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: September 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 October 31, 2002, 6,936,209 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...................................................................... 3 Consolidated Balance Sheets as of September 30, 2002 (unaudited) and December 31, 2001 ........................................................................ 4 Consolidated Statements of Operations (unaudited) for the three and nine month periods ended September 30, 2002 and 2001 .......................................... 5 Consolidated Statements of Cash Flows (unaudited) for the nine month periods ended September 30, 2002 and 2001 ................................................ 6 Notes to Unaudited Consolidated Financial Statements ..................................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................................................................ 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk ............................... 18 Item 4. Controls and Procedures .................................................................. 18 PART II -- OTHER INFORMATION Item 1. Legal Proceedings ........................................................................ 19 Item 2. Changes in Securities and Use of Proceeds ................................................ 19 Item 3. Defaults Upon Senior Securities .......................................................... 19 Item 4. Submission of Matters to a Vote of Security Holders ...................................... 19 Item 5. Other Information ........................................................................ 19 Item 6. Exhibits and Reports on Form 8-K ......................................................... 19 SIGNATURES ........................................................................................ 20 EXHIBIT INDEX ..................................................................................... 23

2 PART I -- FINANCIAL INFORMATION Item 1. Financial Statements UBICS, Inc. ("UBICS" or the "Company") did not obtain a review of the interim financial statements for the quarter ended September 30, 2002 included in this Report on Form 10-Q by an independent accountant using professional review standards and procedures, even though such review is required by Form 10-Q. The Company did not obtain such review because, on November 12, 2002, BDO Seidman, LLP resigned as the Company's independent auditor of record and the Company has not yet engaged a new independent auditor to perform the review. The Company is in the process of identifying and interviewing new accountants to serve as its independent auditor, and will refile its interim financial statements for the quarter ended September 30, 2002 as promptly as practicable following its engagement of a successor independent auditor. 3 UBICS, INC CONSOLIDATED BALANCE SHEETS (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 OPERATIONS (UNAUDITED) (Dollars in thousands, except per share amounts)

The accompanying notes are an integral part of these consolidated financial statements. 5 UBICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars in thousands, except per share amounts)

The accompanying notes are an integral part of these consolidated financial statements. 6 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 September 30, 2002 and December 31, 2001:

4. COMPREHENSIVE LOSS: Total comprehensive loss for the three months ended September 30, 2002 and 2001 and the nine months ended September 30, 2002 and 2001 was as follows (in thousands):

7 5. EARNINGS PER SHARE: Reconciliation of diluted shares (dollars in thousands, except per share amounts):

For the three months and nine months ended September 30, 2002, options to purchase 950,750 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 nine months ended September 30, 2001 were 1,002,000. 8 6. ACQUISITIONS: Oakwood Technical Services Limited, European Software Services (UK) Limited, and Reflex I.T. Solutions Limited 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 by the Company to an 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 ====== DSF Internet Services Private Limited 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 ("Fifth Dimension") 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 9 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 $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 acquisitions 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 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. 10 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 September 30, 2002, the Company has purchased 250,315 shares at a cost of $259,225 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 benefit was 24.2% for the three months ended September 30, 2002, compared to an effective tax benefit of 41.0% for the three months ended September 30, 2001. The difference in rate was primarily the result of the mix of net losses from domestic and foreign operations. In addition, for domestic operations, there are temporary differences between financial and tax reporting for accruals, primarily related to restructuring costs. Tax benefits for domestic operations for both years have been recorded on the basis of carrying the net losses back to offset prior taxable income. A valuation allowance has been provided for the tax benefits relating to net losses from foreign operations due to the uncertainty of realizing those benefits. For the nine-month periods ended September 30, 2002 and 2001, the effective tax rates were a tax provision of 18% and a tax benefit of 39%, respectively. The difference in rates was primarily the result of the differences between financial and tax reporting for goodwill impairment, a valuation allowance for deferred tax assets, and the mix of net losses from foreign and domestic operations. 10. RECENTLY ISSUED ACCOUNTING STANDARDS: Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," Accounting Principles Board 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 Accounting Research Bulletin No. 51, "Consolidated Financial Statements." SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and for interim periods within those fiscal years. The adoption of SFAS No. 144 has had no impact on the Company's consolidated financial position or results of operations. In April 2002, Financial Accounting Standards Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 updates, clarifies, and simplifies existing accounting pronouncements. The Company is currently evaluating the provisions of this statement. In July 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force 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 No. 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 No. 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 No. 146. 11. GOODWILL: At the beginning of fiscal year 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," 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 to be 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 September 30, 2002. The amount will be finalized upon completion of step 2 of the impairment test. In addition, the Company will evaluate the goodwill for impairment each year, with any resulting impairment reported as an operating expense. The change in the carrying amount of goodwill for the nine months ended September 30, 2002 is as follows (dollars in 11 thousands): Balance as of January 1, 2002 .............................. $4,376 Impairment losses .......................................... (2,444) ------ Balance as of September 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):

12. SUBSEQUENT EVENTS: On October 21, 2002, the Company, through its subsidiary, UBICS Holding Company ("UHC") purchased an aircraft from Davis Oil Company pursuant to an Aircraft Purchase Agreement dated October 10, 2002. The purchase price of the aircraft was $3,350,000, paid in cash at the closing. Title to the aircraft was registered in the name of Wells Fargo Bank Northwest, National Association ("Wells Fargo") as Trustee under a Trust Agreement dated October 21, 2002 between Wells Fargo and UHC, as trustor and sole beneficiary of such Trust. The aircraft will be leased for a five-year term to United Breweries Holdings, Ltd. ("UBH") pursuant to the terms of an Aircraft Lease Agreement (the "Lease") to be entered into between Wells Fargo, as owner trustee, and UBH. During the term of the Lease, UBH will pay rent in the amount of $50,000 per month, and will be responsible for payment of all expenses relating to the operation and maintenance of the aircraft. The lease also provides that UBH will purchase the aircraft at any time upon 90 days written notice from the lessor for a purchase price of $4.0 million. Prior to leasing the aircraft to UBH, UHC will cause the aircraft to be refurbished at a cost to UHC of not more than $650,000. Any cost of refurbishment in excess of $650,000 will be paid by UBH. UBH is a controlled affiliate of United Breweries (Holdings) Limited, an Indian company, which will enter into a Guaranty and Suretyship Agreement, absolutely and unconditionally guaranteeing all obligations of UBH under the Lease. The Chairman and ultimate beneficial owner of 55% of the outstanding common stock of UBICS, Vijay Mallya, is the Chairman and a shareholder of United Breweries (Holdings) Limited, which controls UBH. 12 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 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 nine months ended September 30, 2002, approximately 35% of the Company's revenues were derived from IT professionals deployed from subcontractors. As of September 30, 2002, IT professionals deployed from subcontractors comprised 66 of the Company's 186 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 31% of revenues for the nine months ended September 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. 13 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 ("Fifth Dimension") 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 SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2001. Revenues Revenues for the quarter ended September 30, 2002 were $6.4 million, compared to $9.3 million for the quarter ended September 30, 2001, a decrease of $2.9 million, or 31%. 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 186 at September 30, 2002 from 235 at September 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 September 30, 2002 was $1.9 million, compared to $3.0 million for the quarter ended September 30, 2001, a decrease of $1.1 million, or 36.7%. Gross profit as a percentage of revenues decreased to 30.5% for the quarter ended September 30, 2002 from 31.8% for the quarter ended September 30, 2001. 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 September 30, 2002 were $2.1 million, compared to $5.9 million for the quarter ended September 30, 2001, a decrease of $3.8 million or 64%. The decrease in SG&A was primarily due to reductions in home office staffing. SG&A expenses as a percentage of revenues decreased to 33.4% for the quarter ended September 30, 2002 from 14 62.9% for the comparable quarter in 2001. The decrease was primarily due to a decrease in overhead staff. Restructuring The Company recorded a restructuring charge of $892,000 in the quarter ended September 30, 2001, of which, approximately $460,000 was associated with a write-off of unused office space, approximately $170,000 was related with merging the Company's UB Interactive division with its SquareRadius, Inc. subsidiary, approximately $160,000 was related to a write-off of obsolete assets; and approximately $100,000 was related to a reduction in workforce to better reflect market opportunities. Interest Income, Net Interest income, net for the three months ended September 30, 2002, was $35,000 compared to interest income of $70,000 for the three months ended September 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 benefit was 24.2% for the three months ended September 30, 2002, compared to an effective tax benefit of 41.0% for the three months ended September 30, 2001. The difference in rate was primarily the result of the mix of domestic and foreign net income. The Company did not record a tax benefit for its foreign subsidiaries due to the uncertainty of realizing the benefits of the net operating loss carryforwards in those countries. The Company recorded a tax benefit in the United States to the extent that its estimated current year tax loss may be carried back to offset prior taxable income. 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 to be impaired under this standard. This impairment loss is an estimate that has not yet been finalized as of September 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 reflected as an operating expense. The change in the carrying amount of goodwill for the three months ended September 30, 2002 is as follows (dollars in thousands): Balance as of July 1, 2002 ................................. $1,932 Impairment losses .......................................... -- ------ Balance as of September 30, 2002 ........................... $1,932 ====== Net Loss Net loss for the three months ended September 30, 2002 was $116,000, compared to net loss of $2.2 million for the three months ended September 30, 2001, a decrease of $2.1 million, or 94.7%. The net loss as a percentage of revenues decreased to (1.7)% for the three months ended September 30, 2002, from (23.6)% for the three months ended September 30, 2001. Although sales were weaker in the 2002 period compared to the 2001 period, the Company's net loss decreased from the three months ended September 30, 2001 to the three months ended September 30, 2002. The primary reason for the decrease in net loss was a decrease in SG&A expenses and a one-time restructuring charge of $0.9 million taken in the three months ended September 30, 2001. NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2001. Revenues Revenues for the nine months ended September 30, 2002 were $19.8 million, compared to $30.7 million for the six months ended September 30, 2001, a decrease of $10.9 million, or 35.5%. 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 186 at September 30, 2002 from 235 at September 30, 2001. 15 Gross Profit Gross profit for the nine months ended September 30, 2002 was $6.0 million, compared to $8.0 million for the nine months ended September 30, 2001, a decrease of $2.0 million, or 25%. Gross profit as a percentage of revenues increased to 30.3% for the nine months ended September 30, 2002 from 26.0% for the nine months ended September 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 nine months ended September 30, 2002 were $6.8 million, compared to $13.1 million for the nine months ended September 30, 2001, a decrease of $6.3 million or 49.0%. The decrease in SG&A expenses was primarily due to reductions in home office staffing and a charge in the nine months ended September 30, 2001 for expenses associated with a computer system implementation. SG&A expenses as a percentage of revenues decreased to 34.2% for the nine months ended September 30, 2002 from 42.5% for the comparable period in 2001. The decrease was due to the reduction in SG&A expenses, partially offset by a decline in revenues. Restructuring The Company recorded a restructuring charge of $892,000 in the nine months ended September 30, 2001, of which, approximately $460,000 was associated with a write-off of unused office space, approximately $170,000 was related with merging the Company's UB Interactive division with its SquareRadius, Inc. subsidiary, approximately $160,000 was related to a write-off of obsolete assets; and approximately $100,000 was related to a reduction in workforce to better reflect market opportunities. Interest Income, Net Interest income, net for the nine months ended September 30, 2002, was $101,000 compared to interest income, net of $317,000 for the nine months ended September 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 (17.8)% for the nine months ended September 30, 2002, compared to an effective tax benefit of 39.0% for the nine months ended September 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 net operating loss carrybacks in the current period and resulting tax refund of $1.5 million. 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 to be impaired under this standard. This impairment loss is an estimate that has not yet been finalized as of September 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 reflected as an operating expense. The change in the carrying amount of goodwill for the six months ended September 30, 2002 is as follows (dollars in thousands): Balance as of January 1, 2002 ............................... $ 4,376 Impairment losses ........................................... (2,444) -------- Balance as of September 30, 2002 ............................ $ 1,932 ======== Net Loss Net loss for the nine months ended September 30, 2002 was $3.7 million, compared to net loss of $3.5 million for the nine months ended September 30, 2001, an increase of $0.2 million or 5.7%. The net loss as a percentage of revenues increased to (18.5)% for the nine months ended September 30, 2002, compared to (11.2)% for the nine months ended September 30, 2001. 16 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 $0.8 million for the nine months ended September 30, 2002 compared to net cash used by operating activities of $2.3 million for the comparable period in 2001. Net cash provided by operating activities for the nine months ended September 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 $2.3 million for the nine months ended September 30, 2001 is primarily due to a net loss of $3.5 million and payments made on various liabilities. Net cash used by investing activities was $54,000 for the nine months ended September 30, 2002, as compared to $1.8 million for the same period in 2001. The cash used in the 2002 period was for purchases of property and equipment. In the 2001 period, the company used $1.6 million in cash to fund acquisitions, and $0.2 million for purchases of property and equipment. Because of the economic slowdown, the Company has deferred previously-disclosed plans to establish offshore recruiting offices in various foreign locations. Net cash used by financing activities was $20,000 for the nine months ended September 30, 2002, compared to $66,000 for the same period in 2001, a decrease of $47,000. The use of cash in both years was due to treasury stock purchased under the Company's share repurchase program in 2002. During the nine months ended September 30, 2002, the Company continued its program to repurchase, from time to time, up to $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 nine months ended September 30, 2002, the Company purchased 30,000 shares of its capital stock at a total cost of $20,000, bringing the total number of shares purchased to 250,315 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. On October 21, 2002, the Company announced that it had purchased an aircraft that it will lease to a related party. The total cost of the aircraft, including renovations, is expected to be approximately $4.0 million. Under the terms of the lease, the lessee will pay $50,000 per month for five years, and will pay all expenses associated with the operation and maintenance of the aircraft. The lessee has agreed to purchase the aircraft from the Company at any time at a price of $4.0 million. Except as set forth above, the Company currently has no material commitments for capital expenditures. The Company currently anticipates that $3.8 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. Statement of Operations translation gains and losses arising from differences between the functional and local currencies are recognized in the Consolidated Statement 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 income or 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 ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," Accounting Principles Board 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 Accounting Research Bulletin No. 51, "Consolidated Financial Statements." SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and for 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, Financial Accounting Standards Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 updates, 17 clarifies, and simplifies existing accounting pronouncements. The Company is currently evaluating the provisions of this statement. In July 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force 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 No. 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 No. 146 also requires that the initial measurement of the liability be at its fair value. SFAS No. 146 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 period-end for balance sheet accounts and at 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. Statement 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 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. ITEM 4. CONTROLS AND PROCEDURES. (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company's Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in the Securities Exchange Act of 1934, Rules 13a-14(c) and 15d-14(c)) as of a date within 90 days prior to the filing date of this Quarterly Report on Form 10-Q (the "Evaluation Date"), have concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities on a timely basis, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared. (b) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's disclosure controls and procedures subsequent to the Evaluation Date, nor any significant deficiencies or material weaknesses in such disclosure controls and procedures requiring corrective action. As a result, no corrective actions were taken. 18 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 Nothing to report under this item. 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) 2.4 Aircraft Purchase Agreement dated as of October 10, 2002 between UBICS Holding Company and Davis Oil Company, as amended. (5) 2.5 Agreement dated as of October 21, 2002 among UBICS Holding Company, United Breweries Holdings Ltd., and United Breweries (Holdings) Limited. (5) 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 (5) Incorporated by reference to Form 8-K of the registrant dated November 5, 2002 (b) Reports on Form 8-K: During the third quarter of 2002, the Company filed with the SEC a report on Form 8-K, dated August 8, 2002, reporting the termination of Arthur Andersen LLP and the engagement of BDO Seidman, LLP as the Company's principal accountants to audit the Company's financial statements. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized. UBICS, Inc. (Registrant) Date: November 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 CERTIFICATIONS I, Robert C. Harbage, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q (the "Quarterly Report") of UBICS, Inc. (the "Company"). 2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, and is not misleading with respect to the period covered in this Quarterly Report. 3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present, in all material respects, the financial condition, the results of operations, and cash flows of the Company as of and for the periods presented in this Quarterly Report. 4. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Securities Exchange Act of 1934, Rules 13a-14 and 15d-14) for the Company, and have: a. designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; b. evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report (the "Evaluation Date"); and c. presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The Company's other certifying officer and I have disclosed, based on our most recent evaluation, to the Company's auditors and the Audit Committee of the Company's Board of Directors: a. all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize, and report financial data, and have identified for the Company's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 6. The Company's other certifying officer and I have indicated in this Quarterly Report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Robert C. Harbage -------------------------------------- Robert C. Harbage President and Chief Executive Officer 21 CERTIFICATIONS I, Neil M. Ebner, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q (the "Quarterly Report") of UBICS, Inc. (the "Company"). 2. Based on my knowledge, this Quarterly Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, and is not misleading with respect to the period covered in this Quarterly Report. 3. Based on my knowledge, the financial statements, and other financial information included in this Quarterly Report, fairly present, in all material respects, the financial condition, the results of operations, and cash flows of the Company as of and for the periods presented in this Quarterly Report. 4. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Securities Exchange Act of 1934, Rules 13a-14 and 15d-14) for the Company, and have: a. designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Quarterly Report is being prepared; b. evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Quarterly Report (the "Evaluation Date"); and c. presented in this Quarterly Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date. 5. The Company's other certifying officer and I have disclosed, based on our most recent evaluation, to the Company's auditors and the Audit Committee of the Company's Board of Directors: a. all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize, and report financial data, and have identified for the Company's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 6. The Company's other certifying officer and I have indicated in this Quarterly Report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Neil M. Ebner ---------------------------------------- Neil M. Ebner Vice President, Finance, Chief Financial Officer and Secretary (Principal Finance & Accounting Officer) 22 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) 2.4 Aircraft Purchase Agreement dated as of October 10, 2002 between UBICS Holding Company and Davis Oil Company, as amended. (5) 2.5 Agreement dated as of October 21, 2002 among UBICS Holding Company, United Breweries Holdings Ltd. and United Breweries (Holdings) Limited. (5) 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 (5) Incorporated by reference to Form 8-K of the registrant dated November 5, 2002 23

UBICS INC 10-Q