UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Current Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): JANUARY 3, 2005
TECHTEAM GLOBAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-16284 38-2774613
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
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
----------------------------------------------------------
(Former name or former address if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230 .425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act
(17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT
See discussion in Item 2.01.
ITEM 2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS
As previously reported in the Current Report on Form 8-K filed on
January 5, 2005, on January 3, 2005, TechTeam Global, Inc. (the
"Company"), through its wholly-owned subsidiary Digital Support
Corporation ("DSC"), completed the acquisition of all of the
outstanding stock of Sytel, Inc. ("Sytel") from Sytel's
shareholders, Jeannette Lee White, Yong S. Lee, Evergreen Limited
Partnership, Chase Investments, LLC, The Bullis School, Inc., and
holders of stock and stock options to acquire stock issued under
the Sytel, Inc. Omnibus Stock Plan ("Selling Shareholders"). The
Company is now submitting the financial statements of the
business acquired.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of business acquired.
(b) Pro forma financial information.
(c) Exhibits.
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(a) Financial statements of business acquired.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Sytel, Inc.
We have audited the accompanying consolidated balance sheet of Sytel, Inc. as of
December 31, 2004, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sytel, Inc. at
December 31, 2004, and its consolidated results of operations and cash flows for
the year then ended in conformity with accounting principles generally accepted
in the United States.
/s/ RUBINO & MCGEEHIN, CHARTERED
February 16, 2005
Bethesda, MD
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SYTEL, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2004
ASSETS
Current assets
Cash and cash equivalents................................................... $ 31,674
Accounts receivable, net.................................................... 11,079,955
Deferred income taxes....................................................... 505,000
Other receivables........................................................... 1,629
Prepaid expenses and other current assets................................... 64,664
---------------
Total current assets.................................................... 11,682,922
Property and equipment, net..................................................... 169,452
Deferred income taxes........................................................... 2,000
Deposits........................................................................ 78,924
Stockholder receivable.......................................................... 103,824
---------------
Total assets............................................................ $ 12,037,122
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Line of credit.............................................................. $ 175,968
Accounts payable............................................................ 7,757,694
Accrued payroll and related liabilities..................................... 1,592,089
Accrued expenses and other liabilities...................................... 690,596
Income taxes payable........................................................ 454,000
Note payable................................................................ 120,067
---------------
Total current liabilities............................................... 10,790,414
Deferred rent................................................................... 127,360
---------------
Total liabilities....................................................... 10,917,774
---------------
Stockholders' equity
Class A common stock, $0.01 par value, 10,000,000 shares authorized,
5,570,441 shares issued and outstanding................................. 55,704
Class B common stock, $0.01 par value, 6,666,667 shares authorized,
2,185,714 shares issued and outstanding................................. 21,857
Additional paid-in capital.................................................. 298,715
Retained earnings........................................................... 743,072
---------------
Total stockholders' equity.............................................. 1,119,348
---------------
Total liabilities and stockholders' equity.............................. $ 12,037,122
===============
The accompanying notes are an integral part of these
consolidated financial statements.
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SYTEL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2004
Contract revenue................................................................ $ 28,753,682
Cost of contract revenue........................................................ 21,154,333
---------------
Gross profit........................................................... 7,599,349
Selling, general and administrative............................................. 4,955,306
---------------
Income from operations................................................. 2,644,043
Interest income................................................................. 10,433
Interest expense................................................................ (76,845)
---------------
Income from continuing operations before taxes.................................. 2,577,631
Provision for income taxes...................................................... 904,769
---------------
Income from continuing operations............................................... 1,672,862
Discontinued operations -- Loss from discontinued segment,
net of tax expense of $800................................................. (7,361)
---------------
Net income...................................................................... $ 1,665,501
===============
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
SYTEL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
YEAR ENDED DECEMBER 31, 2004
Common Stock Additional Retained Total
------------------------- Paid-in Earnings Stockholders'
Class A Class B Capital (Deficit) Equity (Deficit)
------- ------- ------- --------- -----------------
Balance at December 31, 2003............... $ 55,704 $ 21,857 $ 298,715 $ (922,429) $ (546,153)
Net income................................. -- -- -- 1,665,501 1,665,501
-------------- -------------- ---------- ------------- ------------
Balance at December 31, 2004............... $ 55,704 $ 21,857 $ 298,715 $ 743,072 $ 1,119,348
============== ============== ========== ============= ============
The accompanying notes are an integral part of these consolidated
financial statements.
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SYTEL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2004
Cash flows from operating activities:
Net income....................................................................................... $ 1,665,501
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization................................................................ 85,215
Deferred income tax benefit.................................................................. (31,000)
Changes in operating assets and liabilities-
Accounts receivable, net................................................................. (2,923,303)
Other receivables........................................................................ 36,887
Prepaid expenses and other current assets................................................ 31,918
Deposits................................................................................. 15,379
Stockholder receivable................................................................... (69,015)
Accounts payable......................................................................... 4,189,738
Accrued payroll and related liabilities.................................................. 419,902
Accrued expenses and other liabilities................................................... (199,838)
Income taxes payable..................................................................... (128,606)
Deferred rent............................................................................ (35,317)
-----------------
Net cash provided by operating activities........................................................ 3,057,461
-----------------
Cash flows from investing activities-
Purchases of property and equipment.............................................................. (111,763)
-----------------
Cash flows from financing activities:
Net repayments on line of credit................................................................. (3,026,078)
Payments on notes payable........................................................................ (175,000)
-----------------
Net cash used by financing activities............................................................ (3,201,078)
-----------------
Net decrease in cash and cash equivalents............................................................ (255,380)
Cash and cash equivalents, beginning of year......................................................... 287,054
-----------------
Cash and cash equivalents, end of year............................................................... $ 31,674
=================
The accompanying notes are an integral part of these consolidated
financial statements.
-7-
SYTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2004
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Sytel, Inc. (the "Company") was incorporated on November 16, 1987, in the state
of Maryland. The Company provides information technology, network engineering,
outsourcing services and systems integration services and sales principally
under prime contracts and subcontracts with agencies and departments of the U.S.
Government, as well as to commercial customers.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, Creative Networks, Inc. ("CNI"). All
significant inter-company transactions and balances have been eliminated in
consolidation. CNI's operations effectively ceased in September 2001 and have
been reflected as discontinued operations in the statement of operations (see
Note 2).
USE OF ESTIMATES
The preparation of financial statements in conformity with United States
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenue and expense during the reporting
period. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents. In addition, bank
deposits often exceed federally-insured limits. Management, however, does not
consider this a significant concentration of credit risk.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated over the shorter of
their estimated useful lives, which range from three to thirty years, or their
lease term. Capital leases are recorded at their net present value at the
inception of the lease. All assets acquired prior to December 31, 1995, are
depreciated using an accelerated method. The straight-line method of
depreciation has been used for all assets acquired after January 1, 1996.
REVENUE RECOGNITION
Revenue from cost-plus-fixed-fee contracts is recognized on the basis of direct
and indirect costs incurred and an allocable portion of the fixed fee. Revenue
from fixed-price contracts is recognized as the work is performed, with costs
and estimated profits recorded on the basis of direct and indirect costs
incurred. Revenue from time and materials contracts is recognized based on
fixed-hourly rates for direct labor expended. The fixed rate includes direct
labor, indirect expenses, and profits.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses become
evident. Changes in job performance, job conditions and estimated profitability,
including final contract settlement, may result in revisions to costs and income
and are recognized in the period in which the revisions become evident.
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SYTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
YEAR ENDED DECEMBER 31, 2004
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Deferred income taxes represent temporary differences in the recognition of
certain items for income tax and financial reporting purposes and are determined
using enacted rates expected to be in effect during the year in which the
differences reverse. Realization of deferred tax assets depends upon sufficient
levels of future taxable income. If at any time we believe that current or
future taxable income does not support the realization of deferred tax assets, a
valuation allowance is provided.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation awards granted to employees
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and
related interpretations. The effect on net income had compensation costs been
recognized based on the fair value method prescribed by Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," is as follows:
Reported net income.......................................................... $ 1,665,501
Add: Total stock-based compensation expense included in reported
net income, net of tax................................................... -
Deduct: Total stock-based compensation expense determined under
the fair value method for all awards, net of tax......................... (67,076)
-----------------
Pro forma net income......................................................... $ 1,598,425
=================
The fair value of stock-based compensation was estimated as of the date of grant
using the Black-Scholes option pricing model with the following assumptions in
2004: risk-free interest rate of 4.77%; volatility factor of 40%, and an
expected life of 10 years. Pro forma compensation cost is recognized on a
straight-line basis.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest and income taxes totaled approximately $77,000 and
$1,066,000, respectively, in 2004.
NOTE 2 -- DISCONTINUED OPERATIONS
On November 10, 1999, the Company purchased all of the shares of CNI. In
September 2001, CNI's operations effectively ceased as management closed their
California office and terminated the remaining employees as they had no ongoing
contracts. The disposal of CNI has been accounted for as discontinued
operations, and accordingly, its operating results have been segregated and
reported separately from continuing operations. CNI had no revenue and a net
loss of $(7,361) for the year ended December 31, 2004. CNI had net assets of
approximately $38,000 at December 31, 2004.
-9-
SYTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 2004
NOTE 3 -- ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at December 31, 2004:
Billed..................................... $ 6,065,309
Unbilled................................... 5,414,385
Allowance for doubtful accounts............ (399,739)
---------------
Net accounts receivable.................... $ 11,079,955
===============
Billed receivables are expected to be collected within the next fiscal year.
Unbilled receivables consist of retained fees, costs in excess of billings due
to the difference between provisional and actual indirect cost rates, and
amounts billable after year-end. Approximately $127,000 of unbilled receivables
at December 31, 2004 will be invoiced upon completion of the contracts and/or
government approval of actual indirect costs and, accordingly, are expected to
be collected after the next fiscal year.
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 2004:
Furniture and equipment................................... $ 186,563
Computer equipment and software........................... 999,446
Leasehold improvements.................................... 60,316
Equipment held under capital leases....................... 128,525
---------------
1,374,850
Less -- Accumulated depreciation and amortization......... (1,205,398)
---------------
Net property and equipment................................ $ 169,452
===============
NOTE 5 -- NOTE PAYABLE AND LINE OF CREDIT
At December 31, 2004, the Company has an available line of credit with a bank
whereby the Company may borrow up to $5,500,000. Borrowings are based on
accounts receivable, secured by substantially all of the Company's assets, and
guaranteed by the Company's majority stockholder. The line of credit bears
interest, payable monthly at the LIBOR daily floating rate plus an applicable
margin, which fluctuates based on certain financial covenants (4% at December
31, 2004). Under the line of credit, $500,000 can be reserved for letters of
credit, of which $17,572 were outstanding at December 31, 2004. Outstanding
borrowings under the line of credit totaled $175,968 at December 31, 2004. The
Company must comply with certain financial and other covenants as part of the
line of credit.
At December 31, 2004, the note payable consists of $120,067 payable to
Montgomery County, Maryland Economic Development Fund, the terms of which were
modified during 2003. The note is payable in 17 quarterly principal and interest
installments beginning February 15, 2004, at 5% per annum, provided that the
Company maintains a premises and a minimum employment base of full-time
employees in Montgomery County. No payments were made during 2004.
-10-
SYTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 2004
NOTE 6 - COMMON STOCK
The Class B common stock is held by the Company's majority stockholder's former
husband pursuant to a divorce settlement. Class B common stock is similar to
Class A common stock in all respects, except that it does not have voting
rights. In the event the Class B stockholder desires to transfer any of his
shares to a third party, the majority stockholder has the right of first refusal
or can cause the Company to redeem the shares.
In the event that the majority stockholder proposes to transfer more than 50% of
the total shares held by her, the majority stockholder has the right to cause
the Class B stockholder to tender for purchase his shares (see Note 12), and the
Class B stockholder has the right to sell to the purchaser his shares of Class B
common stock at the same price and on such other terms and conditions as granted
to the majority stockholder.
In the event of the death or disability of the Class B stockholder, the Class B
stockholder or his estate has the right to require the Company or the majority
stockholder to purchase all shares held by the Class B stockholder.
NOTE 7 - STOCK-BASED COMPENSATION
The Company has had the Omnibus Stock Plan (the "Plan") in effect, which was
adopted by the Board of Directors and approved by the sole stockholder in 1998.
The purpose of the Plan is to allow employees and eligible independent
contractors of the Company to participate in the shareholder value of the
Company, have a mutuality of interest with other shareholders of the Company and
enable the Company to attract, retain, and motivate key employees and officers.
The aggregate number of shares of common stock for which options may be granted
under the Plan shall not exceed 2,350,000 shares. Additional information with
respect to stock option activity is summarized as follows:
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
--------- --------------
Options outstanding at December 31, 2003............... 1,839,345 $0.54
Granted................................................ 101,450 $0.49
Exercised.............................................. - -
Cancelled.............................................. (107,890) $0.49
---------
Options outstanding at December 31, 2004............... 1,832,905 $0.54
=========
Weighted average fair value of options granted in 2004 $ 0.33
In connection with the change in ownership discussed in Note 12, the Plan was
terminated in January 2005. Substantially all options outstanding at December
31, 2004 were exercised by January 3, 2005.
-11-
SYTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 2004
NOTE 8 - INCOME TAXES
The components of income tax expense consist of the following for the year ended
December 31, 2004:
Current income taxes....................................................... $ 935,769
Deferred................................................................... (31,000)
----------
Income tax expense......................................................... $ 904,769
==========
The reconciliation of the provision for income taxes and the amount computed by
applying the United States Federal statutory income tax rate to income before
income taxes is as follows:
Provision for income taxes at Federal statutory rate....................... 34.0%
State income taxes, net of Federal income tax benefit...................... 4.9%
Nondeductible expense and other............................................ 1.4%
Reduction in valuation allowance........................................... (5.2)%
-----
Total provision for income taxes........................................... 35.1%
=====
Deferred tax assets and liabilities as of December 31, 2004 result from the
following temporary differences:
ASSET LIABILITY
----------- ---------
Depreciation and amortization........................... - $ (48,000)
Goodwill................................................ 467,000 -
Accruals and reserves................................... 422,000 -
Less - Valuation allowance.............................. (334,000) -
----------- ---------
Total $ 555,000 $ (48,000)
=========== =========
The valuation allowance on deferred tax assets was reduced in 2004 due to
management's reassessment of their realization given changes in facts and
circumstances.
NOTE 9 - RETIREMENT PLANS
The Company has a profit sharing plan (the "Plan") in accordance with Section
401(k) of the Internal Revenue Code. The Plan benefits substantially all
employees who have attained age 21 and provides for contributions by employees
of up to 15% of their eligible compensation. The Company matches 100% of
employee contributions up to 3% of their eligible compensation. The Company may
also contribute a discretionary amount determined annually by the Board of
Directors. The Company contributed approximately $102,000 to the Plan in 2004.
The Company also has a cafeteria plan which enables employees to make pre-tax
contributions to a flexible spending account for certain elected benefits.
The Company's employee benefit plans may be merged into the plans of the
acquiring company, or otherwise modified, as a result of the change in ownership
discussed in Note 12.
-12-
SYTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 2004
NOTE 10 -- COMMITMENTS
LEASES
The Company leases office space, automobiles and various office and computer
equipment under non-cancelable operating lease agreements. Rent expense was
approximately $1,350,000 in 2004. The Company also subleases space in one of its
buildings and recognizes rental income as an offset to rental expense. Sublease
income under these agreements was approximately $317,000 in 2004.
Minimum future payments and receipts under noncancelable operating leases and
subleases with initial terms of one year or more at December 31, 2004 are as
follows:
LEASE SUBLEASE
PAYMENTS RECEIPTS
------------- -----------
2005.............................................. $ 1,310,000 $ 210,000
2006.............................................. 750,000 100,000
2007.............................................. 30,000 --
2008.............................................. 20,000 --
2009.............................................. 10,000 --
------------- -----------
Total minimum lease payments...................... $ 2,120,000 $ 310,000
============= ===========
In November 2002, one of the Company's primary subleases ended, and the office
space was unoccupied. The Company accrued a lease loss of $113,000, representing
the present value of the difference between the remaining lease payments, which
expire August 2006, and the estimated fair market value of potential sublease
income. During 2004, the Company sublet the unoccupied space at less than
originally expected, and accordingly, a lease loss of $196,000 was accrued at
December 31, 2004.
GOVERNMENT AUDITS
A significant portion of the Company's revenues represent payments made by the
U.S. government and by contractors that have prime contracts with the U.S.
government. The costs for such contracts are subject to adjustment upon audit by
the Defense Contract Audit Agency ("DCAA"). DCAA has approved and issued final
indirect rates for the Company through December 31, 2001. The disallowance of
costs by government auditors could adversely affect the Company's financial
statements by reducing contract profitability. Management periodically reviews
its estimates of allowable and allocable costs based on the results of
government audits, and adjustments, if needed, are made in the year they are
determined. Management is of the opinion that any disallowances of costs for
unaudited fiscal years by the government auditors, other than amounts already
provided, will not materially affect the Company's financial statements.
-13-
SYTEL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 2004
NOTE 11 -- RELATED PARTY TRANSACTIONS
At December 31, 2004, the Company has executed four promissory note agreements
with an officer and a stockholder of the Company, whereby the Company agreed to
loan $59,000 to these individuals. The notes bear annual interest at 7% per
annum. The notes require annual payments of principal and interest of $14,201
and mature at various dates through July 31, 2007. In 2004, the Company issued
two additional one-year promissory notes to the same officer and another
shareholder of the Company. The principal amount of the notes totaled $80,000
and is required to be paid in full in 2005. At December 31, 2004, the balance of
all notes receivable was $103,824.
The Company incurred expense of approximately $375,000 in 2004 from one of its
subcontractors whose owner is a direct family member of the Company's majority
stockholder. At December 31, 2004, $93,854 was due to this subcontractor for
services provided.
NOTE 12 -- SUBSEQUENT EVENT
On January 3, 2005, the Company's stockholders entered into a Stock Purchase
Agreement in which all of the Company's outstanding common stock, including
exercised stock options, as of that date will be acquired by TechTeam Global,
Inc. The initial consideration received by the selling stockholders was
$18,500,000. In addition to the initial purchase price, the selling stockholders
will be paid an amount equal to 7% of Sytel's gross profit in excess of
$12,000,000 in 2005 and $14,000,000 in 2006. The purchase price is subject to a
working capital adjustment based upon the change in Sytel's net working capital
position from June 30, 2004 through January 3, 2005. The selling stockholders
were also paid at closing an estimated working capital adjustment of $1,600,000,
subject to final adjustment and settlement, in addition to the amounts reported
above.
-14-
(b) Pro forma financial information.
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The unaudited pro forma condensed combined financial information for TechTeam
Global, Inc. ("TechTeam") set forth below gives effect to the acquisition of
Sytel, Inc. ("Sytel") using the purchase method of accounting, after giving
effect to the adjustments described in the accompanying notes. The unaudited pro
forma condensed combined statements of operations includes only the results of
ongoing operations and excludes such impacts as nonrecurring items related to
the acquisition and synergies and related cost savings associated with the
integration of the acquisition.
The unaudited pro forma condensed combined statement of financial position as of
December 31, 2004 gives effect to the acquisition of Sytel as if it occurred on
that date. The unaudited pro forma condensed combined statements of operations
for the year ended December 31, 2004 give effect to the acquisition as if it
occurred on January 1, 2004. The unaudited pro forma condensed combined
financial information reflects certain adjustments.
The pro forma condensed combined financial information is for informational
purposes only and does not purport to represent what the consolidated financial
position or results of operations of TechTeam would actually have been if the
Sytel acquisition, in fact, had occurred on December 31, 2004, or at the
beginning of 2004, or to project the consolidated financial position or results
of operations as of any future date or any future period. The unaudited pro
forma financial information should be read together with (i) the TechTeam
Global, Inc. consolidated financial statements as of December 31, 2004 and 2003,
and for each of the three years in the period ended December 31, 2004, including
the notes thereto, included in TechTeam's Annual Report on Form 10-K for the
fiscal year ended December 31, 2004.
-15-
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL POSITION
AS OF DECEMBER 31, 2004
(UNAUDITED)
PRO FORMA
TECHTEAM PRO FORMA TECHTEAM
GLOBAL SYTEL ADJUSTMENTS GLOBAL
------------- ------------- ------------- -------------
(In thousands)
ASSETS
Current assets
Cash and cash equivalents...................... $ 40,436 $ 32 $ (5,814)(A) $ 34,654
Accounts receivable, net....................... 28,888 11,080 -- 39,968
Prepaid expenses and other..................... 2,385 66 -- 2,451
Deferred income taxes ......................... -- 505 -- 505
------------- ------------- ------------- -------------
Total current assets........................... 71,709 11,683 (5,814) 77,578
Property, equipment, and purchased software, net... 8,382 169 -- 8,551
Goodwill and other intangible assets, net.......... 8,440 -- 22,677(A) 31,117
Other assets....................................... 456 185 -- 641
------------- ------------- ------------- -------------
Total assets....................................... $ 88,987 $ 12,037 $ 16,863 $ 117,887
============= ============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of notes payable............... $ 27 $ 296 $ -- $ 323
Accounts payable............................... 3,707 7,758 -- 11,465
Accrued payroll, related taxes and
withholdings................................ 7,485 1,592 -- 9,077
Accrued expenses and other..................... 3,029 1,145 -- 4,174
Deferred revenue............................... 1,380 -- -- 1,380
------------- ------------- ------------- -------------
Total current liabilities...................... 15,628 10,791 -- 26,419
Long-term liabilities.............................. 1,699 127 17,982(A) 19,808
Redeemable convertible preferred stock............. 5,000 -- -- 5,000
Shareholders' equity
Common stock................................... 88 77 (77)(A) 88
Additional paid-in capital..................... 59,437 299 (299)(A) 59,437
Unamortized deferred compensation.............. (533) -- -- (533)
Retained earnings.............................. 4,793 743 (743)(A) 4,793
Accumulated other comprehensive income......... 2,875 -- -- 2,875
------------- ------------- ------------- -------------
Total shareholders' equity .................... 66,660 1,119 (1,119) 66,660
------------- ------------- ------------- -------------
Total liabilities and shareholders' equity......... $ 88,987 $ 12,037 $ 16,863 $ 117,887
============= ============= ============= =============
-16-
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004
(UNAUDITED)
PRO FORMA
TECHTEAM PRO FORMA TECHTEAM
GLOBAL SYTEL ADJUSTMENTS GLOBAL
---------- -------- ----------- ---------
(In thousands, except per share data)
Revenue............................................ $ 127,988 $ 28,754 $ - $ 156,742
Cost of services delivered......................... 97,401 21,155 - 118,556
---------- -------- ----------- ---------
Gross profit....................................... 30,587 7,599 - 38,186
Selling, general, and administrative expense....... 24,040 4,955 1,231 (B) 30,226
---------- -------- ----------- ---------
Operating income................................... 6,547 2,644 (1,231) 7,960
Other income....................................... 628 (66) (496)(C) 66
---------- -------- ----------- ---------
Income before income taxes......................... 7,175 2,578 (1,727) 8,026
Income tax provision............................... 2,547 905 (604)(D) 2,848
---------- -------- ----------- ---------
Income from continuing operations.................. 4,628 1,673 (1,123) 5,178
Income (loss) from discontinued operations,
net of tax..................................... 97 (7) - 90
---------- -------- ----------- ---------
Net income......................................... $ 4,725 $ 1,666 $ (1,123) $ 5,268
========== ======== =========== =========
Basic earnings per common and preferred share...... $ 0.51 $ 0.56
========== =========
Basic earnings per preferred share................. $ 0.51 $ 0.56
========== =========
Diluted earnings per common share.................. $ 0.49 $ 0.55
========== =========
Weighted average number of common shares
and common share equivalents outstanding
Basic -- common................................. 8,660 8,660
Basic -- preferred.............................. 690 690
Diluted -- common............................... 8,904 8,904
-17-
TECHTEAM GLOBAL, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
NOTE 1 -- PRO FORMA ADJUSTMENTS
Pro forma adjustments for the unaudited pro forma condensed combined statement
of financial position as of December 31, 2004, and the condensed combined
statements of operations for the year ended December 31, 2004, are as follows:
(A) To reflect the payment of the initial purchase price of $20,814,000,
including acquisition costs of $714,000, for the acquisition of all
of the outstanding stock of Sytel with $5,814,000 in cash and
$15,000,000 in long-term debt borrowings, to reflect the fair value
of identifiable intangible assets acquired and related long-term
deferred tax liabilities, and to reflect goodwill as the excess of
the purchase price paid over the estimated fair value of the
identified net assets acquired.
(B) To reflect the estimated amortization of identifiable intangible
assets resulting from the acquisition, which are amortized on a
straight-line basis over periods ranging from four to seven years.
As discussed in Note 2 below, the allocation of the purchase price
among the identifiable intangible assets and resulting amortization
expense is based on preliminary estimates of the fair market value
of those assets.
(C) To reduce interest income for the cash used in the acquisition of
Sytel and increased interest expense for the long-term debt issued
in the transaction.
(D) To record the related tax effects of the pro forma adjustments to
the condensed combined statements of operations at the estimated
effective tax rate of 35%.
NOTE 2 -- BASIS OF PRESENTATION
The total estimated purchase price for the acquisition has been allocated on a
preliminary basis to assets and liabilities based on management's best estimates
of their fair values with the excess purchase price over the net assets acquired
allocated to goodwill. The allocation of the purchase price among the
identifiable intangible assets is based on preliminary estimates of the fair
market value of those assets. Final determination of the allocation of the
purchase price will be based on independent appraisals that we expect to have
completed during the first quarter of 2005.
-18-
EXHIBIT INDEX
(c) Exhibits
The following exhibit is filed with this report:
23.1 Consent of Independent Registered Public Accounting Firm
E-1
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECHTEAM GLOBAL, INC.
By: /s/ Marc J. Lichtman
------------------------------------
Marc J. Lichtman, Vice President and
Chief Accounting Officer
Date: March 21, 2005
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