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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------- ----------------
Commission file number 0-23239
UBICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 34-1744587
(State or other jurisdiction of (I.R.S.Employer Identification No.)
incorporation or organization)
333 TECHNOLOGY DRIVE, SUITE 210 SOUTHPOINTE, CANONSBURG, PENNSYLVANIA 15317
(Address of principal executive offices) (Zip code)
(724) 746-6001
(Registrant's telephone number, including area code)
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 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 [ ]
As of August 12, 2002, 6,938,709 shares of common stock, par value $0.01
per share, of the Registrant were outstanding.
UBICS, INC.
Form 10-Q
TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2002 (unaudited) and
December 31, 2001 3
Consolidated Statements of Operations (unaudited) for the three and six
months ended June 30, 2002 and 2001. 4
Consolidated Statements of Cash Flows (unaudited) for the six months
ended June 30, 2002 and 2001 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 20
EXHIBIT INDEX 21
2
UBICS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
June 30, December 31,
2002 2001
----------- ------------
ASSETS (unaudited) (audited)
Current assets:
Cash and cash equivalents ................................ $ 7,200 $ 7,088
Accounts receivable, net of allowance for
doubtful accounts of $500 and $500, respectively....... 1,877 2,464
Unbilled receivables ..................................... 1,794 1,665
Employee advances ........................................ 33 50
Prepaids and other ....................................... 257 1,051
Deferred tax asset ....................................... 661 761
------- -------
Total current assets .................................. 11,822 13,079
------- -------
Property and equipment:
Leasehold improvements ................................... 135 135
Vehicles ................................................. 86 92
Computer equipment and software .......................... 1,349 1,318
Furniture and fixtures ................................... 714 714
------- -------
Total property and equipment .......................... 2,284 2,259
Accumulated depreciation ................................. (1,546) (1,264)
------- -------
Net property and equipment ............................ 738 995
------- -------
Goodwill, net of amortization ............................ 1,932 4,376
Notes receivable ......................................... 983 983
Deferred tax asset and other long-term assets ............ 124 1,175
------- -------
Total assets ....................................... $15,599 $20,608
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................... $ 757 $ 1,172
Payroll liabilities ...................................... 1,623 2,323
Other current liabilities ................................ 1,551 1,935
Deferred revenue ......................................... 14 91
Due to affiliates, net ................................... 10 10
------- -------
Total current liabilities ............................. 3,955 5,531
Deferred tax liability and other long term liabilities ... 241 100
------- -------
Total liabilities ..................................... 4,196 5,631
------- -------
Minority interest in consolidated subsidiary ................ -- 13
Common stock, subject to redemption, $0.01 par
value, 183,200 shares issued and outstanding ................ 550 550
Stockholders' equity:
Preferred stock, $0.01 par value, 2,000,000 shares
authorized, no shares issued and outstanding .......... -- --
Common stock, $0.01 par value, 20,000,000 shares
authorized, 7,003,324 shares issued ................... 70 70
Additional paid-in capital ............................... 14,171 14,171
Treasury stock - 247,815 and 220,115 shares,
Respectively, at cost ................................. (258) (239)
Retained earnings (deficit) .............................. (3,124) 423
Accumulated other comprehensive loss ..................... (6) (11)
------- -------
Total stockholders' equity ............................ 10,853 14,414
------- -------
Total liabilities and stockholders' equity ......... $15,599 $20,608
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
3
UBICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except per share amounts)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Revenues ........................................ $ 6,606 $ 10,599 $ 13,401 $ 21,376
Cost of revenues ................................ 4,530 7,740 9,357 16,356
---------- ---------- ---------- ----------
Gross profit ................................. 2,076 2,859 4,044 5,020
Selling, general and administrative
expenses ..................................... 2,300 3,783 4,634 7,192
---------- ---------- ---------- ----------
Loss from operations ............................ (224) (924) (590) (2,172)
Minority interest ............................... 4 -- 13 --
Interest income, net ............................ 31 101 66 247
---------- ---------- ---------- ----------
Loss before income taxes and
Cumulative effect of a change in accounting
Principle .................................... (189) (823) (511) (1,925)
Cumulative effect of a change in accounting
Principle .................................... -- -- (2,444) --
Provision (benefit) for income taxes ............ 669 (288) 592 (675)
---------- ---------- ---------- ----------
Net loss ........................................ $ (858) $ (535) $ (3,547) $ (1,250)
========== ========== ========== ==========
Basic and diluted loss
per share .................................... $ (0.12) $ (0.08) $ (0.51) $ (0.18)
========== ========== ========== ==========
Basic - weighted average shares
Outstanding .................................. 6,939,709 7,012,151 6,944,575 7,012,151
========== ========== ========== ==========
Diluted - weighted average shares
Outstanding .................................. 6,939,709 7,012,151 6,944,575 7,012,151
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
4
UBICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
For the Six Months Ended
June 30,
2002 2001
------- -------
Cash flows from operating activities:
Net loss .............................................. $(3,547) $(1,250)
Adjustments to reconcile net loss to
net cash used by operating activities--
Depreciation ....................................... 282 232
Amortization of goodwill ........................... -- 91
Goodwill impairment ................................ 2,444 --
Deferred income taxes .............................. 669 --
Asset impairment ................................... -- 618
Minority interest .................................. (13) --
Changes in assets and liabilities--
Accounts receivable ............................. 587 705
Unbilled receivables ............................ (129) 510
Employee advances ............................... 17 24
Due to affiliates, net .......................... -- 24
Income tax refund ............................... --
1,485
Prepaids and other .............................. (31) (864)
Other long-term assets .......................... 63 --
Accounts payable ................................ (415) (622)
Payroll liabilities ............................. (700) (230)
Accrued taxes and other current liabilities ..... (453) (1,850)
Long term liabilities ........................... (100) --
------- -------
Net cash provided (used) by operating activities ... 159 (2,612)
------- -------
Cash flows from investing activities:
Purchases of property and equipment ................... (33) (159)
Cash paid for acquisitions, net of cash acquired ...... -- 141
------- -------
Net cash used by investing activities .............. (33) (18)
------- -------
Cash flows from financing activities:
Purchase of treasury stock ............................ (19) --
------- -------
Net cash used by financing activities .............. (19) --
------- -------
Effect of currency translation on cash ................... 5 --
Net increase (decrease) in cash and cash equivalents ..... 112 (2,630)
Cash and cash equivalents, at beginning of period ........ 7,088 10,477
------- -------
Cash and cash equivalents, at end of period .............. $ 7,200 $ 7,847
======= =======
Supplemental data:
Cash payments for income taxes ........................ $ -- $ 108
Fair value of:
Assets acquired .................................... $ -- $ 2,447
Liabilities assumed ................................ -- (605)
Due to seller ...................................... -- (1,983)
------- -------
Cash acquired ...................................... $ -- $ (141)
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
5
UBICS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The financial statements of UBICS, Inc. ("UBICS" or "the Company")
presented herein are unaudited. Certain information and footnote disclosures
normally prepared in accordance with accounting principles generally accepted in
the United States have been either condensed or omitted pursuant to the rules
and regulations of the Securities and Exchange Commission. Although the Company
believes that all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation have been made, interim periods are not
necessarily indicative of the consolidated financial results of operations for a
full year. As such, these unaudited consolidated financial statements should be
read in conjunction with the financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for its fiscal year ended December 31,
2001.
2. OPERATIONS:
UBICS, a Delaware corporation, provides information technology (IT)
professional services to large and mid-sized organizations. The Company provides
its clients with a wide range of professional services in such areas as
client/server design and development, enterprise resource planning package
implementation and customization, e-commerce applications design and
development, applications maintenance programming and database and systems
administration.
3. OTHER CURRENT LIABILITIES:
Other current liabilities consisted of the following at June 30, 2002 and
December 31, 2001:
June 30, 2002 December 31, 2001
------------- -----------------
(unaudited)
Restructuring liabilities $ 401 $ 539
Other current liabilities 1,150 1,396
------ ------
Other current liabilities $1,551 $1,935
====== ======
4. COMPREHENSIVE LOSS:
Total comprehensive loss for the three months ended June 30, 2002 and 2001
and the six months ended June 30, 2002 and 2001 was as follows (in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
Net loss $(858) $(535) $(3,547) $(1,250)
Foreign currency translation
adjustments 13 -- 5 --
----- ----- ------- -------
Comprehensive loss $(845) $(535) $(3,542) $(1,250)
====== ===== ======= =======
6
5. EARNINGS PER SHARE:
Reconciliation of diluted shares (dollars in thousands, except per share
amounts):
Three Months Ended June 30,
2002 2001
----------- -----------
(unaudited) (unaudited)
Basic loss per share
Net loss $ (858) $ (535)
---------- ----------
Divided by:
Weighted average common shares outstanding 6,939,709 7,012,151
---------- ----------
Basic loss per share $ (0.12) $ (0.08)
========== ==========
Diluted loss per share
Net loss $ (858) $ (535)
---------- ----------
Divided by:
Weighted average common shares outstanding 6,939,709 7,012,151
Dilutive effect of common stock equivalents -- --
---------- ----------
Dilutive weighted average common shares
outstanding 6,939,709 7,012,151
---------- ----------
Diluted loss per share $ (0.12) $ (0.08)
========== ==========
Six Months Ended June 30,
2002 2001
----------- -----------
(unaudited) (unaudited)
Basic loss per share
Net loss $ (3,547) $ (1,250)
---------- ----------
Divided by:
Weighted average common shares outstanding 6,944,575 7,012,151
---------- ----------
Basic loss per share $ (0.51) $ (0.18)
========== ==========
Diluted loss per share
Net loss $ (3,547) $ (1,250)
---------- ----------
Divided by:
Weighted average common shares outstanding 6,944,575 7,012,151
Dilutive effect of common stock equivalents -- --
---------- ----------
Dilutive weighted average common shares 6,944,575 7,012,151
---------- ----------
outstanding
Diluted loss per share $ (0.51) $ (0.18)
========== ==========
For the three months and six months ended June 30, 2002, options to
purchase 975,750 shares were excluded from the calculation of diluted loss per
share as the effect would be anti-dilutive due to the exercise price of such
options exceeding the average market price for the period. The number of
anti-dilutive stock options omitted from the computation of dilutive average
common shares for the three months and six months ended June 30, 2001 were
1,246,000.
7
6. ACQUISITION:
The Company completed the acquisition of all of the outstanding common
stock of Oakwood Technical Services Limited, European Software Services (UK)
Limited and Reflex I.T. Solutions Limited (collectively referred to as
"Oakwood") in the United Kingdom on March 30, 2001 for a consideration of 1.4
million Pounds Sterling or approximately US$2.0 million. The 1.4 million Pounds
Sterling was to be paid to the escrow agent as follows: 1.1 million Pounds
Sterling paid on the purchase date, 151,667 Pounds Sterling paid twelve months
after the closing and the remaining 151,667 Pounds Sterling eighteen months
after the closing. On December 21, 2001 the parties agreed to reduce the
purchase price to 1.1 million Pounds Sterling or approximately US$1.6 million,
thereby eliminating the Company's obligation to make subsequent payments to the
escrow agent. The Company felt the acquisition was necessary to expand its
European presence. Oakwood engages in the business of information, consulting
and technical services ranging from high-level strategic human resources
planning to project outsourcing and on-site consulting. The Oakwood acquisition
expanded the Company's presence in the European market. The results of Oakwood's
operations have been included in the consolidated financial statements since
April 1, 2001. The consideration of 1.1 million Pounds Sterling was paid to the
escrow agent on the closing and is to be distributed to the seller as follows:
(a) First installment of 490,000 Pounds Sterling on closing
(b) Second installment of 303,333 Pounds Sterling six months after the
closing date
(c) Third installment of 60,667 Pounds Sterling on January 1, 2002
(d) Fourth installment of 60,666 Pounds Sterling on April 1, 2002
(e) Fifth installment of 60,667 Pounds Sterling on July 1, 2002
(f) Sixth installment of 60,666 Pounds Sterling on October 1, 2002; and
(g) Seventh and final installment of 60,667 Pounds Sterling on December
31, 2002.
The excess of the purchase price over the net assets acquired ($1,822,583)
has been allocated to goodwill. None of the goodwill is expected to be
deductible for tax purposes. The Company was willing to pay the purchase price
based on the acquired workforce and synergies which were expected to increase
future profits.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition (in thousands).
Current assets $ 499
Net property and equipment 34
Goodwill 1,823
------
Total assets acquired 2,356
Current liabilities 655
------
Total liabilities 655
------
Net assets acquired $1,701
======
The Company, through its UBIX Computer Services subsidiary, completed the
acquisition of seventy percent (70%) of the equity share capital of DSF Internet
Services Private Limited ("DSF") in India on September 6, 2001 for a
consideration of US$825,000. DSF engages in the business of offshore development
of software, including video/audio streaming, web designing and content
management. The Company believed the acquisition was necessary to obtain cost
effective offshore capabilities. The DSF acquisition provides the Company an
offshore development option for its clients. The results of DSF's operations
have been included in the consolidated financial statements since that date. In
the transaction, UBICS also agreed to satisfy the seller's obligation to Fifth
Dimension Limited for its mediation services in connection with the transaction
by paying $175,000 and issuing 219,173 shares of the common stock of the Company
to Fifth Dimension. The $825,000 is payable to the seller as follows:
(a) An amount of $87,500 was paid by wire transfer to the seller as a down
payment on June 5, 2001
(b) An amount of $125,000 was paid to the seller on the closing date
(c) An amount of $612,500 was deposited into an escrow account on
September 28, 2001. Of such amount, $112,500 may be released to the
seller six months after the closing date, $200,000 may be released to
the seller on the first anniversary of the closing date, $200,000 may
be released to the seller eighteen months after the closing date, and
the remaining $100,000 may be released to the seller on the later of:
i. May 30, 2003
ii. Ten days after all taxes payable by DSF in connection with the
agreement have been determined
iii. The business day following the date that UBICS receives payment
of the working capital adjustment, if any, under the agreement.
8
The $175,000 was paid to Fifth Dimension on the closing date. The 219,173
shares of the common stock of the Company were issued to Fifth Dimension on the
closing date and deposited into escrow. The shares may be released to Fifth
Dimension as follows:
(a) 65,752 shares of the common stock of the Company may be released to
Fifth Dimension at any time on or after the closing date
(b) Second installment of 43,835 shares of the common stock of the Company
may be released to Fifth Dimension six months after the closing date
(c) Third installment of 43,835 shares of the common stock of the Company
may be released to Fifth Dimension on the first anniversary of the
closing date
(d) Fourth installment of 43,835 shares of the common stock of the Company
may be released to Fifth Dimension eighteen months after the closing
date
(e) Fifth installment of 21,916 shares of the common stock of the Company
may be released to Fifth Dimension on the later of:
i. May 30, 2003
ii. Ten days after all taxes payable by DSF in connection with the
agreement have been determined
iii. The business day following the date that UBICS receives payment
of the working capital adjustment, if any, under the agreement
The excess of the purchase price over the net assets acquired ($1,166,848)
has been allocated to goodwill. None of the goodwill is expected to be deducible
for tax purposes. The Company was willing to pay the purchase price based on the
acquired workforce and expected future profits as a result of lowered costs of
sales.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition (in thousands).
Current assets $ 81
Net property and equipment 51
Intangible assets 5
Goodwill 1,167
------
Total assets acquired 1,304
Current liabilities 147
Long-term liabilities 2
------
Total liabilities 149
------
Net assets acquired $1,155
======
The Company has consolidated the results of operations for each of the
acquired entities as of the respective merger date. The following table reports
pro forma information as if the acquisition of Oakwood and DSF had been
completed at the beginning of the stated periods (unaudited, in thousands,
except per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues As reported $6,606 $10,599 $13,401 $21,376
Pro forma 6,606 11,667 13,401 22,243
Net loss As reported $ (858) $ (535) $(3,547) $(1,250)
Pro forma (858) (527) (3,547) (1,232)
Basic and diluted loss per share As reported $(0.12) $ (0.08) $ (0.51) $ (0.18)
Pro forma (0.12) (0.07) (0.51) (0.17)
7. USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires
9
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
8. SHARE REPURCHASE PROGRAM:
On July 3, 2001, the Company announced that its Board of Directors had
approved a stock repurchase plan for up to an additional $500,000 of the total
outstanding shares of the Company. The repurchases of common stock may occur
from time to time on the open market or through privately negotiated
transactions funded through cash on hand. As of June 30, 2002, the Company has
purchased 247,815 shares at a cost of $258,134 and has placed these shares in
treasury. Any gains or losses incurred on the transactions based upon these
shares will be properly offset to additional paid-in capital in accordance with
accounting principles generally accepted in the United States.
9. INCOME TAXES:
The Company's effective tax provision was (354.0)% for the three months
ended June 30, 2002, compared to an effective tax benefit of 35.0% for the three
months ended June 30, 2001. The change in rate was primarily the result of the
effect of various international tax rates and the mix of domestic and foreign
net income and the reduction in deferred tax assets as a result of the
utilization of the NOL carrybacks in the current period and resulting tax
refund.
10. RECENTLY ISSUED ACCOUNTING STANDARDS:
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144 ("SFAS 144") Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, APB Opinion No. 30,
Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions and ARB No. 51, Consolidated Financial Statements. This
statement is effective for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. The adoption of SFAS 144 has had no
impact on the Company's consolidated financial position or results of
operations.
In April 2002, FASB issued Statement of Financial Accounting Standards No.
145 Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections ("SFAS 145"). SFAS 145 updates, clarifies, and
simplifies existing accounting pronouncements. The Company is currently
evaluating the provisions of this statement.
In July 2002, FASB issued Statement of Financial Accounting Standards No.
146 Accounting for Costs Associated with Exit or Disposal Activities ("SFAS
146"). SFAS 146 address financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS 146 requires that a company recognize a liability for
a cost associated with an exit or disposal activity only when it meets the
definition of liability (i.e., when the liability is incurred). SFAS 146
also requires that the initial measurement of the liability be at its fair
value. This statement is effective on a prospective basis for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. The Company is currently evaluating the provisions of this
SFAS 146.
11. GOODWILL:
At the beginning of fiscal year 2002, the Company adopted SFAS No.
142, Goodwill other Intangibles ("SFAS 142") under which goodwill and other
intangible assets with indefinite lives are not amortized. In accordance with
SFAS 142, the Company evaluated the carrying amount of its existing goodwill
and $2.4 million was deemed impaired under these standards. The fair value used
to evaluate goodwill was determined based upon a comparison of carrying value to
fair market value as determined by a valuation technique using comparative sales
values. This impairment loss is an estimate that has not yet been finalized as
of June 30, 2002. The amount will be finalized upon completion of step 2 of the
impairment test. In addition, each year, the Company will evaluate the goodwill
for impairment with any resulting impairment reported as an operating expense.
10
The change in the carrying amount of goodwill for the six months ended
June 30, 2002 is as follows (dollars in thousands):
Balance as of January 1, 2002 .......... $ 4,376
Impairment losses ...................... (2,444)
-------
Balance as of June 30, 2002 ............ $ 1,932
=======
The following table is the Company's disclosure of what reported net
income, basic earnings per share, and diluted earnings per share would have been
if the non-amortization provisions of SFAS 142 had been adopted in all periods
presented (dollars in thousands except per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
Reported net loss ................... $ (858) $ (535) $(3,547) $(1,250)
Goodwill amortization ............ -- 63 -- 91
------ ------ ------- -------
Adjusted net loss ................... $ (858) $ (472) $(3,547) $(1,159)
====== ====== ======= =======
Basic loss per share ................ $(0.12) $(0.08) $ (0.51) $ (0.18)
Goodwill amortization ............ -- .01 -- .01
------ ------ ------- -------
Adjusted basic loss per share ....... $(0.12) $(0.07) $ (0.51) $ (0.17)
====== ====== ======= =======
Diluted loss per share .............. $(0.12) $(0.08) $ (0.51) $ (0.18)
Goodwill amortization ............ -- .01 -- .01
------ ------ ------- -------
Adjusted diluted loss per share ..... $(0.12) $(0.07) $ (0.51) $ (0.17)
====== ====== ======= =======
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction
with Part II, Item 7 of the Company's Annual Report on Form 10-K for the year
ended December 31, 2001 (the "2001 Form 10-K"). The following discussion should
also be read in conjunction with the Consolidated Financial Statements and notes
thereto appearing elsewhere in this Quarterly Report on Form 10-Q ("Form 10-Q").
The information contained herein is not a comprehensive management overview and
analysis of the financial condition and results of operations of the Company,
but rather updates disclosures made in the 2001 Form 10-K.
Some of the statements in this Form 10-Q that are not historical facts
are forward-looking statements. These forward-looking statements include the
Company's financial, growth, and liquidity projections, as well as statements
concerning the Company's plans, strategies, intentions and beliefs concerning
the Company's business, cash flows, costs, and the markets in which the Company
operates. These statements are based on information currently available to the
Company, and the Company assumes no obligation to update these statements as
circumstances change. There are risks and uncertainties that could cause actual
events to differ materially from these forward-looking statements. These risks
include, but are not limited to, the level of market demand for the Company's
services, the highly-competitive market for the types of services that the
Company offers, market conditions that could cause the Company's customers to
reduce their spending for the Company's services or cause prospective customers
to decide not to engage third-party providers of Information Technology (IT)
services, the Company's ability to acquire new businesses and to grow its
existing businesses, the Company's ability to attract and retain qualified
personnel, currency fluctuations and market conditions in India and elsewhere
around the world, and the Company's ability to reduce costs and conserve cash in
an uncertain economic environment. While the Company cannot predict all of these
risks and uncertainties, investors should also review the risks and
uncertainties described in the 2001 Form 10-K.
OVERVIEW
UBICS, founded in 1993, provides Information Technology (IT) professional
services to large and mid-sized organizations. UBICS provides its clients with a
wide range of professional services in such areas as client/server design and
development, Enterprise Resource Package (ERP) implementation and customization,
e-commerce applications design and development, applications maintenance
programming, and database and systems administration. UBICS' services are
provided primarily on a time-and-materials basis to client-managed projects,
with UBICS IT professionals providing integral support as project team members.
With respect to website design and development projects, UBICS' services are
provided on a fixed price basis. The Company's revenues are based on the hourly
billing of its IT professional services and on the fixed prices for its website
design and development services. Revenue is recognized as services are provided.
UBICS effectively minimizes the number of days IT professionals are not
assigned to projects by proactively marketing these professionals to clients.
Resource managers closely monitor the availability of IT professionals and
utilize subcontractors when UBICS IT professionals are unavailable. The Company
maintains strong relationships with nearly 80 subcontractors located worldwide.
For the six months ended June 30, 2002, approximately 35% of the Company's
revenues were derived from IT professionals deployed from subcontractors. As of
June 30, 2002, IT professionals deployed from subcontractors comprised 63 of the
Company's 184 deployed IT professionals. The Company believes that its network
of subcontractors enables it to maintain closer relationships with clients by
fulfilling more of their needs for IT professional services. Management believes
that as the Company increases its investment in recruiting and retaining
qualified IT professionals, the ratio of UBICS IT professionals to subcontractor
IT professionals will increase.
Since inception, the Company has developed relationships with 700 clients
in a range of industries and currently has IT professionals deployed at nearly
80 of these clients. The Company's five largest clients accounted for
approximately 29% of revenues for the six months ended June 30, 2002. While this
revenue concentration has remained fairly constant, the Company believes that
the continuing growth in its client base and revenues should reduce the
percentage of revenue attributable to its largest clients. The Company's
strategy is to continue to provide services to clients in a wide range of
industries, in order to reduce credit risk from conditions or occurrences within
any specific industry or region in which these clients operate.
On March 30, 2001, the Company completed the acquisition of all of the
outstanding common stock of Oakwood Technical Services Limited, European
Software Services (UK) Limited and Reflex I.T. Solutions Limited in the United
Kingdom for a consideration of 1.4 million Pounds Sterling or approximately
US$2.0 million. On December 21, 2001, the parties agreed to reduce the total
consideration to be paid by the Company to 1.1 million Pounds Sterling or
approximately US$1.6 million.
12
On September 6, 2001, the Company, through its UBIX Computer Services
Limited subsidiary, completed the acquisition of seventy percent (70)% of the
equity share capital of DSF Internet Services Private Limited in India for a
purchase price of $825,000. In the transaction, UBICS has agreed to satisfy the
seller's obligation to Fifth Dimension Limited for its mediation services in
connection with the transaction by paying $175,000 and issuing 219,173 shares of
the common stock of the Company to Fifth Dimension.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statements of operations data as a percentage of revenues:
Percentage of Revenues
Three Months Six Months
Ended June 30 Ended June 30
2002 2001 2002 2001
----- ----- ----- -----
Revenues .................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues ............................ 68.6 73.0 69.8 76.5
----- ----- ----- -----
Gross profit ................................ 31.4 27.0 30.2 23.5
Selling, general and administrative
expenses ................................. 34.8 35.7 34.6 33.6
----- ----- ----- -----
Loss from operations ........................ (3.4) (8.7) (4.4) (10.1)
Interest income, net ........................ 0.5 0.9 0.6 1.1
----- ----- ----- -----
Loss before income taxes and cumulative
effect of a change in accounting
principle ................................... (2.9) (7.8) (3.8) (9.0)
Cumulative effect of a change in
accounting principle ..................... -- -- (18.2) --
Provision (benefit) for income taxes ........ 10.1 (2.7) 4.4 (3.2)
----- ----- ----- -----
Net loss .................................... (13.0)% (5.1)% (26.5)% (5.8)%
===== ===== ===== =====
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001.
Revenues
Revenues for the quarter ended June 30, 2002 were $6.6 million,
compared to $10.6 million for the quarter ended June 30, 2001, a decrease of
$4.0 million, or 38%. The decrease in revenues was due to weaker demand in the
IT staffing industry. The number of the Company's deployed IT professionals
decreased to 184 at June 30, 2002 from 251 at June 30, 2001.
Gross Profit
Gross profit consists of revenues less cost of revenues. Cost of
revenues is comprised principally of IT professional salaries and benefits,
including subcontractor professional costs and relocation expenses. Gross profit
for the quarter ended June 30, 2002 was $2.1 million, compared to $2.9 million
for the quarter ended June 30, 2001, a decrease of $0.8 million, or 27%. Gross
profit as a percentage of revenues increased to 31.4% for the quarter ended June
30, 2002 from 27.0% for the quarter ended June 30, 2001. The increase in gross
profit as a percentage of revenues resulted primarily from better management of
the Company's bench, i.e., its undeployed IT professionals.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses consist of costs
associated with the Company's sales and marketing efforts, executive, finance
and human resource functions, facilities, telecommunications and other general
overhead expenses. SG&A expenses for the quarter ended June 30, 2002 were $2.3
million, compared to $3.8 million for the quarter ended June 30, 2001, a
decrease of $1.5 million or 39.2%. The decrease in SG&A was primarily due to
reductions in home office staffing and a $618,000 write-off for the PeopleSoft
implementation taken in the second quarter of 2001. SG&A expenses as a
percentage of revenues decreased to 34.8% for the quarter ended June 30, 2002
from 35.7% for the comparable quarter in 2001. The decrease was primarily due to
a decrease in overhead staff.
13
Interest Income, Net
Interest income, net for the three months ended June 30, 2002, was
$31,000 compared to interest income of $101,000 for the three months ended June
30, 2001. The decrease resulted primarily from the reduction in the amount of
cash available for short-term investments and lower interest rates.
Provision (Benefit) for Income Taxes
The Company's effective tax provision was (354.0)% for the three
months ended June 30, 2002, compared to an effective tax benefit of 35.0% for
the three months ended June 30, 2001. The change in rate was primarily the
result of the effect of various international tax rates and the mix of domestic
and foreign net income and the reduction in deferred tax assets as a result of
the utilization of the NOL carrybacks in the current period and resulting tax
refund. The deferred tax asset was reduced as a result of a re-evaluation of
such asset.
Goodwill Impairment
At the beginning of fiscal year 2002, the Company adopted SFAS No.
142, under which goodwill and other intangible assets with indefinite lives are
not amortized. In accordance with SFAS No. 142, the Company evaluated the
carrying amount of its existing goodwill and $2.4 million was deemed impaired
under this standard. This impairment loss is an estimate that has not yet been
finalized as of June 30, 2000. The amount will be finalized upon completion of
Step 2 of the impairment test. In addition, each year the Company will evaluate
the goodwill for impairment with any resulting impairment reflected as an
operating expense.
The change in the carrying amount of goodwill for the three months
ended June 30, 2002 is as follows (dollars in thousands):
Balance as of April 1, 2002............. $1,932
Impairment losses....................... --
------
Balance as of June 30, 2002............. $1,932
======
Net Loss
Net loss for the three months ended June 30, 2002 was $858,000,
compared to net loss of $538,000 for the three months ended June 30, 2001, an
increase of $323,000 or 60.4%. The net loss as a percentage of revenues
increased to (13.0)% for the three months ended June 30, 2002, compared to
(5.0)% for the three months ended June 30, 2001. The increase in net loss was
primarily due to lower sales and a higher effective tax rate.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001.
Revenues
Revenues for the six months ended June 30, 2002 were $13.4 million,
compared to $21.4 million for the six months ended June 30, 2001, a decrease of
$8.0 million, or 37%. The decrease in revenues was due to weaker demand in the
IT staffing industry. The number of the Company's deployed IT professionals
decreased to 184 at June 30, 2002 from 251 at June 30, 2001.
Gross Profit
Gross profit for the six months ended June 30, 2002 was $4.0 million,
compared to $5.0 million for the six months ended June 30, 2001, a decrease of
$1.0 million, or 19%. Gross profit as a percentage of revenues increased to
30.2% for the six months ended June 30, 2002 from 22.5% for the six months ended
June 30, 2001. The increase in gross profit as a percentage of revenues resulted
primarily from better management of the Company's bench, i.e., its undeployed IT
professionals.
Selling, General and Administrative Expenses
SG&A expenses for the six months ended June 30, 2002 were $4.6
million, compared to $7.2 million for the six months ended June 30, 2001, a
decrease of $2.6 million or 35.6%. The decrease in SG&A was primarily due to
reductions in home office staffing and PeopleSoft write-off. SG&A expenses as a
percentage of revenues increased to 34.3% for the six months ended June 30, 2002
from 33.7% for the
14
comparable period in 2001. The increase was primarily due to a decrease in
revenue for the same period.
Interest Income, Net
Interest income, net for the six months ended June 30, 2002, was
$66,000 compared to interest income, net of $247,000 for the six months ended
June 30, 2001. The decrease resulted primarily from the reduction in the amount
of cash available for short-term investments and lower interest rates. The
deferred tax asset was reduced as a result of a re-evaluation of such asset.
Provision (Benefit) for Income Taxes
The Company's effective tax provision was (4.4)% for the six months
ended June 30, 2002, compared to an effective tax benefit of 35.1% for the six
months ended June 30, 2001. The change in rate was primarily the result of the
effect of various international tax rates and the mix of domestic and foreign
net income and the reduction in deferred tax assets as a result of the
utilization of the NOL carrybacks in the current period and resulting tax
refund.
Goodwill Impairment
At the beginning of fiscal year 2002, the Company adopted SFAS No.
142, under which goodwill and other intangible assets with indefinite lives are
not amortized. In accordance with SFAS No. 142, the Company evaluated the
carrying amount of its existing goodwill and $2.4 million was deemed impaired
under this standard. This impairment loss is an estimate that has not yet been
finalized as of June 30, 2000. The amount will be finalized upon completion of
Step 2 of the impairment test. In addition, each year, the Company will evaluate
the goodwill for impairment with any resulting impairment reflected as an
operating expense.
The change in the carrying amount of goodwill for the six months ended
June 30, 2002 is as follows (dollars in thousands):
Balance as of January 1, 2002........... $ 4,376
Impairment losses....................... (2,444)
-------
Balance as of June 30, 2002............. $ 1,932
=======
Net Loss
Net loss for the six months ended June 30, 2002 was $3.5 million,
compared to net loss of $1.3 million for the six months ended June 30, 2001, an
increase of $2.3 million or 183.8%. The net loss as a percentage of revenues
increased to (26.5)% for the six months ended June 30, 2002, compared to (5.9)%
for the six months ended June 30, 2001. The increase in net loss was primarily
due to lower revenue, the $2.4 million cumulative effect of a change in
accounting principle the Company incurred in conjunction with the adoption of
SFAS No. 142, and a higher effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $0.2 million for the six
months ended June 30, 2002 compared to net cash used by operating activities of
$2.6 million for the comparable period in 2001. Net cash provided by operating
activities for the six months ended June 30, 2002 is primarily due to a tax
refund of $1.5 million resulting from a net operating loss carryback offset by
payments for various liabilities. Net cash used by operating activities of $2.6
million for the six months ended June 30, 2001 is primarily due to a net loss of
$1.3 million and payments made on various liabilities.
Net cash used by investing activities was $33,000 for the six months
ended June 30, 2002, as compared to $18,000 for the same period in 2001. The
increase was a result of lower capital purchases during the period offset by
cash acquired in the Oakwood acquisition in 2001.
Net cash used by financing activities was $19,000 for the six months
ended June 30, 2002, an increase of $19,000 from the same period in 2001. The
increase was due to treasury stock purchased under the Company's share
repurchase program in 2002.
For the six months ended June 30, 2002, the Company continued its
program to repurchase, from time to time, up to an additional $500,000 of its
outstanding capital stock for investment or other general corporate purposes.
This board approved repurchase program was announced on July 3, 2001. During the
six months ended June 30, 2002, the Company purchased 28,000 shares of its
capital stock at a total
15
cost of $19,000, bringing the total number of shares purchased to 248,000
shares. The repurchases were financed principally from cash on hand. Repurchases
may be made from time to time in the open market, in negotiated or other
permissible transactions.
Capital expenditures for the six months ended June 30, 2002 and 2001
were $33,000 and $159,000, respectively. Because of the economic slowdown, the
Company has deferred previously disclosed plans to establish offshore recruiting
offices in various foreign locations. Except as set forth above, the Company
currently has no material commitments for capital expenditures.
The Company currently anticipates that $7.2 million in available cash
balances, together with the existing sources of liquidity and cash generated
from operations, will be sufficient to satisfy its cash needs at least through
the next twelve months.
The Company's functional currency for financial reporting purposes is
the U.S. Dollar. The Company generally invoices its clients and pays expenses in
the local currency of the country in which the client is located. Statements of
Operations translation gains and losses arising from differences between the
functional and local currencies are recognized in the Consolidated Statements of
Operations, and have not had a significant impact on the results of operations.
Balance Sheet gains and losses as a result of fluctuations in foreign currency
exchange rates are recognized in the Consolidated Balance Sheet as a component
of comprehensive loss. The Company continually evaluates the economic conditions
of each country in which it operates, and bases its foreign currency accounting
policies on those assessments.
RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets ("SFAS 144"). This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement supersedes FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, APB Opinion No.
30, Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions and ARB No. 51, Consolidated Financial Statements. This
statement is effective for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. The adoption of SFAS 144 has had no
impact on the Company's consolidated financial position or results of
operations.
In April 2002, FASB issued Statement of Financial Accounting Standards No.
145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections ("SFAS 145"). SFAS 145 updates,
clarifies, and simplifies existing accounting pronouncements. The Company is
currently evaluating the provisions of this statement.
In July 2002, FASB issued Statement of Financial Accounting Standards No.
146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS
146"). SFAS 146 address financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS 146 requires that a Company recognize a liability for
a cost associated with an exit or disposal activity only when it meets the
definition of liability (i.e., when the liability is incurred). SFAS 146
also requires that the initial measurement of the liability be at its fair
value. This statement is effective on a prospective basis for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. The Company is currently evaluating the provisions of SFAS 146.
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company currently does not invest excess funds in derivative
financial instruments or other market risk sensitive instruments for the purpose
of managing its foreign currency exchange rate risk or for any other purpose.
The fair values and carrying amounts of the Company's financial
instruments, primarily accounts receivable and accounts payable are
approximately equivalent. All other financial instruments are classified as
current and will be utilized within the next 12 months.
The financial statements of foreign subsidiaries are translated using the
exchange rate in effect at year-end for balance sheet accounts and the average
exchange rate in effect during the period for revenue and expense accounts.
The Company's functional currency for financial reporting purposes is the
U.S. Dollar. The Company generally invoices its clients and pays expenses in the
local currency of the country in which the client is located. Statements of
Operations translation gains and
16
losses arising from differences between the functional and local currencies are
recognized in the Consolidated Statements of Operations and have not had a
significant impact on the results of operations. Balance Sheet gains and losses
as a result of fluctuations in foreign currency exchange rates are recognized in
the Consolidated Statements of Changes in Stockholders' Equity as a component of
accumulated other comprehensive loss. The Company continually evaluates the
economic conditions of each country in which it operates, and bases its foreign
currency accounting policies on those assessments.
17
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor any of its subsidiaries is a party to any material
pending legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
Nothing to report under this item.
Item 3. Defaults Upon Senior Securities
Nothing to report under this item.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The company held its 2002 Annual Meeting of Shareholders (the "2002
Annual Meeting") on May 17, 2002.
(b) The following matter was voted upon at the 2002 Annual Meeting, with
the results indicated:
Election of Director: The following votes were cast for the nominees
standing for election as directors of the Company for a three year
term:
Nominee: Robert C. Harbage
Votes For: 5,874,674
Votes Withheld: 34,188
Nominee: Scott R. Heldfond
Votes For: 5,881,014
Votes Withheld: 27,846
Nominee: Rahul Merchant
Votes For: 5,881,014
Votes Withheld: 27,846
Item 5. Other Information
Nothing to report under this item.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
2.1 Share Purchase Agreement dated as of March 30, 2001 between
UBICS, Inc. and Teksys, Inc. (2)
2.2 Share Purchase Agreement, dated as of September 4, 2001, among
UBIX Computer Services Limited and Anmol Taneja and Vani Taneja
(3)
2.3 Amendment to Share Purchase Agreement dated as of December 21,
2001 between UBICS, Inc. and Teksys Inc. (4)
3.1 Amended and Restated Certificate of Incorporation of UBICS, Inc.
(1)
3.2 Amended and Restated Bylaws of UBICS, Inc. (1)
99.1 Certification Pursuant to 18 U.S.G. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
99.2 Certification Pursuant to 18 U.S.G. Section 1350, as adopted
pursuant to Section 906
18
of the Sarbanes-Oxley Act of 2002 (filed herewith).
(1) Incorporated by reference to the registrant's Registration
Statement on Form S-1, No. 333-35171, filed September 8, 1997.
(2) Incorporated by reference to Form 8-K of the registrant dated
March 30, 2001
(3) Incorporated by reference to Form 8-K of the registrant dated
September, 2001
(4) Incorporated by reference to Form 10-K of the registrant for the
year ended December 31, 2001
(b) Reports on Form 8-K:
During the second quarter of 2002, the Company filed with the SEC a
report on Form 8-K, dated June 17, 2002, reporting that the Nasdaq Stock
Market, Inc. had approved the Company's application to transfer the listing
of its common stock from the Nasdaq National Market to the Nasdaq Smallcap
Market.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this Amendment to Form 10-Q to be signed on its behalf by
the undersigned thereunto duly authorized.
UBICS, Inc.
(Registrant)
Date: August 14, 2002
By: /s/ Robert C. Harbage
----------------------------------------
Robert C. Harbage
President and Chief Executive Officer
By: /s/ Neil M. Ebner
----------------------------------------
Neil M. Ebner
Vice President, Finance,
Chief Financial Officer and Secretary
(Principal Finance & Accounting Officer)
20
EXHIBIT INDEX
2.1 Share Purchase Agreement dated as of March 30, 2001 between
UBICS, Inc. and Teksys, Inc. (2)
2.2 Share Purchase Agreement, dated as of September 4, 2001, among
UBIX Computer Services Limited and Anmol Taneja and Vani Taneja
(3)
2.3 Amendment to Share Purchase Agreement dated as of December 21,
2001 between UBICS, Inc. and Teksys Inc. (4)
3.1 Amended and Restated Certificate of Incorporation of UBICS, Inc.
(1)
3.2 Amended and Restated Bylaws of UBICS, Inc. (1)
99.1 Certification Pursuant to 18 U.S.G. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
99.2 Certification Pursuant to 18 U.S.G. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
(1) Incorporated by reference to the registrant's Registration
Statement on Form S-1, No. 333-35171, filed September 8, 1997.
(2) Incorporated by reference to Form 8-K of the registrant dated
March 30, 2001
(3) Incorporated by reference to Form 8-K of the registrant dated
September, 2001
(4) Incorporated by reference to Form 10-K of the registrant for the
year ended December 31, 2001
21