| TECHTEAM GLOBAL INC Item 1A Risk Factors 9 ITEM 1A RISK FACTORS FACTORS INFLUENCING FUTURE RESULTS Because of the following factors, as well as other variables affecting our operating results which are not set forth below, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods |
| OUR REVENUE, GROSS PROFIT, AND EXPENSES MAY SUFFER IF WE ARE NOT ABLE TO MAINTAIN OUR RELATIONSHIP WITH A LARGE AUTOMOBILE MANUFACTURER AND OTHER SIGNIFICANT CUSTOMERS FOR WHOM WE HAVE CONTRACTS UP FOR RENEWAL As set forth in "e Item 1 -- Business, "e we continue to depend upon Ford and its subsidiaries for a substantial portion of our revenue |
| The past three years have been difficult financially for this client, and further deterioration of its financial condition could have a material adverse impact on our business as they may seek further price concessions or the termination of projects |
| Similarly, the loss of any significant customer or a further reduction in economic activity in the automotive industry would have a material adverse impact on our business, financial condition, and results of operations |
| The most significant contract is the contract to provide support to Canon Europe NV, which is scheduled for renewal at the end of March 2006 |
| We believe that we are well positioned to renew this contract due to our performance, but there can be no assurance in this regard |
| See also discussion of risks inherent in government technology services |
| THE COMPETITIVE PRESSURES WE FACE COULD HARM OUR REVENUE, GROSS MARGIN, AND BUSINESS PROSPECTS We face intense competition in all of our markets and for all of our services |
| Many competitors have substantially greater resources, including more locations, greater financial resources, a larger client base, and greater name and brand recognition |
| These competitors may be willing to provide the same services that we do at a loss or at a lower gross margin in order to attain other, more lucrative business from our customers |
| Due to this competition, it may be difficult for us to retain our current customers or grow our revenue outside of our current customer base |
| The intense competition may result in our customers being able to demand reduced pricing in order for us to remain a preferred vendor |
| These pressures will likely increase due to the trend to move outsourcing services offshore to countries with lower labor costs, such as India, Malaysia, and the Philippines |
| Our inability to continue to execute upon our strategy to address the globalization of the support services market could have a material adverse impact on our ability to maintain and grow our customer base |
| Further, we may have to continue to lower the prices of our services to stay competitive, while at the same time trying to maintain or improve revenue and gross margin |
| If we cannot proportionately decrease our cost structure on a timely basis in response to competitive price pressures, our gross margin and therefore our profitability could be adversely affected |
| Any of these circumstances could have a material adverse effect on our business, financial condition, and results of operations |
| Our IT outsourcing services business models require significant changes to our customers &apos business processes and each customer may have significant internal political difficulties with local environments giving up decentralized control of the support function |
| The decision makers are rarely involved in the early details of the selection process so there are often multiple sales efforts -- to the team charged with selection and then to the Chief Information Officer/Chief Executive Officer/Board -- that have to occur |
| Our results are dependent on our ability to successfully manage the sales process and strong competition in these markets |
| WE ARE SUBJECT TO CONTRACT RISKS INHERENT IN OUR BUSINESS The great majority of our contracts, including our Ford Global SPOC contract, may be terminated without cause on short notice, often upon as little as 90 days &apos notice |
| Terminations and non-renewals of major contracts could have a material adverse impact upon our business, financial condition, and results of operations |
| 9 A portion of our IT outsourcing services business is billed on a managed service basis (where the fee is fixed to perform specified services) as opposed to time and materials |
| The onset of problems in our customers &apos infrastructure, such as computer viruses, may require us to deploy additional resources to solve these problems |
| In many instances, we would not receive any additional revenue for the work performed, thereby adversely impacting our profitability |
| To the extent we provide service on a per-incident or per-minute basis, our financial performance is dependent upon the volume of service requests that we receive on the project |
| Some of our contracts do not contain minimum guaranteed volume, so we may not always receive enough volume to pay for our costs relating to a specific contract |
| Even where volume guarantees exist we may not receive enough volume to make a profit for the time period when the guarantee is enforced |
| Also, many of our contracts contain financial penalties for our failure to meet the contractual performance service levels |
| In the United States, we are able to manage this risk through changes in our staffing, but due to labor laws, our European entities do not have as much flexibility in staffing |
| Due to the competitive market, we often must agree to a price for providing service based primarily on information provided to us by our prospective customer |
| Sometimes this information is not correct, and it is difficult to increase our price because the prospective customer has a limited budget |
| Our inability to estimate accurately the resources and related expenses required for the project or our failure to complete our contractual obligations in a manner consistent with their terms could materially and adversely affect our results of operations |
| WE ARE SUBJECT TO RISKS INHERENT IN THE PROVISION OF TECHNOLOGY SERVICES TO GOVERNMENTAL ENTITIES We derive an increasing amount of our revenues from government contracts that typically are awarded through competitive processes and span a one-year base period and one or more option years |
| The unexpected termination or non-renewal of one or more of our significant contracts could result in significant revenue shortfalls |
| Our clients generally have the right not to exercise the option periods |
| In addition, our contracts typically contain provisions permitting an agency to terminate the contract on short notice, with or without cause |
| Following the expiration of the contract term, if the client requires further services of the type provided in the contract, there is frequently a competitive re-bidding process |
| We may not win any particular re-bid or be able to successfully bid on new contracts to replace those that have been terminated |
| Many of the systems we support involve managing and protecting information involved in the US Department of Defense and other sensitive government functions |
| A security breach in one of these systems could cause serious harm to our business, could result in negative publicity and could prevent us from having further access to such critically sensitive systems or other similarly sensitive areas for other governmental clients |
| Losses that we could incur from such a security breach could exceed the policy limits that we have for "e errors and omissions "e insurance |
| Some of our government contracts require us, and certain of our employees, to maintain security clearances |
| If we lose or are unable to obtain security clearances, the client can terminate the contract or decide not to renew it upon its expiration |
| As a result, to the extent we cannot obtain the required security clearances for our employees working on a particular engagement, we may not derive the revenue anticipated from the engagement, which could negatively impact our operating results |
| These agencies review a contractorapstas performance on its contract, pricing practices, cost structure and compliance with applicable laws, regulations and standards |
| An audit could result in an adjustment to our revenues because any costs found to be improperly allocated to a specific contract will not be reimbursed, while improper costs already reimbursed must be refunded |
| If a government audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or debarment from doing business with federal government agencies |
| In addition, we could suffer harm to our reputation if allegations of impropriety were made against us |
| We must comply with and are affected by US federal government regulations relating to the formation, administration, and performance of government contracts |
| These regulations affect how we do business with our clients and may impose added costs on our business |
| Any failure to comply with applicable laws and regulations could result in contract termination, US price or fee reductions or suspension or debarment from contracting with the federal 10 government |
| Further, the federal government may reform its procurement practices or adopt new contracting methods relating to the General Services Administration schedule or other government-wide contract vehicles |
| To the extent that we are unable to successfully comply with these regulations, our Government Technology Services business could be negatively impacted |
| IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO RECRUIT ADDITIONAL QUALIFIED PERSONNEL, OUR BUSINESS AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED The success of the Company is highly dependent upon the efforts, direction, and guidance of its senior management |
| The only employment agreements that we currently have with the executive officers of the Company are with the President and Chief Executive Officer, the Vice President of Sales and Marketing EMEA, and Vice President of Operations EMEA Except for Employment Agreements Relating to a Change of Control, which only apply to a change in the control of the Company, we do not have any other employment agreements with other members of our executive officer team |
| The loss of any of these senior executives or our inability to attract, retain, or replace key management personnel in the future, could have a material adverse effect on our business, financial condition, and results of operations |
| OUR INABILITY TO ATTRACT AND RETAIN QUALIFIED EMPLOYEES COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS Our business involves the delivery of professional services and is very labor intensive |
| Our success depends in large part upon our ability to attract, develop, motivate, and retain highly skilled technical, clerical, and administrative employees |
| Qualified personnel, especially in Washington, DC, Bucharest, Romania, and Gothenburg Sweden, are in high demand |
| Accordingly, we expect to experience increased compensation costs that may not be offset through either increased productivity or higher customer pricing |
| Moreover, no assurances can be given that we will be able to attract and retain sufficient numbers of qualified employees in the future, especially when we need to expand our services in a short time period |
| We attempt to implement a career path model where our helpdesks are located, thereby enabling our employees to move to new jobs that require higher skill levels and pay more money |
| Our inability to effectively implement this business model in these locations could negatively affect our employee retention rates |
| Our failure to attract and retain employees could have a material adverse effect on our business, financial condition, and results of operations |
| IMPLEMENTATION OF OUR STRATEGY TO GROW THROUGH COMPLEMENTARY BUSINESS ACQUISITIONS IS SUBJECT TO NUMEROUS RISKS AND DIFFICULTIES Our business strategy includes seeking to make complementary business acquisitions |
| In order to pursue a growth by acquisition strategy successfully, we must identify suitable candidates for these transactions, complete these transactions, and manage post-closing issues such as the integration of acquired companies |
| Integration issues are complex, time-consuming and potentially expensive and, without proper planning and implementation, could significantly disrupt our business, including, but not limited to, the diversion of managementapstas attention, the loss of key business and/or personnel from the acquired company, unanticipated events, legal liabilities, and dilutive effect of the issuance of additional securities, and possible impairment of intangible assets |
| Moreover, the financial risks continue after the integration of the company |
| If the implicit value of the business declines, there could be a non-cash partial or full write-off of the goodwill attributed to the acquisition |
| Transactions may result in significant costs and expenses and charges to earnings, including those related to severance pay, early retirement costs, employee benefit costs, asset impairment charges, charges from the elimination of duplicative facilities and contracts, in-process research and development charges, inventory adjustments, legal, accounting and financial advisory fees, and required payments to executive officers and key employees under retention plans |
| Any of these possible difficulties could have a material adverse effect on our business, financial condition, and results of operations |
| WE ARE SUBJECT TO NUMEROUS RISKS RELATING TO OUR INTERNATIONAL OPERATIONS We operate businesses in many countries outside the United States, all of which are currently located throughout Europe |
| As part of our business strategy, we plan to further expand our global reach to be able to deliver services from Asia and South America |
| As a result, we expect to continue expansion through start-up operations and 11 acquisitions in additional countries |
| Expansion of our existing international operations and entry into additional countries will require management attention and financial resources |
| Our future revenue, gross margin, expenses, and financial condition also could suffer due to a variety of international factors, including the following: - changes in a countryapstas or regionapstas economic or political conditions, including inflation, recession, interest rate fluctuations, and unanticipated military conflicts; - currency fluctuations, particularly in the European euro, which contribute to variations in sales of services in impacted jurisdictions and also affect our reported results expressed in US dollars; - longer accounts receivable cycles and financial instability among customers; - local labor conditions and regulations; - differences in cultures and languages, which impair our ability to work as an effective global team; - differing political and social systems; - changes in the regulatory or legal environment; - differing technology standards or customer requirements; - difficulties associated with repatriating cash generated or held abroad in a tax-efficient manner and changes in tax laws; and - natural and man-made disasters |
| To the extent that the Company does not manage its international operations successfully, its business could be adversely affected and its revenues or earnings could be reduced |
| In addition, there has been an increasing amount of political discussion and debate related to worldwide outsourcing, particularly from the United States to offshore locations |
| There is federal and state legislation currently pending related to this issue, and such legislation, if enacted, could potentially have an adverse effect on the Companyapstas results of operations and financial condition |
| THERE ARE SUBSTANTIAL RISKS ASSOCIATED WITH EXPANDING OUR BUSINESS INTO OFFSHORE MARKETS The outsourcing industry trend to move business towards offshore markets could result in excess operating capacity in the United States and Belgium, thereby increasing competition for customers |
| Moreover, there are no assurances that we will be able to successfully expand into and conduct business in offshore markets |
| The success of any offshore operation is subject to numerous contingencies, some of which are beyond management control, including general and regional economic conditions, prices for our services, competition, changes in regulation, and other risks |
| Any failure in our strategy could have a material adverse effect on our business, financial condition, and results of operations |
| See the discussion above regarding the risks associated with international operations |
| Our customers are primarily attracted to a reduction in cost of our services as a result of delivery from an offshore location, and they are looking to enter into long-term contracts to provide monthly services with a price that does not adjust significantly with inflation |
| When a number of service providers enter these offshore locations, the competition for employees increases, causing turnover and increasing labor costs |
| In these circumstances, the Company bears the risk of inflation, which could result in our costs increasing faster than we can improve technician productivity |
| WE ARE SUBJECT TO CURRENCY RISKS AS A RESULT OF OUR EUROPEAN OPERATIONS We serve an increasing number of our US-based customers using helpdesks in Europe |
| Some of these contracts are priced in US dollars, while a substantial portion of our costs are incurred in Romanian lei or the European euro |
| Thus, we are subject to a foreign currency exchange risk |
| Although we enter into contracts to limit potential foreign currency exposure, the Company does not fully hedge this exposure |
| 12 OUR INABILITY TO PROPERLY MANAGE PROJECTS AND CAPACITY COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS The Companyapstas ability to profit from the global trend toward outsourcing depends in part on how effectively it manages its helpdesk capacity |
| There are several factors and trends that have intensified the challenge of resource management |
| In order to create the additional capacity necessary to accommodate new or expanded outsourcing projects, the Company must consider opening new helpdesk facilities |
| The opening or expansion of a helpdesk facility may result, at least in the short term, in idle capacity until any new or expanded program is implemented fully |
| The Company periodically assesses the expected long-term capacity utilization of its helpdesk facilities |
| As a result, it may, if deemed necessary, consolidate, close or partially close under-performing helpdesk facilities in order to maintain or improve targeted utilization and margins |
| There can be no assurance that the Company will be able to achieve or maintain optimal utilization of its helpdesk capacity |
| If the Company does not effectively manage its capacity, its results of operations could be adversely affected |
| With the inclusion of our Romanian helpdesk facility, we have significantly increased the amount of business that we are performing for the same customers from more than one location |
| Multi-site and multi-lingual delivery increases the complexity of the service provided, including but not limited to managing call volume and resources |
| The inability of the Company to manage the different cultures and personnel to deliver consistent quality from different sites could reduce the Companyapstas profitability and results of operation |
| Further, our work in the IT Consulting and Systems Integration business segment requires the efficient management of human resources |
| Because we may not be able to maintain a steady or increasing demand for our services, we could suffer fluctuations in our revenue, the number of employees, and results of operations |
| WE ARE HIGHLY DEPENDENT UPON TECHNOLOGY, AND OUR INABILITY TO KEEP UP WITH TECHNOLOGICAL ADVANCES IN OUR INDUSTRY, OR OUR FAILURE OR INABILITY TO PROTECT AND MAINTAIN OUR EXISTING SYSTEMS, COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS Our success depends in part on our ability to develop IT solutions that keep pace with continuing changes in the IT industry, evolving industry standards, and changing client preferences |
| There can be no assurance that we will be successful in adequately addressing these developments on a timely basis or that, if these developments are addressed, we will be successful in the marketplace |
| For example, our Support Portal offering is comprised of our proprietary incident management tool and software developed and sold by software companies |
| We have integrated this software into the Support Portal |
| During this time, there have been other tools developed by other competitors and software vendors that can match the functionality of the Support Portal |
| If these other tools can provide similar or better functionality at a lower effective cost, or if our software vendors go out of business, we could have a product and service offering that will lose its marketability |
| The cost to update our incident management tool and change the third party software comprising the Support Portal could be significant |
| Our inability to effectively keep pace with continuing changes in the IT industry could have a material adverse effect on our business, financial condition, and results of operations |
| Moreover, experienced computer programmers and hackers may be able to penetrate our network security, or that of our customers, and misappropriate our confidential information, create system disruptions, or cause shutdowns |
| As a result, we could incur significant expenses in addressing problems created by security breaches of our network |
| Moreover, we could lose existing or potential customers for information technology outsourcing services or other information technology solutions, or incur significant expenses in connection with our customers &apos system failures |
| In addition, sophisticated hardware and operating system software and applications that we produce or procure from third parties may contain defects in design and manufacture, including "e bugs "e and other problems that can unexpectedly interfere with the operation of our systems |
| The costs to eliminate or alleviate security problems, viruses, worms, and bugs could be significant, and the efforts to address these problems could result in interruptions, delays, or cessation of service |
| 13 Our operations are dependent upon our ability to protect our helpdesk facility and our information databases against damages that may be caused by fire and other disasters, power failure, telecommunications failures, unauthorized intrusion, computer viruses, and other emergencies |
| The temporary or permanent loss of such systems could have a material adverse effect on our business, financial condition, and results of operations |
| Notwithstanding precautions we have taken to protect ourselves and our clients from events that could interrupt delivery of our services, there can be no assurance that a fire, natural disaster, human error, equipment malfunction or inadequacy, computer virus, firewall breach, or other event would not result in a prolonged interruption in our ability to provide support services to our clients |
| As we commence delivering services from an offshore location, the risks attendant to interruption of telecommunications increase |
| Any interruption to our data or voice telecommunications networks could have a material adverse effect on our business, financial condition, and our results of operations |
| Softened demand for our services caused by economic weakness and constrained information technology spending over the past several years has resulted, and may result in the future, in decreased revenue, gross profit, earnings, or growth rates and problems with our ability to realize customer receivables |
| In addition, customer financial difficulties have resulted, and could in the future result, in increases in bad debt write-offs and additions to reserves in our receivables portfolio |
| Uncertainty about future economic conditions makes it difficult to forecast operating results and to make decisions about future investments |
| Further delays or reductions in information technology spending could have a material adverse effect on demand for our products and services and consequently our results of operations, prospects, and stock price |
| RISING HEALTH CARE AND OTHER BENEFIT COSTS COULD ADVERSELY IMPACT OUR PROFITABILITY Health care and other benefit costs continue to increase |
| Our business is labor intensive, and therefore we have exposure to these increasing healthcare benefit costs |
| While we attempt to compensate for these escalating costs in our business cost models and customer pricing and have passed along some of these increased costs to our employees, we have long-term, generally fixed-price pricing agreements with our customers |
| WE MAY BE SUBJECT TO RISKS ASSOCIATED WITH TERRORIST ACTS OR OTHER EVENTS BEYOND OUR CONTROL Terrorist acts or acts of war (wherever located around the world) may cause damage or disruption to TechTeam, our employees, facilities, partners, suppliers, distributors, resellers, or customers, which could adversely impact our revenue, costs and expenses, and financial condition |
| WE ARE SUBJECT TO RISKS ASSOCIATED WITH OUR USE OF INTELLECTUAL PROPERTY We rely upon a combination of nondisclosure and other contractual arrangements and trade secrets, copyright, and trademark laws to protect our proprietary rights and the proprietary rights of third parties from whom we license intellectual property |
| We enter into confidentiality agreements with our employees, customers, and suppliers and limit distribution of proprietary information |
| There can be no assurance, however, that the steps taken by us in this regard will be adequate to deter misappropriation of proprietary information or that we will be able to detect unauthorized use of such information and take appropriate steps to enforce our intellectual property rights |
| Although we believe our services and/or software do not infringe upon the intellectual property rights of others and that we have all of the rights necessary to utilize the intellectual property employed in our business, we are subject to the risk of litigation alleging infringement of third-party intellectual property rights |
| Any such claims could require us to spend significant sums of money in litigation, pay damages, develop non-infringing intellectual property, or acquire licenses of the intellectual property, which may be the subject of asserted infringement |
| 14 WE MAY EXPERIENCE VOLATILITY IN OUR STOCK PRICE THAT COULD AFFECT YOUR INVESTMENT The price of our common stock has been, and may continue to be, highly volatile in response to various factors, many of which are beyond our control, including: - the depth and liquidity of the trading market for our common stock; - general economic conditions; - developments in the industries or markets in which we operate; - announcements by competitors; - actual or anticipated variations in quarterly or annual operating results; - speculation in the press or investment community; - sales of large blocks of our common stock or sales of our common stock by insiders; - regulation actions or litigation; and - departures of our key personnel |
| Our common stockapstas market price may also be affected by our inability to meet analyst and investor expectations and failure to achieve projected financial results |
| Any failure to meet such expectations or projected financial results, even if minor, could cause the market price of our common stock to decline |
| Volatility in our stock price may result in your inability to sell your shares at or above the price at which you purchased them |
| In addition, stock markets have generally experienced a high level of price and volume volatility, and the market prices of equity securities of many companies have experienced wide price fluctuations not necessarily related to the operating performance of such companies |
| These broad market fluctuations may adversely affect the market price of our common stock |
| In the past, securities class action lawsuits frequently have been instituted against such companies following periods of volatility in the market price of such companies &apos securities |
| If any such litigation is instigated against us, it could result in substantial costs and a diversion of managementapstas attention and resources, which could have a material adverse effect on our business, results of operations, and financial condition |
| CERTAIN PROVISIONS OF OUR ORGANIZATIONAL DOCUMENTS AND RIGHTS AGREEMENT, AS WELL AS APPLICABLE DELAWARE CORPORATE LAW, COULD IMPEDE AN ATTEMPT TO REPLACE OR REMOVE OUR MANAGEMENT, PREVENT THE SALE OF OUR COMPANY, OR PREVENT OR FRUSTRATE ANY ATTEMPT BY STOCKHOLDERS TO CHANGE THE DIRECTION OF OUR COMPANY, EACH OF WHICH COULD DIMINISH THE VALUE OF OUR COMMON STOCK Our certificate of incorporation and bylaws, each as amended and/or restated, as well as applicable Delaware corporate law, contain provisions that could impede an attempt to replace or remove our management or prevent the sale of our company that, in either case, stockholders might consider to be in their best interests |
| For example, our bylaws limit the ability of stockholders to call special meetings of the stockholders and establish certain advance notice procedures for nomination of candidates for election as directors and for stockholder proposals to be considered at stockholders &apos meetings |
| Our certificate of incorporation also authorizes our Board of Directors to determine the rights, preferences and restrictions of unissued series of preferred stock, without any vote or action by our stockholders |
| In addition, our Board of Directors has adopted a Rights Agreement, dated May 6, 1997, as amended, that may have anti-takeover effects by delaying, deferring or preventing an unsolicited acquisition proposal, even if the proposal may be beneficial to the interests of our stockholders |
| Further, certain anti-takeover provisions of the Delaware General Corporation Law could make it more difficult for an unsolicited bidder to acquire us |
| These provisions of our certificate of incorporation and bylaws and Delaware law may discourage potential acquisition proposals and may delay, deter, or prevent a change of control of our company, including through transactions, and in particular unsolicited transactions, that some or all of our stockholders might consider to be desirable |
| 15 WE MAY BECOME ENGAGED IN A PROXY CONTEST RELATING TO THE ELECTION OF OUR BOARD OF DIRECTORS, WHICH CONTEST COULD ADVERSELY AFFECT OUR BUSINESS Costa Brava Partnership III, LP ( "e Costa Brava "e ), the holder of approximately 8dtta8prca of our outstanding shares of Common Stock, has notified us that it will be submitting a slate of seven nominees to stand for election as our board of directors |
| The Companyapstas Board of Directors has announced its intention to nominate its own slate for election as our directors |
| As a result, the Company may be engaged in a proxy contest with respect to the election of the board of directors at its upcoming 2006 annual meeting of stockholders to be held on May 31, 2006 (the "e Proxy Contest "e ) |
| The uncertainty created by the Proxy Contest could be disruptive to our operations, possibly distracting management and impacting our ability to attract new customers |
| Further, the Board of Directors has retained the services of various professionals to assist in conducting the Proxy Contest, the costs of which are expected to impact our financial results for 2006 |
| Moreover, if Costa Brava is successful, it could result in a default under the terms of our business loan agreements with LaSalle Bank Midwest, NA, which we do not believe will cause the loans to become due and payable, but there can be no assurances in this regard |
| As a result of the foregoing, the Proxy Contest could potentially have a material adverse affect on our business, financial condition and results of operations, at least in the short term |