined by multiplying the
number of users supported at the customer by the monthly per-seat fee. Within
the IT Outsourcing Services segment, greater than 99% of services are delivered
as a "monthly service" and not over multiple periods. The Company refers to
fixed-fee and per-seat contracts as "managed service" contracts. Many contracts
that are billed on a per-transaction basis contain a minimum monthly fee, which
is derived by multiplying the agreed-upon forecast of anticipated incidents by
an agreed-upon minimum percentage. Under this arrangement, the Company receives
a minimum revenue amount for having committed to provide a specific level of
staff to support the services projected during a month. Since the customer is
invoiced for the minimum fee without reducing future billings, the minimum fee
is recognized as revenue in the month in which the incidents are below the
customer's minimum forecast. Incident resolution usually occurs in the same
month that incidents are reported. Under managed service contracts, material
costs are generally not incurred in a future month to complete a service
obligation that arose in a prior month. In those instances where the Company's
service obligation is not complete and more costs are expected to be incurred in
future months, revenue that represents the fair value of that service obligation
is deferred.
Revenue from all other services provided under other operating segments --
Government Technology Services, IT Consulting and Systems Integration and Other
Services -- may be categorized into two primary types: time and material and
fixed price. For the year ended December 31, 2006, approximately 71% of the
Company's revenue in these business segments were time and material and 24% were
fixed price (a substantial majority of which are fixed price level of effort
contracts).
Revenue is recognized under time and materials contracts as time is spent at
hourly rates, which are negotiated with the customer, plus the cost of any
allowable material costs and out-of-pocket expenses. Revenue is recognized under
the majority of fixed price contracts, which are predominantly level of effort
contracts, using the cost-to-cost method for all services provided. In addition,
contracts for multiple deliverables are evaluated and may require the
segmentation of each deliverable into separate accounting units for proper
revenue recognition.
50
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Contracts with agencies of the U.S. Federal Government are subject to periodic
funding by the respective contracting agency. Funding for a contract may be
provided in full at inception of the contract or ratably throughout the term of
the contract as the services are provided. From time to time the Company may
proceed with work on unfunded portions of existing contracts based on customer
direction pending finalization and signing of formal funding documents. All
revenue recognition is deferred during periods in which funding is not received.
Allowable contract costs incurred during such periods are deferred if the
receipt of funding is assessed as probable. In evaluating the probability of
funding being received, the Company considers previous experience with the
customer, communications with the customer regarding funding status, and the
Company's knowledge of available funding for the contract or program. If funding
is not assessed as probable, costs are expensed as incurred.
Revenue is recognized under cost-based U.S. Federal Government contracts based
on allowable contract costs, as mandated by the U.S. Federal Government's cost
accounting standards. The costs the Company incurs under U.S. Federal Government
contracts are subject to regulation and audit by certain agencies of the U.S.
Federal Government. Contract cost disallowances, resulting from government
audits, have not been significant.
DEFERRED INCOME TAXES
Deferred income taxes represent temporary differences in the recognition of
certain items for income tax and financial reporting purposes. Realization of
deferred tax assets depends upon sufficient levels of future taxable income. If
at any time the Company believes that current or future taxable income does not
support the realization of deferred tax assets, a valuation allowance is
provided.
No provision has been made with respect to approximately $10,193,000 of
undistributed earnings of foreign subsidiaries at December 31, 2006, since these
earnings are considered to be permanently reinvested.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of non-U.S. subsidiaries are translated into U.S. dollars
based on the prevailing exchange rate at each respective balance sheet date.
Revenue and expenses are translated into U.S. dollars based on the average
exchange rate for the period. Cumulative translation adjustments are included as
a separate component of shareholders' equity as accumulated other comprehensive
income. Currency transaction gains or losses are generally derived from
receivables and payables stated in a currency other than the local currency, and
are recognized as income or expense in the accompanying consolidated statements
of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 2006, the Company's financial instruments consist of accounts
receivable, accounts payable and notes payable. The carrying values of these
financial instruments approximate their fair values due to their short maturity
periods, market interest rates or quoted market prices for equivalent
instruments.
Certain trade receivables are denominated in currencies other than the local
currency of the TechTeam entity that delivers the service. From time to time the
Company enters into foreign currency options or forward contracts to manage the
Company's exposure to fluctuations in the exchange rate between the U.S. dollar
and European euro. No derivatives, options contracts or similar instruments were
outstanding at December 31, 2006.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest expense totaled $67,000 in 2006, $176,000 in 2005, and
$20,000 in 2004. Cash paid for income taxes totaled $2,910,000 in 2006,
$3,720,000 in 2005, and $1,260,000 in 2004.
51
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
RECLASSIFICATIONS
Certain reclassifications have been made to the 2004 and 2005 financial
statements in order to conform to the 2006 financial statement presentation. See
Note 12 -- Segment Reporting for a discussion of reclassifications associated
with the Company's presentation of reportable operating segments.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value
Measurements." SFAS 157 establishes a framework for measuring fair value and
expands disclosures about fair value measurements. The changes to current
practice resulting from the application of SFAS 157 relate to the definition of
fair value, the methods used to measure fair value and the expanded disclosures
about fair value measurements. SFAS 157 is effective for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. The
Company is evaluating the impact of SFAS 157 on the Company's financial position
and results of operations.
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48"). FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken in a tax return. FIN 48 also provides
guidance regarding subsequent reversal of a tax position, balance sheet
classification, accounting in interim periods, disclosure, and transition. FIN
48 is effective for fiscal years beginning after December 15, 2006. The Company
has not completed its analysis of the potential impact of FIN 48 on the
Company's financial position or results of operations.
NOTE 2 -- EARNINGS PER SHARE
In 2005 and 2004, earnings per share was computed using the two-class method as
required by SFAS No. 128, "Earnings Per Share." The two-class method is an
earnings allocation formula that determines earnings per share separately for
common stock and participating securities according to dividends declared (or
accumulated) and participation rights in undistributed earnings. Between April
2003 and May 2005, the Company had outstanding redeemable convertible preferred
stock, which was a participating security under SFAS 128. The redeemable
convertible preferred stock had rights to undistributed earnings, but was not
required to participate in net losses of the Company. In May 2005 through a
series of transactions, the holder of the Company's preferred stock converted
all 689,656 shares of preferred stock into an equal number of shares of
unregistered Company common stock and sold those shares in the open market
pursuant to rules and regulations of the United States Securities and Exchange
Commission.
Earnings per share for common stock is computed using the weighted average
number of common shares and common share equivalents outstanding. Common share
equivalents consist of stock options, unvested restricted stock issued to
employees and shares held in escrow in connection with the Company's acquisition
of TechTeam Akela SRL. Earnings per share for preferred stock is computed using
the weighted average number of preferred shares outstanding. Earnings are
allocated to each class of stock pro rata based on the weighted average number
of shares and share equivalents outstanding for each class of stock.
During 2006, 2005 and 2004, 596,900, 134,000 and 506,400 stock options,
respectively, were excluded from the computation of diluted earnings per common
share because the exercise prices of the options were higher than the average
market price of the Company's common stock for the respective year.
52
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 2 -- EARNINGS PER SHARE (continued)
The following table reconciles the numerators and denominators of the basic and
diluted earnings per common share computations for income from continuing
operations:
YEAR ENDED DECEMBER 31,
-------------------------
2006 2005 2004
------- ------ ------
(In thousands,
except per share data)
Income from continuing operations .................... $ 1,877 $5,394 $4,628
Less -- Income from continuing operations allocated
to preferred shareholders ......................... -- 135 342
------- ------ ------
Income from continuing operations available to
common shareholders ............................... $ 1,877 $5,259 $4,286
======= ====== ======
Basic weighted average common shares ................. 10,092 9,508 8,660
Common stock equivalents ............................. 84 324 244
------- ------ ------
Diluted weighted average common shares ............... 10,176 9,832 8,904
======= ====== ======
Weighted average preferred shares .................... -- 244 690
======= ====== ======
Earnings per share from continuing operations:
Basic earnings per common share ................... $ 0.19 $ 0.55 $ 0.49
Basic earnings per preferred share ................ N/A $ 0.55 $ 0.49
Diluted earnings per common share ................. $ 0.18 $ 0.54 $ 0.48
NOTE 3 -- ACQUISITIONS
AKELA INFORMATIQUE SRL
In connection with the Company's acquisition of Akela Informatique SRL on
October 3, 2005, the selling shareholders may receive up to 100,000 euro in 2006
and up to 250,000 euro in 2007, subject to Akela's achievement of gross profit
targets. For 2006, the selling shareholders will receive 75,000 euro based upon
Akela's gross profit performance. The additional consideration is recorded as
goodwill when it is earned.
SYTEL, INC.
In connection with the Company's acquisition of Sytel, Inc. on January 3, 2005,
the selling shareholders were to 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 paid up to
$2,000,000 subject to the renewal of a specific contract. Based upon Sytel's
gross profit performance in 2005 and 2006 and the lack of renewal of the
aforementioned contract, no additional amounts were paid to the selling
shareholders.
53
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 3 -- ACQUISITIONS (continued)
ADVANCED NETWORK ENGINEERING NV/SA
In connection with the Company's acquisition of Advanced Network Engineering
NV/SA on May 13, 2004, an additional 150,000 euro was payable on May 13, 2007,
provided a cumulative operating income target was met for the three-year period
ending April 30, 2007. However, the Company and the selling shareholders amended
the earnout portion of the share purchase agreement in January 2007 to set the
earnout consideration at 68,200 euro to be paid to the selling shareholders in
2007 related to A.N.E.'s operating income performance since the acquisition
date. In addition, 4,216 shares of restricted stock were issued to selling
shareholders that entered into a three-year management services agreement with
the Company effective January 1, 2007. The additional cash consideration is
recorded as additional goodwill at December 31, 2006. The fair value of the
restricted stock is being amortized over the three-year period of the management
services agreement.
DIGITAL SUPPORT CORPORATION
In connection with the Company's acquisition of Digital Support Corporation
("DSC") on December 31, 2003, additional amounts up to a maximum of $2,500,000
were payable to selling shareholders and certain key employees provided specific
performance conditions and operating income targets were met in 2005 and 2004.
DSC exceeded its operating income targets in 2005 and 2004 and satisfied the
specific performance conditions (the renewal of DSC's largest contract) during
2005. As a result, selling shareholders received an additional $1,200,000 for
2005 and $500,000 for 2004, and key employees received $400,000 for 2005 and
$100,000 for 2004. Amounts paid to selling shareholders were recorded as
goodwill while amounts paid to key employees were recorded as compensation
expense.
SUMMARY OF ACQUISITION PURCHASE PRICE
The following table summarizes the allocation of the cumulative purchase price
and net cash used for the acquisitions of Akela, Sytel, A.N.E. and DSC through
December 31, 2006, including additional payments earned and accrued during 2006:
AKELA SYTEL A.N.E. DSC
------ -------- ------- -------
(In thousands)
Goodwill .......................................... $1,775 $ 14,640 $ 602 $ 5,030
Amortizable intangible assets ..................... 1,551 7,853 449 3,367
Property, equipment and software .................. 94 169 72 330
Other current and non-current assets,
excluding cash acquired ........................ 294 11,700 1,367 3,803
Accounts payable and accrued liabilities assumed .. (307) (12,886) (1,117) (3,411)
Accrued purchase price ............................ (132) -- (90) --
Notes payable assumed ............................. -- -- (191) (710)
Issuance of equity instruments .................... (301) (542) -- --
------ -------- ------- -------
Net cash used ..................................... $2,974 $ 20,934 $ 1,092 $ 8,409
====== ======== ======= =======
54
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 3 -- ACQUISITIONS (continued)
PRO FORMA RESULTS OF OPERATIONS
The unaudited pro forma condensed combined results of operations are presented
below as though Sytel had been acquired on January 1, 2004. The pro forma
results of operations for the acquisitions of Akela and A.N.E. are not
materially different than reported results and are not presented.
YEAR ENDED
DECEMBER 31, 2004
-----------------
(In thousands,
except per share
data)
Revenue
As reported ..................... $127,988
Pro forma ....................... $156,741
Income from continuing operations
As reported ..................... $ 4,628
Pro forma ....................... $ 5,175
Net income
As reported ..................... $ 4,725
Pro forma ....................... $ 5,272
Diluted earnings per common share
As reported ..................... $ 0.49
Pro forma ....................... $ 0.55
NOTE 4 -- NOTES PAYABLE AND LINE OF CREDIT
The Company has a business loan agreement with LaSalle Bank Midwest, N.A.
whereby the Company may borrow up to $5,000,000 under a line of credit that
expires on December 31, 2007, and up to $15,000,000 under a term loan facility
due January 3, 2010. The line of credit and term loan facilities bear interest
at 0.5% per annum and are collateralized by a compensating balance cash deposit
required to be held at the bank equal to the amount of the outstanding
principal.
Borrowings under the term note facility were $3,174,000 and $10,937,000 at
December 31, 2006 and 2005, respectively. Standby letters of credit of $533,000
and $470,000 were outstanding as of December 31, 2006 and 2005, respectively.
Interest expense was $99,000 in 2006, $79,000 in 2005 and $61,000 in 2004.
55
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 5 -- INCOME TAXES
The income tax provision from continuing operations consists of the following:
YEAR ENDED DECEMBER 31,
-------------------------
2006 2005 2004
------ ------ -------
(In thousands)
Current:
U.S. federal ........................................ $ 499 $1,980 $ --
State ............................................... 201 255 310
Foreign ............................................. 1,111 976 1,051
------ ------ ------
Total current provision ................................ 1,811 3,211 1,361
Deferred ............................................... (938) (809) 1,186
------ ------ ------
Total income tax provision from continuing operations .. $ 873 $2,402 $2,547
====== ====== ======
The income tax provision from continuing operations was calculated based on the
following components of income (loss) from continuing operations before income
taxes:
YEAR ENDED DECEMBER 31,
-------------------------
2006 2005 2004
------- ------ ------
(In thousands)
Domestic income (loss) .................................... $(1,208) $4,055 $4,408
Foreign income ............................................ 3,958 3,741 2,767
------- ------ ------
Income from continuing operations before income taxes .. $ 2,750 $7,796 $7,175
======= ====== ======
A reconciliation of the income tax provision and the amount computed by applying
the federal statutory income tax rate to income from continuing operations
before income taxes is as follows:
YEAR ENDED DECEMBER 31,
------------------------
2006 2005 2004
----- ------ -------
(In thousands)
Income tax provision at federal statutory rate of 34% ..... $ 920 $2,651 $2,440
State taxes, net of federal benefit ....................... 133 168 204
Permanent differences ..................................... 66 53 24
Foreign operating losses not benefited .................... 40 14 346
Utilization of operating loss carryforwards ............... (159) (160) --
Effect of foreign tax rates ............................... (116) (174) (208)
Recovery of taxes paid in prior years ..................... -- -- (216)
Other ..................................................... (11) (150) (43)
----- ------ ------
Total income tax provision from continuing operations .. $ 873 $2,402 $2,547
===== ====== ======
56
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 5 -- INCOME TAXES (continued)
The principal components of deferred income taxes are as follows:
DECEMBER 31,
-------------------------------------------
2006 2005
-------------------- --------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
(In thousands)
Net operating loss carryforwards ......... $1,117 $ -- $1,332 $ --
Accruals and reserves .................... 430 -- 475 --
Accelerated tax depreciation ............. 172 -- -- 83
Intangible assets (other than goodwill) .. -- 2,888 -- 3,514
Prepaid expenses ......................... -- 288 -- 317
Other .................................... 212 -- 139 --
------ ------ ------ ------
Total deferred income taxes .............. 1,931 3,176 1,946 3,914
Less -- Valuation allowance .............. (290) -- (505) --
------ ------ ------ ------
Net deferred income taxes ............. $1,641 $3,176 $1,441 $3,914
====== ====== ====== ======
At December 31, 2006, the Company had available pre-tax net operating loss
carryforwards of approximately $958,000 in Belgium and Romania and $2,177,000 in
the United States, which may be used to offset future taxable income in each
respective jurisdiction. The loss carryforward in the United States expires in
2025 and the loss carryforward in Belgium does not expire. Based on the
historical losses in Belgium and Romania, a valuation allowance has been
provided against the deferred tax asset related to the net operating loss
carryforwards in these countries.
NOTE 6 -- EMPLOYEE RETIREMENT PLANS
TechTeam Global, Inc. and its domestic subsidiaries together have three 401(k)
retirement savings plans that cover substantially all U.S.-based employees.
Under the provisions of the plans, the Company makes discretionary employer
matching contributions. Matching contributions under all plans totaled
$1,250,000 in 2006, $762,000 in 2005 and $294,000 in 2004. Matching
contributions for the plan of TechTeam Global, Inc. are made only with Company
common stock and are credited to the TechTeam Global Stock Fund for the benefit
of each participant. Matching contributions for the plans of the Company's
subsidiaries are made in cash.
57
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 7 -- LEASES
The Company leases its call center facilities, corporate and other offices, and
certain office equipment under various operating and month-to-month leases.
These leases are renewable with various options and terms. Total rental expense
was $5,261,000 in 2006, $5,791,000 in 2005 and $4,550,000 in 2004. The Company
subleases a portion of its facilities to third parties. Total sublease income
was $273,000 in 2006, $785,000 in 2005 and $526,000 in 2004. No future sublease
agreements are outstanding as of December 31, 2006.
Minimum future payments and receipts under noncancelable operating leases and
subleases with initial terms of one year or more at December 31, 2006, are as
follows:
YEAR LEASE PAYMENTS
---- --------------
(In thousands)
2007................. $ 4,629
2008................. 4,135
2009................. 3,259
2010 and thereafter.. 14,514
-------
Total................ $26,537
=======
Certain facilities leases include periods of free rent or rent payments that
increase over the life of the lease. For these leases, total rent expense for
the entire lease is recorded on a straight-line basis over the life of the lease
and an asset or liability is recorded, as appropriate. At December 31, 2006 and
2005, long-term liabilities include a liability of $562,000 and $564,000,
respectively, for these leases.
NOTE 8 -- STOCK-BASED COMPENSATION
ADOPTION OF SFAS 123R
Effective January 1, 2006, the Company adopted the provisions of SFAS 123R,
"Share-Based Payment," which requires companies to measure and recognize
compensation expense for all share-based payment awards to employees and
directors based on estimated fair values of all awards. Compensation expense is
recognized over the period during which an employee or director is required to
provide service in exchange for the award. SFAS 123R supersedes the Company's
previous accounting methodology using the intrinsic value method under
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees," and related interpretations. Under the intrinsic value
method, no share-based compensation expense had been recognized in the Company's
consolidated statements of operations for stock option awards with an exercise
price equal to or greater than the fair value of the underlying stock on the
date of grant.
The Company adopted SFAS 123R using the modified prospective transition method.
Under this transition method, stock-based compensation expense recognized after
the effective date includes: (1) compensation expense for all share-based awards
granted prior to, but not yet vested, as of December 31, 2005, based on the
grant-date fair value estimated in accordance with the original provisions of
SFAS 123, and (2) compensation cost for all share-based awards granted
subsequent to January 1, 2006, based on the grant-date fair value estimated in
accordance with the provisions of SFAS 123R. In accordance with the modified
prospective transition method, the consolidated financial statements from prior
periods have not been restated and do not include the impact of SFAS 123R. As a
result of adopting SFAS 123R, the Company recorded pre-tax and after-tax amounts
of $314,000 and $207,000, respectively, for share-based compensation expense in
2006, that it otherwise would not have recorded under its previous accounting
methodology. Basic and diluted earnings per common share outstanding were lower
by $0.02 in 2006 as a result of adopting SFAS 123R.
58
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 8 -- STOCK-BASED COMPENSATION (continued)
Stock-based compensation expense recognized in each period is based on the value
of the portion of the share-based award that is ultimately expected to vest.
SFAS 123R requires that forfeitures be estimated at the time of the grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. In the Company's pro forma disclosures required under SFAS 123
for periods prior to 2006, forfeitures were accounted for as they occurred.
On November 10, 2005 the Financial Accounting Standards Board ("FASB") issued
FASB Staff Position No. 123R-3, "Transition Election Related to Accounting for
Tax Effect of Share-Based Payment Awards." The Company has elected to adopt the
alternative transition method provided in the FASB Staff Position for
calculating the tax effect of share-based compensation pursuant to SFAS 123R.
The alternative transition method includes simplified methods to establish the
beginning balance of the additional paid-in capital pool ("APIC Pool") related
to the tax effect of employee share-based compensation, and to determine the
subsequent impact on the APIC Pool and consolidated statements of cash flows of
the tax effects of employee and director share-based awards that are outstanding
as of the adoption of SFAS 123R.
STOCK OPTIONS
As of December 31, 2006, the Company has stock options outstanding under two
plans -- the 2004 Incentive Stock and Awards Plan ("2004 Plan") and the 1990
Nonqualified Stock Option Plan ("1990 Plan"). As a result of the adoption of the
2004 Plan, options may no longer be granted under the 1990 Plan.
The Company also had the 1996 Non-Employee Directors Stock Plan ("1996 Plan"),
which expired on December 31, 2005. All remaining outstanding options under the
1996 Plan were either exercised or terminated in 2006. The Company expects to
seek approval from its shareholders for a new stock plan covering non-employee
directors in 2007. In the event a new plan is not approved by the Company's
shareholders, non-employee directors in the aggregate will receive a cash
payment equal to the estimated fair value of 110,000 stock options, as
determined using the Black-Scholes valuation model assuming a grant date of June
23, 2006. This award is accounted for as a liability award under a share-based
payment arrangement and, therefore, the fair value of the award is remeasured at
each reporting date until the date of settlement. In 2006, the Company recorded
approximately $257,000 of expense for the potential stock option award or cash
payment.
Under the 2004 Plan, the Compensation Committee of the Board of Directors may
issue stock options, performance shares and restricted stock to employees and
consultants representing up to 1,200,000 shares of the Company's common stock.
Stock options may be granted with terms up to ten years and must have an
exercise price that is equal to or greater than the fair market value of the
Company's common stock on the date of grant. Options outstanding under the 1990
Plan have expiration terms ranging from four to six years and become exercisable
ratably over periods ranging from three to five years.
The Company recorded $314,000 of compensation expense relating to outstanding
options during the year ended December 31, 2006. No compensation expense related
to outstanding options was recorded during the years ended December 31, 2005 and
2004. As of December 31, 2006, total unrecognized compensation cost related to
stock options was $228,000, which is expected to be recognized over a
weighted-average period of approximately 2.8 years.
The Company records compensation expense for employee stock options based on the
estimated fair value of the options on the date of grant using the Black-Scholes
valuation model. The Company uses historical data among other factors to
estimate the expected price volatility, the expected option term and the
expected forfeiture rate. The risk-free rate is based on the U.S. Treasury yield
curve in effect at the date of grant for the expected term of the option.
59
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 8 -- STOCK-BASED COMPENSATION (continued)
The following assumptions were used to estimate the fair value of options
granted:
YEAR ENDED DECEMBER 31,
---------------------------
2006 2005 2004
------- ------- -------
Expected dividend yield...... 0.0% 0.0% 0.0%
Weighted average volatility.. 38% 39% 53%
Risk free interest rate...... 4.5-4.7% 3.3-4.5% 1.2-3.0%
Expected term (in years)..... 2.9 3.1 3.4
A summary of stock option activity under the above plans and related information
is as follows:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE REMAINING AGGREGATE
NUMBER OF PRICE PER CONTRACTUAL INTRINSIC
SHARES SHARE TERM VALUE
--------- --------- ----------- ---------
Outstanding at January 1, 2004.... 1,213,018 $ 6.95
Granted........................ 401,900 $ 8.73
Exercised...................... (292,172) $ 4.75
Canceled....................... (126,502) $ 7.26
---------
Outstanding at December 31, 2004.. 1,196,244 $ 8.05
Granted........................ 646,900 $10.64
Exercised...................... (409,174) $ 7.42
Canceled....................... (31,000) $ 9.16
---------
Outstanding at December 31, 2005.. 1,402,970 $ 9.41
Granted........................ 174,000 $ 9.82
Exercised...................... (391,336) $ 6.50
Canceled....................... (256,667) $13.03
--------- ------
Outstanding at December 31, 2006.. 928,967 $ 9.71 7.9 Years $1,487,266
========= ====== ========= ==========
Vested and expected to vest in the
future at December 31, 2006.... 928,967 $ 9.71 7.9 Years $1,487,266
========= ====== ========= ==========
Exercisable at December 31, 2006.. 796,967 $ 9.70 7.8 Years $1,290,736
========= ====== ========= ==========
The weighted average grant-date fair value of options issued under all plans was
$2.96 in 2006, $3.35 in 2005 and $3.51 in 2004. The total intrinsic value of
options exercised under all plans was $1,272,000 in 2006, $2,198,000 in 2005 and
$1,147,000 in 2004. The intrinsic values were determined as of the date of
exercise.
Cash received from option exercises under all plans was $2,542,000 in 2006,
$3,034,000 in 2005 and $1,387,000 in 2004. The actual tax benefit realized
related to tax deductions from option exercises under all plans totaled
approximately $390,000 in 2006, $336,000 in 2005 and $264,000 in 2004.
60
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 8 -- STOCK-BASED COMPENSATION (continued)
The following table summarizes certain information about stock options
outstanding at December 31, 2006:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF NUMBER OF AVERAGE AVERAGE PER NUMBER OF AVERAGE PER
PER SHARE OPTIONS REMAINING LIFE SHARE EXERCISE OPTIONS SHARE EXERCISE
EXERCISE PRICES OUTSTANDING IN YEARS PRICE EXERCISABLE PRICE
--------------- ----------- -------------- -------------- ----------- --------------
$ 2.60 - 8.90 105,667 4.29 $ 7.32 97,667 $ 7.32
$ 9.00 - 10.08 493,400 8.42 $ 9.40 399,400 $ 9.38
$10.33 - 14.29 329,900 8.31 $10.93 299,900 $10.90
------- -------
928,967 796,967
======= =======
RESTRICTED COMMON STOCK
All restricted stock is authorized and issued under the 2004 Plan. Under the
2004 Plan, the Compensation Committee of the Board of Directors may issue stock
options, performance shares and restricted stock to employees and consultants
representing up to 1,200,000 shares of the Company's common stock. Performance
shares and restricted stock awards may be granted subject to such terms and
conditions as the Compensation Committee deems appropriate, including a
condition that one or more performance goals be achieved for the participant to
realize all or a portion of the award.
Effective January 1, 2004, the Board of Directors approved the Executive
Long-Term Incentive Plan ("Long-Term Incentive Plan"), in which awards may be
issued under: (1) a restricted stock program that focuses on retaining high
performing executives over a longer period of time, (2) a performance stock
program that focuses on rewarding extraordinary performing executives and (3) a
non-qualified stock option program that focuses on the long-term retention of
key executives. Awards under these programs are administered in conjunction with
the 2004 Plan whereby shares available for issuance are funded by the shares
available for issuance under the 2004 Plan.
Under the restricted stock program, certain members of management are entitled
to an award of restricted stock equal to a percentage of the participant's
salary if certain operating targets are met on a rolling three-year basis,
except that the first year of the plan was based on the operating target for
only 2004, and the second year of the plan was based on the cumulative operating
target for 2004 and 2005. During January 2007, the Executive Long-Term Incentive
Plan was modified to change the vesting period of restricted stock grants. All
restricted grants will vest ratably over four years. Previously, restricted
stock grants became 100% vested at the end of five years from the date of grant
(cliff vesting). Grants awarded on March 15, 2005 were modified to vest at a
rate of 25% per year beginning on January 1, 2007 and grants awarded on March
15, 2006 were modified to vest at a rate of 25% per year beginning January 1,
2008. Compensation expense in 2006 was not affected by the change in vesting.
The Company issued 46,000 shares of restricted stock under the 2004 Plan in
2006. No shares of restricted stock were granted under the 2004 Plan in 2005 or
2004. No performance shares were granted during any period presented. The
Company also granted 42,306 and 46,460 shares of restricted stock to certain
employees under the Long-Term Incentive Plan in 2006 and 2005, respectively, for
performance during the years ended December 31, 2005 and 2004. Shares of
restricted stock valued at $160,000 will be granted to certain employees under
the Long-Term Incentive Plan in March 2007 for performance during the three-year
period ended December 31, 2006.
61
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 8 -- STOCK-BASED COMPENSATION (continued)
Compensation expense related to restricted stock is recorded on a straight-line
basis over the vesting period. The Company recorded compensation expense of
approximately $129,000 in 2006 and $107,000 in 2005 related to outstanding
shares of restricted stock under all plans. No compensation expense was recorded
related to restricted stock in 2004. The weighted average grant-date fair value
of restricted stock granted under all plans was $10.24 in 2006 and $11.35 in
2005. No shares of restricted stock were granted in 2004. Under the Long-Term
Incentive Plan, the fair value of restricted stock awards is determined based on
the average closing trading price of the Company's common stock for thirty (30)
trading days prior to the date of grant. The fair value of restricted stock
awards granted under the 2004 Plan was determined based on the closing trading
price of the Company's common stock on the grant date.
At December 31, 2006 and 2005, there was approximately $776,000 and $866,000,
respectively, of total unrecognized compensation expense related to nonvested
shares of restricted stock granted to employees. Unrecognized compensation
expense at December 31, 2006, is expected to be recognized over a weighted
average period of 3 years. Unrecognized compensation expense related to
nonvested shares of restricted stock awards was recorded as unamortized deferred
compensation within shareholders' equity at December 31, 2005. As part of the
modified prospective transition method of adoption of SFAS 123R, approximately
$866,000 of unamortized deferred compensation at December 31, 2005, has been
reclassified as a component of additional paid-in-capital.
The following table summarizes the Company's activities with respect to its
nonvested stock activity for year ended December 31, 2006:
WEIGHTED
AVERAGE
NUMBER OF GRANT-DATE
NONVESTED RESTRICTED SHARES SHARES FAIR VALUE
--------------------------- --------- ----------
Nonvested at January 1, 2005..... -- $ --
Granted.......................... 46,460 $11.35
------- ------
Nonvested at December 31, 2005... 46,460 $11.35
Granted.......................... 88,306 $10.24
Forfeited........................ (38,546) $10.94
------- ------
Nonvested at December 31, 2006... 96,220 $10.50
======= ======
62
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 8 -- STOCK-BASED COMPENSATION (continued)
PRO FORMA EMPLOYEE SHARE-BASED COMPENSATION EXPENSE
Prior to January 1, 2006, the Company accounted for its share-based compensation
arrangements in accordance with the provisions and related interpretations of
APB 25. The following pro forma table illustrates the effect on net income and
earnings per share had the share-based awards been determined consistent with
SFAS 123R:
YEAR ENDED DECEMBER 31,
-----------------------
2005 2004
------- -------
(In thousands, except
per share data)
Reported net income......................................... $ 5,468 $ 4,725
Add: Total stock-based compensation expense included
in reported net income, net of tax....................... 117 43
Deduct: Total stock-based compensation expense determined
under the fair value method for all awards, net of tax... (1,247) (1,073)
------- -------
Pro forma net income........................................ $ 4,338 $ 3,695
======= =======
Basic earnings per common share:
As reported.............................................. $ 0.56 $ 0.51
Pro forma................................................ $ 0.44 $ 0.40
Diluted earnings per common share:
As reported.............................................. $ 0.54 $ 0.49
Pro forma................................................ $ 0.43 $ 0.39
NOTE 9 -- COMMON STOCK
The Company has reserved for issuance shares of common stock necessary to effect
the exercise of all outstanding and ungranted stock options.
The Company has acquired shares of its common stock in connection with various
authorized stock repurchase programs. In 2004, the Company purchased and retired
350,000 shares of common stock from a director of the Company and his immediate
family for $2,744,000, inclusive of commission expense, under a program approved
in 2004. No shares were repurchased in 2006 and 2005.
NOTE 10 -- PREFERRED STOCK
The Company's preferred stock may be issued from time to time in one or more
series. The Company's Board of Directors is authorized to fix the dividend
rights and dividend rates, any conversion rights or right of exchange, any
voting rights, rights and terms of redemption, payments in the event of
liquidation, and any other rights, preferences, privileges, and restrictions of
any series of preferred stock and the number of shares constituting such series
and their designation.
63
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 10 -- PREFERRED STOCK (continued)
On April 8, 2003, the Company completed a private placement of 689,656 shares of
newly authorized Series A convertible preferred stock ("Preferred Stock") for
$5,000,000, or $7.25 per share. In May 2005 through a series of transactions,
the holder of the Company's preferred stock converted all 689,656 shares of
preferred stock into an equal number of shares of unregistered Company common
stock and sold those shares in the open market pursuant to rules and regulations
of the United States Securities and Exchange Commission. The Company has no
present plans to issue any shares of preferred stock.
NOTE 11 -- PREFERRED SHARE PURCHASE RIGHTS
On April 29, 1997, the Board of Directors authorized the distribution of one
Preferred Share Purchase Right ("Right") for each outstanding share of the
Company's common stock under the terms of a Rights Agreement between the Company
and U.S. Stock Transfer Corporation, dated May 6, 1997, and as amended August
24, 2000 and May 5, 2003. Each Right entitles shareholders to buy one
one-hundredth of a share of a new series of preferred stock at a price of $80.
As distributed, the Rights trade together with the common stock of the Company
and do not have any separate voting powers. They may be exercised or traded
separately only after the earlier to occur of the following: (1) 10 days after
any person or group of persons acquires 15% or more of the Company's common
stock, (2) 10 business days after a person or group of persons announces an
offer that, if completed, would result in its owning 15% or more of the
Company's common stock, or (3) promptly after a declaration by the Board that a
person who acquires 15% or more of the Company's common stock is an "Adverse
Person" as defined by the Rights Agreement. Additionally, if the Company is
acquired in a merger or other business combination, each Right will entitle its
holder to purchase, at the Right's exercise price, shares of the acquiring
Company's common stock (or stock of the Company if it is the surviving
corporation) having a market value of twice the Right's exercise price.
The Rights may be redeemed at the option of the Board of Directors for $0.01 per
Right at any time before a person or group of persons accumulates 15% or more of
the Company's common stock. At any time after a person or group of persons
acquires 15% but before the person or group of persons has acquired 50% of
outstanding shares of the Company's common stock, the Board may exchange each
Right for one share of common stock. The Board may amend the Rights at anytime
without shareholder approval. The Rights will expire by their terms on May 6,
2007.
NOTE 12 -- SEGMENT REPORTING
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or decision-making group, in deciding how to
allocate resources and in assessing performance. Our chief operating
decision-making group is the Management Committee, which is comprised of the
President and Chief Executive Office, the Chief Financial Officer, the lead
executive of each geographic region and the Vice President of Service Delivery.
The operating segments are managed separately because each operating segment
represents a strategic business unit that offers different services. Reportable
operating segments currently include the following:
IT OUTSOURCING SERVICES -- this segment provides corporations and
governments with around-the-clock (24x7x365) technical support for their
end-users and other constituencies. The Company supports the full range of
a client's information technology ("IT") and business process
infrastructure. The Company also provides technical support to customers of
the Company's client's products and software.
64
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 12 -- SEGMENT REPORTING (continued)
GOVERNMENT TECHNOLOGY SERVICES -- this segment provides managed network
services and advanced enterprise solutions. For managed network services
customers, the Company provides complete life cycle support for a
customer's IT infrastructure ranging from their desktops to their data and
voice networks. For advance enterprise solutions business, the Company
assists customers in the design, development, and implementation of
enterprise-level technology solutions. The Company also provides design,
implementation, operation, and maintenance (helpdesk and desk side support)
services.
IT CONSULTING AND SYSTEMS INTEGRATION -- this segment provides IT
infrastructure support to commercial customers through systems integration,
technology deployment, and implementation services from project planning
and maintenance to full-scale network server and workstation installations.
The Company offers a wide range of information technology services for the
customer, ranging from technology consulting to desk-side support to
network monitoring. The Company also provides full-service IT staff and
consulting services to companies to help manage their IT infrastructure.
OTHER SERVICES -- this segment maintains a staff of trained technical
personnel, which are placed at client facilities to provide technical
support services including help desk technicians, software developers and
network support. This segment also provides custom training and
documentation solutions. The Company provides customized training programs
for many customers' proprietary applications.
During the fourth quarter of 2006, the Company combined two operating segments
-- Technical Staffing and Learning Services -- into one operating segment called
Other Services since these segments represent less than 10% of the Company's
total revenue. During the fourth quarter of 2006, the Company also reclassified
certain projects between the Company's three main service lines -- IT
Outsourcing Services, Government Technology Services and IT Consulting and
Systems Integration -- which allows the Company to track business unit results
more appropriately and to report consistent with how the services are managed.
Prior year amounts have been reclassified to be consistent with the current year
presentation.
The accounting policies of the operating segments are the same as those
described in Note 1. The Company evaluates segment performance based on segment
gross profit. Assets are not allocated to operating segments, but certain
amounts of depreciation and amortization expense are allocated to operating
segments.
Financial information for the Company's operating segments is as follows:
YEAR ENDED DECEMBER 31,
------------------------------
2006 2005 2004
-------- -------- --------
(In thousands)
REVENUE
IT Outsourcing Services................. $ 86,461 $ 76,845 $ 77,205
Government Technology Services.......... 47,393 56,159 28,142
IT Consulting and Systems Integration... 24,013 24,483 14,641
Other Services.......................... 9,497 9,010 8,000
-------- -------- --------
Total revenue.............................. $167,364 $166,497 $127,988
======== ======== ========
65
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 12 -- SEGMENT REPORTING (continued)
YEAR ENDED DECEMBER 31,
------------------------------
2006 2005 2004
-------- -------- --------
(In thousands)
GROSS PROFIT
IT Outsourcing Services.............................. $ 22,002 $ 19,315 $ 20,119
Asset impairment loss................................ (580) -- (485)
-------- -------- --------
Total IT Outsourcing Services..................... 21,422 19,315 19,634
Government Technology Services....................... 12,604 14,880 6,286
IT Consulting and Systems Integration................ 5,741 6,068 3,262
Other Services....................................... 1,610 1,820 1,405
-------- -------- --------
Total gross profit...................................... 41,377 42,083 30,587
Other operating expenses............................. (39,217) (34,892) (24,040)
Net interest income.................................. 776 390 719
Foreign currency transaction gain (loss)............. (186) 215 (91)
-------- -------- --------
Income from continuing operations before income taxes... $ 2,750 $ 7,796 $ 7,175
======== ======== ========
DEPRECIATION AND AMORTIZATION
IT Outsourcing Services.............................. $ 1,715 $ 2,034 $ 2,237
Government Technology Services....................... 70 105 79
IT Consulting and Systems Integration................ 169 209 124
Other Services....................................... 1 -- --
Unallocated depreciation and amortization............ 3,193 3,141 1,922
-------- -------- --------
Total depreciation and amortization..................... $ 5,148 $ 5,489 $ 4,362
======== ======== ========
The Company attributes revenue to different geographic areas on the basis of the
location providing the services to the customer. Revenue and long-lived assets
by geographic area is presented below:
GEOGRAPHIC INFORMATION
---------------------------------------------------------------------
2006 2005 2004
--------------------- --------------------- ---------------------
LONG-LIVED LONG-LIVED LONG-LIVED
REVENUE ASSETS REVENUE ASSETS REVENUE ASSETS
-------- ---------- -------- ---------- -------- ----------
(In thousands)
United States....... $110,887 $32,658 $116,508 $33,543 $ 86,814 $12,135
Europe:
Belgium.......... 37,537 3,488 35,631 3,601 27,335 4,095
Rest of Europe... 18,940 5,416 14,358 4,676 13,839 1,034
-------- ------- -------- ------- -------- -------
Total Europe........ 56,477 8,904 49,989 8,277 41,174 5,129
-------- ------- -------- ------- -------- -------
Total............... $167,364 $41,562 $166,497 $41,820 $127,988 $17,264
======== ======= ======== ======= ======== =======
66
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 12 -- SEGMENT REPORTING (continued)
Corporate services for major companies are provided on an international scale.
Revenue from customers that comprise 10% or greater of total revenue in any
period presented are as follows:
YEAR ENDED
DECEMBER 31,
------------------
2006 2005 2004
---- ---- ----
U.S. Federal Government.. 24.9% 30.0% 16.7%
Ford Motor Company....... 26.4% 27.4% 37.4%
---- ---- ----
Total.................... 51.3% 57.4% 54.1%
==== ==== ====
We conduct business under multiple contracts with various entities within the
Ford Motor Company organization and with various agencies and departments of the
U.S. Federal Government. No single agency or department of the U.S. Federal
Government comprised 10% or greater of the Company's total revenue for any year
presented.
Revenue from Ford is earned in the IT Outsourcing Services, IT Consulting and
Systems Integration and Other Services operating segments. All revenue from the
U.S. Federal Government is earned in the Government Technology Services
operating segment.
Amounts due from the U.S. Federal Government and Ford Motor Company accounted
for 38.0% and 16.0% of total accounts receivable at December 31, 2006,
respectively, and 42.8% and 23.6%, at December 31, 2005, respectively.
NOTE 13 -- RELATED PARTY TRANSACTIONS
In January 2006, Costa Brava Partnership III, L.P. ("Costa Brava") filed suit
against TechTeam in the Court of Chancery in the State of Delaware seeking
access to certain of TechTeam's books and records. In February 2006, Costa Brava
also nominated a slate of directors to stand of election at the Company's 2006
Annual Meeting. On May 4, 2006, the Company entered into a settlement agreement
with Costa Brava ("Settlement Agreement") resolving the proxy contest and the
litigation. Under the terms of the Settlement Agreement, the Company reimbursed
Costa Brava $611,000 for their expenses incurred as a result of the proxy
contest and related litigation. At the time of payment, Costa Brava owned
approximately 11.7% of the Company's common stock and Andrew R. Siegel was a
director of the Company. Mr. Siegel is a Senior Vice President at Roark, Rearden
& Hamot Capital Management L.L.C., an investment management firm that is the
general partner of Costa Brava.
The Company and a major customer were engaged in a pilot program in 2005 and
2006 testing software that is intended to evaluate and motivate help desk
agents. The software was owned by an affiliate of the Company's former Chairman
of the Board. The pilot program ended in the first half of 2006 and involved
Company personnel but no significant out-of-pocket expense to the Company.
In February 2004, the Company purchased 350,000 shares of the Company's common
stock from a director of the Company and his immediate family for $7.84 per
share. The closing price of the Company's common stock on February 26, 2004 was
$7.88.
67
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 14 -- CONTINGENCIES
In November 2006, the Company entered into a settlement to resolve claims
previously reported by the Company that were brought against it by William F.
Coyro, Jr., its former President and Chief Executive Officer, and David W.
Morgan, its former Vice President of Finance and Business Development, Chief
Financial Officer and Treasurer. The settlement included a full release of any
existing liability of the Company the dismissal with prejudice of the complaint
Mr. Morgan filed with the U.S. Department of Labor Occupational Safety and
Health Agency asserting that he resigned from employment with the Company due to
actions taken against him as a result of certain activities protected under
Section 806 of the Corporate and Criminal Fraud Accountability Act of 2002,
Title VIII of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1514A. The
Company recorded pre-tax expense of $650,000 during the third quarter of 2006 to
conclude these settlements.
In addition to the above matter, from time to time the Company is involved in
various litigation matters arising in the ordinary course of its business. None
of these matters, individually or in the aggregate, currently is material to the
Company.
NOTE 15 -- SUBSEQUENT EVENT
On February 9, 2007, TechTeam, through its wholly-owned subsidiary TechTeam
Global AB, completed the acquisition of all of the outstanding stock of SQM
Sverige AB ("SQM"), a information technology outsourcing and solutions company
headquartered in Stockholm, Sweden, that provides information technology
outsourcing services - including technical staffing solutions, IT infrastructure
support solutions and management consulting related to corporate IT support
operations. SQM had unaudited revenue of 81,100,000 Swedish Kroner ("SEK") and
net income of SEK 3,200,000 for the year ended December 31, 2006, which is not
included in the accompanying financial statements. The initial consideration
paid by the Company was SEK 36,300,000 (1 Swedish kroner = $0.143 on February 9,
2007) plus acquisition costs of approximately $126,000. In addition to the
initial purchase price, the selling shareholders will be paid an amount of SEK
4,200,000 if SQM meets a revenue target of SEK 93,500,000 in 2007.
Of the initial consideration, SEK 30,600,000 was paid to selling
shareholders and the remaining SEK 5,700,000 was placed into an escrow
holdback for a period of one year after closing to cover any potential claims
for indemnity or breach of representation and warranties.
NOTE 16 -- DISCONTINUED OPERATIONS
Capital Group, a subsidiary of the Company, previously wrote leases for
computer, telecommunications, and other types of capital equipment, with initial
lease terms ranging from two to five years. Capital Group ceased writing new
leases in March 2000 and is in the final stages of running out its lease
portfolio. The Company's future revenue stream from contractually committed
leases is expected to be inconsequential to the Company's results of operations.
The activity that remains in winding-down the leasing operation is the
collection of accounts receivable, including older accounts receivable related
to terminated leases. As a result, Capital Group has been presented as a
discontinued operation in accordance with SFAS No. 144, "Accounting for the
Disposal or Impairment of Long-Lived Assets." Under this statement, the
operating results of Capital Group are presented separately from continuing
operations in the accompanying financial statements for all periods presented.
Capital Group previously was reported as a separate operating segment called
Leasing Operations.
68
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 16 -- DISCONTINUED OPERATIONS (continued)
Summarized information for Capital Group is as follows:
YEAR ENDED
DECEMBER 31,
----------------------
2006 2005 2004
---- ---- ----
(In thousands,
except per share data)
Revenue ............................ $ -- $87 $483
Income (loss) before income taxes .. $(43) $74 $147
NOTE 17 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly condensed consolidated results of operations are summarized as
follows:
QUARTER ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(In thousands, except per share data)
2006
Revenue ..................................... $40,598 $40,869 $42,027 $43,871
Gross profit ................................ 10,040(1) 9,731 10,363 11,244
Income (loss) from continuing operations .... 337(2) (75)(3) 381(4) 1,234
Income (loss) from discontinued operations .. -- -- (11) (32)
Net income (loss) ........................... $ 337(2) $ (75)(3) $ 370(4) $ 1,202
Earnings (loss) per share from continuing
operations:
Basic per common ......................... $ 0.03(2) $ (0.01)(3) $ 0.04(4) $ 0.12
Diluted per common ....................... $ 0.03(2) $ (0.01)(3) $ 0.04(4) $ 0.12
Earnings (loss) per share:
Basic per common ......................... $ 0.03(2) $ (0.01)(3) $ 0.04(4) $ 0.12
Diluted per common ....................... $ 0.03(2) $ (0.01)(3) $ 0.04(4) $ 0.12
69
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 17 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (continued)
QUARTER ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(In thousands, except per share data)
2005
Revenue .............................. $42,038 $42,285 $41,314 $40,860
Gross profit ......................... 10,708 11,001 10,343 10,031
Income from continuing operations .... 1,695 1,577 1,226 896
Income from discontinued operations .. 55 1 3 15
Net income ........................... $ 1,750 $ 1,578 $ 1,229 $ 911
Earnings per share from continuing
operations:
Basic per common .................. $ 0.18 $ 0.16 $ 0.12 $ 0.09
Basic per preferred ............... $ 0.18 $ 0.16 N/A N/A
Diluted per common ................ $ 0.17 $ 0.16 $ 0.12 $ 0.09
Earnings per share:
Basic per common .................. $ 0.18 $ 0.16 $ 0.12 $ 0.09
Basic per preferred ............... $ 0.18 $ 0.16 N/A N/A
Diluted per common ................ $ 0.18 $ 0.16 $ 0.12 $ 0.09
(1) Includes a pre-tax loss of $580,000 from the write-down of a software
asset.
(2) Includes an after-tax loss of $383,000 from the write-down of a software
asset and after-tax expenses of $329,000 for legal and professional fees
associated with a proxy contest initiated by a shareholder.
(3) Includes after-tax expenses of $568,000 for legal and professional fees
associated with the proxy contest.
(4) Includes after-tax expenses of $30,000 for legal and professional fees
associated with the proxy contest and after-tax expenses of $429,000 for
settlement of claims against the Company by certain former Company
officers.
70
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in accountants, disagreements, or other events requiring
reporting under this Item.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of December 31, 2006, our management, with the participation of our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the design and operation of our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that, as of December 31, 2006, our disclosure controls and procedures were (1)
designed to ensure that material information relating to us, including our
consolidated subsidiaries, is made known to our Chief Executive Officer and
Chief Financial Officer by others within those entities, particularly during the
period in which this report was being prepared and (2) effective, in that they
provide reasonable assurance that information required to be disclosed by us in
the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the U.S.
Securities and Exchange Commission's rules and forms.
It should be noted that any system of controls, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system will be met. In addition, the design of any control
system is based in part upon certain assumptions about the likelihood of certain
events. Because of these and other inherent limitations of control systems,
there is only reasonable assurance that our controls will succeed in achieving
their goals under all potential future conditions.
Management's report on internal control over financial reporting and Ernst &
Young LLP's report on both management's assessment and on the Company's internal
control over financial reporting are included in Item 8 of this Form 10-K and
incorporated herein by reference.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
No change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter
ended December 31, 2006, that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
71
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
DIRECTORS AND EXECUTIVE OFFICERS
Information relating to our Board of Directors will be found in our Proxy
Statement to be dated on or about April 5, 2007 (the "Proxy Statement") under
"Proposal 1. Election of Directors" and is incorporated in this report by
reference.
Information relating to our executive officers will be found in our Proxy
Statement under "Executive Officers of the Company." In addition, information
relating to certain filing obligations of directors and executive officers under
the federal securities laws will be found in the Proxy Statement under "Section
16(a) Beneficial Ownership Reporting Compliance." That information is
incorporated in this report by reference.
CODE OF ETHICS
We have adopted a code of ethics as set forth in our Code of Business Conduct,
which is available on our Web site at
http://phx.corporate-ir.net/phoenix.zhtml?c=91039&p=irol-govhighlights.
In the event of any amendments to, or waivers from, a provision of the code
affecting the chief executive officer, chief financial officer, controller or
persons performing similar functions, we intend to post on the above Web site
within four business days after the event a description of the amendment or
waiver as required under applicable U.S. Securities and Exchange Commission
rules. We will maintain that information on our Web site for at least 12 months.
Paper copies of these documents are available free of charge upon request to the
Company's secretary at the address on the front of this Form 10-K.
CORPORATE GOVERNANCE
In our proxy statements, we describe the procedures by which shareholders can
recommend nominees to our board of directors. There have been no changes in
those procedures since they were last published in our proxy statement of May
12, 2006.
The Board of Directors has determined that the Audit Committee consists entirely
of independent directors in accordance with applicable U.S. Securities and
Exchange Commission and Nasdaq(R) Global Market rules for audit committees. The
members of the committee are James G. Roche, Andrew R. Siegel and Richard R.
Widgren (Chairman). The Board of Directors has determined that Mr. Widgren is an
audit committee financial expert as defined in the U.S. Securities and Exchange
Commission rules.
ITEM 11. EXECUTIVE COMPENSATION
Information on director compensation, executive compensation and compensation
committee matters will be provided in the Proxy Statement under "Directors'
Compensation," "Executive Compensation" (which includes the Report of the
Compensation Committee) and "Compensation Committee Interlocks and Insider
Participation." That information is incorporated in this report by reference.
72
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information relating to ownership of the Company's common stock by management
and by persons known by the Company to be the beneficial owners of more than
five percent of the outstanding shares of common stock will be found in the
Proxy Statement under "Ownership of Company Stock." That information is
incorporated in this report by reference.
The following table presents information as of December 31, 2006, regarding our
compensation plans under which shares of our common stock have been authorized
for issuance.
EQUITY COMPENSATION PLAN INFORMATION
-------------------------------------------------------------------------
(C)
------------------------
(A) NUMBER OF SECURITIES
----------------------- (B) REMAINING AVAILABLE FOR
NUMBER OF SECURITIES -------------------- FUTURE ISSUANCE UNDER
TO BE ISSUED UPON WEIGHTED-AVERAGE EQUITY COMPENSATION
EXERCISE OF OUTSTANDING EXERCISE PRICE OF PLANS (EXCLUDING
OPTIONS, WARRANTS OUTSTANDING OPTIONS, SECURITIES
PLAN CATEGORY AND RIGHTS (1) WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
------------- ----------------------- -------------------- ------------------------
Equity compensation plans approved
by security holders............... 868,300 $9.95 59,664
Equity compensation plans not
approved by security holders...... 60,667 $6.16 --
------- ----- ------
Total................................ 928,967 $9.71 59,664
======= ===== ======
(1) Represents options to purchase shares of the Company's common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information to be set forth under the caption "Compensation of Executive
Officers -- Certain Relationships and Related Transactions" in the Proxy
Statement is incorporated herein by reference.
DIRECTOR INDEPENDENCE
Information relating to director independence will be found in the Proxy
Statement under "Director Independence" and is incorporated in this report by
reference.
RELATED PARTY TRANSACTIONS
Information relating to transactions with related parties can be found in the
Proxy Statement under "Certain Relationships and Related Transactions" and
information relating to the Board of Director's policies and procedures for
approval of related party transactions can be found in the Proxy Statement under
"Board Matters - Audit Committee." That information is incorporated in this
report by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information to be set forth under the caption "Fees of the Independent
Auditors for 2006 and 2005" in the Proxy Statement is incorporated herein by
reference.
73
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a) Certain documents are filed as part of this Report on Form 10-K.
(1) See "Item 8 -- Financial Statements and Supplementary Data"
beginning at page 34.
(2) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts for the years
ended December 31, 2006, 2005 and 2004
(3) Exhibits.
EXHIBIT
NUMBER EXHIBIT REFERENCE *
------- ---------------------------------------------------------------------- -----------
2.1 Share Purchase Agreement, dated May 13, 2004, in respect of the Shares
in Advance Network Engineering NV, between Peter De Gendt, Werner
Meynaerts, Pascal Claessens, Wim De Geetere, and Christophe Gesqueire,
as Sellers, and TechTeam Global NV as Purchaser (excluding Exhibits
and Schedules thereto) *13
2.2 First Amendment to Share Purchase Agreement between Peter De Gendt,
Werner Meynaerts, Pascal Claessens, Wim De Geetere, and Christophe
Gesqueire, as Sellers, and TechTeam Global NV as Purchaser, dated
December 31, 2006.
2.3 Stock Purchase Agreement, dated January 3, 2005 by and among TechTeam
Global, Inc. and Digital Support Corporation and Sytel, Inc., The
Stockholders of Sytel, Inc. and Certain of the Option holders of
Sytel, Inc. *11
2.4 Share Purchase Agreement, dated October 3, 2005, by and between
TechTeam Global, Inc., TechTeam Global NV/SA and Akela Informatique
SRL, Lucian Ionut Butnaru, Peter Andrei Ungureanu, Sabin Girlea,
Philippe Bouzier, Alain Joseph Maurice Kremer and George Tudor *14
2.5 Share Purchase Agreement between TechTeam Global AB and SQM Nordic AB
dated January 19, 2007 *17
2.6 First Amendment of Share Purchase Agreement, dated as of February 9,
2007 *17
3.1 Certification of Incorporation of TechTeam Global, Inc. filed with the
Delaware Secretary of State on September 14, 1987. *8
3.2 Certificate of Amendment dated November 27, 1987 to our Certificate of
Incorporation. *8
3.3 Certificate of Amendment dated May 8, 2002 to Certificate of
Incorporation *8
3.4 Bylaws of TechTeam Global, Inc. as Amended and Restated February 13,
2006. *15
4.5 Rights Agreement dated as of May 6, 1997, between TechTeam Global,
Inc. and U.S. Stock Transfer Corporation, as Rights Agent, which
includes as Exhibit A thereto the Form of Certificate of Designations,
as Exhibit B thereto the Form of Right Certificate, and as Exhibit C
thereto the Summary of Rights to Purchase Preferred Stock. *5
4.6 First Amendment of Rights Agreement dated as of May 6, 1997 *6
4.7 Second Amendment of Rights Agreement dated as of May 6, 1997. *9
10.1 Lease Agreement for office space in Southfield, Michigan known as the
Cumberland Tech Center between the Company and Eleven Inkster
Associates dated September 27, 1993. *2
11.2 Seventh Amendment dated August 24, 2006 to the Lease Agreement for
office space in Southfield, Michigan between Eleven Inkster L.L.C. and
the Company. *16
74
EXHIBIT
NUMBER EXHIBIT REFERENCE *
------- ---------------------------------------------------------------------- -----------
10.3 Lease for office space in Dearborn, Michigan between the Company and
Dearborn Atrium Associates Limited Partnership dated November 18,
1996. *4
10.4 Third Amendment to Lease between the Company and Dearborn Tech, L.L.C
(owner of interest of Dearborn Atrium Associates Limited Partnership)
dated November 30, 2004. *13
10.5 Lease Agreement for office space in Davenport, Iowa known as the 1010
Shopping Center between the Company and Partnership 1010, L.L.P. dated
August 28, 1999. *7
10.6 Office Lease Agreement by and between FJ Dulles Business Park II,
L.L.C., as Landlord, and TechTeam Government Solutions, Inc.,
(formerly known as Digital Support Corporation) as Tenant, dated
December 21, 2000. *10
10.7 Lease Contract between IMMOBILIERE DE LA RUE DE STRASBOURG S.A and
TechTeam Global NV/SA, as amended, dated April 4, 2003. *10
10.8 Office Building Lease between Elizabethean Court Associates III L.P.,
as landlord, and TechTeam Global, Inc., as tenant, dated May 18, 2006.
10.9 Lease Agreement for office space in Bucharest, Romania between S.C.
Italian-Romanian Industrial Development Enterprises - IRIDE SA and
TechTeam Global SRL dated February 2, 2005 *13
10.10 1996 Nonemployee Directors Stock Plan. *3
10.11 1990 Nonqualified Stock Option Plan. *1
10.12 2004 Incentive Stock and Awards Plan *13
10.13 TechTeam Global, Inc. Executive Annual Incentive Plan.
10.14 TechTeam Global, Inc. Executive Long Term Incentive Program.
10.15 Supplemental Retirement Plan dated October 1, 2000. *7
10.16 Employment Agreement Relating to Change of Control. *10
10.17 Employment Agreement between TechTeam Europe, NV and Christoph Neut
dated October 2, 1996. *8
10.18 Employment Agreement between TechTeam Global, Inc. and William C.
Brown, dated February 3, 2006 *15
10.19 Ford Global SPOC Agreement with Ford Motor Company dated December 1,
2005. *15
10.20 Amended and Restated Business Loan Agreement, dated January 3, 2005,
between TechTeam Global, Inc. and Standard Federal Bank NA *12
10.21 Promissory Note (Line of Credit), dated September 7, 2004 *11
10.22 Promissory Note (Term Loan), dated January 3, 2005 *12
14.1 TechTeam Global, Inc. Code of Business Conduct.
21.1 List of subsidiaries of TechTeam Global, Inc.
23.1 Consent of Independent Registered Public Accounting Firm.
31.1 Certification of William C. Brown 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 of Marc J. Lichtman, 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 of William C. Brown Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Marc J. Lichtman Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
75
Exhibits 10.10 through 10.18 represent management contracts and compensatory
plans.
EXHIBIT
----------------------------------------------------------------------
*1 Incorporated by reference to our Annual Report on Form 10-K for the
year ended December 31, 1990, filed as Exhibit 4.14 thereto.
*2 Incorporated by reference to our Annual Report on Form 10-KSB for the
year ended December 31, 1993.
*3 Incorporated by reference to our Registration Statement on Form S-3
(Registration No. 333-10687).
*4 Incorporated by reference to our Annual Report on Form 10-K dated
December 31, 1996.
*5 Incorporated by reference to our Registration Statement on Form 8-A
dated May 9, 1997.
*6 Incorporated by reference to our Registration Statement on Form 8-A/A,
dated September 23, 1999.
*7 Incorporated by reference to our Annual Report on Form 10-K dated
March 31, 2001.
*8 Incorporated by reference to our Annual Report on Form 10-K dated
March 18, 2003.
*9 Incorporated by reference to our Registration Statement on form
8-A12G/A, dated May 22, 2003.
*10 Incorporated by reference to our Report on Form 10-K dated March 24,
2004.
*11 Incorporated by reference to our Report on Form 8-K dated September
21, 2004.
*12 Incorporated by reference to our Report on Form 8-K dated January 5,
2005.
*13 Incorporated by reference to our Annual Report on Form 10-K dated
March 18, 2005.
*14 Incorporated by reference to our Report on Form 8-K dated October 5,
2005.
*15 Incorporated by reference to our Annual Report on Form 10-K dated
March 16, 2006
*16 Incorporated by reference to our Report on Form 10-Q dated November 9,
2006
*17 Incorporated by reference to our Report on Form 8-K dated February 9,
2007
76
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TECHTEAM GLOBAL, INC.
Date: March 16, 2007 By: /s/ William C. Brown William C. Brown
-------------------------------------- President, Chief Executive
Officer and Director
(Principal Executive Officer)
By: /s/ Marc J. Lichtman Marc J. Lichtman
-------------------------------------- Chief Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities indicated on March
16, 2007.
/s/ Kent Heyman Director
-------------------------------------
Kent Heyman
/s/ John P. Jumper Director
-------------------------------------
General John P. Jumper (USAF Retired)
/s/ James A. Lynch Director
-------------------------------------
James A. Lynch
/s/ Alok Mohan Director
-------------------------------------
Alok Mohan
/s/ James D. Roche Director
-------------------------------------
James D. Roche
/s/ Andrew R. Siegel Director
-------------------------------------
Andrew R. Siegel
/s/ Richard R. Widgren Director
-------------------------------------
Richard R. Widgren
77
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
CHARGED TO
BALANCE AT (REDUCTION OF) BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- ---------- -------------- ---------- ---------
(In thousands)
2006
Allowance for doubtful accounts.......... $757 $ 232 $(523) $466
Valuation allowance for deferred taxes... $505 $(215) $ -- $290
2005
Allowance for doubtful accounts.......... $912 $(286) $ 131 $757
Valuation allowance for deferred taxes... $765 $(260) $ -- $505
2004
Allowance for doubtful accounts.......... $637 $ 220 $ 55 $912
Valuation allowance for deferred taxes... $668 $ 97 $ -- $765
78
INDEX OF EXHIBITS
EXHIBIT
NUMBER EXHIBIT
------- ----------------------------------------------------------------------
2.2 First Amendment to Share Purchase Agreement between Peter De Gendt,
Werner Meynaerts, Pascal Claessens, Wim De Geetere, and Christophe
Gesqueire, as Sellers, and TechTeam Global NV as Purchaser, dated
December 31, 2006.
10.8 Office Building Lease between Elizabethean Court Associates III L.P.,
as landlord, and TechTeam Global, Inc., as tenant, dated May 18, 2006.
10.13 TechTeam Global, Inc. Executive Annual Incentive Plan.
10.14 TechTeam Global, Inc. Executive Long Term Incentive Program.
14.1 TechTeam Global, Inc. Code of Business Conduct.
21.1 List of subsidiaries to TechTeam Global, Inc.
23.1 Consent of Independent Registered Public Accounting Firm.
31.1 Certification of William C. Brown 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 of Marc J. Lichtman 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 of William C. Brown Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Marc J. Lichtman Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
79