10-Q 1 d10q.txt FORM 10-Q 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)

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)

The accompanying notes are an integral part of these consolidated financial statements. 4 UBICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars in thousands)

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):

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):

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):

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:

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

UBICS INC 10-Q