UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2003
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission file number 0-16284
TECHTEAM GLOBAL, INC.
---------------------
(Name of issuer in its charter)
DELAWARE 38-2774613
--------- -----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
27335 West 11 Mile Road, Southfield, MI 48034
---------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 357-2866
---------------
Registrant's Internet address: www.techteam.com
----------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
|X| Yes |_| No
The number of shares of the registrant's common stock outstanding at April 30,
2003 was 10,711,597. The number of shares of the registrant's preferred stock
outstanding at April 30, 2003 was 689,656.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ACTUAL RESULTS COULD
DIFFER FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF
CERTAIN FACTORS DESCRIBED IN THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 2002 PREVIOUSLY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
1
TECHTEAM GLOBAL, INC.
FORM 10-Q
INDEX
========================================================================================================================
PAGE
NUMBER
---------------------------------------------------------------------------------------------------------- ------------
PART I -- FINANCIAL INFORMATION
ITEM 1.
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended March 31, 2003 and 2002 3
Condensed Consolidated Statements of Financial Position (Unaudited)
March 31, 2003 and December 31, 2002 4 - 5
Condensed Consolidated Statements of Cash Flows (Unaudited)
March 31, 2003 and 2002 6
Notes to the Condensed Consolidated Financial Statements (Unaudited) 7 - 11
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations 12 - 19
ITEM 4.
Controls and Procedures 19
PART II -- OTHER INFORMATION
ITEM 1.
Legal Proceedings 20
ITEM 2.
Changes in Securities and Use of Proceeds 20
ITEM 5.
Other Information 20
ITEM 6.
Exhibits and Reports on Form 8-K 21
Signatures 22
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2
PART 1 -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
=======================================================================================================================
THREE MONTHS ENDED MARCH 31,
---------------------------------
2003 2002
--------------- ---------------
(In thousands, except per share data)
REVENUES
Corporate services
Corporate help desk services............................................. $ 16,009 $ 14,419
Technical staffing....................................................... 2,366 2,808
Systems integration...................................................... 2,138 2,235
Training programs........................................................ 218 276
--------------- ---------------
Total corporate services.................................................... 20,731 19,738
Leasing operations.......................................................... 1,032 3,209
--------------- ---------------
TOTAL REVENUES.................................................................. 21,763 22,947
COST OF SERVICES DELIVERED...................................................... 17,104 17,793
--------------- ---------------
GROSS PROFIT.................................................................... 4,659 5,154
--------------- ---------------
OTHER EXPENSES
Selling, general, and administrative........................................ 4,401 3,890
Michigan Single Business Tax................................................ 202 225
--------------- ---------------
TOTAL OTHER EXPENSES............................................................ 4,603 4,115
--------------- ---------------
OPERATING INCOME................................................................ 56 1,039
Interest income................................................................. 218 205
Interest expense................................................................ (9) (70)
--------------- ---------------
NET INTEREST INCOME............................................................. 209 135
--------------- ---------------
Income before income taxes...................................................... 265 1,174
Income tax provision............................................................ 206 532
--------------- ---------------
Income before cumulative effect of accounting change............................ 59 642
Cumulative effect of accounting change.......................................... -- (1,123)
--------------- ---------------
NET INCOME (LOSS)............................................................... $ 59 $ (481)
=============== ===============
BASIC EARNINGS (LOSS) PER SHARE
Income before cumulative effect of accounting change............................ $ .01 $ .06
Cumulative effect of accounting change.......................................... -- (.10)
--------------- ---------------
Total basic earnings (loss) per share........................................... $ .01 $ (.04)
=============== ===============
DILUTED EARNINGS (LOSS) PER SHARE
Income before cumulative effect of accounting change............................ $ .01 $ .06
Cumulative effect of accounting change.......................................... -- (.10)
--------------- ---------------
Total diluted earnings (loss) per share......................................... $ .01 $ (.04)
=============== ===============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND COMMON SHARE EQUIVALENTS
OUTSTANDING
Basic....................................................................... 10,695 10,903
Net effect of dilutive stock options........................................ 161 57
--------------- ---------------
Diluted..................................................................... 10,856 10,960
=============== ===============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
=======================================================================================================================
NET INCOME, AS SET FORTH ABOVE.................................................. $ 59 $ (481)
Foreign currency translation adjustments........................................ 189 (97)
--------------- ---------------
COMPREHENSIVE INCOME (LOSS)..................................................... $ 248 $ (578)
=============== ===============
3
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)
======================================================================================================================
MARCH 31, DECEMBER 31,
ASSETS 2003 2002
--------------------------------------------------------------------------------- --------------- ---------------
(In thousands)
CURRENT ASSETS
Cash and cash equivalents.................................................. $ 38,244 $ 39,435
Securities available for sale.............................................. 6,644 6,492
Accounts receivable -- corporate services (less allowances of $138 at
March 31, 2003 and $182 at December 31, 2002)........................... 16,673 14,328
Accounts receivable -- leasing (less allowances of $563 at March 31, 2003
and $415 at December 31, 2002).......................................... 3,146 2,906
Refundable taxes........................................................... 1,547 1,393
Inventories of off-lease equipment and supplies (less reserves of $1,674 at
March 31, 2003 and $1,974 at December 31, 2002)......................... 1,318 1,452
Prepaid expenses and other................................................. 1,281 864
Deferred income tax ....................................................... 1,242 1,242
--------------- ---------------
Total current assets ...................................................... 70,095 68,112
PROPERTY, EQUIPMENT, AND PURCHASED SOFTWARE
Computer equipment and office furniture.................................... 18,682 18,169
Purchased software......................................................... 9,800 9,435
Leasehold improvements..................................................... 3,665 3,531
Transportation equipment................................................... 249 273
--------------- ---------------
32,396 31,408
Less -- accumulated depreciation and amortization.......................... 23,686 22,768
--------------- ---------------
8,710 8,640
OTHER ASSETS
Assets of leasing operations, net of amortization (less reserves of $355 at
March 31, 2003 and $823 at December 31, 2002)............................ 2,300 3,489
Intangibles (less accumulated amortization of $6,640 at March 31, 2003
and $6,442 at December 31, 2002)......................................... 1,234 1,432
Loans receivable........................................................... 30 30
Other...................................................................... 229 161
--------------- ---------------
3,793 5,112
--------------- ---------------
TOTAL ASSETS................................................................... $ 82,598 $ 81,864
=============== ===============
See accompanying notes.
4
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (continued)
(UNAUDITED)
=======================================================================================================================
MARCH 31, DECEMBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2003 2002
-------------------------------------------------------------------------------- -------------- --------------
(In thousands)
CURRENT LIABILITIES
Accounts payable....................................................... $ 1,928 $ 1,639
Accrued payroll, related taxes, and withholdings....................... 3,866 3,187
Deferred revenues...................................................... 607 321
Accrued expenses and taxes............................................. 944 1,618
Current portion of notes payable....................................... 354 492
Other.................................................................. 179 175
-------------- --------------
TOTAL CURRENT LIABILITIES.............................................. 7,878 7,432
LONG-TERM LIABILITIES...................................................... 1,018 1,112
SHAREHOLDERS' EQUITY
Preferred stock, par value $.01, 5,000,000 shares authorized, none issued
Common stock, par value $.01, 45,000,000 shares authorized,
Issued 16,974,833 and 16,953,100 shares at March 31, 2003
and December 31, 2002, respectively.............................. 170 169
Additional paid-in capital............................................. 109,603 109,482
Retained earnings...................................................... 1,173 1,114
Accumulated other comprehensive income -- foreign currency
translation adjustment.............................................. 345 156
-------------- --------------
Total.................................................................. 111,291 110,921
Less -- Treasury stock (6,273,236 and 6,274,436 shares at March 31, 2003
and December 31, 2002 respectively)................................. 37,589 37,601
-------------- --------------
Total shareholders' equity............................................. 73,702 73,320
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................. $ 82,598 $ 81,864
============== ==============
See accompanying notes.
5
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
=======================================================================================================================
THREE MONTHS ENDED MARCH 31,
--------------------------------
2003 2002
-------------- --------------
(In thousands)
OPERATING ACTIVITIES
Income before cumulative effect of accounting change....................... $ 59 $ 642
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization........................................ 1,640 3,746
Non-cash stock option compensation expense.......................... 15 -
Treasury stock contributed to 401(k) plan and other.................. 13 83
Changes in current assets and liabilities............................ (2,590) (629)
Changes in long-term liabilities..................................... (20) -
------------- -------------
Net cash provided by (used in) operating activities..................... (883) 3,842
INVESTING ACTIVITIES
Purchase of property, equipment, and software, net......................... (986) (1,066)
Disposal of leased equipment............................................... 667 1,424
Purchase of marketable securities.......................................... (152) (2,955)
Decrease in investment in direct financing leases and residuals............ 132 216
Other...................................................................... (69) (23)
------------- -------------
Net cash used in investing activities................................... (408) (2,404)
FINANCING ACTIVITIES
Payments on notes payable, net............................................. (194) (1,689)
Proceeds from issuance of Company common stock............................. 105 -
Other...................................................................... 189 (97)
------------- -------------
Net cash provided by (used in) financing activities..................... 100 (1,786)
------------- -------------
Decrease in cash and cash equivalents................................... (1,191) (348)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............................... 39,435 30,251
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..................................... $ 38,244 $ 29,903
============= =============
See accompanying notes.
6
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying unaudited condensed consolidated financial statements have been
prepared by TechTeam Global, Inc. ("TechTeam" or "Company" or "We") in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements. In our opinion, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended March 31, 2003 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2003. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company and
Subsidiaries' annual report on Form 10-K for the year ended December 31, 2002.
Certain reclassifications have been made to the 2002 financial statements in
order to conform to the 2003 financial statement presentation.
NOTE A -- EARNINGS PER SHARE
Earnings per share is computed using the weighted average number of common
shares and common share equivalents outstanding. Common share equivalents
consist of stock options and are calculated using the treasury stock method.
The weighted average number of fully diluted shares fell from 11,102,814 at
December 31, 2002 to 10,855,784 at March 31, 2003 due primarily to the shares
purchased in December, 2002 under the Company's stock repurchase program. As of
March 31, 2003 and 2002, 645,477 and 1,617,321 stock options, respectively, were
excluded from the fully diluted calculation because the option exercise price
was higher than the stock price.
NOTE B -- DESCRIPTION OF THE BUSINESS
Revenues from clients that exceeded 10% or more of total revenues for any of the
periods presented are summarized as follows:
=======================================================================================================================
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------------------------
2003 2002
--------------------------------- ---------------------------------
(In thousands)
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
--------------- ---------------- --------------- ---------------
Ford Motor Company.......................... $ 11,474 52.7% $ 11,117 48.5%
DaimlerChrysler............................. $ 3,354 15.4% $ 3,426 14.9%
NOTE C -- EFFECTS OF ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS 142, "Goodwill and Other Intangible Assets."
Under Statement 142, goodwill and indefinite lived intangible assets are no
longer amortized but are reviewed annually for impairment, or more frequently if
impairment indicators arise. Separable intangible assets that have finite lives
will continue to be amortized over their useful lives. As of January 1, 2002 the
Company adopted SFAS 142. Accordingly, the Company took a charge of $1.1 million
related to impaired goodwill in our Leasing operations in the first quarter of
2002. Under SFAS 142, the charge recognized upon adoption of the statement was
reported as the cumulative effect of an accounting change.
NOTE D -- STOCK OPTIONS
We account for stock options under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
7
Pro forma information regarding net income/(loss) and earnings/(loss) per share
is required by SFAS No. 123, Accounting for Stock-Based Compensation, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method. The fair value for these options was estimated as
of the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions a range of risk-free interest rates of 5%
to 7% based on the expected life of the options; a volatility factor of the
expected market price of our common stock of .464 at March 31, 2003 and 2002;
and a weighted average expected life of three years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
our employee stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in our opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the stock
options is amortized over the options' vesting period. Our pro forma information
is as follows:
=============================================================================================================
THREE MONTHS ENDED MARCH 31,
-------------------------------
2003 2002
-------------- --------------
(In thousands)
Pro forma net loss........................................... $ (253) $ (577)
Pro forma loss per share
Basic.................................................... (.02) $ (.05)
Diluted.................................................. $ (.02) $ (.05)
NOTE E -- LEGAL PROCEEDINGS
Refer to Part II, Item 1 for a description of legal proceedings.
NOTE F -- STOCK REPURCHASE PROGRAMS
In August 2002, we announced a stock repurchase program to repurchase up to
2,000,000 shares of common stock. Under this program, we have repurchased
470,600 shares for $3,422,701, inclusive of commission expense, in 2002. The
Company did not acquire any shares of its common stock during the first quarter
of 2003 in connection with the program, which expired on February 26, 2003.
In April 2003, we announced a new stock repurchase program to repurchase up to
2,000,000 shares of Company common stock.
8
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE G -- SEGMENT REPORTING
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or decision-making group, in deciding how to
allocate resources and in assessing performance. Our chief operating
decision-making group is the Senior Management Committee, which is comprised of
the President and the lead executives of each of our functional divisions. The
operating segments are managed separately because each operating segment
represents a strategic business unit that offers different products.
Our reportable operating segments include Corporate Services (consisting of
corporate help desk services, technical staffing, systems integration, and
training programs), and Leasing Operations.
Our reportable geographic segments are the United States and Europe. The Europe
segment provides the corporate help desk services and technical staffing. The
United States geographic segment provides services in all operating segments.
Revenues are attributed to geographic segments based upon the location of
service delivery.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies in our December 31,
2002 Form 10K. We evaluate performance based on stand-alone operating segment
gross profit.
Financial information for our business segments is as follows:
========================================================================================================================
CORPORATE SERVICES
-----------------------------------------------------------------
CORPORATE
HELP DESK TECHNICAL SYSTEMS TRAINING LEASING
SERVICES STAFFING INTEGRATION PROGRAMS TOTAL OPERATIONS TOTAL
------------ ------------ ----------- ------------ ------------ ----------- ------------
(In thousands)
Three months ended
March 31, 2003
--------------------------
Revenues................. $ 16,009 $ 2,366 $ 2,138 $ 218 $ 20,731 $ 1,032 $ 21,763
Gross profit............. 3,595 499 557 39 4,690 (31) 4,659
Depreciation and
amortization......... 738 1 5 1 745 541 1,286
Expenditures for
property............. 753 - 3 1 757 - 757
Three months ended
March 31, 2002
--------------------------
Revenues................. $ 14,419 $ 2,808 $ 2,235 $ 276 $ 19,738 $ 3,209 $ 22,947
Gross profit (loss)...... 3,907 357 591 67 4,922 232 5,154
Depreciation and
amortization......... 686 7 3 2 698 2,733 3,431
Expenditures for
property............. 723 8 3 - 734 - 734
Segment Assets
--------------------------
March 31, 2003........... $ 18,720 $ 1,907 $ 1,757 $ 186 $ 22,570 $ 6,624 $ 29,194
December 31, 2002........ 16,695 1,919 1,350 216 20,180 7,757 27,937
9
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE G -- SEGMENT REPORTING (continued)
=======================================================================================================================
GEOGRAPHIC INFORMATION
--------------------------------------------------------------------
REVENUE ASSETS
--------------------------------- --------------------------------
THREE MONTHS ENDED MARCH 31, MARCH 31, DECEMBER 31,
--------------------------------- --------------- ---------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
(In thousands)
United States................................... $ 16,097 $ 19,175 $ 71,441 $ 71,731
Europe 5,665 3,772 11,157 10,133
--------------- --------------- --------------- ---------------
Total........................................... $ 21,763 $ 22,947 $ 82,598 $ 81,864
=============== =============== =============== ===============
A reconciliation of the totals reported for the operating segments to the
applicable line item in the consolidated financial statements are as follows:
=======================================================================================================================
THREE MONTHS ENDED
MARCH 31,
---------------------------------
2003 2002
--------------- ---------------
(In thousands)
Depreciation and amortization
Total for reportable segments.............................................. $ 1,286 $ 3,431
Corporate assets........................................................... 354 315
--------------- ---------------
Total depreciation and amortization..................................... $ 1,640 $ 3,746
=============== ===============
Expenditures for property
Total for reportable segments.............................................. $ 757 $ 734
Corporate assets........................................................... 229 $ 332
--------------- ---------------
Total expenditures for property......................................... $ 986 $ 1,066
=============== ===============
MARCH 31, DECEMBER 31,
2003 2002
--------------- ---------------
(In thousands)
Assets
Total assets for reportable segments....................................... $ 29,194 $ 27,937
Corporate assets........................................................... 53,404 53,927
--------------- ---------------
Total assets............................................................ $ 82,598 $ 81,864
=============== ===============
10
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE H -- EXECUTIVE STOCK OPTIONS
As previously disclosed in our Form 10K, we and our President and Chief
Executive Officer, William F. Coyro, Jr., entered into an employment agreement
on August 9, 2001. The terms of the agreement provided for TechTeam Global, Inc.
stock options granted to Dr. Coyro to become exercisable on September 30, 2002,
with the number of stock options exercisable determined by the average closing
price of our common stock during the month of September 2002. The actual number
of stock options that became exercisable by Dr. Coyro under this formula was
100,000.
Accounting Principles Board Opinion No. 25 required that in 2002 we record a
charge that was determined by multiplying the number of options actually awarded
by the difference in the stock price at the time the number of options become
determined and the exercise price for the option. Accordingly, we recorded a
charge of $410,000, which represented 100,000 options multiplied by $6.85
(closing price of the stock on October 1, 2002) less $2.75 (the option exercise
price), $408,000 of this expense was accrued in the second quarter of 2002, and
an additional $2,000 in expense in the third quarter of 2002. These charges were
recorded in selling, general, and administrative expenses.
NOTE I -- INCOME TAXES
The consolidated effective tax rate differs from the statutory tax rate due to
certain non-deductible expenses.
NOTE J -- SUBSEQUENT EVENT
On April 8, 2003, TechTeam Global, Inc. completed a private placement of 689,656
shares of newly created Series A Convertible Preferred Stock ("Series A
Preferred Stock") with ChrysCapital II, LLC, ("CCII") a Mauritius limited
liability company, in consideration for five million six dollars ($5,000,006) or
$7.25 per share. Refer to Part II, Item 2 for further description of the
transaction. Series A Preferred Stockholders are currently entitled to elect one
director to the Company's Board of Directors, and CCII has agreed, through its
representative on the Board, Mr. Brahmal Vasudevan, to provide advice and
guidance to the Company regarding the Company's expansion into India and
elsewhere in Asia. The holder(s) of Series A Preferred Stock ("Holder") has the
right to vote each share of its Series A Preferred Stock as if it were converted
to the Company's Common Stock. Refer to Part II, Item 2 for further description
of the transaction.
11
ITEM 2-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain of the statements contained in this report that are not historical facts
are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. Our actual results may differ materially from those
included in the forward-looking statements. We caution readers not to place
undue reliance on these forward-looking statements, which reflect management's
opinions only as of the date hereof. We do not undertake an obligation to revise
or publicly release the results of any revisions to these forward-looking
statements. You should carefully review the risk factors described in other
documents the Company files from time to time with the SEC, including the Annual
Report on Form 10-K for the year ended December 31, 2002.
OVERVIEW
TECHTEAM GLOBAL, INC. ("TechTeam" or "Company" or "We") is a global provider of
information technology (IT) and business process outsourcing support services to
entities, including Fortune 1000 companies, multinational companies, product
providers, and governments. These services are provided with a single point of
contact philosophy centralized on our IT help desk support services. We also
offer other services, including technology deployment and migration services,
consulting, systems integration, training, and technical staffing. We provide
support services in Europe through our subsidiaries: TechTeam Europe, NV/SA;
TechTeam Europe, Ltd.; TechTeam Europe, GmbH; and TechTeam Europe, AB.
TechTeam Global, Inc. is incorporated under the laws of the State of Delaware.
The Company's common stock is traded on the Nasdaq National Stock Market(R)
under the symbol "TEAM". Our client base includes Ford Motor Company,
DaimlerChrysler, Deere & Company, Cendant Corporation, Liberty Mutual Insurance
Company, Schering-Plough Research Institute, and other companies in the
manufacturing, pharmaceutical, office equipment, insurance, logistics,
hospitality, food service, retail, and other industries.
We had total employees of 1,351 and 1,298 at March 31, 2003 and December 31,
2002, respectively.
INDUSTRY BACKGROUND
For the past two years, the information technology industry has been depressed.
IT customers have generally been withholding or postponing their decisions to
invest in a new generation of hardware and software designed to provide
productivity improvements. Instead, they have been extending the life of their
existing IT systems and equipment. The collapse of companies from the ".com" era
and the general climate of economic uncertainty have led to large amounts of
equipment available on the secondary (resale) market, depressing the sale of new
equipment and the prices of used equipment. Coincidentally, there have been real
price pressures from customers of standard IT outsourcing services, especially
with the increasing availability of "off-shore" IT outsourcing services from
India and other countries with low labor costs.
The slow pace of implementations of new infrastructure and systems means that
mission critical information systems are remaining in use for longer periods of
time, and customers continue to require reliable and cost-effective support
services to maintain and manage them. Businesses obtain this support from
internal staff, by outsourcing the responsibilities, or a combination thereof.
The IT support services industry provides the resources to businesses that
outsource their support service functions. In this difficult environment, many
IT service providers are facing financial troubles.
Historically, once customers start to renew their investment in their IT
infrastructures, they have purchased outsourced IT and business process support
services to perform the implementation services. This enables them to reduce the
risk of adding IT professionals to their staff and to focus on their core
strengths by outsourcing non-core functions to outsourcing companies expert in
the type of support needed. While it is impossible to predict exactly when the
business climate will improve, we are positioning the Company to benefit from
the improved economy and the expected increased IT investment.
12
CORPORATE SERVICES
As an IT and business process support service provider, we provide our customers
with staff to design, implement, manage, and maintain their IT infrastructure
and systems through technical help desk services, technical staffing, systems
integration, professional services, and training programs. Consistent with our
business strategy, we integrate these services to provide total and flexible
solutions for our customers, while providing our employees with a career path.
This career path enables our employees to obtain training that allows them to
work on projects with increasing levels of complexity, which improves employee
retention, reduces turnover, and lowers costs. We are in the process of
implementing a strategy to improve our delivery capabilities across a broader
range of IT outsourcing services.
HELP DESK SERVICES
Our help desk solutions provide corporate end users with around-the-clock
technical support from the customer's facilities or from our various help desk
sites. We support the full range of a client's IT and business process
infrastructure, from network environments to computing systems, and from
shrink-wrapped applications to advanced proprietary and acquired application
systems. Our flexibility and business processes enable us to tailor our delivery
to meet the needs of the customer's IT environment, including the support of
proprietary business applications.
We have deployed a "single point of contact" (SPOC) model to enable the customer
to consolidate its incident resolution support functions into a centralized help
desk. Our technicians are specially trained in the customer's products and
applications to enable them to diagnose problems and answer technical questions.
Our technicians answer questions and diagnose technical problems ranging from
application features and functionality to wide area network (WAN) failures. If
the technician is not able to resolve the problem with the end user, the call is
escalated to the appropriate resource to solve the problem. Data collected by
our technicians shows trends in IT usage and potential trouble spots. We
implement advanced data analytics to identify the cause(s) of problem areas.
From these analyses, we offer improvement opportunities to our customers.
During the past two years, we have concluded multi-year contracts with many of
our help desk customers, including Ford Motor Company (August 1, 2002,
three-year agreement), Deere & Company (November 1, 2002, five-year agreement),
and Liberty Mutual Insurance Company (September 8, 2001, three-year agreement).
Through these negotiations we have experienced downward pressure from our
customers on our pricing levels. While the price concessions initially resulted
in a reduction in revenue derived from these customers, we believe that we will,
in varying timeframes, grow the revenue from these accounts by adding new
business from divisions of these companies that we were not previously
supporting.
We also believe that we can succeed at maintaining our gross margin levels as a
result of achieving productivity gains and managerial efficiencies.
Historically, we have provided our help desk solutions to our customers on a
fixed-price-per-number-of-technicians providing the service. While we still
provide this model of service for some of our customers, we have successfully
moved many of our contracts to pricing models based upon the number of incidents
handled by our technicians, on a per end-user seat managed, or on a managed
service basis. Our experience has demonstrated that these models provide us with
greater control over the required staffing levels and therefore the cost of
providing these services.
We have also noted our customers' increased focus on the Company's non-financial
performance metrics, including the quality and accuracy of our service delivery
and the satisfaction of the end users. In order to deliver stable or improving
gross margin performance given the continuing downward price pressure and
quality focus, we are required to constantly find ways to improve our service
delivery. To this end, we have implemented a number of measures to assure the
development, use, and standardization of best practices over our various help
desks. We have successfully received ISO 9001:2000 certification in our major
help desk centers in Southfield and Dearborn, Michigan and our facility in
Brussels, Belgium, and are seeking certification for our Davenport, Iowa site.
We have also implemented a Performance Management Office that is responsible for
driving best practices through each of our help desk centers.
Our largest help desk services project is the Ford Motor Company SPOC program.
Under the global SPOC program, TechTeam provides a single point of contact for
parts of the technology infrastructure of Ford Motor in North America, the
United Kingdom, Germany, and Ford Motor Credit Corporation in North America. As
a global service provider, we are responsible for providing consistent service
levels with a constant support level at one global price per technology seat
maintained. Our technicians handle inbound "level one" help desk support
requests via the telephone, web submit, and e-mail. We also handle level one
desk side support requests. Encompassed within the SPOC program is the Project
Office that is responsible for flexibly providing project work to our customers.
Outside
13
of our Dearborn, Michigan help desk servicing Ford of North America, we provide
these services on our customers' sites.
In March 2002, we established TechTeam Europe, AB, our Swedish subsidiary.
WM-Data, a leading provider of IT outsourcing services in the Nordic region, was
awarded a contract with Volvo AB, a member of the Ford Motor Company Premier
Auto Group, to provide a managed IT outsourcing solution. TechTeam Europe, AB
will be providing help desk and desk side support services to Volvo through
WM-Data. We have successfully launched support services with Volvo. However, the
roll out of the services has been significantly slower than anticipated due to
issues outside our control.
In Brussels, Belgium, we operate a multilingual technical support help desk for
our customers, which is conversant in as many as 22 languages. This help desk
service is a unique value proposition as we provide technical support on a
Pan-European and global basis from one location. During the three-month period
ended March 31, 2003, revenue grew 76.1% to $3.4 million from $1.9 million for
the three-month period ended March 31, 2002. This growth is attributable to the
stability of the customer base and the establishment of a steady stream of new
customer relationships. We recently announced the doubling of our Brussels help
desk operation. This expansion is due, in part, to significant additional
business from Canon Europe, NV, a subsidiary of Canon, Inc. of Japan. We also
have successfully implemented a strategy to support the Electronic Data Capture
(EDC) of the business processes associated with new drug trials in the
pharmaceutical industry. We provide EDC support for Schering-Plough Research
Institute and CRF Box.
In light of the demand for the value proposition provided by multilingual
helpdesk operations, we are looking to expand our operations to Malaysia or
other locations where we can acquire or develop the ability to provide Pan-Asian
support.
Most of our help desk business is performed as a dedicated desk for a single
customer. As a result of the business acquired through the purchase of certain
assets from Cyntergy Corporation, we have developed a shared desk service
offering. This shared desk provides support to the retail, hospitality, and food
services industries, as well as other customers who do not have sufficient call
volume to warrant a dedicated desk. We have also created a shared desk out of
our Brussels help desk to support the EDC business.
To add further value to our customers, TechTeam has invested in the development
of an integrated, web-based support offering that encompasses incident
management, knowledge management, data analytics, self-help, and distance
learning, known as the "Support Portal". This support offering enables customers
to submit inquiries for support and to solve their incidents through the access
of focused knowledge articles. Allowing customers to solve their own incidents
and providing them access to open incident information results in call
deflection and lower total cost to the customer. Our tools also provide our
customers with real-time access to their project's performance statistics. This
data analytic capability allows our customers to be proactive in addressing
changes in their environment. The Support Portal is currently deployed for both
internal company uses as well as with multiple global customers. We are focused
on enhancing its functionality and challenging our partners to assist with
improving its functionality.
SYSTEMS INTEGRATION
Currently, we provide IT infrastructure (personal computers, printers, phone
systems, networks, servers, switches, etc.) support through systems integration,
technology deployment, and implementation services from project planning and
management to full-scale network server and workstation installations. We offer
a wide range of information technology services for the customer, ranging from
technology consulting to desk side support to network monitoring. We provide the
IT staff for American Community Mutual Insurance Company, who in turn provide a
full range of infrastructure support, including help desk, desk side support,
deployment, and network support. We are a channel partner for inSORS, a web
collaboration tool providing video and audio conferencing and a wide range of
other capabilities.
Through our TechTeam Cyntergy, L.L.C. subsidiary, we offer deployment, training,
and implementation services to entities in the hospitality, retail, and food
service industries throughout the United States. TechTeam Cyntergy employees
visit client sites, deploy technology, and train the customer's personnel in the
use of point-of-sale and property management software. Reduced IT spending had a
negative impact on our Systems Integration business during 2002.
We believe that companies will need to start a new round of infrastructure
construction and spending in the near
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term because of the continued aging of their current infrastructure and the
required development of tools that will improve their productivity. Also, we
believe that there will be a greater emphasis on the use of new technologies,
which move data and presentations electronically, as opposed to physically. We
envision customers' spending to grow with respect to security, networking,
wireless devices, wireless infrastructure, storage, and voice over IP. As
spending increases, opportunities for project work will increase.
As part of our long-term strategic plan, we are committed to expanding our
footprint in the IT infrastructure support sector. We are committed to grow this
portion of the business organically and, if the right opportunities arise,
through acquisition. We believe the further development of infrastructure
support services is an important aspect of our sales strategy as it provides
services that have a shorter sales cycle than help desk services. It also
provides significant career path opportunities for our employees.
TECHNICAL STAFFING
We maintain a staff of trained technical personnel to provide IT and business
process support to our clients at their facilities. We recruit a technically
proficient employee base. We enhance our employees' proficiency by providing
access to technical training programs, which includes training in new
technologies; in advanced operating systems like Windows 2000, Windows XP, and
Unix; and in sophisticated applications such as SAP and PeopleSoft. This
training allows us to provide our customers with highly skilled professionals,
trained, and certified in the latest technologies.
Further, the technical staffing business helps us to provide our employees with
a diverse career path. As help desk technicians learn new technology and utilize
our internal training programs, they can migrate to technical staffing positions
where they can increase their compensation and knowledge, also enabling us to
retain our most valuable resources. We consider our career pathing program to be
a competitive advantage relative to other staffing service and help desk service
providers and an excellent tool to reduce employee turnover.
TRAINING
We provide custom training and documentation solutions that include a wide
spectrum of offerings, including computer-based training (CBT), distance
learning, course catalogs, registration, instructional design consultants,
customized course materials, certified trainers, evaluation options, desk side
tutorials, and custom reports. We provide customized training programs for many
of our customers' proprietary applications.
EQUIPMENT 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 2 to 5 years. Effective
March 31, 2000, the majority of Capital Group staff was terminated and Capital
Group ceased looking for new leasing opportunities. Capital Group is currently
running out its lease portfolio. With the exception of renewals of existing
leases, the majority of the portfolio will run off by the end of the second
quarter 2003. We cannot predict how many lease renewals we will receive or how
long they will be in effect.
IMPACT OF BUSINESS WITH MAJOR CLIENTS
Historically, we have been heavily dependent upon two or three major clients for
a substantial portion of our revenues. Any loss of (or failure to retain a
significant amount of business with) these key clients would have a material
adverse impact on the Company. Our major clients include Ford Motor Company
("Ford") and DaimlerChrysler. For the years ended December 31, 2002, and 2001
respectively, Ford accounted for 50.0% and 43.6% of the Company's total revenues
and DaimlerChrysler accounted for 15.4% and 17.5% of revenues. For the
three-month periods ended March 31, 2003 and 2002 respectively, Ford accounted
for 52.7% and 48.5% of the Company's total revenues and DaimlerChrysler
accounted for 15.4% and 14.9% of revenues.
We continue to increase our revenue with Ford, increasing from $41.2 million in
2001 to $43.3 million in 2002. Our business with Ford consists of the SPOC
program noted previously, technical staffing, and installation of new personal
equipment through the Dell Corporation. With the addition of the support
services being provided for Volvo AB and the anticipated growth in the SPOC
program, we believe that our revenue for Ford will continue to grow.
We continue to seek to diversify our client base from both a client and industry
perspective. During 2002, we were
15
successful in selling new non-Ford related business, especially through our
Belgium help desk. We met with limited success in diversifying our business base
in the United States, and our operations in the United Kingdom and Germany
solely service Ford. A major facet of our business strategy for 2003 is to
diversify our business and become less revenue-dependent on Ford.
Nevertheless, because we believe that our existing client base presents
significant opportunities for cross-marketing our services, we will continue to
seek additional business from our largest clients. We anticipate that our major
clients will continue to account for a large percentage of our revenues in the
near future, although no assurance can be given in this regard.
COMPETITION
We are engaged in a highly competitive business. While there are many companies
that provide similar services, no one company dominates our industry. We
frequently find ourselves competing with the larger IT outsourcing entities,
such as IBM Global Services and Electronic Data Systems, Inc. We believe that we
have the best overall value proposition in the IT industry when you consider our
price, quality, focus, and flexibility of our service offerings. Accordingly, we
compete principally on the basis of service excellence, the ability to provide
best-in-class help desk services, price, experience and reputation in the
industry, technological capabilities, ISO quality practices, responsiveness to
client needs, and referrals from existing clients.
We believe the following factors may provide us with competitive advantages over
certain of our competitors:
o Strong Internationally-Recognized Client Base -- Our existing
multinational clients provide us with a strong foundation for the
development of new business.
o Price -- Our cost structure is lower than our major outsourcing
competitors.
o Qualified Technical Staff -- We focus on developing and retaining high
quality talent. Our employees are trained and offered a career path to
higher-level positions within the Company.
o Quality Client-Driven Metrics and Service Excellence -- As an ISO 9001
certified company, we follow a well-defined quality system with a
focus on continuous improvement.
o Core Expertise -- Our ability to deliver mission critical IT and
business process solutions has been well established and recognized by
our diverse customer base.
We anticipate that off-shore outsourcing companies will begin to make inroads
into the corporate support business. Specifically, we believe that service
providers will start to provide IT outsourcing customers with help desk services
from India, where the cost of labor is significantly lower than in the United
States. We are developing a strategy to address this new area of competition.
EUROPEAN OPERATIONS
We service our clients in Europe through four wholly-owned subsidiaries:
TechTeam Europe, Ltd., in Chelmsford, England; TechTeam Europe, NV/SA, in
Brussels, Belgium; TechTeam Europe, GmbH, in Cologne, Germany; and TechTeam
Europe, AB in Gothenburg, Sweden.
TechTeam Europe, Ltd., TechTeam Europe, GmbH, and TechTeam Europe, AB provide
clients with technical staffing and help desk services. TechTeam Europe, NV/SA
provides our clients primarily with multilingual help desk support. A
significant portion of our business in Europe is driven by our client base in
the United States. As noted, Ford is currently the only client of TechTeam
Europe, GmbH, TechTeam Europe, Ltd., and TechTeam Europe, AB.
Our international business is subject to risks customarily encountered in
foreign operations, including changes in a specific country's 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. While these risks are believed to be manageable, no
assurances can be given.
LEASING OPERATIONS
As previously disclosed, TechTeam Capital Group is running out its lease
portfolio. Capital Group ceased writing new leases in March of 2000. While there
are a few leases whose original lease termination dates extend through
16
March of 2005, the vast majority of the lease terminations will occur before May
of 2003. The future revenue stream for these remaining contractually committed
leases is $472,000 as of March 31, 2003.
Despite the decision to discontinue writing new leases, sustained efforts are
required in order to obtain maximum value from the lease portfolio. Capital
Group seeks to obtain value by extending leases on a month-to-month basis or for
a fixed term, selling lease equipment before its original lease term expires,
and selling off-lease equipment from its inventories.
During the first quarter of 2003, Capital Group received $738,000 in additional
month-to-month lease renewal revenue above the amount that was contractually
committed. We have not estimated additional revenues from future lease renewals
as it is not possible for us to predict how many lease renewals we will receive
or how long they will be extended.
As Capital Group runs out its lease portfolio, these lease assets, and their
associated residual reserves, are transferred to the inventories account.
Currently, the inventories of off-lease assets are carried at a book value of
$3.0 million and have a reserve of $1.7 million for an adjusted value of $1.3
million, which represents 8.6% of the original equipment cost. During 2002, we
sold inventory for an average of 10.2% of original cost. During the first
quarter of 2003, we sold inventory for an average of 4.6% of original cost.
During the first quarter of 2003, Capital Group sold assets from its inventories
with a net book value of $546,000 for $345,000, for a loss of $201,000. Capital
Group currently sells assets directly and also uses equipment brokers to sell
assets. Capital Group and its brokers sell assets to both retail and wholesale
customers. Inventories net of reserve include approximately $895,000 returned in
2002 and approximately $380,000 returned in 2003.
The performing lease assets of $2.0 million have a reserve of $355,000 for an
adjusted net book value of $1.6 million. During the second quarter of 2003,
Capital Group estimates that lease assets with a residual value of $1.6 million
and a reserve of $343,000, for a net of $1.2 million, will come off lease and
transfer into inventories, unless renewed or sold.
Obtaining the value of the performing lease assets and the off-lease equipment
inventories is the most significant financial risk faced by Capital Group. The
$1.7 million reserve for the off-lease inventories represents 56.8% of the $3.0
million inventory amount. Capital Group has a $355,000 residual reserve for the
lease assets currently on lease, or 18.0% of the $2.0 million of current book
value of these leased assets. Capital Group is also evaluating the use of
additional sales channels in order to improve the value obtained for its
disposed assets.
Capital Group's accounts receivable increased to $3.7 million at March 31, 2003
from $3.3 million at December 31, 2002 primarily due to customer payment delays.
As we close down our portfolio and leasing relationships end, we are
experiencing additional collection delays. Allowances against accounts
receivable were increased to $563,000 at March 31, 2003 from $415,000 at
December 31, 2002 in recognition of the additional collection challenges.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO MARCH 31, 2002
Revenues decreased 5.2% to $21.8 million in the first quarter of 2003 from $22.9
million in the first quarter of 2002. This decline was primarily due to a 67.8%
decrease in revenue from leasing operations to $1.0 million from $3.2 million,
as a result of our decision to discontinue the leasing business operation.
Leasing revenues will continue to decline over the next year depending on the
size and duration of renewals. Revenues from our corporate services segment
increased 5.0% to $20.7 million from $19.7 million. Revenues from corporate help
desk services increased 11.0% to $16.0 million from $14.4 million, due to growth
in business with our existing customers, primarily Ford Motor Company. Revenues
from technical staffing decreased 15.8% to $2.4 million from $2.8 million
principally as a result of price concessions granted to existing customers and
reductions in placements. Revenues from systems integration decreased 4.3% to
$2.1 million from $2.2 million primarily due to reduced volume in the
hospitality, retail, and food service industries. If our revenues in
hospitality, retail, and food services business do not recover, we may be
required to write off certain intangible assets with a carrying value of
$368,000 at March 31, 2003. Revenue from the provision of training programs
declined 20.9% to $218,000 from $276,000.
Gross profit as a percentage of sales decreased to 21.4% in the first quarter of
2003 from 22.5% in the first quarter of 2002. This decrease was primarily due to
a decrease in gross profit margins from our leasing operations, to a negative
gross profit margin of (3.0) % in 2003 from a positive gross profit margin of
7.2% in 2002. Secondarily, the gross profit margin decreased for corporate
services to 22.6% from 24.9%. Within the corporate services product segment, the
corporate help desk services gross profit margin decreased to 22.5% from 27.1%
due primarily to the $464,000 in price concessions included in the multi-year
contracts negotiated during 2002 with some of our help desk customers, including
Ford Motor Company and Deere & Company. The systems integration gross profit
margin
17
decreased slightly to 26.1% from 26.4%. The training program gross profit
margin decreased to 17.9% from 24.3%. These gross profit margin decreases were
partially offset by an improvement in the technical staffing gross profit margin
to 21.1% from 12.7%.
Selling, general, and administrative (SG&A) expense increased to $4.4 million in
the first quarter of 2003 from $3.9 million in the first quarter of 2002. The
Selling portion of SG&A expense increased by $220,000 as we invested in a new
sales team in order to increase revenue during 2003. Our payroll expense
increased by $157,000, outside services expense by $34,000 and travel expense by
$25,000. The General and Administrative portion of SG&A expense increased
$292,000 primarily due to increased facilities expense of $120,000 for office
space formerly used in our operations that we are working to sublease, increased
property, commercial and other insurance expense of $57,000, depreciation
expense of $57,000, and recruiting expense of $45,000. Accounting fees expense
increased $111,000 due primarily to due diligence and audit fees in regards to a
potential acquisition candidate we ultimately did not acquire. The compensation
for the members of the Board of Directors increased by approximately $30,000 due
to the Company's decision to increase the monthly retainer and to pay Directors
for committee meetings in order to fairly compensate Directors for their
services. These expense increases were partially offset by reduced expenses for
payroll and payroll taxes by $63,000, and other net expense savings of $26,000.
SG&A in the first quarter of 2002 included an additional bad debt expense of
$39,000 in comparison to the first quarter of 2003.
The Company's Michigan Single Business tax expense decreased $23,000 to $202,000
in the first quarter of 2003 from $225,000 in the first quarter of 2002.
Interest Income increased to $218,000 in the first quarter of 2003 from $205,000
in the first quarter of 2002. This increase is a result of the increased cash,
cash equivalents, and marketable securities balance of $45.0 million at March
31, 2003 versus $38.2 million at March 31, 2002, despite reduced returns from
our cash investments. The decline in our investment yield is consistent with the
overall decline in short-term market interest rates and returns. Interest
expense decreased to $9,000 from $70,000 due primarily to the continuing
reduction in outstanding debt, related to our leasing operations.
The consolidated effective tax rate differs from the statutory tax rate due to
certain non-deductible expenses.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
DEFERRED INCOME TAXES:
At March 31, 2003, we had net deferred tax assets of $1.2 million, primarily
related to alternative minimum tax credit carry forwards in the United States,
which do not expire. Realization of the deferred tax assets depends upon
sufficient levels of future taxable income. Based on historical and expected
future taxable income, we believe it is more likely than not that these deferred
tax assets will be realized. If at any time we believe that current or future
taxable income will not support the realization of deferred tax assets, a
valuation allowance would be provided.
INVENTORIES:
Inventories consist primarily of equipment retained by the Company's leasing
operations subsequent to the end of the lease term and intended for resale. Such
off-lease equipment is valued at the lower of estimated market value at lease
termination or current market value. The values of inventories are impacted by a
number of factors, including the speed of technological change and the secondary
market for used computer equipment. Valuation reserves against depreciated costs
of off-lease equipment inventories amounted to $1.7 million at March 31, 2003
and $2.0 million at December 31, 2002. The net inventories balance of $1.3
million at March 31, 2003 is 8.6% of the original cost of the equipment.
Equipment returned prior to December 31, 2001 is fully reserved, i.e., carried
at a net book value of zero. Inventories net of reserve include approximately
$895,000 worth of equipment returned in 2002 and approximately $380,000 returned
in 2003. The Company also has $43,000 of computer supplies inventories.
LEASED ASSETS:
We periodically review our estimate of residual values of leased assets, which
consist principally of computer equipment. The values of the leased assets are
impacted by a number of factors, including the speed of technological change,
the secondary market for used computer equipment, the disposition of customers
towards lease renewals, and our ability to offer structured alternatives to our
customers. Valuation reserves against depreciated cost of leased equipment
amounted to $355,000 at March 31, 2003 and $823,000 at December 31, 2002.
Substantially all of the net decreases in such reserves resulted from the lease
terms ending and the equipment being sold or transferred to
18
inventories. The net leased equipment amount of $1.6 million represents
approximately 10.5% of its original cost. There can be no assurance that our
estimates of residual values will accurately reflect future results.
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 written off when we determine they are
uncollectible. Our customers are generally large, well-capitalized entities. We
generally do not require collateral. As our leasing portfolio winds down,
additional collection challenges may be encountered. Allowances against accounts
receivable amounted to $701,000 at March 31, 2003 and $597,000 at December 31,
2002. The accounts receivable balance for the leasing operations segment at
March 31, 2003 amounted to $3.7 million, less an allowance of $563,000. There
can be no assurance that our estimates of collectibility will accurately reflect
future results.
Our Senior Management has discussed the development and selection of critical
accounting policies and estimates with the Audit Committee of the Board of
Directors.
LIQUIDITY AND CAPITAL RESOURCES
BALANCE SHEET:
As of March 31, 2003 our balance sheet reflects a high degree of liquidity and
little financial leverage.
Cash, cash equivalents, and marketable securities decreased by $1.0 million,
from $45.9 million on December 31, 2002 to $44.9 million on March 31, 2003. Our
working capital position increased by $1.5 million during the first three months
of 2002, from $60.7 million as of December 31, 2002 to $62.2 million as of March
31, 2003.
Our total debt decreased during the first three months of 2003, from a balance
of $850,000 on December 31, 2002 to $503,000 on March 31, 2003. The Company's
total debt as a percentage of its cash, cash equivalents, and securities
decreased from 1.9% on December 31, 2002 to 1.1% on March 31, 2003.
As of March 31, 2003 our book value per fully diluted share was $6.79.
CASH USED IN OPERATIONS:
Cash used in operating activities was $883,000 for the three months ended March
31, 2003. A significant use of operating cash was the increase of $2.6 million
in accounts receivable. Depreciation and amortization expense for the three
months ended March 31, 2003 was $1.6 million, of which $541,000 came from our
leasing operations.
CASH USED IN INVESTING ACTIVITIES:
Net cash used in investing activities was $408,000 for the three months ended
March 31, 2003. We used $986,000 to purchase assets to be used in the provision
of customer services and used $152,000 to purchase marketable securities. We
received $667,000 from assets used in leasing operations and $63,000 from other
activities.
CASH PROVIDED BY FINANCING ACTIVITIES:
Cash provided by financing activities was $100,000. We received $105,000 from
the issuance of common stock related to the exercise of stock options.
Additionally $189,000 resulted from foreign currency transaction adjustments. We
used $194,000 to pay down debt related to leasing operations.
ITEM 4 -- CONTROLS AND PROCEDURES
As of March 31, 2003, an evaluation was performed under the supervision and with
the participation of our management, including the Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operations of
our disclosure controls and procedures. Based on that evaluation, our
management, including the Chief Executive Officer and Chief Financial Officer,
concluded that our disclosure controls and procedures were effective as of March
31, 2003. There have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls subsequent to
March 31, 2003.
19
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
The Company is a party to legal proceedings that are routine and incidental to
its business. Although the consequences of these proceedings are not presently
determinable, in the opinion of management, they will not have a material
adverse affect on the Company's liquidity, financial position or results of
operations.
ITEM 2 -- CHANGES IN SECURITIES AND USE OF PROCEEDS
On April 8, 2003, TechTeam Global, Inc. completed the private placement of
689,656 shares of a newly created Series A Convertible Preferred Stock ("Series
A Preferred Stock") with ChrysCapital II, LLC ("CCII") in consideration for five
million six dollars ($5,000,006) or $7.25 per share. Expenses incurred by the
Company in connection with the issuance of the Series A Preferred Stock were
approximately $127,800, including a commission of $50,000, none of which were
paid or are owed to directors or officers of the Company. The net offering
proceeds are approximately $4,872,206. We anticipate using these funds to
acquire businesses in the Far East. The transaction is exempt from registration
requirements under section 5 of the Securities Act of 1933 ("Act") under section
4(2) of the Act, as amended, and Rule 506 of Regulation D promulgated by the
U.S. Securities and Exchange Commission. Specifically, CCII is a partnership
with total assets in excess of $5,000,000. The holder of Series A Preferred
Stock may convert its Series A Preferred Stock into Common Stock at any time
after the first anniversary of the initial issuance thereof on a one share of
Series A Preferred Stock for one share of Common Stock basis. The conversion
ratio is subject to adjustment if there is a dilutive issuance.
ITEM 5 -- OTHER INFORMATION
Election to the Board of Directors
G. Ted Derwa was elected to the Board of Directors effective January 21,
2003.
Justice Conrad L. Mallett, Jr. was elected to the Board of Directors
effective January 21, 2003.
The Company's Board of Directors expanded the size of its membership to 10
seats to accommodate the seat granted with the private placement of newly
created Series A Convertible Preferred Stock with ChrysCapital II LLC.
Brahmal Vasudevan was appointed to the Board of Directors effective April
8, 2003 by ChrysCapital II LLC, to fill the seat granted with the private
placement of Series A Convertible Preferred Stock with ChrysCapital II,
LLC.
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ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Written Statement of the Chief Executive Officer Pursuant to
10 U.S.C. Section 1350
99.2 Written Statement of the Chief Financial Officer Pursuant to
10 U.S.C. Section 1350
(b) Reports on Form 8-K.
(i) Announcement of the Election of G. Ted Derwa and Justice
Conrad L. Mallett, Jr. to its Board of Directors effective
January 21, 2003, dated January 13, 2003.
(ii) Announcement of the Company's earnings for 2002 and the Fourth
Quarter of 2002, dated February 24, 2003.
(iii) Filing of SEC Form 10-K for 2002, dated March 13, 2003.
(iv) Announcement of the private placement of Preferred Stock with
ChrysCapital II, LLC, dated April 9, 2003.
ITEMS 3 AND 4 ARE NOT APPLICABLE AND HAVE BEEN OMITTED
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
TechTeam Global, Inc.
----------------------
(Registrant)
Date: May 8, 2003 By: /s/ William F. Coyro, Jr.
--------------------------------
William F. Coyro, Jr.
President and Chief
Executive Officer
Date: May 8, 2003 By: /s/ David W. Morgan
--------------------------------
David W. Morgan
Vice President, Chief Financial
Officer and Treasurer
22
WRITTEN STATEMENT OF WILLIAM F. COYRO, JR.
I, William F. Coyro, Jr., President and Chief Executive Officer of TechTeam
Global, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of TechTeam Global, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 8, 2003 /s/ William F. Coyro, Jr.
----------------------------
William F. Coyro, Jr.
23
WRITTEN STATEMENT OF DAVID W. MORGAN
I, David W. Morgan, Vice President, Chief Financial Officer, and Treasurer of
TechTeam Global, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of TechTeam Global, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 8, 2003 /s/ David W. Morgan
---------------------------
David W. Morgan
25
10-Q EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
EX-99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EX-99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002