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, 2002
TECHTEAM GLOBAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-16284 38-2774613
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer Identification No.)
incorporation)
27335 West 11 Mile Road, Southfield, MI 48034
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 357-2866
Registrant's internet address: www.techteam.com
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value
(Title of Class)
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 (229.405 of this chapter) 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. [ ]
The number of shares outstanding of the registrant's common stock as of February
28, 2003 was 10,697,064. The aggregate market value of the registrant's common
stock held by non-affiliates of the registrant as of June 30, 2002 was
approximately $81,656,080. For the sole purpose of making this calculation, the
term "non-affiliates" has been interpreted to exclude directors and executive
officers of the Company. Such interpretation is not intended to be, and should
not be construed to be, an admission by TechTeam Global, Inc. or such directors
or executive officers of the Company that such directors and executive officers
of the Company are "affiliates" of TechTeam Global, Inc., as that term is
defined under the Securities act of 1934.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement, dated on or about March 24, 2003. Form 10-K referenced Part
III, Items 10, 11, 12, 13 and 16.
1
TECHTEAM GLOBAL, INC.
FORM 10-K
INDEX
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PAGE
NUMBER
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PART I
Item 1 Business 3-8
Item 2 Properties 8
Item 3 Legal Proceedings 9
Item 4 Submission of Matters to a Vote of Security Holders 9
PART 2
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 10
Item 6 Selected Financial Data 11-12
Item 7 Management's Discussion and Analysis of Financial Condition and Results of 13-19
Operations
Item 7A Quantitative and Qualitative Disclosures about Market Risk 20
Item 8 Financial Statements and Supplementary Data 20
Report of Ernst & Young LLP, Independent Auditors 21
TechTeam Global, Inc. and Subsidiaries Consolidated Financial Statements
Operations 22
Comprehensive Income/(Loss) 23
Financial Position 24-25
Shareholders' Equity 26
Cash Flows 27
Notes to Consolidated Financial Statements 28-44
Item 9 Disagreements on Accounting and Financial Disclosures 44
PART 3
Item 10 Directors and Executive Officers of the Registrant 45
Item 11 Executive Compensation 45
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related 45
Stockholder Matters
Item 13 Certain Relationships and Related Transactions 45
Item 14 Controls and Procedures 45
Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 46-48
Item 16 Principal Accountant Fees and Services 48
Signatures 49
Written Statement of William F. Coyro Jr. 50
Written Statement of David W. Morgan 51
Index of Exhibits 52-53
Exhibit 23.1 -- Consent of Ernst & Young LLP 54
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2
PART I
ITEM 1. BUSINESS
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 1,298 and 1,286 at December 31, 2002 and 2001,
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.
SERVICES
We commenced operations as a value-added reseller of computer hardware and
software that also provided training for our customers. During the late 1980's,
we added IT staffing and systems integration services as a complement to our
existing training business. In 1993, as a result of our growing expertise in
providing IT staffing to on-site help desks, we entered the technology support
(help desk/call center) industry. We have recently expanded into the business
process outsourcing support services sector.
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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 show 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 9000 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
4
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 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 deskside support services to Volvo through
WM-Data. We have successfully launched support services with Volvo, and we
envision steady growth in our Swedish operations throughout of 2003.
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. The Brussels operation has
grown significantly, with revenue of $8.5 million in 2002, or 28.7% growth over
the 2001 revenue of $6.6 million. This growth is attributable to the stability
of the customer base and the establishment of a steady stream of new customer
relationships. We 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.
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. The Support Portal remains a key component of our
service offerings.
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 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
5
respect to security, networking, wireless devises, 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. During 2002, we appointed
Larry W. Granger as Vice President of Professional Services to further develop
our expertise and sales of infrastructure support. 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 for
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, 2001, and
2000 respectively, Ford accounted for 50.0%, 43.6%, and 32.3% of the Company's
total revenues and DaimlerChrysler accounted for 15.4%, 17.5%, and 18.2% of
revenues.
We continue to increase our revenue with Ford, increasing from $40.1 million in
2000 to $41.2 million in 2001 and $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.
Management continues to seek to diversify its client base from both a client and
industry perspective. During 2002, we were successful in selling new non-Ford
related business, especially through our Belgium help desk. We met with
6
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:
- Strong Internationally-Recognized Client Base -- Our existing
multinational clients provide us with a strong foundation for the
development of new business.
- Price -- Our cost structure is lower than our major outsourcing
competitors.
- 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.
- 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.
- 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.
7
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 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
$948,000 as of December 31, 2002.
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 fourth quarter of 2002, Capital Group received $408,000 in additional
month-to-month lease renewal revenue above the amount that was contractually
committed for. 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 for 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
$3.4 million and have a reserve of $2.0 million for an adjusted value of $1.4
million, which represents 8.5% of the original equipment cost. During 2002, we
sold inventory for an average of 10.2% of original cost. Due to the excess of
equipment in the used equipment market, we feel a lower valuation is
appropriate. Inventories net of reserve include approximately $82,000 returned
in 2001 and approximately $1.4 million returned in 2002.
The performing lease assets of $3.5 million have a reserve of $0.8 million for
an adjusted net book value of $2.7 million. During the first quarter of 2003,
Capital Group estimates that lease assets with a residual value of $2.4 million
and a reserve of $0.7 million, for a net of $1.7 million, will come off lease
and transfer into inventories, unless renewed.
During 2002, Capital Group sold lease assets with a net book value of $1,193,000
prior to the conclusion of the lease term for $995,000, a loss of $198,000.
During 2002, Capital Group also sold assets from its inventories with a net book
value of $1,914,000 for $1,097,000, for a loss of $817,000. 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.
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
$2.0 million reserve for the off-lease inventories represents 57.6% of the $3.4
million inventory amount. Capital Group has a $0.8 million residual reserve for
the lease assets currently on lease, or 23.5% of the $3.5 million of current
book value of these leased assets. The lease assets reserve percentage of 23.5%
is expected to rise as these assets continue to depreciate over their useful
lives under their lease terms. Capital Group is also evaluating the use of
additional sales channels in order to improve the value obtained for its
disposed assets.
ITEM 2. PROPERTIES
Our world headquarters and principal executive offices are located in
Southfield, Michigan. The following table sets forth certain information
regarding the principal properties used by TechTeam, all of which are leased:
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LEASE TERM BEGINNING SQUARE
LOCATION FUNCTION AND EXPIRING FOOTAGE
- -------------------------- ------------------------------------------------- ------------------------ ---------
Southfield, MI World Headquarters and Call Center 11/01/93 -- 12/31/05 100,657
Dearborn, MI Call Center and Training Center 04/01/97 -- 03/31/06 30,182
Brussels, Belgium European Headquarters and Call Center 08/01/97 -- 07/31/06 24,855
Davenport, IA Call Center 10/15/99 -- 10/14/04 22,263
Chelmsford, England Sales and Administrative Office 11/01/00 -- 11/01/03 3,340
Gothenburg, Sweden Sales and Administrative Office 09/01/02 -- 09/30/05 1,829
Cologne, Germany Sales and Administrative Office 09/01/02 -- 08/31/05 1,291
8
We believe the facilities we occupy are well maintained and in good operating
condition. As we grow our business in our Brussels location, we are able to rent
additional space in the same location. With the additional space available in
Brussels, we believe this location is 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
The Company is a party to various legal proceedings that are routine and
incidental to its business. Although the consequences of these proceedings are
not presently determinable, in the opinion of management, they will not have a
material adverse affect on our liquidity, financial condition, or results of
operations, although no assurances can be given in this regard.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2002.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the reported high and low sales prices of our
common stock for the quarters indicated as reported by the Nasdaq National Stock
Market(R). Our common stock trades on the Nasdaq National Stock Market(R) under
the symbol "TEAM".
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YEAR AND QUARTER HIGH LOW
- ----------------------------------------------------------------------- ------- ---------
2001
First Quarter...................................................... $ 4.000 $ 2.125
Second Quarter..................................................... 3.200 2.125
Third Quarter...................................................... 3.200 2.150
Fourth Quarter .................................................... 3.250 2.200
2002
First Quarter...................................................... $ 4.790 $ 3.050
Second Quarter..................................................... 8.440 4.070
Third Quarter...................................................... 8.000 5.450
Fourth Quarter..................................................... 7.549 4.750
The Company has never paid any dividends on its common stock. Any future
decision as to payment of dividends will be 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 430 shareholders of record as of February 20, 2003. Management
estimates there are approximately additional 3,400 beneficial owners of our
stock held in street names.
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ITEM 6. SELECTED FINANCIAL DATA
The following table presents information derived from our consolidated financial
statements for the five years ended December 31, 2002. This information should
be read in conjunction with "Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operation," 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,
STATEMENT OF OPERATIONS DATA 2002 2001 2000 1999 1998
- ------------------------------------------------- --------- --------- -------- -------- ---------
(In thousands, except per share data)
REVENUES
Corporate services
Corporate help desk services.............. $ 59,106 $ 51,316 $ 64,769 $ 66,620 $ 56,048
Technical staffing........................ 10,153 14,522 18,874 23,002 25,716
Systems integration....................... 7,197 6,918 9,679 17,818 14,436
Training programs......................... 1,077 2,005 3,485 4,888 6,622
--------- --------- -------- -------- ---------
Total corporate services..................... 77,533 74,761 96,807 112,328 102,822
Leasing operations........................... 9,102 19,849 27,349 20,477 14,099
--------- --------- -------- -------- ---------
Total revenues................................... 86,635 94,610 124,156 132,805 116,921
Cost of services delivered....................... 66,578 75,777 95,860 109,417 97,523
--------- --------- -------- -------- ---------
Gross profit..................................... 20,057 18,833 28,296 23,388 19,398
--------- --------- -------- -------- ---------
Other expenses
Selling, general, and administrative......... 16,864 22,290 21,969 19,349 20,805
Class action litigation and related matters.. -- -- -- 92 3,439
Michigan Single Business Tax................. 900 700 1,710 450 496
--------- --------- -------- -------- ---------
Total other expense.............................. 17,764 22,990 23,679 19,891 24,740
--------- --------- -------- -------- ---------
Operating income (loss).......................... 2,293 (4,157) 4,617 3,497 (5,342)
Gain on sale of GE Joint Venture................. -- -- 322 -- --
Interest income.................................. 896 1,186 887 644 1,845
Interest expense................................. (164) (779) (1,435) (914) (1,484)
--------- --------- -------- -------- ---------
Net interest income (expense).................... 732 407 (548) (270) 361
--------- --------- -------- -------- ---------
Income (loss) before income taxes................ 3,025 (3,750) 4,391 3,227 (4,981)
Income tax provision (credit).................... 1,627 (172) 2,245 1,717 (1,233)
--------- --------- -------- -------- ---------
Income (loss) before cumulative effect of
accounting change............................ 1,398 (3,578) 2,146 1,510 (3,748)
Cumulative effect of accounting change........... 1,123 -- -- -- --
--------- --------- -------- -------- ---------
Net income (loss)................................ $ 275 $ (3,578) $ 2,146 $ 1,510 $ (3,748)
========= ========= ======== ======== =========
11
BASIC EARNINGS (LOSS) PER SHARE
Income (loss) before cumulative effect of
accounting change........................... $ .13 $ (.33) $ .17 $ .11 $ (.24)
Cumulative effect of accounting change........... (.10) -- -- -- --
--------- --------- -------- -------- ---------
Total basic earnings (loss) per share............ $ .03 $ (.33) $ .17 $ .11 $ (.24)
========= ========= ======== ======== =========
DILUTED EARNINGS (LOSS) PER SHARE
Income (loss) before cumulative effect of
accounting change........................... $ .13 $ (.33) $ .17 $ .11 $ (.24)
Cumulative effect of accounting change .......... (.10) -- -- -- --
--------- --------- -------- -------- ---------
Total diluted earnings (loss) per share.......... $ .02 $ (.33) $ .17 $ .11 $ (.24)
========= ========= ======== ======== =========
Weighted average number of common shares and
common share equivalents outstanding
Basic................................. 10,957 10,771 12,554 13,280 14,758
Net effect of dilutive stock options.. 146 -- -- 23 --
--------- --------- -------- -------- ---------
Diluted............................... 11,103 10,771 12,554 13,303 14,758
========= ========= ======== ======== =========
-------------------------------------------------------------
DECEMBER 31,
-------------------------------------------------------------
STATEMENT OF FINANCIAL POSITION DATA 2002 2001 2000 1999 1998
- ------------------------------------------------- --------- --------- --------- --------- --------
(In thousands)
Current assets................................... $ 68,112 $ 58,801 $ 40,985 $ 40,463 $ 52,606
Current liabilities.............................. 7,432 11,746 17,840 18,069 19,972
Total assets..................................... 81,864 87,121 100,774 112,307 111,618
Long-term liabilities............................ 376 805 4,817 10,030 7,312
Total shareholders' equity....................... $ 73,320 $ 74,570 $ 78,117 $ 84,208 $ 84,334
- -------------------------------------------------------------------------------------------------------------------
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001
Revenues decreased 8.4% to $86.6 million from $94.6 million. This decline was
primarily due to a 54.1% decrease in revenue from leasing operations to $9.1
million from $19.8 million, as a result of our decision in March 2000 to
discontinue actively seeking new leasing business and to commence the winding
down of our leasing portfolio. The trend of reduced leasing revenues will
continue over the next year depending on the size and duration of renewals.
Revenues from corporate help desk services increased 15.2% to $59.1 million from
$51.3 million, due to growth in business with our existing customers, primarily
Ford Motor Company and new business acquired with the Cyntergy asset acquisition
in September 2001. Revenues from systems integration services grew 4.0%, to $7.2
million from $6.9 million, primarily due to growth of our customer base
associated with the Cyntergy acquisition. Revenues from technical staffing
decreased 30.1% to $10.2 million from $14.5 million principally as the result of
price concessions granted to existing customers and reductions in placements.
Revenue from the provision of training programs declined 46.3% to $1.1 million
from $2.0 million, primarily due to discontinuance of training contracts with
Sun Microsystems, Inc. and with one of our major automotive customers.
Gross profit as a percentage of sales increased to 23.2% in 2002 from 19.9% in
2001. This increase was primarily due to an increase in gross profit margins
from our leasing operations, to 6.6% in 2002 from (3.3)% in 2001. These benefits
were partially offset by the gross margin reduction for corporate services to
25.1% from 26.1%. Within the corporate services product segment, the corporate
help desk services' margin decreased to 27.2% in 2002 from 28.9% in 2001
primarily due to increased cost of sales in expanding the customer use of the
Support Portal; technical staffing decreased to 14.6% from 15.4% due primarily
to price concessions granted to existing customers; systems integration gross
margin decreased to 23.0% in 2002 from 31.3% in 2001 as we invested in
integrating the newly acquired Cyntergy customers. These decreases in corporate
services gross margins decreases were partially offset by the training gross
margin increase to 20.8% in 2002 from 13.0% in 2001.
Selling, general, and administrative (SG&A) expense declined 24.3% to $16.9
million in 2002 from $22.3 million in 2001. The expense decrease is partially
due to aggressive cost containment efforts and expense reduction initiatives
undertaken during 2002 that reduced facility expenses by $1,169,000, outside
services expense by $278,000, employee-recruiting expense by $129,000, legal
fees by $124,000, and payroll and benefits expense by $105,000. These decreases
were partially offset by increases for depreciation expense of $152,000, travel
expense of $141,000, and the non-cash charge of $410,000 resulting from the
variable stock option grant made to our President and Chief Executive Officer,
pursuant to an employment agreement entered into on August 9, 2001. Also, we
adopted SFAS 142 as of January 1, 2002. Consequently, we did not amortize
goodwill during 2002. We recognized $1,257,000 in goodwill amortization expense
during 2001, which was recorded as SG&A expense. The $22.3 million of SG&A
expense in 2001 also included expense of $919,000 to increase the capabilities
of the Support Portal for expanded use, a net settlement of $370,000 related to
earn-out and release agreements with former officers of TechTeam Capital Group,
higher bad debt expense of $301,000, severance payments of $300,000 for
terminated administrative employees, intangible amortization expense of
$286,000, write-offs of $200,000 for remaining goodwill and equity interest of
prior acquisitions determined to be impaired, an $87,000 loss on disposal of
assets due to the closing of a call center office, and a $95,000 loss related to
the write-off of a vendor supply agreement no longer being used. In addition, a
$165,000 write-down was taken due to our decision to cease making payments on
insurance contracts for an officer of the Company.
The Company's Michigan Single Business Tax expense increased $200,000 to
$900,000 in 2002, from $700,000 in 2001, due primarily to a higher tax
apportionment factor, for U.S. operations only, for Michigan.
Interest income declined to $896,000 in 2002 from $1,186,000 in 2001 as a result
of 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 significantly, to $164,000 from
$779,000, primarily due to the continuing reduction in outstanding debt,
related to our leasing operations.
13
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
Revenues decreased $29.6 million, or 23.8%, to $94.6 million in 2001 from $124.2
million in 2000. The decrease resulted primarily from revenue decreases in
corporate help desk services of $13.5 million, leasing operations of $7.5
million, technical staffing services of $4.4 million, system integration
services of $2.7 million, and training services of $1.5 million. Corporate help
desk services revenues were reduced due largely to the Company selling its
interest in the GE Joint Venture and ceasing to provide services to the new
owner of the Joint Venture in 2001. Revenues from leasing operations decreased
due to our decision to cease looking for new leasing opportunities. Systems
integration revenues decreased due mainly to a reduction in computer upgrade and
installation work at an automotive client as well as the completion of systems
work at two smaller customers in 2000. Technical staffing revenues decreased in
large part due to our two major automotive customers making cuts in
subcontracted staffing to reduce their cost structure. Training revenues
decreased mostly due to the discontinuance of our training contract with Sun
Microsystems, Inc. and a reduction in services provided to one of our major
automotive customers.
Gross Profit as a percentage of sales decreased to 19.9% in 2001 from 22.8% in
2000. The decrease was due to a series of factors, including, but not
necessarily limited to, a net loss from the sale of equipment coming off lease
of $2.2 million in 2001 as compared to a gain of $0.7 million in 2000, an
increase in our residual reserve of $1.5 million to $1.9 million, the reduction
in revenues in the Company's leasing operations, a reduction in revenues in the
corporate help desk services, and a reduction of gross profit margin in the
corporate help desk services due primarily to the effects of a fourth quarter
acquisition.
Selling, general, and administrative expenses increased to $22.3 million in 2001
from $22.0 million in 2000. The $22.3 million in 2001 includes a net settlement
of $370,000 related to earn-out and release agreements with former officers of
TechTeam Capital Group, severance payments of $300,000 for administrative
employees that were terminated, write-offs of $200,000 for remaining goodwill
and equity interest of prior acquisitions determined to be impaired, an $87,000
loss on disposal of assets due to the closing of a call center office, and a
$95,000 loss related to the write-off of a vendor supply agreement no longer
being used. In addition, a $165,000 write down was taken due to our decision to
cease making payments on insurance contracts for an officer of the Company.
Without these items, selling, general, and administrative costs would have
decreased by approximately $900,000 in 2001 from 2000.
The Michigan Single Business Tax decreased in 2001 primarily because in 2000 the
Company reversed certain tax credits that we had previously expected to receive.
Interest income increased to $1.2 million in 2001 from $0.9 million in 2000, due
to an improved cash position, which resulted from our decision to no longer
underwrite new leasing business. Interest expense decreased due to the reduction
in the outstanding notes payable related to the leasing business.
We recognized an income tax credit of $0.2 million on a pretax loss of $3.8
million in 2001. The consolidated income tax provision is due to the combination
of a net income tax credit from U.S. operations, offset in part by an income tax
expense from European operations. Our effective tax rates for the European
operations are not significantly different than the statutory rates. Our
effective tax rate for the U.S. operations differs from the statutory tax rate
primarily due to nondeductible goodwill and other intangible asset amortization.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
DEFERRED INCOME TAXES:
At December 31, 2002, 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 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
14
speed of technological change and the secondary market for used computer
equipment. Valuation reserves against depreciated costs of off-lease equipment
inventories amounted to $2.0 million at December 31, 2002, $1.1 million at
December 31, 2001, and $270,000 at December 31, 2000. Substantially all of the
net increases in these reserves resulted from transfers from the leased asset
reserve account as the equipment comes off lease and is transferred into
inventories. The net inventories balance of $1.4 million at December 31, 2002 is
8.5% of the original cost of the equipment. Equipment returned prior to December
31, 2000 is fully reserved, i.e., carried at a net book value of zero.
Inventories net of reserve include approximately $82,000 worth of equipment
returned in 2001 and approximately $1.4 million returned in 2002.
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 $0.8 million at December 31, 2002 and $1.9 million at December 31,
2001. Substantially all of the net decreases in such reserves resulted from the
lease terms ending and the equipment being sold or transferred to inventories.
The net leased equipment amount of $2.7 million represents approximately 13% 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 $597,000 at December 31, 2002 and $433,000 at December
31, 2001. The accounts receivable balance for the leasing operations segment at
December 31, 2002 amounted to $3.3 million, less an allowance of $415,000. We
have reduced our days sales outstanding from 75 days at June 30, 2002 to 68 days
at December 31, 2002. There can be no assurance that our estimates of
collectibility will accurately reflect future results.
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
CASH PROVIDED FROM OPERATIONS:
Cash provided from operating activities was $17.0 million for the year ended
December 31, 2002. A significant source of operating cash flow was the leasing
business, as cash rental income and non-cash depreciation and amortization
expense comprise substantially all of the operating activities. Depreciation and
amortization expense for the year ended December 31, 2002 was $11.1 million, of
which $6.7 million came from our leasing operations.
We believe that cash flows provided from operations will continue to be
sufficient to meet our ongoing working capital requirements.
CASH USED IN INVESTING ACTIVITIES:
Net cash used in investing activities was $1.2 million for the year ended
December 31, 2002. We used $3.5 million to purchase assets to be used in the
provision of customer services and used a net amount of $1.2 million to purchase
marketable securities. We received $3.2 million from the sale of assets used in
leasing operations.
CASH USED IN FINANCING ACTIVITIES:
Cash used in financing activities was $6.6 million. We used $4.5 million to pay
down debt related to our leasing operations and $3.4 million to purchase Company
Stock. We received $0.9 million from the issuance of common stock related to the
exercise of stock options.
15
EFFECTS OF ACCOUNTING PRONOUNCEMENTS:
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets ("SFAS 142"). Under SFAS 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. In the
fourth quarter of 2001, TechTeam announced that $1.1 million of goodwill related
to leasing operations would become impaired after adoption of SFAS 142. As of
January 1, 2002 we adopted SFAS 142. Accordingly, we took an impairment charge
of $1.1 million in the first quarter of 2002. Under SFAS 142, the charge
recognized upon adoption of the statement is reported as the cumulative effect
of an accounting change.
In August 2001, the FASB issued SFAS No. 144 Accounting for the Impairment or
Disposal of Long-lived Assets. SFAS No. 144 addresses financial accounting and
reporting for the impairment of long-lived assets and for long-lived assets to
be disposed of. SFAS No. 144 is effective for financial statements issued for
fiscal years beginning after December 15, 2001 and was adopted by the Company on
January 1, 2002. The adoption of SFAS No. 144 did not have an impact on our
reported results of operations or our financial position.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities ("SFAS 146"), which addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity. SFAS 146 requires that
a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred, whereas under Issue 94-3, a liability
for an exit cost was recognized at the date of an entity's commitment to an exit
plan. A fundamental conclusion reached by the FASB in SFAS 146 is that an
entity's commitment to a plan, by itself, does not create an obligation that
meets the definition of a liability. Therefore, SFAS 146 eliminates the
definition and requirements for recognition of exit costs in Issue 94-3 and
establishes that fair value is the objective for initial measurement of the
liability. FASB 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. TechTeam does not expect that the adoption of
SFAS 146 will have a significant impact on its financial statements.
In December 2002, the FASB issued No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure ("SFAS 148") that amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition to SFAS 123's fair value method of accounting for stock-based
employee compensation and to require disclosure of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
SFAS 148 does not require companies to account for employee stock options using
the fair value method; accordingly, TechTeam has continued to elect to account
for employee stock options under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and its related interpretations. The
effect of adopting SFAS 148 had no material effect except for the quarterly
disclosure provisions, which will be made in our March 31, 2003 interim
financial statements.
FACTORS INFLUENCING FUTURE RESULTS:
Some of the information in this Annual Report on Form 10-K contains
forward-looking statements that involve substantial risks and uncertainties. You
can identify these statements by their inclusion of such forward-looking words
as "may," "will," "expect," "anticipate," "believe," "estimate," "forecast,"
"intend," "promise," "should," "conditioned upon," "project," "predict,"
"continue," and similar words. You should read statements that contain these
words carefully because they discuss our future expectations and may contain
projections of our future results of operations or of our financial condition or
state other "forward-looking" information. We believe it is important to
communicate our expectations to our investors. However, there will be events in
the future that we are not able to accurately predict or over which we will have
no control. The risk factors listed in this section as well as any other
cautionary language in this report, provide examples of just a few of the many
risks, uncertainties, and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
You should be aware that the occurrence of the events described in the following
risk factors and elsewhere in this report, or in our other publicly filed
reports that we may file from time-to-time, could have a material adverse effect
on our business, operating results, and financial condition. In addition, any
one or more of the risks outlined below could have a greater or lesser impact on
our business at any particular point in time and you should not give any greater
or lesser emphasis or weight to any single factor merely by virtue of the order
of its presentation or the depth of its discussion in this report.
16
IMPACT OF BUSINESS WITH MAJOR CLIENTS:
As set forth in "Item 1 Business," we depend upon major clients in the U.S.
automotive industry for a substantial portion of our revenues. The past two
years have been difficult financially for our automotive clients, and further
deterioration of their financial condition could have a material adverse impact
on our business as they may seek further price concessions or the termination of
projects. Similarly, the loss of any significant customer or a reduction in
economic activity in the U.S. automotive industry would have a material adverse
impact on our business, financial condition, and results of operations.
RISKS INHERENT IN LEASING:
The TechTeam Capital Group leasing portfolio is largely wound down, and we
anticipate that we will be receiving less than $1 million in contractually
committed lease revenue from the portfolio during 2003. However, as the actual
amount of revenue is dependent upon the renewals that we receive, and we cannot
predict the number of renewals that we will receive, the actual revenue we
receive could be greater. Yet, we will continue to receive equipment from the
lessees as it returns off lease, and it is difficult to determine the value of
this equipment at the expiration of the lease. If we are able to sell the
equipment to the original lessee or to others quickly, our proceeds are usually
greater than we would otherwise receive by disposing of these assets through
other means. Accordingly, variations in lease renewals and in the sale price of
off-lease equipment will lead to fluctuations in the performance of TechTeam
Capital Group, which could have a material adverse effect on our results of
operations.
COMPETITION:
We face intense competition in all of our markets and for all of our services,
including the help desk and call center services markets. Some competitors have
substantially greater resources, including more locations, greater financial
resources, a larger client base, and greater name recognition. These customers
may be willing to provide the same services that we do at a loss in order to
attain other, more lucrative business with our customers. Due to this
competition, it may be difficult for us to grow our revenue outside of our
current customer base. Also, as a result, we have experienced and continue to
anticipate significant downward pricing pressure from our customers in order to
remain a preferred vendor. These pressures will likely increase due to the trend
to move outsourcing services off-shore to countries with lower labor costs, such
as India and the Philippines. Our inability to develop and execute a strategy to
address the globalization of the support services market could have a material
adverse impact on our ability to maintain and grow our current customers and
expand our customer base. Any of these circumstances could have a material
adverse effect on our business, financial condition, and results of operations.
CONTRACT RISKS:
The great majority of our non-leasing related contracts, including our Global
Help Desk contract with Ford Motor Company, 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. Moreover, increasing
portions of our projects are billed on a managed service basis (where the fee is
fixed to perform specified services) as opposed to time and materials. While we
have successfully managed our resources to date, the onset of problems in our
customers' infrastructure, such as a computer virus, may require us to deploy
additional resources to solve the problem. In many instances, we would not
receive any additional revenue for the work performed. Our inability to estimate
accurately the resources and related expenses required for the managed service
project or our failure to complete our contractual obligations in a manner
consistent with the contractual obligations upon which a fixed-fee contract was
based could materially and adversely affect the business.
RELIANCE ON SENIOR MANAGEMENT:
The success of the Company is highly dependent upon the efforts, direction, and
guidance of its senior management. The only employment agreements that we
currently have with the executive officers of the Company are with the President
and Chief Executive Officer and the Vice President - Europe. We do not have any
other employment agreements with other members of our executive officer team.
The loss of any of these senior executives or our inability to attract, retain,
or replace key management personnel in the future, could have a material adverse
effect on our business, financial condition, and results of operations.
17
ATTRACTION AND RETENTION OF EMPLOYEES:
Our business involves the delivery of professional services and is very labor
intensive. Our success depends in large part upon our ability to attract,
develop, motivate, and retain highly skilled technical, clerical, and
administrative employees. Qualified personnel are in high demand. Accordingly,
we expect to experience increased compensation costs that may not be offset
through either increased productivity or higher customer pricing. Moreover, no
assurances can be given that we will be able to attract and retain sufficient
numbers of qualified employees in the future, especially when we need to expand
our services in a short time period. The failure to do so could have a material
adverse effect on our business, financial condition, and results of operations.
INTERRUPTION OF TELECOMMUNICATIONS AND NETWORK:
Our operations are dependent upon our ability to protect our technical support
centers and our information databases against damages that may be caused by fire
and other disasters, power failure, telecommunications failures, unauthorized
intrusion, computer viruses, and other emergencies. The temporary or permanent
loss of such systems could have a material adverse effect on our business,
financial condition, and results of operations. Notwithstanding precautions we
have taken to protect ourself 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. Any interruption to our
data network could have a material adverse impact on our business, financial
condition, and our results of operations.
Our primary telecommunications service provider is WorldCom, which is currently
operating under the provisions of Chapter 11 of the United States Bankruptcy
Code. While we have created redundant networks, and the United States government
has indicated that they will not allow WorldCom to cease operations, there are
no assurances that our telecommunications services will continue without
interruption. Such an event could have a material adverse effect on our
business, financial condition, and results of operations.
TECHNOLOGICAL CHANGES; DEPENDENCE ON TECHNOLOGY AND COMPUTER SYSTEMS:
Our success depends in part on our ability to develop IT solutions that keep
pace with continuing changes in IT, evolving industry standards, and changing
client preferences. There can be no assurance that we will be successful in
adequately addressing these developments on a timely basis or that, if these
developments are addressed, we will be successful in the marketplace. For
example, our Support Portal offering is comprised of our proprietary incident
management tool and software developed and sold by software companies. Over the
past three years, we have integrated this software into the Support Portal.
During this time, there have been other tools developed by other competitors and
software vendors that can match the functionality of the Support Portal. If
these other tools can provide similar or better functionality at a lower
effective cost, we could have a product and service offering that will lose its
marketability. Our inability to keep pace with continuing changes in the IT
industry could have a material adverse effect on our business, financial
condition, and results of operations.
MANAGEMENT OF GROWTH:
Our business strategy includes the attainment of significant growth through
expanding our customer base and through the Company's potential acquisitions.
Any time there is significant growth from new customers, there are risks
associated with the launch and management of new projects, including but not
limited to, proper project management, staff development, and scoping of the
work. Acquisitions involve special risks, including, but not limited to, the
diversion of Management's attention, the inability to integrate the acquired
business into our operations, the loss of key business and/or personnel from the
acquired company, unanticipated events, legal liabilities, and dilutive effect
of the issuance of additional securities, and amortization of intangibles.
Moreover, the financial risks continue after the integration of the company. If
the business becomes impaired, there could be a non-cash partial or full
write-off of the goodwill attributed to the acquisition. Any of these possible
difficulties could have a material adverse effect on our business, financial
condition and results of operations.
18
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS:
Certain risks are inherent in our business strategy, which includes plans for
the global expansion of our operations. We may encounter difficulties in
marketing, selling, and delivering our services outside the United States due
to, among other things, differences in cultures, languages, labor and employment
policies, and differing political and social systems. In addition, our business,
financial condition, and results of operations may be materially affected as a
result of currency fluctuations and differing tax laws in countries other than
the United States. Any of these possibilities could have a material adverse
effect on our business, financial condition, and results of operations.
RISKS IN OFFSHORE MARKETS:
While we do not have any current offshore (i.e., Far-Eastern or Indian)
capabilities, we intend to pursue opportunities in offshore markets. There are
no assurances that we will be able to successfully expand into and conduct
business in offshore markets. The industry trend to move business towards
offshore markets could result in the Company's having excess operating capacity
in the United States. Moreover, 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.
HEALTH CARE AND OTHER BENEFIT COSTS:
Health care and other benefit costs continue to increase. While we attempt to
compensate for these escalating costs in our business cost models and customer
pricing and have passed along some of these increased costs to our employees, we
have long term, generally fixed-price pricing agreements with our customers.
LIMITED PROTECTION OF PROPRIETARY SYSTEMS AND PROCEDURES:
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 and limit distribution of proprietary information. There can be no
assurance, however, that the steps taken by us in this regard will be adequate
to deter misappropriation of proprietary information or that we will be able to
detect unauthorized use of such information and take appropriate steps to
enforce our intellectual property rights.
Although we believe our services and/or software do not infringe upon the
intellectual property rights of others and that we have all of the rights
necessary to utilize the intellectual property employed in our business, we are
subject to the risk of litigation alleging infringement of third-party
intellectual property rights. Any such claims could require us to spend
significant sums of money in litigation, pay damages, develop non-infringing
intellectual property, or acquire licenses of the intellectual property, which
may be the subject of asserted infringement.
VOLATILITY OF STOCK PRICE:
The market price of our common stock has fluctuated over a wide range during the
past several years and may continue to do so in the future. (See "Item 5 Market
for Registrant's Common Equity and Related Stockholder Matters.") The market
price of our common stock could be subject to significant fluctuations in
response to various factors or events, including, among other things, the depth
and liquidity of the trading market for our common stock, quarterly variations
in our operating results, actual versus anticipated operating results, growth
rates, market conditions in the industry in which we compete, announcements by
competitors, regulatory actions, litigation (including class action litigation)
and general economic conditions. In addition, the stock market has from
time-to-time experienced significant price and volume fluctuations, which have
particularly affected the market prices of the stocks of technology companies.
As a result of the foregoing, our operating results and future prospects at
various times may be below the expectations of public market analysts and
investors. Any such event could have a material adverse effect on the price of
our common stock.
19
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have any material market risk-sensitive financial instruments.
Substantially all of our operations are located in the United States. Our debt
obligations have fixed interest rates and relatively short lives. We are 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.
Currently, we have two principle areas of foreign currency exposure that could
result in short-term variations in earnings. (1) We have dollar-denominated loan
balances and inter-company balances with our foreign subsidiaries; and (2) One
of our foreign subsidiaries has a contract with a customer which requires sales
to be billed in U.S. dollars, while our related expenditures are primarily
denominated in Euros.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of TechTeam Global, Inc. and
Subsidiaries are included in Item 8:
- -------------------------------------------------------------------------------------------------------------------------
PAGE
---------
Report of Ernst & Young LLP, Independent Auditors........................................................... 21
Consolidated Statements of Operations -- Years Ended December 31, 2002, 2001, and 2000...................... 22
Consolidated Statements of Comprehensive Income / (Loss) -- Years Ended December 31,
2002, 2001, and 2000.................................................................................... 23
Consolidated Statements of Financial Position -- December 31, 2002 and December 31, 2001.................... 24-25
Consolidated Statements of Shareholders' Equity -- Years Ended December 31, 2002, 2001, and 2000............ 26
Consolidated Statements of Cash Flows -- Years Ended December 31, 2002, 2001, and 2000...................... 27
Notes to the Consolidated Financial Statements.............................................................. 28-44
The following financial statement schedules of TechTeam Global, Inc. and
Subsidiaries are included pursuant to the requirements of Item 14(d): None.
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.
20
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
BOARD OF DIRECTORS
TECHTEAM GLOBAL, INC.
We have audited the accompanying consolidated statements of financial position
of TechTeam Global, Inc. (formerly National TechTeam, Inc.) and subsidiaries as
of December 31, 2002 and 2001 and the related consolidated statements of
operations, comprehensive income/(loss), shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
TechTeam Global, Inc. and subsidiaries at December 31, 2002 and 2001, and the
consolidated results of their operations and their cash flows for the each of
the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note A to the consolidated financial statements, in 2002, the
Company changed its method of accounting for goodwill.
Detroit, Michigan /s/ Ernst & Young LLP
February 21, 2003
21
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2002 2001 2000
-------------- ------------- --------------
(In thousands, except per share data)
REVENUES
Corporate services
Corporate help desk services........................... $ 59,106 $ 51,316 $ 64,769
Technical staffing..................................... 10,153 14,522 18,874
Systems integration.................................... 7,197 6,918 9,679
Training programs...................................... 1,077 2,005 3,485
------------- ------------- -------------
Total corporate services.................................. 77,533 74,761 96,807
Leasing operations........................................ 9,102 19,849 27,349
------------- ------------- -------------
TOTAL REVENUES................................................ 86,635 94,610 124,156
COST OF SERVICES DELIVERED.................................... 66,578 75,777 95,860
------------- ------------- -------------
GROSS PROFIT.................................................. 20,057 18,833 28,296
------------- ------------- -------------
OTHER EXPENSES
Selling, general, and administrative...................... 16,864 22,290 21,969
Michigan Single Business Tax.............................. 900 700 1,710
------------- ------------- -------------
TOTAL OTHER EXPENSES.......................................... 17,764 22,990 23,679
------------- ------------- -------------
OPERATING INCOME (LOSS)....................................... 2,293 (4,157) 4,617
Gain on sale of GE Joint Venture.............................. -- -- 322
Interest income............................................... 896 1,186 887
Interest expense.............................................. (164) (779) (1,435)
------------- ------------- -------------
NET INTEREST INCOME (EXPENSE) ................................ 732 407 (548)
------------- ------------- -------------
Income (loss) before income taxes............................. 3,025 (3,750) 4,391
Income tax provision (credit)................................. 1,627 (172) 2,245
------------- ------------- -------------
Income (loss) before cumulative effect of accounting change... 1,398 (3,578) 2,146
Cumulative effect of accounting change........................ 1,123 -- --
------------- ------------- -------------
NET INCOME (LOSS)............................................. $ 275 $ (3,578) $ 2,146
============= ============= =============
BASIS EARNINGS (LOSS) PER SHARE
Income (loss) before cumulative effect of accounting change... $ .13 $ (.33) $ .17
Cumulative effect of accounting change........................ (.10) -- --
------------- ------------- -------------
Total basic earnings (loss) per share......................... $ .03 $ (.33) $ .17
============= ============= =============
DILUTED EARNINGS (LOSS) PER SHARE
Income (loss) before cumulative effect of accounting change... $ .13 $ (.33) $ .17
Cumulative effect of accounting change........................ (.10) -- --
------------- ------------- -------------
Total diluted earnings (loss) per share....................... $ .02 $ (.33) $ .17
============= ============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND COMMON SHARE EQUIVALENTS OUTSTANDING
Basic..................................................... 10,957 10,771 12,554
Net effect of dilutive stock options...................... 146 -- --
------------- ------------- -------------
Diluted................................................... 11,103 10,771 12,554
============= ============= =============
See accompanying notes.
22
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
- -------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2002 2001 2000
------------- ------------- --------------
(In thousands, except per share data)
NET INCOME (LOSS), AS SET FORTH IN STATEMENT OF OPERATIONS.... $ 275 $ (3,578) $ 2,146
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation adjustments.................. 383 (109) (69)
------------- ------------- -------------
COMPREHENSIVE INCOME (LOSS)................................... $ 658 $ (3,687) $ 2,077
============= ============= =============
See accompanying notes.
23
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
- ----------------------------------------------------------------------------------------------------------------
DECEMBER 31,
--------------------------------
ASSETS 2002 2001
- --------------------------------------------------------------------------- -------------- --------------
(In thousands)
CURRENT ASSETS
Cash and cash equivalents.............................................. $ 39,435 $ 30,251
Securities available for sale.......................................... 6,492 5,321
Accounts receivable -- corporate services (less allowances of $182
and $253 at December 31, 2002 and 2001, respectively)................ 14,328 14,172
Accounts receivable - leasing (less allowances of $415 and $180 at
December 31, 2002 and 2001, respectively)........................... 2,906 3,549
Refundable taxes....................................................... 1,393 2,693
Inventories of off-lease equipment (less reserves of $1,974
and $1,078 at December 31, 2002 and 2001, respectively)............. 1,452 304
Prepaid expenses and other............................................. 864 1,281
Deferred income tax ................................................... 1,242 1,230
-------------- --------------
Total current assets .................................................. 68,112 58,801
PROPERTY, EQUIPMENT, AND PURCHASED SOFTWARE
Computer equipment and office furniture................................ 18,169 16,125
Purchased software..................................................... 9,435 8,610
Leasehold improvements................................................. 3,531 3,096
Transportation equipment............................................... 273 213
-------------- --------------
31,408 28,044
Less -- accumulated depreciation and amortization...................... 22,768 19,371
-------------- --------------
8,640 8,673
OTHER ASSETS
Assets of leasing operations, net of amortization (less reserves of
$823 and $1,940 at December 31, 2002 and 2001, respectively)........ 3,489 15,705
Intangibles (less accumulated amortization of $6,442 and $14,938 at
December 31, 2002 and 2001, respectively)........................... 1,432 3,432
Deferred income tax.................................................... -- 276
Loans receivable....................................................... 30 77
Other.................................................................. 161 157
-------------- --------------
5,112 19,647
-------------- --------------
TOTAL ASSETS............................................................... $ 81,864 $ 87,121
============== ==============
See accompanying notes.
24
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
- ----------------------------------------------------------------------------------------------------------------
DECEMBER 31,
--------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 2002 2001
- --------------------------------------------------------------------------- -------------- --------------
(In thousands)
CURRENT LIABILITIES
Accounts payable....................................................... $ 1,639 $ 1,981
Accrued payroll, related taxes, and withholdings....................... 3,187 2,762
Deferred revenues...................................................... 321 1,184
Accrued expenses and taxes............................................. 1,618 1,097
Current portion of notes payable....................................... 492 4,605
Other.................................................................. 175 117
-------------- --------------
TOTAL CURRENT LIABILITIES.............................................. 7,432 11,746
LONG-TERM LIABILITIES...................................................... 376 805
DEFERRED INCOME TAXES...................................................... 736 --
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 16,953,100 and 16,723,000 shares at December 31, 2002 169 167
and 2001.........................................................
Additional paid-in capital............................................. 109,482 108,212
Retained earnings...................................................... 1,114 839
Accumulated other comprehensive income (loss) -- foreign currency 156 (227)
translation adjustment.............................................. -------------- --------------
Total.................................................................. 110,921 108,991
Less -- Treasury stock (6,274,436 and 5,828,374 shares at 37,601 34,421
December 31, 2002 and 2001, respectively)........................... -------------- --------------
Total shareholders' equity............................................. 73,320 74,570
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................. $ 81,864 $ 87,121
============== ==============
See accompanying notes.
25
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATED
ADDITIONAL OTHER
COMMON STOCK PAID-IN RETAINED COMPREHENSIVE TREASURY
CAPITAL EARNINGS INCOME / (LOSS) STOCK
------------- ------------- -------------- --------------- -------------
(In thousands)
Balance at January 1, 2000................ $ 167 $ 111,092 $ 2,271 $ (49) $ (29,273)
Proceeds from issuance of 5,600
shares under stock option plans.... -- 26 -- -- --
Tax benefit from exercise of employee
stock options and other............ -- 33 -- -- --
Contribution to 401(k) plan and other. -- (1,140) -- -- 1,982
Purchase of common stock.............. -- -- -- -- (9,069)
Net income for 2000................... -- -- 2,146 -- --
Other comprehensive loss for 2000..... -- -- -- (69) --
------------- ------------- -------------- --------------- -------------
Balance at December 31, 2000.............. $ 167 $ 110,011 $ 4,417 $ (118) $ (36,360)
Tax benefit from exercise of employee
stock options and other............ -- 32 -- -- --
Contribution to 401(k) plan
and other.......................... -- (1,831) -- -- 2,548
Purchase of common stock.............. -- -- -- -- (609)
Net loss for 2001..................... -- -- (3,578) -- --
Other comprehensive loss for 2001..... -- -- -- (109) --
------------- ------------- -------------- --------------- -------------
Balance at December 31, 2001.............. $ 167 $ 108,212 $ 839 $ (227) $ (34,421)
Proceeds from issuance of 230,100
shares under stock options plan...... 2 931 -- -- --
Tax benefit from exercise of employee
stock options and other............ -- 446 -- -- --
Contribution to 401(k) plan
and other.......................... -- (107) -- -- 243
Purchase of common stock.............. -- -- -- -- (3,423)
Net income for 2002................... -- -- 275 -- --
Other comprehensive income for 2002... -- -- -- 383 --
------------- ------------- -------------- --------------- -------------
Balance at December 31, 2002.............. $ 169 $ 109,482 $ 1,114 $ 156 $ (37,601)
============= ============= ============== =============== =============
See accompanying notes.
26
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------
2002 2001 2000
------------ ------------ -------------
(In thousands)
OPERATING ACTIVITIES
Income (loss) before cumulative effect of accounting change....... $ 1,398 $ (3,578) $ 2,146
Adjustments to reconcile income (loss) to net cash
provided by operating activities:
Depreciation................................................ 10,214 20,229 22,091
Amortization................................................ 878 2,946 4,063
Treasury stock contributed to 401(k) plan and other......... 137 717 842
Sale and equity earnings of affiliates...................... -- -- (553)
Loss on sales of equipment and other........................ 952 388 500
Provision for deferred income tax........................... 1,301 531 (447)
Non-cash stock option compensation expense............. 446 -- --
Provision for uncollectible accounts receivable............. 243 549 280
Changes in operating assets and liabilities:
Accounts receivable..................................... 244 1,586 2,484
Inventories............................................. -- (66) 1,150
Prepaid expenses and other current assets............... 417 602 (67)
Accounts payable........................................ (342) (1,436) 975
Accrued payroll, related taxes, and withholdings........ 426 (455) (68)
Federal income tax...................................... 1,016 (1,834) 180
Deferred revenues and unapplied receipts................ (863) 72 (574)
Accrued expenses and taxes.............................. 521 416 (103)
Other current liabilities............................... 57 (354) 319
Other long-term liabilities............................. (84) 236 --
------------ ------------ -------------
Net cash provided by operating activities................... 16,961 20,549 33,218
INVESTING ACTIVITIES
Purchases of securities available for sale........................ (21,805) (13,689) (2,725)
Proceeds from sales of securities available for sale.............. 20,634 11,093 --
Purchases of property, equipment, and software.................... (3,455) (2,725) (6,682)
Proceeds from sales of property and equipment..................... 3,206 4,338 480
Net change in investment in direct financing leases and residuals. 183 3,049 2,328
Write off loan receivable......................................... -- 932 --
Proceeds from sale of marketing rights............................ -- 915 --
Acquisition....................................................... -- (800) --
Purchases of leased equipment..................................... -- -- (12,469)
Proceeds from sale of GE Joint Venture and related assets......... -- -- 1,750
Other -- net...................................................... 43 713 975
------------ ------------ -------------
Net cash provided by (used in) investing activities............ (1,194) 3,826 (16,343)
FINANCING ACTIVITIES
Payments on long-term borrowings.................................. (4,476) (9,433) (12,167)
Purchase of Company common stock.................................. (3,423) (609) (9,069)
Proceeds from issuance of Company stock .......................... 933 -- 26
Proceeds from long-term borrowings................................ -- -- 6,174
Other -- net...................................................... 383 (77) (36)
------------ ------------ -------------
Net cash provided by (used in) financing activities............ (6,583) (10,119) (15,072)
------------ ------------ -------------
Increase in cash and cash equivalents.......................... 9,184 14,256 1,803
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........................ 30,251 15,995 14,192
------------ ------------ -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR.............................. $ 39,435 $ 30,251 $ 15,995
============ ============ =============
See accompanying notes.
27
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of TechTeam Global,
Inc. and its wholly-owned subsidiaries. Collectively, these companies are
referred to as the "Company" or "TechTeam" or "We" (formerly National TechTeam,
Inc.). Inter-company accounts and transactions have been eliminated.
USE OF ESTIMATES:
Preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from the estimates and
assumptions made.
CASH AND CASH EQUIVALENTS:
Cash includes both interest bearing and non-interest bearing deposits, which are
available on demand. Cash equivalents include all liquid investments with
maturities of three months or less when purchased, including money market funds
held at banks and other financial institutions.
SECURITIES AVAILABLE FOR SALE:
Our management determines the appropriate classification of securities at the
time of purchase and re-evaluates such designation as of each balance sheet
date. Securities available for sale are stated at fair value with any unrealized
gains and losses, net of tax, reported as a component of accumulated other
comprehensive income (loss). Securities available for sale were invested
primarily in high-quality corporate and United States government agency debt
securities.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying values of certain financial instruments such as cash and cash
equivalents, securities available for sale, accounts receivable, accounts
payable, and notes payable approximate their fair values due to their short
maturity periods or market interest rates.
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 $597,000 at December 31, 2002 and $433,000 at December
31, 2001. The accounts receivable balance for the leasing operations segment at
December 31, 2002 amounted to $3.3 million, less an allowance of $415,000.
INVENTORIES:
Inventories consist 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 $2.0 million at December 31, 2002,
$1.1 million at December 31, 2001, and $270,000 at December 31, 2000.
Substantially all of the net increases in these reserves
28
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
resulted from transfers from the leased asset reserve account as the equipment
comes off lease and is transferred into inventories. The net inventories balance
of $1.4 million at December 31, 2002 is 8.5% of the original cost of the
equipment. Equipment returned prior to December 31, 2000 is fully reserved,
i.e., carried at a net book value of zero. Inventories net of reserve includes
approximately $82,000 worth of equipment returned in 2001 and approximately $1.4
million returned in 2002.
PROPERTY, EQUIPMENT AND PURCHASED SOFTWARE:
Property, equipment, and purchased software for internal use are stated at cost.
Property and equipment are depreciated using the straight-line method over their
estimated useful lives, ranging from 3 to 10 years. Leasehold improvements are
amortized on a straight-line basis over the lesser of the lease term or the
estimated useful lives of the improvements. Purchased software is amortized over
3 to 7 years.
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 $0.8 million at December 31, 2002 and $1.9 million at December 31,
2001. Substantially all of the net decreases in such reserves resulted from the
lease terms ending and the equipment being sold or transferred to inventories.
The net leased equipment amount of $2.7 million represents approximately 13% of
its original cost.
INTANGIBLES:
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). Under SFAS 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, we adopted SFAS 142. Accordingly, we have taken an impairment
charge of $1.1 million in the first quarter of 2002. Under SFAS 142, the charge
recognized upon adoption of the statement is reported as the cumulative effect
of an accounting change. Reported income and earnings per share adjusted to
exclude goodwill amortization is as follows:
- -----------------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
-------------------------------------------
(In thousands)
2002 2001 2000
------------ ------------ ------------
Reported income (loss) before cumulative effect of
accounting change................................... $ 1,398 $ (3,578) $ 2,146
Add back goodwill amortization.......................... -- 1,257 784
------------ ------------ ------------
Adjusted income (loss) before cumulative effect of
accounting change................................... $ 1,398 $ (2,321) $ 2,930
Basic and diluted earnings per share:
Income (loss) before cumulative effect of
accounting change as reported.................... $ .13 $ (.33) $ .17
Goodwill amortization .............................. -- .12 .06
------------ ------------ ------------
Income (loss) before cumulative effect of
accounting change as adjusted.................... $ .13 $ (.21) $ .23
============ ============ ============
29
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
We re-evaluate amortizable intangibles based on undiscounted operating cash
flows whenever significant events or changes occur that might indicate
impairment of recorded costs. If undiscounted cash flows are insufficient to
recover recorded costs, we write down recorded costs of the assets to fair value
(based on discounted cash flows or market values).
Intangibles include the following:
DECEMBER 31,
-------------------------------
AMORTIZATION PERIOD
2002 2001 (STRAIGHT-LINE-BASIS)
------------- ------------- -----------------------
(In thousands)
Intangible lease asset................................... $ -- $ 7,311 3 years
Global call center....................................... 5,408 5,408 7 years
Goodwill................................................. 1,765 4,950 5 to 10 years*
Cyntergy customer contract asset......................... 701 701 5 years
------------- -------------
7,874 18,370
Less: Accumulated amortization........................... 6,442 14,938
------------- -------------
$ 1,432 $ 3,432
============= =============
*Prior to adoption of FAS 142.
In the allocation of the purchase price of TechTeam Capital Group, we evaluated
the lease contracts of TechTeam Capital Group and the related equipment,
including estimated residual values at the end of the contractual lease terms.
The excess of the discounted cash flows from the lease contracts, including the
estimated cash flows from estimated residual values over the appraised fair
value of the underlying equipment, was recorded by the Company as an intangible
lease asset in the purchase allocation and was amortized over the related lease
terms.
In the allocation of the purchase price of TechTeam Cyntergy, L.L.C. ("TTCY"),
we evaluated the customer contracts of TTCY, related equipment, accounts
receivables, and notes receivables. The excess of the purchase price over the
estimated fair value of the related equipment, accounts receivable, and notes
receivable was recorded by the Company as an intangible customer contract asset
and is being amortized over the related contract terms.
Our expected amortization expense is as follows: $793,000 for 2003, $92,000 for
2004, $88,000 for 2005, $88,000 for 2006, and zero for 2007.
DEFERRED INCOME TAXES:
At December 31, 2002, we have 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.
30
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
REVENUE RECOGNITION:
Revenues from Corporate Services are recognized as services are performed.
Revenues from TechTeam Capital Group are recognized as described in "Lease
Accounting Policies" below. Revenues from product sales are recognized when
title is transferred. We also have licensed customers who use our Support
Portal, which includes our Global Call Center, a call tracking software product.
Revenues from these licenses are recognized in one of two ways: on a usage
basis, when the licenses are granted in connection with on-going services; or as
lump sum fees when the client acquires the rights to use and is allowed access
to the Global Call Center or Support Portal without any on-going service
obligation by us.
LEASE ACCOUNTING POLICIES:
As a lessor of equipment, the Company, through TechTeam Capital Group, accounts
for leases under Statement of Financial Accounting Standards No. 13, Accounting
for Leases, principally as either direct financing or operating leases. Each of
these types of leases, and its impact on the financial statements of TechTeam,
is as follows:
Operating Leases
Equipment leased to others under operating leases is recorded at cost, less
accumulated depreciation and net of any valuation reserves for estimated
residual values. In estimating depreciation, a residual amount is assumed.
Residual is the estimated fair market value of the leased assets at the
termination of the lease. In estimating residual, we rely largely on historical
experience by equipment type and manufacturer, adjusted for known trends and
current market data. Our estimates of residual values are reviewed periodically;
however, the cash amount we will ultimately realize could differ from these
estimates. Valuation reserves against originally estimated residual values
amounted to $823,000 and $1.9 million at December 31, 2002 and 2001,
respectively. Substantially all of the net increases in such reserves result
from charges to operations.
Revenues from operating leases are recognized on a straight-line basis over the
lease term.
Depreciation expense is recognized on a straight-line basis over the lease term.
Direct Financing Leases
Net investment in direct financing leases consists of the present value of the
future minimum lease payments, the present value of the estimated residual, and
initial direct costs.
Revenues consist of interest earned on the net investment. Revenues are
recognized over the lease term as a constant percentage return on the net
investment.
Initial direct costs are capitalized and amortized over the lease term.
31
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
STOCK OPTIONS:
We account for stock options under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees and related interpretations.
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148,
Accounting for Stock-Based Compensation -- Transition and Disclosure (SFAS 148)
that amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition to SFAS 123's fair value method of accounting
for stock-based employee compensation and to require disclosure of the effects
of an entity's accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual and interim
financial statements. SFAS 148 does not require companies to account for
employee stock options using the fair value method; accordingly, TechTeam has
continued to elect to account for employee stock options under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and
its related interpretations. The effect of adopting SFAS 148 had no material
effect except for the quarterly disclosure provisions, which will be made in our
March 31, 2003 interim financial statements.
Pro forma information regarding net income/(loss) and earnings/(loss) per share
is required by SFAS 123, 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 for 2000 through
2002: 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, .504, and .464 in 2002, 2001, and 2000, respectively; 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 management's 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:
2002 2001 2000
------------------------------------------------
(In thousands)
Pro forma net income/(loss)................................... $ (149) $ (4,193) $ 1,031
Pro forma earnings/(loss) per share
Basic..................................................... (.01) $ (.38) $ .08
Diluted................................................... $ (.01) $ (.38) $ .08
FOREIGN CURRENCY TRANSLATION:
We translated the material assets and liabilities of our non-U.S. subsidiaries
into U.S. dollars based on the December 31, 2002 rates of foreign currency
exchange. Translation adjustments are included in stockholders' equity in the
consolidated balance sheet caption "Accumulated Other Comprehensive Income
(loss)". Currency transaction gains or losses are generally derived from
monetary assets and liabilities stated in a currency other than the local
currency, are recognized as current operations, and have not been significant to
our results in any period.
32
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
RECLASSIFICATIONS:
Certain reclassifications have been made to our 2001 and 2000 financial
statements in order to conform to the 2002 financial statement presentations.
EFFECTS OF ACCOUNTING PRONOUNCEMENTS:
In August 2001, the FASB issued SFAS No. 144 Accounting for the Impairment or
Disposal of Long-lived Assets. SFAS No. 144 addresses financial accounting and
reporting for the impairment of long-lived assets and for long-lived assets to
be disposed of. SFAS No. 144 is effective for financial statements issued for
fiscal years beginning after December 15, 2001 and was adopted by the Company on
January 1, 2002. The adoption of SFAS No. 144 did not have an impact on our
reported results of operations or our financial position.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities ("SFAS 146"), which addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity. SFAS 146 requires that
a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred whereas under Issue 94-3, a liability
for an exit cost was recognized at the date of an entity's commitment to an exit
plan. A fundamental conclusion reached by the FASB in issuing SFAS 146 is that
an entity's commitment to a plan, by itself, does not create an obligation that
meets the definition of a liability. Therefore, SFAS 146 eliminates the
definition and requirements for recognition of exit costs in Issue 94-3 and
establishes that fair value is the objective for initial measurement of the
liability. FASB 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. TechTeam does not expect that the adoption of
SFAS 146 will have a significant impact on its reported results of operations.
See above for discussions of SFAS 142 and SFAS 148.
NOTE B -- 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 basic shares increased from 10,771,124 in 2001 to
10,956,662 in 2002 due primarily to the exercise of 230,100 stock options during
2002, partially offset by 470,600 shares repurchased by the Company, primarily
in December 2002.
The number of fully diluted shares increased from 10,771,124 in 2001 to
11,102,814 in 2002 due primarily to the increase in the number of existing stock
options that are dilutive. In 2002, the stock price began the year at $3.10 per
share and ended the year at $7.43 per share, a value in excess of the strike
price for 662,720 outstanding stock options, which contributed to our increase
in potentially dilutive shares outstanding.
As of December 31, 2002, 2001 and 2000, 538,400, 1,637,100 and 1,353,200 stock
options, respectively, were excluded from the fully diluted calculation because
the option exercise price was higher than the stock price.
33
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE C -- DESCRIPTION OF THE BUSINESS
We provide corporate services, call center services, and lease financing for
major companies on an international scale. Revenues from clients that exceeded
10% of total revenues for any of the periods presented are summarized as
follows:
- -------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2002 2001 2000
------------- -------------- --------------
(In thousands)
Ford Motor Company............................................ $ 43,327 $ 41,238 $ 40,062
DaimlerChrysler .............................................. 13,300 16,584 22,573
GE TechTeam L.P............................................... -- -- 16,150
NOTE D -- ACQUISITION AND DIVESTITURE
On September 28, 2001, our newly formed subsidiary, TechTeam Cyntergy, L.L.C.,
("TTCY") acquired certain assets of Cyntergy Corporation, a privately held
company, in a two-step transaction.
First, TTCY purchased and took an assignment of certain credit facilities and
promissory notes from Cyntergy's principal lender. As a result, TTCY acquired
all of the lender's rights as a secured creditor under the Financing and
Security Agreement and other documentation of the credit facility. Cyntergy
Corporation's borrowings and the credit facilities were in excess of $6 million.
The purchase price of the credit facility was $1,050,000.
Second, TTCY entered into an Agreement for Conveyance In Lieu of Foreclosure
with Cyntergy Corporation. Under this agreement, TTCY acquired certain assets of
Cyntergy Corporation by forgiving $4.5 million of the total debt. These assets
included accounts receivable, notes receivable, various fixed assets, and
certain customer contracts. TTCY is currently providing services to many of
Cyntergy Corporation's former customers. Revenue derived from these customers
was $3.2 million in 2002.
The Company recorded a net cash payment of $800,000 and assumed liabilities of
$848,000. Purchased assets include accounts receivable of $670,000, a long-term
note of $250,000, property and equipment of $27,000, and contracts valued at
$701,000.
On August 22, 2000, we sold our 47% interest in GE TechTeam L.P. and our 49%
membership interest in Support Central, L.L.C. to the majority partner, GE
Warranty Management, Inc. (GEWM). We recorded a pre-tax gain of $322,000 on this
transaction. We no longer provide staffing services to GEWM. We have entered
into an arrangement with GEWM to provide call center technology services, which
include ongoing call center software maintenance, upgrades, and customization.
Until the date of sale, we shared in profits and losses of the GE Joint Venture
OEM call center services business based on our partnership interest. Such
revenue sharing translated to earnings of $331,000 for the year ended December
31, 2000. In 1999, the GE Joint Venture changed its overhead allocation
methodology, but such change was not agreed to by us. The change in 1999
resulted in an additional $531,000 of costs allocated to us previously borne by
GE Appliances. In the quarter ended September 30, 2000, the change in the
allocation methodology was reversed. The effect of the reversal increased our
share in the partnership revenue by $531,000.
34
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE E -- TAX PROVISIONS
The provision (credit) for income taxes consists of the following:
-------------------------------------------------
YEAR ENDED DECEMBER 31,
2002 2001 2000
-------------------------------------------------
(In thousands)
Current:
U.S. Federal (credit)..................................... $ -- $ (1,337) $ 2,087
State..................................................... 154 154 226
Foreign................................................... 172 480 379
------------- ------------- -------------
326 (703) 2,692
Deferred (credit) -- U.S. Federal............................. 1,301 531 (447)
------------- ------------- -------------
Total provision (credit)...................................... $ 1,627 $ (172) $ 2,245
============= ============= =============
Tax payments (receipts)....................................... $ (225) $ 800 $ 2,586
============= ============= =============
A reconciliation of the income tax provision and the amount computed by applying
the Federal statutory income tax rate to income before income tax follows:
-------------------------------------------------
YEAR ENDED DECEMBER 31,
2002 2001 2000
-------------------------------------------------
(In thousands)
Income tax provision (credit) at Federal statutory rate of $ 1,029 $ (1,275) $ 1,492
Goodwill, intangibles, and other permanent differences....... 528 925 616
Foreign tax credit........................................... -- (117) (161)
State taxes, net of federal benefit.......................... 102 102 149
Other........................................................ (32 ) 193 149
------------- ------------- -------------
$ 1,627 $ (172) $ 2,245
============= ============= =============
The provision (credit) for income taxes was calculated based on the following
components of earnings before income taxes:
-------------------------------------------------
YEAR ENDED DECEMBER 31,
2002 2001 2000
-------------------------------------------------
(In thousands)
Domestic..................................................... $ 2,960 $ (4,981) $ 3,020
Foreign...................................................... 65 1,231 1,371
------------- ------------- -------------
$ 3,025 $ (3,750) $ 4,391
============= ============= =============
35
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE E -- TAX PROVISIONS (continued)
The principal components of deferred income tax balances are as follows:
-------------------------------------------------------------
DECEMBER 31
-------------------------------------------------------------
2002 2001
-------------------------- ---------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------------ ----------- ------------ -----------
(In thousands)
Alternative minimum tax credit carryforward ..... $ 850 $ -- $ 1,980 $ --
Allowance for uncollectible accounts receivable.. 186 -- 138 --
Leasing accounting............................... 160 -- 165
Prepaid expenses................................. 89 -- 63 --
Accelerated tax depreciation..................... -- 850 -- 359
Other............................................ 86 15 -- 151
------------ ---------- ------------ -----------
$ 1,371 $ 865 $ 2,181 $ 675
============ ========== ============ ===========
At December 31, 2002, for United States federal income tax purposes, we had a
$850,000 alternative minimum tax credit carryforward that does not expire.
No provision was made with respect to approximately $734,000 of undistributed
earnings of foreign subsidiaries at December 31, 2002, since these earnings are
considered by the Company to be permanently reinvested. Upon distribution of
these earnings, we would be subject to United States income taxes and foreign
withholding taxes. Determining the unrecognized deferred tax liability on the
distribution of these earnings is not practicable as such liability, if any, is
dependent on circumstances existing when remittance occurs.
During 2002, we instituted a formal global transfer-pricing program to enable us
to charge our foreign subsidiaries for the services provided to them by our
United States-based employees. For 2002, we allocated $1.9 million in expenses
to our European subsidiaries for the sales, marketing, training, technical
support, human resources, treasury, legal, financial management, and corporate
leadership services provided.
NOTE F -- ASSETS OF LEASING OPERATIONS
The assets of our leasing operations consist of the following:
-------------------------------
DECEMBER 31,
2002 2001
-------------------------------
(In thousands)
Equipment leased to others under operating leases:
Cost...................................................... $ 21,337 $ 45,058
Less -- Accumulated depreciation and reserves............. 18,657 31,023
------------- -------------
2,680 14,035
Net investment in direct financing leases, consisting of:
Total minimum lease payments receivable................... 778 1,653
Estimated residual values of leased property 59 151
(non-guaranteed).......................................
Unearned income........................................... (48) (158)
Initial direct costs...................................... 4 6
------------- -------------
793 1,652
Net investment in lease residuals............................. 16 18
------------- -------------
Total ....................................................... $ 3,489 $ 15,705
============= =============
36
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE F -- ASSETS OF LEASING OPERATIONS (continued)
Future lease revenues anticipated under noncancelable operating leases at
December 31, 2002 are as follows:
- --------------------------------------------------------------------------------
YEAR AMOUNT
- ------------------------------------------------------------ --------------
(In thousands)
2003 $ 868
2004 75
2005 5
--------------
Total $ 948
==============
Minimum lease payments receivable under direct financing leases at December 31,
2002 are as follows:
- --------------------------------------------------------------------------------
YEAR AMOUNT
- ------------------------------------------------------------ --------------
(In thousands)
2003 $ 480
2004 287
2005 11
-------------
Total $ 778
=============
NOTE G -- NOTES PAYABLE
Notes payable at December 31, consists of the following:
- --------------------------------------------------------------------------------------------------------------
2002 2001
------------- -------------
(In thousands)
Nonrecourse notes payable to financial institutions -- 6.0% -- 12.0%....... $ 496 $ 3,981
Nonrecourse notes payable to others........................................ 202 1,193
------------- -------------
Total...................................................................... $ 698 $ 5,174
============= =============
We finance a portion of our lease transactions by assigning the noncancelable
rentals to various financial institutions and others on a nonrecourse basis. In
the event of a default by the lessee under a lease, which has been assigned on a
nonrecourse basis, the holder has a first lien against the underlying equipment
but has no further recourse against the Company.
At December 31, 2002 and 2001, the carrying value of the pledged assets was
approximately $1,250,000 and $10,000,000, respectively.
Future minimum payments of notes payable are as follows:
- --------------------------------------------------------------------------------
YEAR AMOUNT
- ------------------------------------------------------------ --------------
(In thousands)
2003......................................................... $ 492
2004......................................................... 195
2005......................................................... 11
-------------
Total........................................................ $ 698
=============
Interest paid on notes payable was $148,000, $703,000, and $1,429,000 in 2002,
2001, and 2000, respectively.
37
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE H -- EMPLOYEE RETIREMENT PLAN
The Company has a 401(k) Retirement Savings Plan, which covers substantially all
U.S.-based employees. Under the provisions of the Plan, we will match employee
contributions in amounts up to 1.4% of gross compensation, subject to statutory
limitations. These contributions were $294,000 in 2002, $673,000 in 2001, and
$723,000 in 2000. In 2002, we reduced the Company matching contribution to 1.4%
from 3% of gross compensation. Our matching contributions are made only with our
common stock and are credited only to the TechTeam Global Stock Fund for the
benefit of each participant.
NOTE I -- LEASES
The Company leases its call center facilities, corporate and other offices and
certain office equipment under noncancelable operating leases. These leases are
renewable with various options and terms. Total rental expense was $3,698,000 in
2002, $3,993,000 in 2001, and $2,911,000 in 2000.
Minimum future payments and receipts under noncancelable operating leases and
subleases with initial terms of one-year or more at December 31, 2002 were as
follows:
- --------------------------------------------------------------------------------------
LEASE SUBLEASE
YEAR PAYMENTS RECEIPTS
- --------------------------------------------------- ------------- -------------
(In thousands)
2003............................................... $ 2,734 $ 578
2004............................................... 2,983 364
2005............................................... 2,835 238
2006............................................... 476 60
2007 and thereafter................................ -- --
------------- -------------
Total.............................................. $ 9,028 $ 1,240
============= =============
NOTE J -- 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 our liquidity, financial position, or results of operations.
NOTE K -- RELATED PARTY TRANSACTIONS
TechTeam was involved in the following related party transactions:
a) Paid $145,000 and $156,000 in 2002 and 2001, respectively, for
consulting fees to a director of the Company.
b) Paid legal fees of $6,000 and $13,000 in 2002 and 2001, respectively,
to a law firm whose members include a director of the Company.
c) Paid $9,000 in 2001 for brokerage service fees to a securities firm
that employs a director of the Company.
NOTE L -- PREFERRED SHARE PURCHASE RIGHTS
On April 29, 1997, our Board of Directors authorized the distribution of one
Preferred Share Purchase Right ("Right") for each outstanding share of Common
Stock of the Company. The terms of the Rights plan are described in the Rights
Agreement between the Company and U.S. Stock Transfer Corporation, dated May 6,
1997, as amended August 24, 2000. Each Right entitles shareholders to buy one
one-hundredth of a share of a new series of preferred stock at a price of $80.
38
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE L -- PREFERRED SHARE PURCHASE RIGHTS (continued)
As distributed, the Rights trade together with the Common Stock of the Company
and do not have any separate voting powers. They may be exercised or traded
separately only after the earlier to occur of the following: (1) 10 days after
any person or group of persons acquires 15% or more of our Common Stock, (2) 10
business days after a person or group of persons announces an offer that, if
completed, would result in its owning 15% or more of our Common Stock, or (3)
promptly after a declaration by the Board that a person who acquires 15% or more
of our Common Stock is an "Adverse Person" as defined by the Rights Agreement.
Additionally, if the Company is acquired in a merger or other business
combination, each Right will entitle its holder to purchase, at the Right's
exercise price, shares of the acquiring Company's Common Stock (or stock of the
Company if it is the surviving corporation) having a market value of twice the
Right's exercise price.
The Rights may be redeemed at the option of the Board of Directors for $.01 per
Right at any time before a person or group of persons accumulates 15% or more of
our Common Stock. At any time after a person or group of persons acquires 15%
but before the person or group of persons has acquired 50% of outstanding shares
of our Common Stock, the Board may exchange each Right for one share of Common
Stock. The Board may amend the Rights at any time without shareholder approval.
The Rights will expire by their terms on May 6, 2007.
NOTE M -- STOCK OPTIONS
As previously disclosed in our 2002 Proxy Statement and other filings with the
U.S. Securities and Exchange Commission, TechTeam Global, Inc. and its President
and Chief Executive Officer, William F. Coyro, Jr., entered into an employment
agreement on August 9, 2001. The terms of the agreement provide 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. Pursuant to this options grant in his employment
agreement, Dr. Coyro exercised his option to purchase 80,000 shares of the
Company's stock on October 10, 2002 and an additional 10,000 shares on October
28, 2002.
Accounting Principles Board Opinion No. 25 requires that we accrue as expense a
charge that is 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 represents 100,000 options multiplied by $6.85
(closing price of the stock on October 1, 2002) less $2.75 (the option exercise
price). These charges were recorded in selling, general, and administrative
expenses.
Our 1990 Nonqualified Stock Option Plan authorized the grant of options to
management personnel and others for up to 3,800,000 shares of our common stock.
Generally, options granted have six-year terms and vest and become exercisable
ratably over the first five years of their term.
Our 1996 Non-Employee Directors Stock Plan has authorized the grant of options
to non-employee directors of the company for our common stock. Generally,
options granted have a ten-year term and vest and become exercisable immediately
from the date of the grant. Currently options for 270,000 shares of our common
stock remain unexercised.
39
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE M -- STOCK OPTIONS (continued)
A summary of our stock option activity and related information is as follows:
- -----------------------------------------------------------------------------------------------------------------------
EMPLOYEES DIRECTORS OTHERS
------------------------ ----------------------- -----------------------
TOTAL AVERAGE AVERAGE AVERAGE
SHARES SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- ---------- ------- ----------- ------- -----------
Outstanding at
January 1, 2000 ..... 1,157,214 944,361 $ 11.09 135,000 $ 15.11 77,853 $ 6.72
Granted.................. 337,000 187,000 5.50 60,000 5.75 90,000 7.43
Exercised................ (5,600) (5,600) 4.63 -- -- -- --
Canceled................. (135,427) (135,427) 8.82 -- -- -- --
--------- --------- ---------- ------- ----------- ------- -----------
Outstanding at
December 31, 2000 ... 1,353,187 990,334 10.43 195,000 12.23 167,853 7.10
Granted.................. 535,000 475,000 2.73 60,000 3.06 -- --
Exercised................ -- -- -- -- -- -- --
Canceled................. (251,061) (233,208) 8.80 (15,000) 5.00 (2,853) 35.05
--------- --------- ---------- ------- ----------- ------- -----------
Outstanding at
December 31, 2001 ... 1,637,126 1,232,126 7.77 240,000 10.39 165,000 6.62
Granted.................. 342,321 262,321 4.78 80,000 4.05 -- --
Exercised................ (230,100) (210,100) 4.06 (20,000) 4.05 -- --
Canceled................. (548,227) (468,227) 10.83 (30,000) 11.52 (50,000) 5.00
--------- --------- ---------- ------- ----------- ------- -----------
Outstanding at
December 31, 2002 ... 1,201,120 816,120 $ 6.01 270,000 $ 8.86 115,000 $ 7.32
The weighted fair value of options issued (computed using the Black-Scholes
option valuation model) in 2002, 2001, and 2000 were $2.78, $0.89, and $1.83,
respectively.
The following table summarizes certain information about stock options
outstanding at December 31, 2002:
- --------------------------------------------------------------------------------------------------------------
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 -- $ 4.15 435,520 4.90 $ 3.54 222,500 $ 3.18
5.00 -- 10.31 715,600 2.60 7.53 481,650 7.36
23.00 -- 25.75 50,000 4.40 24.10 50,000 24.10
The Company granted options to purchase 90,000 shares of common stock to
consultants in 2000. No options were granted to consultants in 2001 or 2002. The
estimated fair value of such options was expensed over the contract benefit
period.
40
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE N -- STOCK REPURCHASE PROGRAMS
The Company has acquired shares of its common stock in connection with
authorized stock repurchase programs.
In May of 2000, we announced a stock repurchase program to repurchase up to
2,000,000 shares of common stock. In October of 2000, we extended this program
to repurchase an additional 2,000,000 shares. During 2000, we repurchased
2,605,150 shares for $9,069,000 inclusive of commission expense, and in 2001, we
repurchased 229,000 shares for $609,000, inclusive of commission expense.
In August 2002, we announced a stock repurchase program to repurchase up to
2,000,000 shares of common stock. Under this program, we repurchased 470,600
shares for $3,422,701, inclusive of commission expense.
NOTE O -- 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
European segment provides services in the corporate help desk services and the
technical staffing segments. 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. We evaluate
performance based on stand-alone operating segment gross profit.
41
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE O -- SEGMENT REPORTING (continued)
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)
2002
Revenues.............. $ 59,106 $ 10,153 $ 7,197 $ 1,077 $ 77,533 $ 9,102 $ 86,635
Gross profit.......... 16,092 1,482 1,657 224 19,455 602 20,057
Depreciation and
amortization...... 2,907 21 10 9 2,947 6,747 9,694
Segment assets........ 16,695 1,919 1,350 216 20,180 7,757 27,937
Expenditures for
property.......... 2,423 16 7 6 2,452 -- 2,452
2001
Revenues.............. $ 51,316 $ 14,522 $ 6,918 $ 2,005 $ 74,761 $ 19,849 $ 94,610
Gross profit (loss)... 14,820 2,242 2,168 260 19,490 (657) 18,833
Depreciation and
amortization...... 2,064 419 14 57 2,554 17,217 19,771
Segment assets........ 14,575 2,307 2,803 518 20,203 19,647 39,850
Expenditures for
property.......... 1,767 251 9 -- 2,027 -- 2,027
2000
Revenues.............. $ 64,769 $ 18,874 $ 9,679 $ 3,485 $ 96,807 $ 27,349 $ 124,156
Gross profit.......... 16,931 3,154 2,694 400 23,179 5,117 28,296
Depreciation and
amortization...... 1,584 272 70 138 2,064 20,294 22,358
Segment assets........ 13,536 3,134 3,832 976 21,478 45,732 67,210
Expenditures for
property.......... 1,853 985 119 234 3,191 -- 3,191
Geographic information is presented in the table below:
- --------------------------------------------------------------------------------------------------------------------
GEOGRAPHIC INFORMATION
----------------------------------------------------------------------------------------------
2002 2001 2000
---------------------------- ---------------------------- -----------------------------
REVENUE ASSETS REVENUE ASSETS REVENUE ASSETS
------------ ------------ ------------ ------------ ------------ ------------
(In thousands)
United States.... $ 69,438 $ 71,731 $ 82,095 $ 81,676 $ 113,940 $ 96,069
Europe 17,197 10,133 12,515 5,445 10,216 4,705
------------ ------------ ------------ ------------ ------------ ------------
Total............ $ 86,635 $ 81,864 $ 94,610 $ 87,121 $ 124,156 $ 100,774
============ ============ ============ ============ ============ ============
42
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE O -- SEGMENT REPORTING (continued)
A reconciliation of the totals reported for the operating segments to the
applicable line item in the consolidated financial statements is as follows:
- -------------------------------------------------------------------------------------------------------------------
2002 2001 2000
-------------------------------------------------
(In thousands)
Depreciation and amortization
Total for reportable segments............................. $ 9,694 $ 19,771 $ 22,358
Corporate assets.......................................... 1,398 3,404 3,796
------------- ------------- -------------
Total depreciation and amortization.................... $ 11,092 $ 23,175 $ 26,154
============= ============= =============
Assets
Total assets for reportable segments...................... $ 27,937 $ 39,850 $ 67,210
Corporate assets.......................................... 53,927 47,271 33,564
------------- ------------- -------------
Total assets........................................... $ 81,864 $ 87,121 $ 100,774
============= ============= =============
Expenditures for property
Total for reportable segments............................. $ 2,452 $ 2,027 $ 3,191
Corporate assets.......................................... 1,003 698 3,491
------------- ------------- -------------
Total expenditures for property........................ $ 3,455 $ 2,725 $ 6,682
============= ============= =============
NOTE P -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly consolidated results of operations are summarized as follows:
- -------------------------------------------------------------------------------------------------------------------
QUARTER ENDED
------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------- -------------- ------------- --------------
(In thousands, except per share data)
2002
Revenues.................................. $ 22,947 $ 21,902 $ 21,132 $ 20,654
Gross profit.............................. 5,154 5,170 5,519 4,214
Income (loss) before tax provision........ 1,174 766 1,241 (156)
Income (loss) before cumulative effect of
accounting change................ 642 418 696 (358)
Net income (loss)......................... (481) 418 696 (358)
Earnings (loss) per share
Basic............................... $ (.04) $ .04 $ .06 $ (.03)
Diluted............................. $ (.04) $ .04 $ .06 $ (.03)
2001
Revenues.................................. $ 25,514 $ 23,521 $ 22,167 $ 23,408
Gross profit.............................. 5,946 5,498 3,976 3,413
Income (loss) before tax provision........ 501 (663) (2,066) (1,522)
Income (loss) before cumulative effect of
accounting change................ 225 (913) (1,895) (995)
Net income (loss)......................... 225 (913) (1,895) (995)
Earnings (loss) per share
Basic............................... $ .02 $ (.09) $ (.18) $ (.09)
Diluted............................. $ .02 $ (.09) $ (.18) $ (.09)
43
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE P -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (continued)
Earnings in the fourth quarter of 2002 were decreased by approximately $280,000
due to changes from the estimated annualized effective tax rate used through the
third quarter 2002.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
There were no changes in accountants, disagreements, or other events requiring
reporting under this Item.
44
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information to be set forth under the caption "Election of Directors and
Management Information" in the Proxy Statement dated on or about March 24, 2003,
relating to the Annual Meeting of Shareholders to be held on May 14, 2003, (the
"Proxy Statement"), is incorporated herein by reference.
The information to be set forth under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Proxy Statement is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information to be set forth under the caption "Compensation of Executive
Officers" in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information to be set forth under the caption "Election of Directors and
Management Information -- Security Ownership of Certain Beneficial Holders and
Management" in the Proxy Statement is incorporated herein by reference.
- ---------------------------------------------------------------------------------------------------------------------------------
EQUITY COMPENSATION PLAN INFORMATION
---------------------------------------------------------------------------------------------
(a) (b) (c)
----------------------------- ----------------------------- ------------------------------
Plan Category Number of securities
remaining available for future
Number of securities to be issuance under equity
issued upon exercise of Weighted-average exercise compensation plans
outstanding options, warrants price of outstanding options, (excluding securities
and rights (1) warrants and rights reflected in column (a))
- ----------------------------------- ----------------------------- ----------------------------- ------------------------------
Equity compensation plans
approved by security holders..... 270,000 $8.86 672,400
Equity compensation plans not
approved by security holders..... 931,120 6.17 1,107,993
--------- ----- ---------
Total.............................. 1,201,120 $6.78 1,780,393
========= ===== =========
(1) Represents options to purchase shares of the Company's common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information to be set forth under the caption "Compensation of Executive
Officers -- Certain Relationships and Related Transactions" in the Proxy
Statement is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
As of December 31, 2002, an evaluation was performed under the supervision and
with the participation of the Company's management, including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operations of the Company's disclosure controls and procedures. Based
upon that evaluation, the Company's Management, including the CEO and CFO,
concluded that the Company's disclosure controls and procedures were effective
as of December 31, 2002. There have been no significant changes in the company's
internal controls or in other factors that could significantly affect internal
controls subsequent to December 31, 2002.
45
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a) Certain documents are filed as part of this Report on Form 10-K.
(1) Financial Statements "Item 8 Financial Statements and
Supplementary Data" and Item 14 (d) below.
PAGE
---------
Report of Ernst & Young LLP, Independent Auditors........................................................... 21
Consolidated Statements of Operations -- Years Ended December 31, 2002, 2001, and 2000...................... 22
Consolidated Statements of Comprehensive Income / (Loss) -- Years Ended December 31,
2002, 2001, and 2000.................................................................................... 23
Consolidated Statements of Financial Position -- December 31, 2002 and December 31, 2001.................... 24-25
Consolidated Statements of Shareholders' Equity -- Years Ended December 31, 2002, 2001, and 2000............ 26
Consolidated Statements of Cash Flows -- Years Ended December 31, 2002, 2001, and 2000...................... 27
Notes to the Consolidated Financial Statements.............................................................. 28-44
(1) Financial Statement Schedules
None
(2) Exhibits.
- ----------------------------------------------------------------------------------------------------------------------
REFERENCE *
EXHIBIT OR PAGE
NUMBER EXHIBIT NUMBER
------- ------------------------------------------------------------------------------- -----------
3.1 Certification of Incorporation of TechTeam Global, Inc. filed with the Delaware 55-56
Secretary of State on September 14, 1987.
3.2 Certificate of Amendment dated November 27, 1987 to our Certificate of Incorporation. 57
3.3 Certificate of Amendment dated May 8, 2002 to Certificate of Incorporation 58
3.4 Bylaws of TechTeam Global, Inc. as Amended and Restated January 7, 2003. 59-71
4.1 Rights Agreement dated as of May 6, 1997, between TechTeam Global, Inc. and U.S. Stock *6
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.
10.1 Lease Agreement for office space in Southfield, Michigan known as the Cumberland Tech *2
Center between the Company and Eleven Inkster Associates dated September 29, 1993.
10.2 Lease Amendment for office space in Southfield, Michigan known as the Cumberland Tech *2
Center between the Company and Eleven Inkster Associates dated December 7, 1993.
10.3 Lease Amendment for office space in Southfield, Michigan known as the Cumberland Tech *3
Center between the Company and Eleven Inkster Associates dated January 23, 1995.
10.4 Third Amendment Lease Agreement dated March 29, 1996 for office space in Southfield, *4
Michigan between Eleven Inkster Associates and the Company.
- ----------------------------------------------------------------------------------------------------------------------
46
REFERENCE *
EXHIBIT OR PAGE
NUMBER EXHIBIT NUMBER
------- ------------------------------------------------------------------------------- -----------
10.5 Fourth Amendment Lease Agreement dated March 13, 2000 for office space in Southfield, *8
Michigan between Eleven Inkster Associates and the Company.
10.6 Sublease for office space in Southfield, Michigan known as the Cumberland Tech Center *8
between Dura Operating Corporation and the Company dated August 13, 2000.
10.7 Lease for office space in Dearborn, Michigan between the Company and Dearborn Atrium *5
Associates Limited Partnership dated November 18, 1996.
10.8 Lease Agreement for office space in Davenport, Iowa known as the 1010 Shopping Center *7
between the Company and Partnership 1010, L.L.P. dated August 28, 1999.
10.9 1990 Nonqualified Stock Option Plan. *1
10.10 1996 Nonemployee Directors Stock Plan. *4
10.11 Supplemental Retirement Plan dated October 1, 2000. *7
10.12 Employment Agreement Relating to Change of Control. *8
10.13 Assignment of Credit Facilities and Financing Documents between TechTeam Cyntergy, *9
L.L.C. and Bank of America dated September 28, 2001.
10.14 Financing and Security Agreement between Cyntergy Corporation and Bank of America *9
dated January 29, 1999.
10.15 Agreement for Conveyance in Lieu of Foreclosure and Other Matters between TechTeam *9
Cyntergy, L.L.C. and Robert N. Grimes and Beth Grimes dated September 28, 2001.
10.16 Employment Agreement between TechTeam Global, Inc. and William F. Coyro, Jr. dated 72-75
January 1, 2003.
10.17 Agreement with Ford Motor Company dated July 31, 2002. *10
10.18 Employment Agreement between TechTeam Europe, NV and Christoph Neut dated October 2, 76-78
1996
21 List of subsidiaries of TechTeam Global, Inc. 79
23.1 Consent of Ernst & Young LLP 54
99.1 Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 80
99.2 Written Statement of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 81
- ----------------------------------------------------------------------------------------------------------------------
47
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 Annual Report on Form 10-K for the year ended December 31, 1994.
*4 Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 1995.
*4 Incorporated by reference to our Registration Statement on Form S-3 (Registration No. 333--10687).
*5 Incorporated by reference to our Annual Report on Form 10-K dated December 31, 1996.
*6 Incorporated by reference to our Registration Statement on Form 8-A dated May 9, 1997.
*7 Incorporated by reference to our Annual Report on Form 10-K dated March 31, 2001.
*8 Incorporated by reference to our Report on Form 10-Q dated August 14, 2001.
*9 Incorporated by reference to our Report on Form 10-Q dated November 14, 2001.
*10 Incorporated by reference to our Report on Form 10-Q dated August 8, 2002.
- -------------------------------------------------------------------------------------------------------------------
Exhibits 10.9, 10.12, 10.16, and 10.18 represent management, contracts, and
compensatory plans.
b) Reports on Form 8-K
(i) Announcement of the Company's earnings for the third quarter of
2002 dated November 12, 2002.
(ii) Announcement of the election of Larry W. Granger as Vice President
of Professional Services dated December 11, 2002.
ITEM 16. PRINCIPAL ACCOUNTANT, FEES, AND SERVICES
The information to be set forth under the caption "Fees of the Independent
Auditors for 2002 and 2001" in the Proxy Statement is incorporated herein by
reference.
48
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 14, 2003 By: /s/David W. Morgan
-------------- ------------------ David W. Morgan
Chief Financial Officer and
Treasurer (Principal Financial
and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities indicated on March
14, 2003.
/s/William F. Coyro, Jr. President, Chief Executive Office
- ------------------------------- and Director (Principal Executive Officer)
William F. Coyro, Jr.
/s/Kim A. Cooper Director
- -------------------------------
Kim A. Cooper
/s/G. Ted Derwa Director
- -------------------------------
G. Ted Derwa
/s/Peter T. Kross Director
- -------------------------------
Peter T. Kross
/s/Conrad L. Mallett, Jr. Director
- -------------------------------
Conrad L. Mallett, Jr
/s/Wallace D. Riley Director
- -------------------------------
Wallace D. Riley
/s/Gregory C. Smith Director
- -------------------------------
Gregory C. Smith
/s/Richard G. Somerlott Director
- -------------------------------
Richard G. Somerlott
/s/Ronald T. Wong Director
- -------------------------------
Ronald T. Wong
49
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 Annual Report on Form 10-K of TechTeam Global, Inc.;
2. Based on my knowledge, this Annual 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 Annual
Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual 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 Annual 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 Annual 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 Annual Report (the "Evaluation
Date"); and
(c) presented in this Annual 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 (or persons performing the equivalent
functions):
(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
Annual 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: March 12, 2003 /s/ William F. Coyro Jr.
-------------------------
William F. Coyro, Jr.
50
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 Annual Report on Form 10-K of TechTeam Global, Inc.;
2. Based on my knowledge, this Annual 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 Annual
Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Annual 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 Annual 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 Annual 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 Annual Report (the "Evaluation
Date"); and
(c) presented in this Annual 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 (or persons performing the equivalent
functions):
(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
Annual 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: March 12, 2003 /s/ David W. Morgan
--------------------
David W. Morgan
51
INDEX OF EXHIBITS
EXHIBIT
NUMBER EXHIBIT
3.1 Certification of Incorporation of TechTeam Global, Inc. filed
with the Delaware Secretary of State on September 14, 1987.
3.2 Certificate of Amendment dated November 27, 1987 to
Certificate of Incorporation.
3.3 Certificate of Amendment dated May 8, 2002 to Certificate of
Incorporation.
3.4 Bylaws of TechTeam Global, Inc. as Amended and Restated
January 7, 2003.
4.1 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.
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 29, 1993.
10.2 Lease Amendment for office space in Southfield, Michigan known
as the Cumberland Tech Center between the Company and Eleven
Inkster Associates dated December 7, 1993.
10.3 Lease Amendment for office space in Southfield, Michigan known
as the Cumberland Tech Center between the Company and Eleven
Inkster Associates dated January 23, 1995.
10.4 Third Amendment Lease Agreement dated March 29, 1996 for
office space in Southfield, Michigan between Eleven Inkster
Associates and the Company.
10.5 Fourth Amendment Lease Agreement dated March 13, 2000 for
office space in Southfield, Michigan between Eleven Inkster
Associates and the Company.
10.6 Sublease for office space in Southfield, Michigan known as the
Cumberland Tech Center between Dura Operating Corporation and
the Company dated August 13, 2000.
52
INDEX OF EXHIBITS (continued)
EXHIBIT
NUMBER EXHIBIT
10.7 Lease for office space in Dearborn, Michigan between the
Company and Dearborn Atrium Associates Limited Partnership
dated November 18, 1996.
10.8 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.
10.9 1990 Nonqualified Stock Option Plan.
10.10 1996 Nonemployee Directors Stock Plan.
10.11 Supplemental Retirement Plan dated October 1, 2000.
10.12 Employment Agreement Relating to Change of Control.
10.13 Assignment of Credit Facilities and Financing Documents
between TechTeam Cyntergy, L.L.C. and Bank of America dated
September 28, 2001.
10.14 Financing and Security Agreement between Cyntergy Corporation
and Bank of America dated January 29, 1999.
10.15 Agreement for Conveyance in Lieu of Foreclosure and Other
Matters between TechTeam Cyntergy, L.L.C. and Robert N. Grimes
and Beth Grimes dated September 28, 2001.
10.16 Employment Agreement between TechTeam Global, Inc. and William
F. Coyro, Jr. dated January 1, 2003.
10.17 Agreement with Ford Motor Company dated July 31, 2002.
10.18 Employment Agreement between TechTeam Europe, NV and Christoph
Neut dated October 2, 1996.
21 List of subsidiaries of TechTeam Global, Inc.
23.1 Consent of Ernst & Young LLP
99.1 Statement of the Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350
99.2 Statement of the Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350
53