Unassociated Document
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
quarterly period ended June 30, 2010
Commission
File Number: 0-16284
TECHTEAM
GLOBAL, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
38-2774613
|
(State
or other jurisdiction of incorporation)
|
(I.R.S.
Employer Identification No.)
|
27335
West 11 Mile Road, Southfield, MI 48033
(Address
of principal executive offices) (Zip code)
Registrant’s
telephone number, including area code: (248) 357-2866
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90
days.
Yes x
No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes ¨ No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer ¨
|
Accelerated
filer x
|
Non-
accelerated filer ¨
|
Smaller
reporting company ¨
|
|
(Do
not check if smaller reporting
company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No
x
The
number of shares of the registrant's common stock outstanding at August 1, 2010
was 11,189,878.
TECHTEAM
GLOBAL, INC.
FORM
10-Q
TABLE
OF CONTENTS
|
|
Page
|
|
|
Number
|
PART
I – FINANCIAL INFORMATION
|
|
|
|
|
|
Item
1
|
|
Financial
Statements
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations —
|
|
|
|
|
Three
and Six Months Ended June 30, 2010 and 2009
|
|
3
|
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets —
|
|
|
|
|
As
of June 30, 2010 and December 31, 2009
|
|
4
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows —
|
|
|
|
|
Six
Months Ended June 30, 2010 and 2009
|
|
5
|
|
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
|
6
|
|
|
|
|
|
Item
2
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
17
|
|
|
|
|
|
Item
3
|
|
Quantitative
and Qualitative Disclosures About Market Risk
|
|
30
|
|
|
|
|
|
Item
4
|
|
Controls
and Procedures
|
|
30
|
|
|
|
|
|
PART
II – OTHER INFORMATION
|
|
|
|
|
|
Item
1
|
|
Legal
Proceedings
|
|
31
|
|
|
|
|
|
Item
1A
|
|
Risk
Factors
|
|
31
|
|
|
|
|
|
Item
2
|
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
34
|
|
|
|
|
|
Item
5
|
|
Other
Information
|
|
35
|
|
|
|
|
|
Item
6
|
|
Exhibits
|
|
35
|
|
|
|
|
|
SIGNATURES
|
|
36
|
PART
1 — FINANCIAL INFORMATION
ITEM
1 — FINANCIAL STATEMENTS
TECHTEAM
GLOBAL, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In
thousands, except per share data)
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
—
|
|
|
|
|
|
|
|
|
|
|
|
|
IT
Outsourcing Services
|
|
$ |
25,498 |
|
|
$ |
26,560 |
|
|
$ |
51,706 |
|
|
$ |
54,278 |
|
IT
Consulting and Systems Integration
|
|
|
2,935 |
|
|
|
3,165 |
|
|
|
5,855 |
|
|
|
7,069 |
|
Other
Services
|
|
|
3,261 |
|
|
|
3,975 |
|
|
|
6,986 |
|
|
|
8,240 |
|
Total
Commercial
|
|
|
31,694 |
|
|
|
33,700 |
|
|
|
64,547 |
|
|
|
69,587 |
|
Government
Technology Services
|
|
|
15,088 |
|
|
|
20,627 |
|
|
|
30,244 |
|
|
|
40,845 |
|
Total
revenue
|
|
|
46,782 |
|
|
|
54,327 |
|
|
|
94,791 |
|
|
|
110,432 |
|
Cost
of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IT
Outsourcing Services
|
|
|
19,520 |
|
|
|
20,765 |
|
|
|
39,791 |
|
|
|
42,065 |
|
IT
Consulting and Systems Integration
|
|
|
2,333 |
|
|
|
2,660 |
|
|
|
4,702 |
|
|
|
5,629 |
|
Other
Services
|
|
|
2,477 |
|
|
|
2,990 |
|
|
|
5,282 |
|
|
|
6,148 |
|
Total
Commercial
|
|
|
24,330 |
|
|
|
26,415 |
|
|
|
49,775 |
|
|
|
53,842 |
|
Government
Technology Services
|
|
|
11,375 |
|
|
|
14,566 |
|
|
|
23,485 |
|
|
|
29,316 |
|
Total
cost of revenue
|
|
|
35,705 |
|
|
|
40,981 |
|
|
|
73,260 |
|
|
|
83,158 |
|
Gross
profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
7,364 |
|
|
|
7,285 |
|
|
|
14,772 |
|
|
|
15,745 |
|
Government
Technology Services
|
|
|
3,713 |
|
|
|
6,061 |
|
|
|
6,759 |
|
|
|
11,529 |
|
Total
gross profit
|
|
|
11,077 |
|
|
|
13,346 |
|
|
|
21,531 |
|
|
|
27,274 |
|
Selling,
general and administrative expense
|
|
|
10,805 |
|
|
|
11,450 |
|
|
|
21,442 |
|
|
|
22,042 |
|
Restructuring
charge (credit)
|
|
|
(4
|
) |
|
|
(699
|
) |
|
|
3,140 |
|
|
|
(699
|
) |
Operating
income (loss)
|
|
|
276 |
|
|
|
2,595 |
|
|
|
(3,051
|
) |
|
|
5,931 |
|
Net
interest expense
|
|
|
(203
|
) |
|
|
(294
|
) |
|
|
(389
|
) |
|
|
(604
|
) |
Foreign
currency transaction gain (loss)
|
|
|
156 |
|
|
|
(413
|
) |
|
|
351 |
|
|
|
(648
|
) |
Income
(loss) before income taxes
|
|
|
229 |
|
|
|
1,888 |
|
|
|
(3,089
|
) |
|
|
4,679 |
|
Income
tax provision (benefit)
|
|
|
91 |
|
|
|
598 |
|
|
|
(574
|
) |
|
|
1,739 |
|
Net
income (loss)
|
|
$ |
138 |
|
|
$ |
1,290 |
|
|
$ |
(2,515
|
) |
|
$ |
2,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per common share
|
|
$ |
0.01 |
|
|
$ |
0.12 |
|
|
$ |
(0.24
|
) |
|
$ |
0.28 |
|
Diluted
earnings (loss) per common share
|
|
$ |
0.01 |
|
|
$ |
0.12 |
|
|
$ |
(0.24
|
) |
|
$ |
0.28 |
|
Weighted
average number of common shares and common
share equivalents outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
10,712 |
|
|
|
10,610 |
|
|
|
10,687 |
|
|
|
10,599 |
|
Diluted
|
|
|
10,712 |
|
|
|
10,642 |
|
|
|
10,687 |
|
|
|
10,624 |
|
TECHTEAM
GLOBAL, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except share data)
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
14,846 |
|
|
$ |
15,969 |
|
Accounts
receivable (less allowance of $903 at June 30, 2010 and $1,315 at December
31, 2009)
|
|
|
38,383 |
|
|
|
44,314 |
|
Prepaid
expenses and other current assets
|
|
|
4,159 |
|
|
|
3,766 |
|
Total
current assets
|
|
|
57,388 |
|
|
|
64,049 |
|
Property,
equipment and software, net
|
|
|
5,280 |
|
|
|
6,231 |
|
Goodwill
and other intangible assets, net
|
|
|
46,278 |
|
|
|
47,270 |
|
Deferred
income taxes
|
|
|
4,216 |
|
|
|
3,940 |
|
Other
assets
|
|
|
989 |
|
|
|
1,030 |
|
Total
assets
|
|
$ |
114,151 |
|
|
$ |
122,520 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$ |
4,065 |
|
|
$ |
4,074 |
|
Accounts
payable
|
|
|
5,026 |
|
|
|
5,130 |
|
Accrued
payroll and related taxes
|
|
|
9,500 |
|
|
|
8,486 |
|
Accrued
expenses
|
|
|
1,996 |
|
|
|
5,237 |
|
Other
current liabilities
|
|
|
2,015 |
|
|
|
4,168 |
|
Total
current liabilities
|
|
|
22,602 |
|
|
|
27,095 |
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities
|
|
|
|
|
|
|
|
|
Long-term
debt, less current portion
|
|
|
10,790 |
|
|
|
11,051 |
|
Other
long-term liabilities
|
|
|
1,174 |
|
|
|
745 |
|
Total
long-term liabilities
|
|
|
11,964 |
|
|
|
11,796 |
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
|
|
|
|
|
|
Preferred
stock, 5,000,000 shares authorized, no shares issued
|
|
|
— |
|
|
|
— |
|
Common
stock, $0.01 par value, 45,000,000 shares authorized, 11,200,053 and
11,118,309 shares issued and outstanding at June 30, 2010 and December 31,
2009, respectively
|
|
|
112 |
|
|
|
111 |
|
Additional
paid-in capital
|
|
|
80,765 |
|
|
|
79,762 |
|
Retained
earnings
|
|
|
212 |
|
|
|
2,726 |
|
Accumulated
other comprehensive income (loss)
|
|
|
(1,504
|
) |
|
|
1,030 |
|
Total
shareholders’ equity
|
|
|
79,585 |
|
|
|
83,629 |
|
Total
liabilities and shareholders’ equity
|
|
$ |
114,151 |
|
|
$ |
122,520 |
|
TECHTEAM
GLOBAL, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In
thousands)
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(2,515 |
) |
|
$ |
2,940 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,758 |
|
|
|
3,384 |
|
Non-cash
expense related to stock options and issuance of common stock and
restricted common stock
|
|
|
1,193 |
|
|
|
913 |
|
Other
|
|
|
(101
|
) |
|
|
755 |
|
Changes
in current assets and liabilities
|
|
|
442 |
|
|
|
10,517 |
|
Changes
in long-term assets and liabilities
|
|
|
238 |
|
|
|
(266
|
) |
Net
cash provided by operating activities
|
|
|
2,015 |
|
|
|
18,243 |
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
Purchase
of property, equipment and software
|
|
|
(1,008
|
) |
|
|
(1,141
|
) |
Cash
paid for acquisitions, net of cash acquired
|
|
|
(300
|
) |
|
|
(250
|
) |
Net
cash used in investing activities
|
|
|
(1,308
|
) |
|
|
(1,391
|
) |
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
Other
|
|
|
(189
|
) |
|
|
(13
|
) |
Payments
on long-term debt
|
|
|
(270
|
) |
|
|
(16,606
|
) |
Net
cash used in financing activities
|
|
|
(459
|
) |
|
|
(16,619
|
) |
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(1,371
|
) |
|
|
1,250 |
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(1,123
|
) |
|
|
1,483 |
|
Cash
and cash equivalents at beginning of period
|
|
|
15,969 |
|
|
|
16,881 |
|
Cash
and cash equivalents at end of period
|
|
$ |
14,846 |
|
|
$ |
18,364 |
|
TECHTEAM
GLOBAL, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
1 — Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements have been
prepared by TechTeam Global, Inc. (“TechTeam” or the “Company”) in accordance
with United States generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by United States generally accepted accounting principles for
complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included, and such
adjustments are of a normal recurring nature. Operating results for the three
and six months ended June 30, 2010, are not necessarily indicative of the
results that may be expected for the year ending December 31, 2010. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2009.
Note
2 — Comprehensive Income (Loss)
Comprehensive
income (loss) is defined as net income and all non-ownership changes in
shareholders’ equity. For the Company, comprehensive income (loss) for the
periods presented consists of net income (loss), the foreign currency
translation adjustment and net unrealized gain on derivative instruments. A
summary of comprehensive income (loss) for the periods presented is as
follows:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
138 |
|
|
$ |
1,290 |
|
|
$ |
(2,515
|
) |
|
$ |
2,940 |
|
Other
comprehensive income (loss) —
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(1,433
|
) |
|
|
2,207 |
|
|
|
(2,773
|
) |
|
|
984 |
|
Unrealized
gain on derivative instruments
|
|
|
118 |
|
|
|
189 |
|
|
|
239 |
|
|
|
335 |
|
Comprehensive
income (loss)
|
|
$ |
(1,177
|
) |
|
$ |
3,686 |
|
|
$ |
(5,049
|
) |
|
$ |
4,259 |
|
Note
3 — Earnings (Loss) Per Share
Basic
earnings (loss) per share for common stock is computed using the weighted
average number of common shares excluding unvested restricted shares and shares
held in escrow in connection with the Company’s acquisition of RL Phillips, Inc.
Dilutive earnings (loss) per share for common stock is computed using weighted
average number of common shares and common share equivalents outstanding. Common
share equivalents consist of stock options, unvested restricted stock issued to
employees and shares held in escrow in connection with the Company’s acquisition
of RL Phillips, Inc. During the three months ended June 30, 2010, 1,631,100
stock options were excluded from the computation of diluted earnings per common
share because the exercise prices of the options were higher than the average
market price of the Company’s common stock for the respective period. During the
six months ended June 30, 2010, common share equivalents (including 1,785,500
stock options) were excluded from the computation of diluted earnings per common
share due to the loss for the period. During the three and six months ended June
30, 2009, 2,201,000 and 2,203,000 stock options, respectively, were excluded
from the computation of diluted earnings per common share because the exercise
prices of the options were higher than the average market price of the Company’s
common stock for the respective period.
TECHTEAM
GLOBAL, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
4 — Restructuring
On March
29, 2010, the Company announced a restructuring plan to reduce certain redundant
costs, eliminate excess capacity and support the Company's strategy to more
tightly focus its business. The restructuring plan was approved by the Company’s
Board of Directors on March 23, 2010. The 2010 pre-tax restructuring charge
amounted to $3,140,000, and was primarily related to separation costs for
approximately 40 employees and reductions in excess leased facility capacity
around the world.
The
following table summarizes the accrued charges related to the 2010 restructuring
plans:
|
|
Accrued
Restructuring
Charges at
December 31,
2009
|
|
|
Adjustments
to Accrued
Restructuring
Charges
|
|
|
|
|
|
Accrued
Restructuring
Charges at
June 30, 2010
|
|
|
|
(In
thousands)
|
|
Workforce
reductions
|
|
$ |
— |
|
|
$ |
2,502 |
|
|
$ |
(2,363
|
) |
|
$ |
139 |
|
Other
|
|
|
— |
|
|
|
638 |
|
|
|
(291
|
) |
|
|
347 |
|
Total
|
|
$ |
— |
|
|
$ |
3,140 |
|
|
$ |
(2,654
|
) |
|
$ |
486 |
|
The
following table summarizes the 2010 restructuring charges by operating
segment:
|
|
Accrued
Restructuring
Charges at
December 31,
2009
|
|
|
Adjustments
to Accrued
Restructuring
Charges
|
|
|
|
|
|
Accrued
Restructuring
Charges at
June 30, 2010
|
|
|
|
(In
thousands)
|
|
Restructuring
charges |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
—
|
|
|
|
|
|
|
|
|
|
|
|
|
IT
Outsourcing Services
|
|
$ |
— |
|
|
$ |
681 |
|
|
$ |
(681
|
) |
|
$ |
— |
|
IT
Consulting and Systems Integration
|
|
|
— |
|
|
|
343 |
|
|
|
(343 |
) |
|
|
— |
|
Other
Services
|
|
|
— |
|
|
|
294 |
|
|
|
(166
|
) |
|
|
128 |
|
Total
Commercial
|
|
|
— |
|
|
|
1,318 |
|
|
|
(1,190
|
) |
|
|
128 |
|
Government
Technology Services
|
|
|
— |
|
|
|
139 |
|
|
|
(131
|
) |
|
|
8 |
|
Selling,
general and administrative expense
|
|
|
— |
|
|
|
1,683 |
|
|
|
(1,333
|
) |
|
|
350 |
|
Total
restructuring charges
|
|
$ |
— |
|
|
$ |
3,140 |
|
|
$ |
(2,654
|
) |
|
$ |
486 |
|
In 2009,
the Company implemented a restructuring plan to improve global management
consistency. The Company globalized its sales and solution design functions
across all geographies. This created a redundancy of a senior executive in
Europe. The 2009 pre-tax restructuring charge related to this action was
$1,167,000 and was primarily for separation costs for one employee. The total
2009 restructuring charge relates to the selling, general and administrative
expenses line item on the Consolidated Statement of Operations.
TECHTEAM
GLOBAL, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 4 —
Restructuring (continued)
The
following table summarizes the accrued charges related to the 2009 restructuring
plan:
|
|
Accrued
Restructuring
Charges at
December 31,
2009
|
|
|
Adjustments
to Accrued
Restructuring
Charges
|
|
|
|
|
|
Accrued
Restructuring
Charges at
June 30, 2010
|
|
|
|
(In
thousands)
|
|
Workforce
reductions
|
|
$ |
162 |
|
|
$ |
— |
|
|
$ |
(162
|
) |
|
$ |
— |
|
During
2008, the Company announced corporate-wide organizational realignment and
restructuring actions to improve operating efficiency, achieve greater global
consistency and drive improved financial performance. The restructuring
plans were approved by the Company’s Board of Directors on May 21, 2008 and
December 23, 2008. The 2008 pre-tax restructuring charges amounted to
$5,719,000, and were primarily related to separation costs for approximately 80
employees and reductions in excess leased facility capacity around the
world.
Due to
the inherent uncertainty involved in estimating restructuring expenses, actual
amounts paid for such activities may differ from amounts initially estimated.
Accordingly, during the second quarter of 2009, the Company reversed $699,000 of
previously recorded liabilities related to the 2008 restructuring plan. This
reversal resulted from re-negotiating a lease
for a facility in Europe to eliminate the Company’s obligation to pay for leased
space that was vacated and expensed in 2008 which lowered the expected exit
costs.
The
following table summarizes the accrued charges related to the 2008 restructuring
plans:
|
|
Accrued
Restructuring
Charges at
December 31,
2009
|
|
|
Adjustments
to Accrued
Restructuring
Charges
|
|
|
|
|
|
Accrued
Restructuring
Charges at
June 30, 2010
|
|
|
|
(In
thousands)
|
|
Other
|
|
$ |
156 |
|
|
$ |
— |
|
|
$ |
(36
|
) |
|
$ |
120 |
|
The
following table summarizes the 2008 restructuring charges by operating
segment:
|
|
Accrued
Restructuring
Charges at
December 31,
2009
|
|
|
Adjustments
to Accrued
Restructuring
Charges
|
|
|
|
|
|
Accrued
Restructuring
Charges at
June 30, 2010
|
|
|
|
(In
thousands)
|
|
Restructuring
charges |
|
|
|
Government
Technology Services
|
|
$ |
151 |
|
|
$ |
— |
|
|
$ |
(31
|
) |
|
$ |
120 |
|
Selling,
general and administrative expense
|
|
|
5 |
|
|
|
— |
|
|
|
(5
|
) |
|
|
— |
|
Total
restructuring charges
|
|
$ |
156 |
|
|
$ |
— |
|
|
$ |
(36
|
) |
|
$ |
120 |
|
TECHTEAM
GLOBAL, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
5 — Property, Equipment and Software
Long-lived
assets are evaluated for impairment when events occur or circumstances indicate
that the remaining estimated useful lives may warrant revision or that the
remaining balances may not be recoverable. When this occurs, an estimate of
undiscounted cash flows is used to determine if the remaining balances are
recoverable. No events or circumstances were noted in the six months ended June
30, 2010 and 2009 which would require management to perform the noted
analysis.
Note
6 — Acquisitions and Dispositions
Onvaio
LLC
On
May 30, 2008, TechTeam Global, Inc. completed the acquisition of Onvaio LLC
(“Onvaio”), a California limited liability company. Onvaio is a provider of
technical support outsourcing services for clients globally through its
wholly-owned subsidiary, Onvaio Asia Services, Inc., based in Manila,
Philippines. The initial purchase price totaled $4,787,000 and included
acquisition costs of $400,000. In addition to the initial purchase price paid at
closing, an additional $1,500,000 was placed into an escrow account and is
payable in increments of $125,000 on the last day of each fiscal quarter
provided that Onvaio is still providing services to its largest customer in
substantially the same form and content as it provided at closing. As of June
30, 2010, $1,000,000 had been released from escrow and paid to the selling
shareholders. This additional amount is being recorded as goodwill as it is
earned.
RL
Phillips, Inc.
On
August 31, 2007, TechTeam Global, Inc., through its wholly-owned subsidiary
TechTeam Government Solutions, Inc., completed the acquisition of all the
outstanding common stock of RL Phillips, Inc. (“RL Phillips”) for approximately
$2,150,000. Of the total purchase price, $300,000 was paid in shares of TechTeam
common stock, which was placed into escrow for a period of three years after
closing to reimburse the Company for any claims for indemnity or breach of
representation and warranties. These shares were released in their entirety on
June 23, 2010. Furthermore, $100,000 was held back and was scheduled to be paid
in equal installments on the first and second anniversary of the date of
acquisition. On August 31, 2008, $50,000 was paid to the selling shareholders.
The installment due on August 31, 2009 was held back due to a claim for
indemnity. On May 28, 2010, the final installment of $50,000 was paid to the
selling shareholders.
TECHTEAM
GLOBAL, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
7 — Stock-Based Compensation
The
Company measures and recognizes compensation expense for all stock-based payment
awards based on the estimated fair value of the award. Compensation expense is
recognized over the period during which the recipient is required to provide
service in exchange for the award. Stock-based compensation expense recognized
in each period is based on the value of the portion of the share-based award
that is ultimately expected to vest during the period. The Company’s outstanding
stock-based awards consist of stock options and restricted stock.
Stock
Options
The
Company recorded compensation expense totaling $216,000 and $278,000 during the
three months ended June 30, 2010 and 2009, respectively, and compensation
expense totaling $550,000 and $592,000 during the six months ended June 30, 2010
and 2009, respectively, related to outstanding options. At June 30, 2010 and
2009, there was approximately $1,634,000 and $2,738,000, respectively, of
unrecognized compensation expense related to stock options. Unrecognized
compensation expense at June 30, 2010, is expected to be recognized over a
weighted-average period of approximately two years.
The
Company records compensation expense for stock options based on the estimated
fair value of the options on the date of grant using the Black-Scholes valuation
model. The Company uses historical data among other factors to estimate the
expected price volatility, the expected option term and the expected forfeiture
rate. The risk-free rate is based on the U.S. Treasury yield curve in effect at
the date of grant for the expected term of the option.
The
following assumptions were used to estimate the fair value of options granted
for the six months ended June 30, 2010 and 2009:
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
|
|
Expected
dividend yield
|
|
|
0.0%
|
|
|
|
0.0%
|
|
Weighted
average volatility
|
|
|
65%
|
|
|
|
61%
|
|
Risk
free interest rate
|
|
|
1.2
– 1.3%
|
|
|
|
1.4%
|
|
Expected
term (in years)
|
|
|
3.0
|
|
|
|
3.0
|
|
Restricted
Common Stock
Compensation
expense related to restricted stock under all plans is recorded on a
straight-line basis over the vesting period. The Company recorded compensation
expense of approximately $240,000 and $18,000 for the three months ended June
30, 2010 and 2009, respectively, related to outstanding shares of restricted
stock under all plans and compensation expense of approximately $514,000 and
$242,000 for the six months ended June 30, 2010 and 2009,
respectively.
The
weighted average grant-date fair value of restricted stock granted under all
plans during the three months ended June 30, 2010 and 2009 was $6.38 and $5.93,
respectively. The weighted average grant-date fair value of restricted stock
granted under all plans during the six months ended June 30, 2010 and 2009 was
$6.87 and $5.00, respectively. The fair value of restricted stock awards granted
under all plans was determined based on the closing trading price of the
Company’s common stock on the date of grant.
TECHTEAM
GLOBAL, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 7 — Stock-Based
Compensation (continued)
At June
30, 2010 and 2009, there was approximately $2,456,000 and $2,724,000,
respectively, of total unrecognized compensation expense related to non-vested
shares of restricted stock. Unrecognized compensation expense at June 30,
2010, is expected to be recognized over a weighted average period of
approximately three years.
Note
8 — Income Taxes
At June
30, 2010 and December 31, 2009, the Company had an unrecognized tax benefit of
approximately $225,000 and $113,000, respectively. The Company recognizes
accrued interest related to unrecognized tax benefits as a component of interest
expense and recognizes penalties as a component of selling, general and
administrative expense. During the three and six months ended June 30, 2010 and
2009, interest and penalties recognized in the financial statements were not
material. The Company had no material accruals for the payment of interest and
penalties at June 30, 2010 and December 31, 2009.
The
Company and its subsidiaries file income tax returns in the U.S. federal
jurisdiction and various state and foreign jurisdictions. With few exceptions,
the Company is no longer subject to U.S. federal, state and local, or non-U.S.
income tax examinations by tax authorities for years before 2003. The Internal
Revenue Service commenced an examination of the Company’s 2004 U.S. federal
income tax return in the first quarter of 2007, which was completed in the
second quarter of 2008. The following table summarizes tax years that remain
subject to examination by major tax jurisdictions:
Major Jurisdiction
|
|
Open Years
|
U.S.
Federal income taxes
|
|
2006
through 2009
|
U.S.
State income taxes
|
|
2005
through 2009
|
Foreign
income taxes
|
|
2003
through 2009
|
For the
three and six months ended June 30, 2010, the consolidated effective tax rate
was 39.9% and 18.6%, respectively. The rate for the three months ended June
30, 2010 was higher than the statutory tax rate of 34.0% primarily due to
foreign operating losses for which a tax benefit is not recorded, state income
taxes and non-deductible expenses. The rate for the six months ended June 30,
2010 differed from the statutory rate primarily due to foreign operating losses
for which a tax benefit is not recorded, state income taxes and non-deductible
expenses, which lowers the effective rate when expressed as a percent of a
pretax loss. The level of foreign operating losses was increased
during the six months ended because a significant portion of the Company’s first
quarter restructuring charge was incurred in countries with historical
losses.
For the
three and six months ended June 30, 2009, the consolidated effective tax rate
was 31.7% and 37.2%, respectively. This rate differs from statutory levels
in the three months ended June 30, 2009, primarily due to the reversal of a
restructuring charge in Belgium which resulted in no tax expense due to
substantial tax loss carry forwards from historical net operating losses.
Excluding the reversal of restructuring charges, the effective tax rate for the
three and six months ended June 30, 2009 was 50.3% and 43.7%,
respectively. The effective tax rate excluding the reversal of
restructuring charges differs from the statutory tax rate of 34.0% primarily due
to state income taxes, non-deductible expenses and foreign operating losses for
which a tax benefit is not recorded.
TECHTEAM
GLOBAL, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
9 — 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 Executive Leadership Team, which is comprised of the President and
Chief Executive Officer, the Chief Financial Officer, the Vice President of
Global Sales, the President of TechTeam Government Solutions, the Vice
Presidents of Client Service Management, Chief Information Officer, General
Counsel and the Vice Presidents of Human Resources. The operating segments are
managed separately because each operating segment represents a strategic
business unit that offers different services.
The
accounting policies of the operating segments are the same as those described in
Note 1 to the Company’s consolidated financial statements contained in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
The Company evaluates segment performance based on segment gross profit. Assets
are not allocated to operating segments, but certain amounts of depreciation and
amortization expense are allocated to operating segments.
Financial
information for the Company’s operating segments is as follows:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
IT
Outsourcing Services
|
|
$ |
25,498 |
|
|
$ |
26,560 |
|
|
$ |
51,706 |
|
|
$ |
54,278 |
|
IT
Consulting and Systems Integration
|
|
|
2,935 |
|
|
|
3,165 |
|
|
|
5,855 |
|
|
|
7,069 |
|
Other
Services
|
|
|
3,261 |
|
|
|
3,975 |
|
|
|
6,986 |
|
|
|
8,240 |
|
Total
Commercial
|
|
|
31,694 |
|
|
|
33,700 |
|
|
|
64,547 |
|
|
|
69,587 |
|
Government
Technology Services
|
|
|
15,088 |
|
|
|
20,627 |
|
|
|
30,244 |
|
|
|
40,845 |
|
Total
revenue
|
|
$ |
46,782 |
|
|
$ |
54,327 |
|
|
$ |
94,791 |
|
|
$ |
110,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IT
Outsourcing Services
|
|
$ |
5,978 |
|
|
$ |
5,795 |
|
|
$ |
11,915 |
|
|
$ |
12,213 |
|
IT
Consulting and Systems Integration
|
|
|
602 |
|
|
|
505 |
|
|
|
1,153 |
|
|
|
1,440 |
|
Other
Services
|
|
|
784 |
|
|
|
985 |
|
|
|
1,704 |
|
|
|
2,092 |
|
Total
Commercial
|
|
|
7,364 |
|
|
|
7,285 |
|
|
|
14,772 |
|
|
|
15,745 |
|
Government
Technology Services
|
|
|
3,713 |
|
|
|
6,061 |
|
|
|
6,759 |
|
|
|
11,529 |
|
Total
gross profit
|
|
|
11,077 |
|
|
|
13,346 |
|
|
|
21,531 |
|
|
|
27,274 |
|
Selling,
general and administrative expense
|
|
|
(10,805
|
) |
|
|
(11,450
|
) |
|
|
(21,442
|
) |
|
|
(22,042
|
) |
Restructuring
credit (charge)
|
|
|
4 |
|
|
|
699 |
|
|
|
(3,140
|
) |
|
|
699 |
|
Net
interest expense
|
|
|
(203
|
) |
|
|
(294
|
) |
|
|
(389
|
) |
|
|
(604
|
) |
Foreign
currency transaction gain (loss)
|
|
|
156 |
|
|
|
(413
|
) |
|
|
351 |
|
|
|
(648
|
) |
Income
(loss) before income taxes
|
|
$ |
229 |
|
|
$ |
1,888 |
|
|
$ |
(3,089
|
) |
|
$ |
4,679 |
|
TECHTEAM
GLOBAL, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 9 — Segment
Reporting (continued)
Revenue
from customers, or groups of customers under common control, that comprise 10%
or greater of the Company’s total revenue in any period presented are as
follows:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Federal Government
|
|
|
27.9 |
% |
|
|
33.6 |
% |
|
|
27.8 |
% |
|
|
33.2 |
% |
Ford
Motor Company
|
|
|
10.8 |
% |
|
|
16.2 |
% |
|
|
10.9 |
% |
|
|
16.0 |
% |
Total
|
|
|
38.7 |
% |
|
|
49.8 |
% |
|
|
38.7 |
% |
|
|
49.2 |
% |
The
Company conducts business under multiple contracts with various entities within
the Ford Motor Company organization and with various agencies and departments of
the U.S. Federal Government. For the three months ended June 30, 2010 and 2009,
13.1% and 18.7%, respectively, of the Company’s total revenue was derived from
agencies within the U.S. Department of Defense in the aggregate. For
the six months ended June 30, 2010 and 2009, 13.3% and 19.3%, respectively, of
the Company’s total revenue was derived from agencies within the U.S. Department
of Defense in the aggregate.
The
Company attributes revenue to different geographic areas on the basis of the
location that has the contract with the customer, even though the services may
be provided by a different geographic location. Revenue by geographic area is
presented below:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
31,764 |
|
|
$ |
37,691 |
|
|
$ |
63,244 |
|
|
$ |
75,921 |
|
Europe:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Belgium
|
|
|
7,850 |
|
|
|
7,608 |
|
|
|
16,089 |
|
|
|
16,190 |
|
Rest
of Europe
|
|
|
7,168 |
|
|
|
9,028 |
|
|
|
15,458 |
|
|
|
18,321 |
|
Total
Europe
|
|
|
15,018 |
|
|
|
16,636 |
|
|
|
31,547 |
|
|
|
34,511 |
|
Total
revenue
|
|
$ |
46,782 |
|
|
$ |
54,327 |
|
|
$ |
94,791 |
|
|
$ |
110,432 |
|
Note
10 — Contingencies
From time
to time the Company is involved in various litigation matters arising in the
ordinary course of its business. None of these matters, individually or in the
aggregate, currently is material to the Company.
TECHTEAM
GLOBAL, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
11 – Fair Value Measurements
Items
Measured at Fair Value on a Recurring Basis
On
January 1, 2009, the Company adopted the provisions of ASC 820, “Fair Value
Measurements and Disclosures” (“ASC 820”) related to nonfinancial assets and
liabilities on a prospective basis. ASC 820 establishes the authoritative
definition of fair value, sets out a framework for measuring fair value and
expands the required disclosures about fair value measurement. On
January 1, 2008, the Company adopted the provisions of ASC 820 related to
financial assets and liabilities as well as other assets and liabilities carried
at fair value on a recurring basis. The valuation techniques required by ASC 820
are based on observable and unobservable inputs using the following
hierarchy:
|
Level
1 —
|
Observable
inputs such as quoted prices (unadjusted) in active markets for identical
assets or liabilities.
|
|
Level
2 —
|
Inputs
other than quoted prices that are observable for the asset or liability,
either directly or indirectly. These include quoted prices for similar
assets or liabilities in active markets and quoted prices for identical or
similar assets or liabilities in markets that are not
active.
|
|
Level
3 —
|
Unobservable
inputs that reflect the reporting entity’s own
assumptions.
|
The
following table summarizes the basis used to measure certain financial assets
and financial liabilities at fair value on a recurring basis in the balance
sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands)
|
|
Interest Rate
Swap |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value as of June 30, 2010
|
|
$ |
(210 |
) |
|
|
NA
|
|
|
$ |
(210 |
) |
|
|
NA
|
|
Fair
Value as of December 31, 2009
|
|
$ |
(449 |
) |
|
|
NA
|
|
|
$ |
(449 |
) |
|
|
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
Compensation Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value as of June 30, 2010
|
|
$ |
(442 |
) |
|
$ |
(442
|
) |
|
NA
|
|
|
|
NA
|
|
On
June 4, 2007, the Company entered into an interest rate swap agreement with
a notional amount of $30,000,000. Under the swap agreement, the notional amount
will be reduced by $625,000 on a monthly basis and will mature on June 3,
2011. The purpose of the interest rate swap, which is designated as a cash flow
hedge, is to manage interest costs and the risk associated with variable-rate
debt. The Company does not hold or issue derivative instruments for trading
purposes. The swap effectively converts a portion of the Company’s variable-rate
debt under the Credit Agreement to a fixed rate. Under this agreement, the
Company receives a floating rate based on LIBOR and pays a fixed rate of 5.55%
on the outstanding notional amount. The fair value of these interest rate
derivatives are based on quoted prices for similar instruments from a commercial
bank and, therefore, the interest rate derivative is considered a level 2
item.
For the
three months ended June 30, 2010, gains recognized in other comprehensive income
(loss) on derivatives were $10,000. For the three months ended June 30, 2009,
losses recognized in other comprehensive income (loss) on derivatives were
$11,000. Losses reclassified from other comprehensive income (loss) into
interest expense upon settlement amounted to $108,000 and $200,000, for the
three months ended June 30, 2010 and 2009, respectively. For the six months
ended June 30, 2010 and 2009, losses recognized in other comprehensive income
(loss) on derivatives were $4,000 and $85,000, respectively and losses
reclassified from other comprehensive income (loss) into interest expense upon
settlement amounted to $243,000 and $420,000, for the six months ended June 30,
2010 and 2009, respectively. The liability associated with the interest rate
swap is included in other current liabilities and other long-term liabilities on
the consolidated balance sheet in the amounts of $210,000 and $0, respectively,
at June 30, 2010 and $394,000 and $55,000, respectively, at December 31,
2009.
TECHTEAM
GLOBAL, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 11 – Fair Value Measurements
(continued)
The
Company sponsors a nonqualified deferred compensation plan which allows certain
management employees to annually elect to defer up to 10% of their compensation,
on a pre-tax basis. The plan is intended to be a “top-hat” plan under the
Employee Retirement Income Security Act of 1974. The deferred compensation
obligation related to this plan is adjusted each quarter in accordance with ASC
710, to reflect changes in the fair value of the amount owed to the employee.
The deferred compensation obligation is based on quoted market prices in active
markets and therefore is considered a level 1 item. The deferred compensation
obligation in included in other long-term liabilities on the consolidated
balance sheet.
Items
Measured at Fair Value on a Nonrecurring Basis
In
addition to its interest rate swap and the deferred compensation plan, the
Company measured restructuring related liabilities (Note 4 - Restructuring) at
fair value on a nonrecurring basis. These liabilities are not measured at fair
value on a recurring basis and, therefore, are not included in the tables
above.
The
Company has determined that the fair value measurements included in these
liabilities rely primarily on Company-specific inputs and the Company’s
assumptions about the settlement of liabilities, as observable inputs are not
available. As such, the Company has determined that these fair value
measurements reside within Level 3 of the fair value hierarchy. The
restructuring obligations recorded represent the fair value of the payments
expected to be made, and are discounted if the payment are expected to extend
beyond one year.
As of
June 30, 2010, the Company had $606,000 of restructuring accruals which were
measured at fair value upon initial recognition of the associated
liability.
Note
12 — Other Matters
On June
3, 2010, TechTeam, Jacobs Engineering Group Inc. (“Jacobs Engineering”) and
Jacobs Technology Inc., a wholly-owned subsidiary of Jacobs Engineering (“Jacobs
Technology”), entered into a Stock Purchase Agreement (the “Stock Purchase
Agreement”) for the sale of 100% of the outstanding stock in TechTeam Government
Solutions, Inc. (“Government Solutions”), a wholly-owned subsidiary of TechTeam
(the “Stock Sale”), representing the Company’s government business. The purchase
price of $59.0 million (the “Purchase Price”) is subject to certain escrows and
adjustments in accordance with the terms of the Stock Purchase
Agreement.
The Stock
Sale remains subject to the satisfaction or waiver of a number of closing
conditions set forth therein, including but not limited to, the approval of the
Stock Purchase Agreement and the Stock Sale by stockholders representing a
majority of the outstanding shares of TechTeam’s common stock entitled to vote
on such a matter at a meeting of TechTeam’s stockholders. The stockholders’
meeting is currently scheduled for August 31, 2010. In the Stock
Purchase Agreement, TechTeam has made various representations and warranties,
including, but not limited to, representations and warranties regarding
Government Solutions and its business, and has agreed to certain covenants,
including affirmative and negative covenants regarding the operation of
Government Solutions business during the period between the signing of the Stock
Purchase Agreement and the closing.
The $59.0
million purchase price consists of approximately $41.5 million to be received at
closing and approximately $17.5 million to be placed in escrow, each subject to
such adjustments and other conditions set forth in the Stock Purchase Agreement.
The escrow payment consists of (a) approximately $14.8 million to secure the
payment of any future indemnification claims that may be made by Jacobs
Technology against TechTeam during the 36-month period after the closing date,
and (b) approximately $2.8 million to secure the potential post-closing Purchase
Price adjustment to the extent the net tangible book value of the assets of
Government Solutions at closing exceeds or is less than a target net tangible
book value of approximately $12.2 million. The Company estimates fees
and expenses of approximately $2.9 million for the Stock Sale.
TECHTEAM
GLOBAL, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 12 — Other Matters (continued)
The Stock
Purchase Agreement may be terminated by either TechTeam or Jacobs Technology if
the closing has not occurred by October 1, 2010, provided the terminating party
has not failed to fulfill any material obligations pursuant to the Stock
Purchase Agreement. The Stock Purchase Agreement may also be terminated by the
parties upon the occurrence of other specified events as set forth in the Stock
Purchase Agreement. If the Stock Purchase Agreement is terminated under certain
circumstances, including, but not limited to, in connection with a determination
by TechTeam’s board of directors in accordance with the Stock Purchase Agreement
to accept a superior proposal (as defined therein) and enter into a definitive
agreement with respect thereto immediately following such termination, TechTeam
has agreed to pay to Jacobs Technology a termination fee of $2.36 million and to
reimburse Jacobs Technology for certain expenses incurred by it in connection
with the Stock Sale up to $750,000. If the Stock Purchase Agreement is
terminated because of TechTeam’s inability to obtain stockholder approval of the
Stock Sale, TechTeam will be required to reimburse Jacobs Technology for its
expenses as described above.
For
detailed information regarding the Stock Sale, please review the Company’s
definitive Proxy Statement pursuant to Section 14(a) of the Securities Exchange
Act of 1934, as amended, filed with the Securities and Exchange Commission
(“SEC”) on July 30, 2010, and related additional definitive proxy materials
filed with the SEC thereafter, and the Stock Purchase Agreement, attached hereto
as Exhibit [2.1].
FORWARD-LOOKING
STATEMENTS
This
Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” in Item 2, contains
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These forward-looking statements represent
our expectations or beliefs concerning future events, including projections of
revenue, gross margin, expenses, earnings or losses from operations, or other
financial items; estimates of synergies; sufficiency of cash flows for future
liquidity and capital resource needs; our plans, strategies, and objectives of
management for future operations; developments or performance relating to our
services; and future economic conditions or performance. We caution that
although forward-looking statements reflect our good faith beliefs and
reasonable judgment based upon current information, these statements are
qualified by important factors that could cause actual results to differ
materially from those in the forward-looking statements, because of risks,
uncertainties, and factors including, but not limited to, the continuing effects
of the U.S. recession and global credit environment, other changes in general
economic and industry conditions, the award or loss of significant client
assignments, timing of contracts, recruiting and new business solicitation
efforts, currency fluctuations, and other factors affecting the financial health
of our clients. These and other risks are described in the Company’s most recent
annual report on Form 10-K and subsequent reports filed with or furnished to the
U.S. Securities and Exchange Commission. The forward-looking statements included
in this report are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-looking
statements.
ITEM
2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (“MD&A”)
Overview
TechTeam
Global, Inc. is a leading provider of IT outsourcing and business process
outsourcing services to large and medium businesses, as well as government
organizations. The Company's primary services include service desk, technical
support, desk-side support, security administration, infrastructure management
and related professional services. TechTeam also provides a number of
specialized, value-added services in specific vertical markets. Our business
consists of two main components — our Commercial business and our Government
business. Together, our IT Outsourcing Services segment, IT Consulting and
Systems Integration segment and Other Services segment comprise our Commercial
business. In addition to managing our commercial business by service line, we
also manage it by geographic markets — the Americas (defined as North America
excluding our government-based subsidiaries), Europe and Latin America/Asia. Our
Government Technology Services segment comprises our Government
business.
On June
4, 2010, the Company announced its strategy to divest its government business
unit, TechTeam Government Solutions, Inc. (“Government Solutions”), by
announcing the signing of a definitive agreement to sell Government Solutions to
Jacobs Engineering Group Inc., one of the world's largest and most diverse
providers of technical, professional, and construction services. In developing
this strategy, we recognized that TechTeam consists of two substantially
unrelated, relatively independent and sub-scale businesses which do not have any
significant synergies between them and which both require investment to succeed,
grow and thrive in their respective markets. We believe that the proposed sale
of the Government Solutions business will enable us to focus our resources on
our commercial business, which we believe has the greater opportunity for
growth, profitability and increasing stockholder value.
Under the
terms of the definitive agreement, Jacobs Engineering will acquire 100 percent
of the stock in TechTeam Government Solutions, Inc. for total consideration of
$59.0 million in cash, subject to certain escrows and adjustments set forth in
the definitive acquisition agreement. The transaction was unanimously approved
by TechTeam Global's board of directors and is expected to close in the third
quarter of 2010 subject to the satisfaction of various closing conditions, which
includes the approval of the sale by the stockholders of TechTeam Global.
Detailed information regarding the Stock Sale is available in the Company’s
Proxy Statement pursuant to Section 14(a) of the Securities Exchange Act of 1934
filed with the Securities and Exchange Commission on July 30, 2010. The Company
incurred $850,000 of professional fees related to the sale in 2009 and $2.5
million for the six months ended June 30, 2010.
The
Company financial performance for the second quarter of 2010 reflects the
stabilization of the Company’s business after the end of certain important
customer contracts during the second half of 2009. TechTeam reported net income
of $138,000, or $0.01 per diluted share, for the three months ended June 30,
2010 as compared to net income of $1.3 million, or $0.12 per diluted share, for
the same period last year. The conclusion of certain contracts and
the significant cost of the effort to sell Government Solutions provide the
primary reasons for the year-over-year decline in reported results.
|
·
|
Revenue
was $46.8 million in the second quarter of 2010, a decrease of 13.9% from
the second quarter 2009. The decrease was primarily driven by the
previously announced wind-down of certain customer contracts during the
second half of 2009, including the U.S. federal government in-sourcing of
certain services provided to U.S. Air National Guard and the
discontinuation of service provided for the Volvo Car Company. This
decrease was partially offset by new customer contracts and expansion with
existing customers in the Americas and
Europe.
|
|
·
|
Gross
margin was 23.7% in the second quarter of 2010, compared to 24.6% in the
second quarter of 2009 and a sequential increase from 21.8% in the first
quarter 2010. The decrease was primarily due to the loss of higher margin
government business. Gross margin for the commercial business was 23.2% in
the second quarter of 2010, an increase from 21.6% in the second quarter
of 2009 and a sequential increase from 22.6% in the first quarter of 2010.
This increase in gross margin was primarily due to improved operating
efficiencies and realization of the benefit of the restructuring actions
taken in 2009 and 2010.
|
|
·
|
Selling,
General and Administrative (SG&A) expense was $10.8 million in the
second quarter of 2010 compared to $11.5 million in the second quarter of
2009. The decrease was due to multiple factors including an increase of
$700,000 in the Company’s allowance for doubtful accounts in the second
quarter of 2009, a reduction in amortization expense in 2010 due to the
write-down of certain assets in 2009 and the benefit of the restructuring
actions taken in 2009 and 2010. This decrease was offset by approximately
$1.5 million of professional fees related to the sale of the Company’s
TechTeam Government Solutions subsidiary announced on June 4, 2010.
SG&A expense as a percent of revenue increased to 23.1% in the second
quarter of 2010, from 21.1% in 2009 and on a sequential basis from 21.5%
in the first quarter of 2010.
|
|
·
|
Cash
provided by operations was $2.0 million for the first six months of 2010
compared to $18.2 million for the first six months of 2009. TechTeam ended
the quarter with cash and debt balances of $14.8 million and $14.9
million, respectively.
|
|
·
|
The
Company recorded a pre-tax charge of $3.1 million ($2.5 million net of
tax) during the first quarter of 2010 as a result of a restructuring. The
first quarter 2010 restructuring actions reduced certain redundant costs,
eliminated excess capacity and supported the Company’s strategy to more
tightly focus its business. The Company began to realize cost-savings in
the second quarter 2010 resulting from the
restructuring.
|
We are
encouraged by the financial performance of the Commercial business. We are
seeing more activity from potential new customers, albeit with longer sales
cycles. Moreover, we are optimistic about the prospects for significant
expansion with our existing global customers. We continue to extend our global
reach by expanding into important, targeted geographies and by leveraging the
strong relationships that we have with current global clients to provide
services to them across geographies and in new markets. We announced a
partnership with Stefanini IT Solutions, a global provider of IT consulting,
integration, development and outsourcing services primarily in Latin America.
Through its partnership with Stefanini, TechTeam will now have access to a wide
array of in-region service delivery resources in Latin America.
Results
of Operations
Quarter
Ended June 30, 2010 Compared to June 30, 2009
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands, except percentages)
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
—
|
|
|
|
|
|
|
|
|
|
|
|
|
IT
Outsourcing Services
|
|
$ |
25,498 |
|
|
$ |
26,560 |
|
|
$ |
(1,062
|
) |
|
|
(4.0 |
)% |
IT
Consulting and Systems Integration
|
|
|
2,935 |
|
|
|
3,165 |
|
|
|
(230
|
) |
|
|
(7.3 |
)% |
Other
Services
|
|
|
3,261 |
|
|
|
3,975 |
|
|
|
(714
|
) |
|
|
(18.0 |
)% |
Total
Commercial
|
|
|
31,694 |
|
|
|
33,700 |
|
|
|
(2,006
|
) |
|
|
(6.0 |
)% |
Government
Technology Services
|
|
|
15,088 |
|
|
|
20,627 |
|
|
|
(5,539
|
) |
|
|
(26.9 |
)% |
Total
revenue
|
|
$ |
46,782 |
|
|
$ |
54,327 |
|
|
$ |
(7,545
|
) |
|
|
(13.9 |
)% |
Total
Company revenue decreased $7.5 million, or 13.9%, to $46.8 million in the second
quarter of 2010 from $54.3 million in the second quarter of 2009. The revenue
decrease was across all segments and was driven primarily by the conclusion of
customer contracts in the IT Outsourcing Services and Government Technology
Services segments, a decrease in project based work due to the difficult
economic environment and an approximate $550,000 negative impact of exchange
rates on foreign revenue. This decrease was partially offset by new customer
contracts and expansion with existing customers in the Americas and Europe. The
foreign currency impact was calculated as if revenue generated in foreign
currency was translated into U.S. dollars at the average exchange rates in
effect during the second quarter of 2009. We are unable to predict the effect
fluctuations in international currencies will have on revenue in 2010, but given
the uncertain market environment and the effect on the U.S. dollar, there could
be significant revenue volatility.
IT
Outsourcing Services
Revenue
from IT Outsourcing Services decreased $1.1 million, or 4.0%, to
$25.5 million in the second quarter of 2010, from $26.6 million in the
second quarter of 2009. The revenue decrease was primarily a result of the
conclusion of customer contracts in Europe and the Americas, lower revenue from
Ford and a negative impact of exchange rates on foreign currency revenue. This
decrease was partially offset by an increase in revenue in the Americas from new
customer contracts and expansion with existing customers in the Americas and
Europe. The negative foreign currency impact approximated $500,000 and was
calculated as if IT Outsourcing revenue in foreign currency was translated into
U.S. dollars at the average exchange rates in effect during the second quarter
of 2009.
IT
Outsourcing Services revenue generated from Ford globally decreased $3.0
million, or 42.5%, to $4.1 million in the second quarter of 2010 compared
to $7.1 million in 2009. Revenue from Ford declined 28.2% in the Americas and
65.7% in Europe as a result of a decline in seats supported from a reduction in
Ford’s workforce, the lower price in the contract renewal, the separation of
Jaguar Land Rover from the Ford SPOC contract and the separation of Volvo Car
Corporation from the global Ford IT programs, including the November 2009 SPOC
contract. Please refer to our discussion of Ford in the “Significant Customers”
section of MD&A.
IT
Consulting and Systems Integration
Revenue
from IT Consulting and Systems Integration decreased $230,000, or 7.3%, to $2.9
million in the second quarter of 2010, from $3.2 million in 2009. Revenue
decreased due to less project based work in the Americas and
Europe.
Government
Technology Services
Revenue
from Government Technology Services decreased $5.5 million, or 26.9%, to
$15.1 million in the second quarter of 2010, from $20.6 million in
2009, primarily due to the conclusion of the Company’s ANG contract on September
30, 2009. The work performed under the ANG contract was in-sourced to be
performed by the U.S. Federal Government employees. The Company continues to
provide service to ANG as a subcontractor to Harris Corporation who was awarded
the work under the expiring contract that was not in-sourced and added some
other positions. Accordingly, the new contract will produce significantly less
revenue and gross margin than the expiring contract. Please refer to our
discussion of the U.S. Federal Government in the “Significant Customers” section
of MD&A.
Gross
Profit and Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Gross
Margin %
|
|
|
Amount
|
|
|
Gross
Margin %
|
|
|
Increase
(Decrease)
|
|
|
%
Change
|
|
|
|
(In
thousands, except percentages)
|
|
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IT
Outsourcing Services
|
|
$ |
5,978 |
|
|
|
23.4 |
% |
|
$ |
5,795 |
|
|
|
21.8 |
% |
|
$ |
183 |
|
|
|
3.2 |
% |
IT
Consulting and Systems Integration
|
|
|
602 |
|
|
|
20.5 |
% |
|
|
505 |
|
|
|
16.0 |
% |
|
|
97 |
|
|
|
19.2 |
% |
Other
Services
|
|
|
784 |
|
|
|
24.0 |
% |
|
|
985 |
|
|
|
24.8 |
% |
|
|
(201
|
) |
|
|
(20.4 |
)% |
Total
Commercial
|
|
|
7,364 |
|
|
|
23.2 |
% |
|
|
7,285 |
|
|
|
21.6 |
% |
|
|
79 |
|
|
|
1.1 |
% |
Government
Technology Services
|
|
|
3,713 |
|
|
|
24.6 |
% |
|
|
6,061 |
|
|
|
29.4 |
% |
|
|
(2,348
|
) |
|
|
(38.7 |
)% |
Total
gross profit
|
|
$ |
11,077 |
|
|
|
23.7 |
% |
|
$ |
13,346 |
|
|
|
24.6 |
% |
|
$ |
(2,269
|
) |
|
|
(17.0 |
)% |
Gross
profit decreased $2.2 million, or 17.0%, to $11.1 million in the second quarter
of 2010 from $13.3 million in the second quarter of 2009. Gross margin decreased
to 23.7% for second quarter 2010 from 24.6% for second quarter 2009. The
decrease in gross profit and gross margin was primarily due to the loss of
higher margin government business.
IT
Outsourcing Services
Gross
profit from IT Outsourcing Services increased 3.2% to $6.0 million in the second
quarter of 2010, from $5.8 million in 2009, and gross margin increased to
23.4% from 21.8%. The increase in gross profit and gross margin was due to
improved operating efficiencies and from the successful execution of
restructurings announced and completed in 2009 and the first quarter of
2010.
IT
Consulting and Systems Integration
Gross
profit from IT Consulting and Systems Integration increased 19.2% to $602,000 in
the second quarter of 2010 from $505,000 in 2009, and gross margin increased to
20.5% from 16.0% in 2009. Gross profit and gross margin increased mainly due to
more project based work with higher margin accounts in the Company’s hospitality
business.
Government
Technology Services
Gross
profit from our Government Technology Services segment decreased 38.7% to
$3.7 million in the second quarter of 2010 from $6.1 million in 2009. The
decrease in gross profit was mainly due to lower revenue, primarily from the
conclusion of the Company’s ANG contract on September 30, 2009. Gross margin
also decreased during the second quarter of 2010 to 24.6% from 29.4% in 2009.
The gross margin decrease was due to the loss of higher margin government
business. Please refer to our discussion of the U.S. Federal Government in the
“Significant Customers” section of MD&A.
Geographic
Market Discussion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$ |
16,676 |
|
|
$ |
17,064 |
|
|
$ |
(388
|
) |
|
|
(2.3 |
)% |
Europe
|
|
|
15,018 |
|
|
|
16,636 |
|
|
|
(1,618
|
) |
|
|
(9.7 |
)% |
Total
Commercial
|
|
|
31,694 |
|
|
|
33,700 |
|
|
|
(2,006
|
) |
|
|
(6.0 |
)% |
Government
|
|
|
15,088 |
|
|
|
20,627 |
|
|
|
(5,539
|
) |
|
|
(26.9 |
)% |
Total
revenue
|
|
$ |
46,782 |
|
|
$ |
54,327 |
|
|
$ |
(7,545
|
) |
|
|
13.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
21.4 |
% |
|
|
18.7 |
% |
|
|
|
|
|
|
|
|
Europe
|
|
|
25.5 |
% |
|
|
24.4 |
% |
|
|
|
|
|
|
|
|
Total
Commercial
|
|
|
23.2 |
% |
|
|
21.6 |
% |
|
|
|
|
|
|
|
|
Government
|
|
|
24.6 |
% |
|
|
29.4 |
% |
|
|
|
|
|
|
|
|
Total
Gross Margin
|
|
|
23.7 |
% |
|
|
24.6 |
% |
|
|
|
|
|
|
|
|
Americas
Revenue
generated in the Americas decreased $388,000, or 2.3%, to $16.7 million in the
second quarter of 2010, from $17.1 million in 2009. Revenue from IT
Outsourcing Services experienced a decrease from a decline in revenue earned
from Ford, which was partially offset by an increase from new customers and
expansion with existing customers. Gross margin from the Americas increased to
21.4% for the second quarter of 2010 from 18.7% in 2009 mainly due to improved
operating efficiencies from the realization of restructuring actions taken in
2009 and 2010.
Europe
Revenue
generated in Europe decreased $1.6 million, or 9.7%, to $15.0 million in
the second quarter of 2010 from $16.6 million in 2009, due to the conclusion of
two customer contracts in the IT Outsourcing segment, a decrease in our staffing
business at SQM and a negative impact of an approximate $625,000 from exchange
rates on revenue. The foreign currency impact was calculated as if revenue in
Europe in second quarter of 2010 were translated into U.S. dollars at the
average exchange rates in effect during the second quarter of 2009. Despite a
decrease in revenue, gross margin from Europe increased to 25.5% in the second
quarter of 2010, from 24.4% in 2009, primarily due to improved operating
efficiencies from the realization of restructuring actions taken in 2009 and
2010.
Operating
Expenses and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands, except percentages)
|
|
Operating
Expenses and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expense
|
|
$ |
10,805 |
|
|
$ |
11,450 |
|
|
$ |
(645
|
) |
|
|
(5.6 |
)% |
Restructuring
credit
|
|
$ |
(4
|
) |
|
$ |
(699
|
) |
|
$ |
(695
|
) |
|
NM
|
% |
Net
interest expense
|
|
$ |
(203
|
) |
|
$ |
(294
|
) |
|
$ |
(91
|
) |
|
|
(31.0 |
)% |
Foreign
currency transaction gain (loss)
|
|
$ |
156 |
|
|
$ |
(413
|
) |
|
$ |
569 |
|
|
NM
|
% |
Income
tax provision
|
|
$ |
91 |
|
|
$ |
598 |
|
|
$ |
(507
|
) |
|
NM
|
% |
Selling,
general, and administrative (“SG&A”) expense decreased 5.6% to $10.8 million
for the second quarter of 2010 from $11.5 million in 2009. The decrease was due
to multiple factors including an increase of $700,000 in the Company’s allowance
for doubtful accounts in the second quarter of 2009, a reduction in amortization
expense in 2010 from the write-down of certain intangible assets in 2009 and the
realization of the restructuring actions taken in 2009 and 2010. This decrease
was offset by approximately $1.5 million of professional fees related to the
sale of the Company’s TechTeam Government Solutions subsidiary announced on June
4, 2010. SG&A expense as a percent of revenue increased to 23.1% in the
second quarter of 2010, from 21.1% in 2009.
On March
29, 2010 the Company announced a restructuring plan to enhance the effectiveness
of the Commercial businesses global management team and reduce expenses in line
with current business conditions. The restructuring plan was approved by the
Company’s Board of Directors on March 23, 2010. The 2010 pre-tax restructuring
charges amounted to $3.1 million, and were primarily related to separation costs
for approximately 40 employees and reductions in excess leased facility capacity
around the world.
In 2008,
the Company announced corporate-wide organizational realignment and
restructuring actions to improve operating efficiency, achieve greater global
consistency and drive improved financial performance. The 2008 pre-tax
restructuring charges amounted to $5.7 million and was primarily related to
separation costs for approximately 80 employees and reductions in excess leased
facility capacity. Due to the inherent uncertainty involved in estimating
restructuring expenses, actual amounts paid for such activities may differ from
amounts initially estimated. Accordingly, previously recorded restructuring
related reserves of $699,000 were reversed in the second quarter of 2009
primarily from the Company favorably amending a lease for facilities in Europe
to eliminate its obligation to pay for leased space that was vacated and
expensed as part of the 2008 restructuring.
Net
interest expense was $203,000 in the second quarter of 2010, compared to
$294,000 in 2009, a result of lower average outstanding long-term debt offset by
lower interest income from lower average invested cash equivalents and lower
interest rates.
For the
three months ended June 30, 2010 the consolidated effective tax rates were
39.9%. The rate for
the three months ended June 30, 2010 was higher than the statutory tax rate of
34.0% primarily due to foreign operating losses for which a tax benefit is not
recorded, state income taxes and non-deductible expenses.
For the
three months ended June 30, 2009, the consolidated effective tax rate was 31.7%.
This rate differs from statutory levels primarily because the reversal of the
restructuring charge recorded in Belgium where there was no tax expense for the
charge due to the availability of tax loss carry forwards which offset taxable
income. Excluding the reversal of restructuring charges, the effective tax
rate for the three months ended June 30, 2009 was 50.3%. The effective tax
rate excluding the reversal of restructuring charges differs from the statutory
tax rate of 34.0% primarily due to state income taxes, non-deductible expenses
and foreign operating losses for which a tax benefit is not
recorded.
Results
of Operations
Six
Months Ended June 30, 2010 Compared to June 30, 2009
Revenue
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands, except percentages)
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
—
|
|
|
|
|
|
|
|
|
|
|
|
|
IT
Outsourcing Services
|
|
$ |
51,706 |
|
|
$ |
54,278 |
|
|
$ |
(2,572
|
) |
|
|
(4.7 |
)% |
IT
Consulting and Systems Integration
|
|
|
5,855 |
|
|
|
7,069 |
|
|
|
(1,214
|
) |
|
|
(17.2 |
)% |
Other
Services
|
|
|
6,986 |
|
|
|
8,240 |
|
|
|
(1,254
|
) |
|
|
(15.2 |
)% |
Total
Commercial
|
|
|
64,547 |
|
|
|
69,587 |
|
|
|
(5,040
|
) |
|
|
(7.2 |
)% |
Government
Technology Services
|
|
|
30,244 |
|
|
|
40,845 |
|
|
|
(10,601
|
) |
|
|
(26.0 |
)% |
Total
revenue
|
|
$ |
94,791 |
|
|
$ |
110,432 |
|
|
$ |
(15,641
|
) |
|
|
(14.2 |
)% |
Total
Company revenue decreased $15.6 million, or 14.2%, to $94.8 million for the six
months ended June 30, 2010 from $110.4 million during the same period in 2009.
The revenue decrease was across all segments and was driven primarily by the
conclusion of customer contracts in the IT Outsourcing Services and Government
Technology Services segments and a decrease in project based work due to the
difficult economic environment. This decrease was partially offset by new
customer contracts in the Americas and an approximate $865,000 positive impact
of exchange rates on foreign revenue. The foreign currency impact was calculated
as if revenue generated in foreign currency was translated into U.S. dollars at
the average exchange rates in effect during the first six months of 2009. We are
unable to predict the effect fluctuations in international currencies will have
on revenue for the remainder of 2010, but given the uncertain market environment
and the effect on the U.S. dollar, there could be noteworthy revenue
volatility.
IT
Outsourcing Services
Revenue
from IT Outsourcing Services decreased $2.6 million, or 4.7%, to
$51.7 million for the six months ended June 30, 2010, from $54.3 million
during the same period of 2009. The revenue decrease was primarily a result of
the conclusion of customer contracts in Europe and the Americas and lower
revenue from Ford. This decrease was partially offset by an increase in revenue
in the Americas from new customer contract, expansion with existing customers in
Europe and the Americas and an approximate $600,000 positive impact of exchange
rates on foreign revenue. The foreign currency impact was calculated as if IT
Outsourcing Services revenue in Europe was translated into U.S. dollars at the
average exchange rates in effect during the six months ended June 30,
2009.
IT
Outsourcing Services revenue generated from Ford globally decreased $6.6
million, or 43.8%, to $8.3 million for the six months ended June 30, 2010
compared to $14.9 million in 2009. Revenue from Ford declined 25.3% in the
Americas and 69.4% in Europe as a result of a decline in seats supported from a
reduction in Ford’s workforce, the lower price in the contract renewal, the
separation of Jaguar Land Rover from the Ford SPOC contract and the separation
of Volvo Car Corporation from the global Ford IT programs, including the
November 2009 SPOC contract. Please refer to our discussion of Ford in the
“Significant Customers” section of MD&A.
IT
Consulting and Systems Integration
Revenue
from IT Consulting and Systems Integration decreased $1.2 million, or 17.2%, to
$5.9 million for the six months ended June 30, 2010, from $7.1 million
during the same period in 2009. Revenue decreased in the Americas primarily from
the wind-down of certain systems implementation and training projects in our
hospitality business and our business with Dell through Ford.
Government
Technology Services
Revenue
from Government Technology Services decreased $10.6 million, or 26.0%, to
$30.2 million during the six months ended June 30, 2010, from
$40.8 million for the same period in 2009, primarily due to the conclusion
of the Company’s ANG contract on September 30, 2009. The work performed under
the ANG contract was in-sourced to be performed by the U.S. Federal Government
employees. The Company continues to provide service to ANG as a subcontractor to
Harris Corporation who was awarded the work under the expiring contract that was
not in-sourced and added some other positions. Accordingly, the new contract
will produce significantly less revenue and gross margin than the expiring
contract. Please refer to our discussion of the U.S. Federal Government in the
“Significant Customers” section of MD&A.
Gross
Profit and Gross Margin
|
|
Six Months Ended June
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Gross
Margin %
|
|
|
Amount
|
|
|
Gross
Margin %
|
|
|
Increase
(Decrease)
|
|
|
%
Change
|
|
|
|
(In
thousands, except percentages)
|
|
Gross
Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IT
Outsourcing Services
|
|
$ |
11,915 |
|
|
|
23.0 |
% |
|
$ |
12,213 |
|
|
|
22.5 |
% |
|
$ |
(298
|
) |
|
|
(2.4 |
)% |
IT
Consulting and Systems Integration
|
|
|
1,153 |
|
|
|
19.7 |
% |
|
|
1,440 |
|
|
|
20.4 |
% |
|
|
(287
|
) |
|
|
(19.9 |
)% |
Other
Services
|
|
|
1,704 |
|
|
|
24.4 |
% |
|
|
2,092 |
|
|
|
25.4 |
% |
|
|
(388
|
) |
|
|
(18.5 |
)% |
Total
Commercial
|
|
|
14,772 |
|
|
|
22.9 |
% |
|
|
15,745 |
|
|
|
22.6 |
% |
|
|
(973
|
) |
|
|
(6.2 |
)% |
Government
Technology Services
|
|
|
6,759 |
|
|
|
22.3 |
% |
|
|
11,529 |
|
|
|
28.2 |
% |
|
|
(4,770
|
) |
|
|
(41.4 |
)% |
Total
gross profit
|
|
$ |
21,531 |
|
|
|
22.7 |
% |
|
$ |
27,274 |
|
|
|
24.7 |
% |
|
$ |
(5,743
|
) |
|
|
(21.1 |
)% |
Gross
profit decreased $5.8 million, or 21.1%, to $21.5 million for the six months
ended June 30, 2010 from $27.3 million during the same period of 2009. Gross
margin decreased to 22.7% for six months ended June 30, 2010 from 24.7% for the
same period of 2009. The decrease in gross profit and gross margin was primarily
due to the loss of higher margin government business.
IT
Outsourcing Services
Gross
profit from IT Outsourcing Services decreased 2.4% to $11.9 million for the six
months ended June 30, 2010, from $12.2 million in 2009, and gross margin
increased to 23.0% from 22.5%. The decrease in gross profit was due to lower
revenue and the loss of higher margin accounts in the second half of 2009. Gross
margin improved primarily due to operational efficiencies and from the
successful execution of restructurings announced and completed in 2009 and the
first quarter of 2010.
IT
Consulting and Systems Integration
Gross
profit from IT Consulting and Systems Integration decreased 19.9% to $1.2
million for the six months ended June 30, 2010 from $1.4 million in 2009, and
gross margin decreased to 19.7% from 20.4% in 2009. Gross profit and gross
margin decreased mainly due to less project based work with higher margin
accounts in the Company’s hospitality business and less project based work
throughout the Company due to the difficult economic environment.
Government
Technology Services
Gross
profit from our Government Technology Services segment decreased 41.4% to
$6.8 million for the six months ended June 30, 2010 from $11.5 million in
2009. The decrease in gross profit was mainly due to lower revenue, primarily
from the conclusion of the Company’s ANG contract on September 30, 2009. Gross
margin also decreased during the six months ended June 30, 2010 to 22.3% from
28.2% in 2009. The gross margin decrease was also primarily due to the loss of
higher margin government business. Please refer to our discussion of the U.S.
Federal Government in the “Significant Customers” section of
MD&A.
Geographic
Market Discussion
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands, except percentages)
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$ |
33,000 |
|
|
$ |
35,076 |
|
|
$ |
(2,076
|
) |
|
|
(5.9 |
)% |
Europe
|
|
|
31,547 |
|
|
|
34,511 |
|
|
|
(2,964
|
) |
|
|
(8.6 |
)% |
Total
Commercial
|
|
|
64,547 |
|
|
|
69,587 |
|
|
|
(5,040
|
) |
|
|
(7.2 |
)% |
Government
|
|
|
30,244 |
|
|
|
40,845 |
|
|
|
(10,601
|
) |
|
|
(26.0 |
)% |
Total
revenue
|
|
$ |
94,791 |
|
|
$ |
110,432 |
|
|
$ |
(15,641
|
) |
|
|
(14.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
20.6 |
% |
|
|
20.2 |
% |
|
|
|
|
|
|
|
|
Europe
|
|
|
25.5 |
% |
|
|
24.9 |
% |
|
|
|
|
|
|
|
|
Total
Commercial
|
|
|
22.9 |
% |
|
|
22.6 |
% |
|
|
|
|
|
|
|
|
Government
|
|
|
22.3 |
% |
|
|
28.2 |
% |
|
|
|
|
|
|
|
|
Total
Gross Margin
|
|
|
22.7 |
% |
|
|
24.7 |
% |
|
|
|
|
|
|
|
|
Americas
Revenue
generated in the Americas decreased $2.1 million, or 5.9%, to $33.0 million for
the six months ended June 30, 2010, from $35.1 million for the same period
in 2009. Revenue from IT Outsourcing Services experienced a slight decrease from
the loss of customer contracts in the later part of 2009 and a decline in
revenue earned from Ford. This decrease was offset by an increase from new
customers and expansion with existing customers. Revenue in IT Consulting and
Systems Integration decreased mainly due to the wind-down of certain systems
implementation and training projects in our hospitality business and our
business with Dell through Ford. The Other Services segment also experienced a
decrease in revenue from technical staffing projects due primarily to less
project based work. Gross margin from the Americas increased to 20.6% for six
months ended June 30, 2010 from 20.2% for the same period in 2009 primarily due
to improved operating efficiencies from the realization of restructuring actions
taken in 2009 and 2010.
Europe
Revenue
generated in Europe decreased $3.0 million, or 8.6%, to $31.5 million for
the six months ended June 30, 2009 from $34.5 million for the same period in
2009 due to the conclusion of two customer contracts in the IT Outsourcing
segment and a decrease in our staffing business at SQM. This decrease was
partially offset by expansion with existing customers and by an approximate
$625,000 positive impact from exchange rates on revenue. The foreign currency
impact was calculated as if revenue in Europe for the six months ended June 30,
2010 were translated into U.S. dollars at the average exchange rates in effect
for the same period in 2009. Gross margin from Europe increased to 25.5% for the
six months ended June 30, 2010, from 24.9% in 2009, primarily due to improved
operating efficiencies from the realization of restructuring actions taken in
2009 and 2010.
Operating
Expenses and Other
|
|
Six Months Ended
June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands, except percentages)
|
|
Operating
Expenses and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expense
|
|
$ |
21,442 |
|
|
$ |
22,042 |
|
|
$ |
(600
|
) |
|
|
(2.7 |
)% |
Restructuring
charge (credit)
|
|
$ |
3,140 |
|
|
$ |
(699
|
) |
|
$ |
3,839 |
|
|
NM
|
% |
Net
interest expense
|
|
$ |
(389
|
) |
|
$ |
(604
|
) |
|
$ |
(215
|
) |
|
|
(35.6 |
)% |
Foreign
currency transaction gain (loss)
|
|
$ |
351 |
|
|
$ |
(648
|
) |
|
$ |
999 |
|
|
NM
|
% |
Income
tax provision (benefit)
|
|
$ |
(574
|
) |
|
$ |
1,739 |
|
|
$ |
(2,313
|
) |
|
NM
|
% |
SG&A
expense decreased $600,000, or 2.7%, to $21.4 million for the six months ended
June 30, 2010 from $22.0 million for the six months ended June 30, 2009. The
decrease was due to multiple factors including an increase of $700,000 in the
Company’s allowance for doubtful accounts in the second quarter of 2009, a
reduction in amortization expense in 2010 from the write-down of certain
intangible assets in 2009 and the realization of the restructuring actions taken
in 2009 and 2010. This decrease was offset by approximately $2.5 million of
professional fees related to the sale of the TechTeam Government Solutions
subsidiary announced on June 4, 2010. SG&A expense increased to 22.6% of
total revenue for the six months ended June 30, 2010, from 20.0% of total
revenue in 2009 primarily to the decline in revenue and the increase in
professional fees related to the sale of the Government Technology Services
segment.
On March
29, 2010 the Company announced a restructuring plan to enhance the effectiveness
of the Commercial businesses global management team and reduce expenses in line
with current business conditions. The restructuring plan was approved by the
Company’s Board of Directors on March 23, 2010. The 2010 pre-tax restructuring
charges amounted to $3.1 million, and were primarily related to separation costs
for approximately 40 employees and reductions in excess leased facility capacity
around the world.
In 2008,
the Company announced corporate-wide organizational realignment and
restructuring actions to improve operating efficiency, achieve greater global
consistency and drive improved financial performance. The 2008 pre-tax
restructuring charges amounted to $5.7 million and were primarily related to
separation costs for approximately 80 employees and reductions in excess leased
facility capacity. Due to the inherent uncertainty involved in estimating
restructuring expenses, actual amounts paid for such activities may differ from
amounts initially estimated. Accordingly, previously recorded restructuring
related reserves of $699,000 were reversed in the second quarter of 2009
primarily from the Company favorably amending a lease for facilities in Europe
to eliminate its obligation to pay for leased space that was vacated and
expensed as part of the 2008 restructuring.
Net
interest expense was $389,000 for the six months ended June 30, 2010, compared
to $604,000 million in 2009, a result of lower average outstanding long-term
debt offset by lower interest income from lower average invested cash
equivalents and lower interest rates.
For the
six months ended June 30, 2010, the consolidated effective tax rate was 18.6%.
The rate for the six months ended June 30, 2010 differed from the statutory rate
primarily due to foreign operating losses for which a tax benefit is not
recorded, state income taxes and non-deductible expenses, which lowers the
effective rate when expressed as a percent of a pretax loss. The level of
foreign operating losses was increased during the six months ended because a
significant portion of the Company’s first quarter restructuring charge was
incurred in countries with historical losses.
For the
six months ended June 30, 2009, the consolidated effective tax rate was 37.2%.
This rate differs from statutory levels primarily due to the reversal of a
restructuring charge in Belgium which resulted in no tax expense due to
substantial tax loss carry forwards from historical net operating losses.
Excluding restructuring charges, the effective tax rate for the six months ended
June 30, 2009 was 43.7%. The effective tax rate excluding the
restructuring charges differs from the statutory tax rate of 34.0% primarily due
to state income taxes, foreign operating losses for which a tax benefit is not
recorded and non-deductible expenses.
Significant
Customers
We
conduct business under multiple contracts with various entities within the Ford
organization and with various agencies and departments of the U.S. Federal
Government. For the quarters ended June 30, 2010 and 2009, Ford accounted
for 10.8% and 16.2%, respectively, of the Company’s total revenue, and the U.S.
Federal Government accounted for 27.9% and 33.6%, respectively of the Company’s
total revenue. For the six months ended June 30, 2010 and 2009, Ford
accounted for 10.9% and 16.0%, respectively, of the Company’s total revenue, and
the U.S. Federal Government accounted for 27.8% and 33.2%, respectively, of the
Company’s total revenue. For the three months ended June 30, 2010 and 2009,
respectively, 13.1% and 18.7% of the Company’s total revenue was derived from
agencies within the U.S. Department of Defense, in the aggregate. For the six
months ended June 30, 2010 and 2009, respectively, 13.3% and 19.3% of our
total revenue was derived from agencies within the U.S. Department of Defense,
in the aggregate.
Ford
Motor Company
Our
business with Ford consists of service desk and desk side services, technical
staffing, and network management. Revenue generated through our business with
Ford decreased to $10.3 million in the first six months of 2010 from
$17.6 million in the first six months of 2009. The decline in revenue is
attributable to a number of factors, including: (a) seat count and volume
declines within the Ford environment; (b) the effects of the entry into the
three-year renewal of the Global Single Point of Contact ("SPOC") contract,
which resulted in a change of the service delivery and pricing model as
discussed below; (c) the divestiture of Jaguar Land Rover (“JLR”) from the Ford
family of companies (we continue to provide services to JLR under a direct
contract); (d) the termination of the Company’s contract with Dell, Inc. under
which the Company provided systems integration services to Ford as a
subcontractor to Dell; and (e) the separation of Volvo Car Corporation from the
global Ford IT programs, including the SPOC contract on November 1,
2009.
On
December 23, 2008, the Company executed a new SPOC contract, under which
TechTeam provides support services to Ford's information technology
infrastructure. Under the SPOC contract, TechTeam provides service desk,
deskside support, service management, infrastructure management, and identity
and access management services to Ford in North America, Western Europe, and
Asia. The contract renewal provides for a significant change in the service
delivery model. These changes include the transition and centralization of
service for English speaking Ford personnel to our operations in the
Philippines, the transition of service for German speaking Ford personnel to
Romania, and an enhanced centralized remote deskside support management
function. This transition was completed in 2009.
Under the
existing SPOC contract, we provide these infrastructure support services under
specific service level metrics, and we invoice Ford based upon the number of
seats we support. The number of seats supported is determined bi-annually on
February 1 and August 1 of each year. If certain contractual conditions are met,
Ford and TechTeam have the right during each six month period to request one
out-of-cycle seat adjustment. We do not believe the revenue decline will
continue in 2010, as we believe that we are well-positioned to expand the SPOC
program into Latin America, Canada and Asia during 2010.
U.S.
Federal Government
We
conduct business under multiple contracts with various agencies and departments
of the U.S. Federal Government. Revenue generated through our business with the
U.S. Federal Government decreased to $26.3 million in the first six months
of 2010, from $36.6 million in 2009.
The
decline in revenue was primarily the result of the termination of our contract
for the Air National Guard (“ANG”), which ended on September 30, 2009. As
previously reported, ANG in-sourced the majority of the work performed under the
expiring contract. ANG did award a new contract to Harris Corporation,
with the Company as a subcontractor, which covered the work under the expiring
contract that was not in-sourced and additional positions. Accordingly, the new
contract will produce significantly less revenue and gross margin than the
expiring contract. Specifically, had the Company been delivering service under
the new contract for the six months ended June 30, 2009, total U.S. Federal
Government revenue would have been reduced on a net basis by approximately
14.3%.
Moreover,
the results of our Government business have been impacted by the difficult
government contracting environment created by the budget constraints our
customers faced. As a result of this environment, many customers have delayed
procurement actions, which have decreased the volume of business on many of our
contracts. Also, we have experienced delays in our expected new business
development.
New
Accounting Pronouncements
In
February 2010, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) No. 2010-09, “Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure Requirements,” which amends ASC
855. ASU No. 2010-09 confirms the guidance in ASC 855 for SEC filers to match
subsequent event guidance issued by the SEC. The adoption of ASU No. 2010-09 did
not have a material impact on the Company’s consolidated financial
statements.
In
January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and
Disclosures (Topic 820),” which amends the FASB’s ASC 820. ASC No. 2010-06
requires disclosures of significant transfers between Level 1 and Level 2 of the
fair value hierarchy. ASU NO 2010-06 further requires entities to report, on a
gross basis, activity in the Level 3 fair value measurement reconciliation
beginning on January 1, 2011. The adoption of ASU No. 2010-06 did not have a
material impact on the Company’s consolidated financial statements.
Liquidity
and Capital Resources
Cash and
cash equivalents were $14.8 million at June 30, 2010, as compared to
$16.0 million at December 31, 2009. Cash and cash equivalents
decreased $1.1 million in the first six months of 2010 mainly due to the
$2.5 million net loss and the effects of exchange rates on cash and cash
equivalents.
Net cash
from operating activities for the first six months of 2010 provided cash of $2.0
million compared to $18.2 million in the first six months of 2009. Net cash
provided from operations for the first six months of 2010 was primarily due to a
net loss of $2.5 million, adjusted for depreciation/amortization expense of $2.8
million and non-cash stock based compensation expense of $1.2 million. Net
changes in operating assets and liabilities of $580,000 also contributed to cash
provided by operating activities. The net changes in operating assets and
liabilities as of June 30, 2010 were primarily related to a decrease in accounts
receivable of $4.4 million principally driven by lower revenue and better
collections. This was partially offset by an increase in prepaid accounts and a
decrease in accrued taxes due to timing of payments. The cash generated from
these operating cash flow improvements was primarily used to pay down
debt.
Cash
provided by operations for the first six months of 2009 was primarily due to net
income of $2.9 million, adjusted for net changes in operating assets and
liabilities of $10.3 million, depreciation/amortization expense and non-cash
stock based compensation expense of $3.4 million and $913,000, respectively. The
net changes in operating assets and liabilities as of June 30, 2009 were
primarily related to a decrease in accounts receivable of $13.9 million due to
increased collection efforts. This decrease was partially offset by a decrease
in accrued expenses of $3.1 million due to $1.3 million decrease in accrued
restructuring and due to the timing of payments.
Net cash
used in investing activities was $1.3 million and $1.4 million for the first six
months of 2010 and 2009, respectively. Net cash used in investing activities
during the first six months of 2010 and 2009 were used to purchase equipment and
software and to make payments to the selling shareholders of prior acquisitions
for achieving financial performance targets. Capital expenditures were $1.0
million and $1.1 million respectively, for the first six months of 2010 and
2009.
Net cash
used in financing activities was $459,000 and $16.6 million for the first six
months of 2010 and 2009, respectively. Net cash used in financing activities for
the first six months of 2010 was due to debt repayments and issuance of
restricted stock. Net cash used in financing activities for the first six months
of 2009 was primarily due to a higher pay down of debt.
Long-term
cash requirements, other than for normal operating expenses, are anticipated for
continued global expansion, enhancements of existing technologies, possible
repurchases of our common stock and the possible acquisition of businesses
complementary to our existing businesses. In light of the Company’s cash flow
and the amendment to the Credit Agreement, we believe that cash flows from
operations, together with existing cash balances and the existing credit
facility, will continue to be sufficient to meet our ongoing operational
requirements for the next twelve months and foreseeable future. Our liquidity
position will improve upon completion of the sale of our Government Solutions
subsidiary to Jacobs Engineering. The Company intends to use the proceeds from
the sale to completely pay off the debt facility. We have historically not paid
dividends, and we are restricted from doing so under our Credit Agreement.
Market conditions may limit our sources of funds available, and the terms of
such financings for these activities to the extent financing is desirable or
necessary.
Material
Commitments
There
have been no significant changes in our material commitments disclosed in “Item
7 — Management’s Discussion and Analysis of Financial Condition and Results of
Operations” of our Annual Report on Form 10-K for the year ended
December 31, 2009.
Critical
Accounting Policies and Estimates
There
have been no changes in the selection and application of critical accounting
policies and estimates disclosed in “Item 7 — Management’s Discussion and
Analysis of Financial Condition and Results of Operations” of our Annual Report
on Form 10-K for the year ended December 31, 2009.
ITEM
3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There
have been no material changes in reported market risks disclosed in “Item 7A —
Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report
on Form 10-K for the year ended December 31, 2009.
ITEM
4 — CONTROLS
AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Our
management is responsible for establishing and maintaining a system of
disclosure controls and procedures (as defined in Rule 13a-15(e)) under the
Exchange Act) that is designed to ensure that information required to be
disclosed by the Company in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported, within the time
specified in the Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the issuer's management, including its principal executive officer or
officers and principal financial officer or officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.
In
accordance with Exchange Act Rule 13a-15(b), our management, under the
supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer, performed an evaluation of the effectiveness of the Company's
disclosure controls and procedures as of the end of the fiscal quarter covered
by this Quarterly Report. Based on that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective, as of June 30, 2010, to
provide reasonable assurance that information required to be disclosed in the
Company's reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Commission's rules and forms and that such information is accumulated and
communicated to management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding
disclosure.
Changes
in Internal Control over Financial Reporting
No change
in our internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) occurred during the quarter ended
June 30, 2010, that has materially affected, or is reasonably likely to
materially affect, our internal control over financial
reporting.
PART
II — OTHER INFORMATION
ITEM
1 — LEGAL PROCEEDINGS
From time
to time we are involved in various litigation matters arising in the ordinary
course of its business. None of these matters, individually or in the aggregate,
currently is material.
ITEM
1A — RISK FACTORS
Information
regarding risk factors appears in “Forward-Looking Statements,” in the Part I,
Item 2 of this Report and in Part I - Item 1A of our Annual Report on
Form 10-K for the year ended December 31, 2009. As of the date of
this filing, the following are material changes in the risk factors previously
disclosed in Part I - Item 1A of our Annual Report on Form 10-K for the
year ended December 31, 2009.
There is no
assurance that the sale of the outstanding stock of TechTeam Government
Solutions, Inc. (“Government Solutions”) to Jacobs Technology Inc. (“Jacobs
Technology”), a wholly owned subsidiary of Jacobs Engineering Group Inc.
(collectively, “Jacobs”) (the “Stock Sale”) will be completed, and our inability
to consummate the Stock Sale could harm the market price of our Common Stock and
our business, results of operations and financial condition.
We cannot
assure you that the Stock Sale will be consummated. The consummation of the
Stock Sale is subject to the satisfaction or waiver of a number of conditions,
including, among others, the requirement that we obtain stockholder approval of
the Stock Sale Proposal, the requirement to obtain certain government and other
approvals, requirements with respect to the accuracy of our representations and
warranties, requirements with respect to the satisfaction or waiver of our
closing covenants and the requirement that certain employees will continue to be
employed by Government Solutions. In addition, Jacobs may terminate the Stock
Purchase Agreement if, among other things, such closing conditions are not
satisfied by October 1, 2010 and if we do not cure breaches occurring after
June 3, 2010, if any, of our representations and warranties contained in
the Stock Purchase Agreement within five business days of notice of such
breach.
We cannot
guarantee that we will be able to meet all of the closing conditions of the
Stock Purchase Agreement. For example, subsequent to the signing of the Stock
Purchase Agreement, two employees of Government Solutions, who were included in
the schedules to the Stock Purchase Agreement as being among those employees of
Government Solutions who needed to remain with Government Solutions following
the closing of the Stock Sale, notified us that they were resigning from
Government Solutions to pursue other opportunities. Accordingly, at least one of
the conditions to the obligations of Jacobs Technology to complete the Stock
Sale will not be satisfied at the closing. As of the date of this Report, while
we have requested such a waiver from Jacobs Technology, no such waiver has been
granted and no assurances can be given as to whether Jacobs Technology will
ultimately agree to waive this condition.
If we are
unable to meet all of the closing conditions, Jacobs would not be obligated to
close the Stock Sale. In addition, as a result of our failure to meet the
condition described above with respect to the retention of Government Solutions’
employees, Jacobs has the right, at any time, to terminate the Stock Purchase
Agreement. We also cannot be sure that other circumstances, for example, a
material adverse effect, will not arise that would also allow Jacobs to
terminate the Stock Purchase Agreement prior to closing. If the Stock Sale is
not approved by stockholders or does not close, our Board will be forced to
evaluate other alternatives, which may be less favorable to us than the proposed
Stock Sale.
As a
result of the execution of the Stock Purchase Agreement, employees of the
Government Solutions business may become concerned about the future of the
Government Solutions business and seek other employment. Also, as a result of
our execution of the Stock Purchase Agreement and the announcement of the Stock
Sale, third parties may be unwilling to enter into material agreements with us
with respect to the Government Solutions business. New or existing customers may
prefer to enter into agreements with our competitors who have not expressed an
intention to sell their business because customers may perceive that such new
relationships are likely to be more stable. The failure to maintain these
relationships may give Jacobs the right to terminate the Stock Purchase
Agreement and the Stock Sale. If we fail to complete the proposed Stock Sale,
the failure to maintain existing business relationships or enter into new ones
could adversely affect our business, results of operations and financial
condition.
In
addition, if the Stock Sale is not consummated, our directors, executive
officers and other employees will have expended extensive time and effort and
will have experienced significant distractions from their work during the
pendency of the transaction and we will have incurred significant transaction
costs, in each case, without any commensurate benefit. After focusing on the
potential sale of the Government Solutions business for an extended period, if
the Stock Sale is not consummated, we may not be able to develop and implement a
strategy for the future growth and development of the Government Solutions’
business that would generate a return similar to or better than the return which
would be generated by the Stock Sale. Furthermore, the perception of our
continuing business could potentially result in a loss of customers, business
partners and employees if the Stock Sale is not consummated. The occurrence of
one or more of the foregoing circumstances could likely have a material and
adverse effect on our business, stock price, results of operations and financial
condition.
The Stock
Purchase Agreement imposes substantial restrictions on our ability to operate
the Government Solutions Business, which may delay or prevent us from
undertaking business opportunities that may be beneficial to the Government
Solutions business, pending completion of the Stock Sale.
The Stock
Purchase Agreement contains significant restrictions on our ability to operate
the Government Solutions business prior to the closing. For example, we are
subject to restrictions on our ability to discuss and negotiate with, and
provide information to, a potential acquirer regarding any competing proposals
to the Stock Sale, and our ability to, among other things:
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transfer
or issue any stock of, or liquidate, recapitalize or change the
organizational documents of, Government
Solutions;
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hire
any new senior-level employees, into Government Solutions, except as
provided in the Stock Purchase
Agreement; and
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change
Government Solutions’s accounting methods or
practices;
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enter
into a merger or consolidation of Government
Solutions;
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sell
any portion of the Government Solutions business or the assets of
Government Solutions;
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enter
into certain material
contracts; or
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incur,
assume, guarantee or extend any
indebtedness.
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Our
ability to comply with these provisions before completion of the Stock Sale or
termination of the Stock Purchase Agreement is subject to various risks and
uncertainties. Any failure by us to comply with all applicable covenants in the
Stock Purchase Agreement could result in a breach of the terms of the Stock
Purchase Agreement, which may result in the termination of the Stock Purchase
Agreement and a failure to complete the Stock Sale. Even if we are able to
comply with all of the applicable provisions and restrictions on the operation
of the Government Solutions business, these restrictions could harm us by, among
other things, prohibiting, limiting or restricting our ability to take advantage
of mergers, acquisitions and other corporate opportunities with respect to the
Government Solutions business or to take certain actions that management may
deem to be necessary or desirable to operate or grow the Government Solutions
business or to increase its profitability. Thus, such prohibitions, limitations
and restrictions could have a material adverse effect upon the Government
Solutions business and our financial condition and results of
operations.
If our
stockholders do not approve the Stock Sale proposal, we may not receive an offer
from another potential acquirer of the Government Solutions Business on
satisfactory terms or at all.
If our
stockholders do not approve the Stock Sale and the Stock Purchase Agreement is
subsequently terminated, we may decide to seek another strategic transaction
with respect to the Government Solutions business. However, we may not be able
to find a potential acquirer of the Government Solutions business willing to pay
an equivalent or more attractive price than that which would be paid pursuant to
the Stock Sale, and in fact any purchase price that we do find may be
less.
We are not
permitted to terminate the Stock Purchase Agreement except in limited
circumstances,
and we may be required to pay a substantial termination fee to Jacobs
if the
Stock Purchase Agreement is terminated.
The Stock
Purchase Agreement does not generally allow us to terminate it, except in
certain limited circumstances. If the Stock Purchase Agreement is terminated
under certain circumstances for specified reasons, we would be obligated
to:
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pay
Jacobs a termination fee of
$2,360,000, and
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reimburse
Jacobs for up to $750,000 of its reasonable and documented out-of-pocket
fees and expenses related to the preparation and negotiation of the Stock
Purchase Agreement and the Stock
Sale.
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We would
be required to pay to Jacobs the expense reimbursement and termination fee in
the event of, among other things:
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our
termination of the Stock Purchase Agreement upon the receipt of a superior
proposal (as defined in the Stock Purchase Agreement) that results in,
immediately after the termination of the Stock Purchase Agreement, us
entering into a definitive agreement with respect thereto in compliance
with the terms of the Stock Purchase
Agreement;
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concurrently
or after a change of control of TechTeam, the Stock Purchase Agreement is
terminated for any reason or the closing does not occur by October 1,
2010; or
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Jacobs’
termination of the Stock Purchase Agreement upon the occurrence of certain
triggering events.
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We would
also be required to pay Jacobs this expense reimbursement (without the
termination fee) if the Stock Purchase Agreement is terminated by any party
after the Special Meeting has been held and the stockholders do not approve the
Stock Sale proposal. Any payment of the termination fee or the expense
reimbursement would substantially increase the cost of completing any
alternative transaction involving the Government Solutions business and would
effectively reduce any net proceeds available to us resulting from the
consummation of such an alternative transaction.
The Stock
Purchase Agreement may expose us to contingent liabilities, and we may never
ultimately receive any of the cash portion of the purchase price deposited into
escrow for indemnification purposes.
Under the
Stock Purchase Agreement, we have agreed to indemnify Jacobs for any breach or
violation of any representation, warranty, covenant or undertaking made by us in
the Stock Purchase Agreement and for other matters, subject to certain
limitations and exceptions. Of the total cash purchase price of $59,000,000,
$14,750,000 will be deposited into escrow to secure our indemnification
obligations to Jacobs for a period of up 36 months after closing. However,
Jacobs’ right to seek indemnification from us for certain indemnification claims
may not be limited by this 36-month time period or to any time limitations at
all and may not be limited by any amounts contained in the indemnification
escrow fund. As a result, significant successful indemnification claims by
Jacobs could have an adverse effect on our results of operations and financial
condition. Furthermore, it is possible that we may not ultimately receive any of
the escrowed portion of the purchase price. Moreover, these uncertainties may
make it difficult for a potential acquirer of the Commercial Business to value
the Commercial Business, including, but not limited to, our interest in the
indemnification escrow fund. Given these uncertainties, you should not place
disproportionate emphasis on the amount of the purchase price that is paid into
escrow to satisfy our post-closing indemnification obligations.
Furthermore,
the Stock Sale may be completed without us being released from certain
guarantees that we have provided with respect to the obligations of Government
Solutions. While Jacobs has agreed to use its best efforts to cause it to be
substituted for us with respect to such guarantees and to indemnify us and our
affiliates against any loss if such substitution does not occur, we cannot
assure you that we will be substituted by Jacobs with respect to such guarantees
or that Jacobs’ obligation to indemnify us will ultimately make