<PAGE> 1
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, 1999
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.
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 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
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(Address of Principal Executive Offices) (Zip Code)
(724) 746-6001
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(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 [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock as of the latest practicable date:
Class Outstanding at July 31, 1999
----- ----------------------------
Common Stock, $.01 par value 6,479,800
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UBICS, INC.
Form 10-Q
TABLE OF CONTENTS
PART I - - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of December 31, 1998 and June 30, 1999
Statements of Operations for the three months ended June 30, 1998
and 1999 and, six months ended June 30, 1998 and 1999
Statements of Cash Flows for the six months ended
June 30, 1998 and 1999
Notes to Unaudited Financial Statements
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
PART II - - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
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UBICS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ --------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $11,470 $11,660
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE FOR
DOUBTFUL ACCOUNTS OF $305
AND $575, RESPECTIVELY 4,152 4,935
UNBILLED RECEIVABLES 2,973 2,738
EMPLOYEE ADVANCES 164 113
PREPAIDS AND OTHER 258 720
DUE FROM AFFILIATES, NET 174 206
DEFERRED TAX ASSET 206 259
------- -------
TOTAL CURRENT ASSETS 19,397 20,631
------- -------
PROPERTY AND EQUIPMENT:
LEASEHOLD IMPROVEMENT 40 40
MOTOR CAR 72 72
COMPUTER EQUIPMENT 1,026 1,282
FURNITURE AND FIXTURES 623 656
OFFICE AND OTHER EQUIPMENT 30 39
------- -------
TOTAL PROPERTY AND EQUIPMENT 1,791 2,089
ACCUMULATED DEPRECIATION (170) (304)
------- -------
NET PROPERTY AND EQUIPMENT 1,621 1,785
------- -------
OTHER LONG TERM ASSET 200 250
------- -------
TOTAL ASSETS $21,218 $22,666
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE 2,034 2,352
PAYROLL LIABILITIES 1,628 2,028
ACCRUED TAXES 46 --
OTHER CURRENT LIABILITIES 230 869
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TOTAL LIABILITIES 3,938 5,249
------- -------
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $.01 PAR VALUE, 2,000,000
SHARES AUTHORIZED, NO SHARES ISSUED AND
OUTSTANDING -- --
COMMON STOCK, $.01 PAR VALUE, 20,000,000
SHARES AUTHORIZED, 6,500,000 SHARES
ISSUED 65 65
ADDITIONAL PAID-IN CAPITAL 13,160 13,160
RETAINED EARNINGS 4,155 4,292
TREASURY STOCK (100) (100)
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TOTAL STOCKHOLDERS' EQUITY 17,280 17,417
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $21,218 $22,666
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
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UBICS, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months
Ended June 30,
--------------------------
1998 1999
(unaudited) (unaudited)
----------- -----------
<S> <C> <C>
Revenues $6,962 $9,632
Cost of revenues 4,762 6,983
------ ------
Gross profit 2,200 2,649
Selling, general and
administrative expense 1,408 2,146
Merger related expenses -- 869
------ ------
Income (loss) from operations 792 (366)
Interest income, net 162 130
------ ------
Income (loss) before income taxes 954 (236)
Provision for income taxes 380 (80)
------ ------
Net income (loss) $ 574 $ (156)
====== ======
Basic and diluted earnings (Loss)
per share $ 0.09 $(0.02)
Weighted average shares outstanding 6,653,122 6,479,800
</TABLE>
<TABLE>
<CAPTION>
Six Months
Ended June 30,
----------------------------
1998 1999
(unaudited) (unaudited)
-------------- -------------
<S> <C> <C>
Revenues $13,177 $18,717
Cost of revenues 8,858 13,593
------- -------
Gross profit 4,319 5,124
Selling, general and 2,611 4,276
administrative expense
Merger related expenses -- 869
------- -------
Income (loss) from operations 1,708 (21)
Interest income, net 327 260
------- -------
Income before income taxes 2,035 239
Provision for income taxes 820 102
------- -------
Net income $ 1,215 $ 137
======= =======
Basic and diluted earnings
per share $ 0.18 $ 0.02
Weighted average shares outstanding 6,640,252 6,479,800
</TABLE>
The accompanying notes are an integral part of these financial statements
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UBICS, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
------------------------
1998 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,214 $ 137
Adjustments to reconcile net
income to net cash provided by
operating activities--
Depreciation 23 134
Changes in operating assets and
liabilities--
Accounts receivable, net (381) (783)
Unbilled receivables (624) 235
Employee advances (246) 51
Other long term asset (50)
Due to affiliates, net (99) (32)
Deferred tax asset -- (53)
Prepaids and other (143) (462)
Accounts payable 490 318
Payroll liabilities 192 400
Accrued taxes and other
current liabilities (673) 593
------- -------
Net cash (used) provided by
operating activities (247) 488
------- -------
Cash flows from investing activities:
Purchases of property and
Equipment (488) (298)
------- -------
Net cash used by investing
activities (488) (298)
------- -------
Net increase (decrease) in cash
and cash equivalents (735) 190
Cash and cash equivalents, at
beginning of period 12,790 11,470
------- -------
Cash and cash equivalents, at
end of year $12,055 $11,660
======= =======
Supplemental data:
Cash payments for income taxes $ 1,476 $ 744
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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UBICS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
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 generally accepted accounting principles 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 financial results of operations for a full year. As such, these 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, 1998 filed on March 31, 1999, as amended by a Form 10-K/A
filed on April 30, 1999.
Reclassifications
Certain prior balances have been reclassified to conform to the current
period presentation.
2. OPERATIONS:
UBICS, a Delaware corporation, provides information technology 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, applications maintenance programming and database and systems
administration.
3. REVOLVING CREDIT FACILITY:
The Company has available borrowings under a revolving credit facility with
PNC Bank, National Association ("PNC"). Borrowings under this arrangement are
limited to $1,000, bear interest at prime (7.75% and 8.00% at December 31, 1998
and June 30, 1999, respectively) as defined plus 0.5% and are payable upon
demand. The revolving credit facility is secured by the assets of the Company.
There were no borrowings outstanding as of December 31, 1998 and June 30,
1999, respectively.
4. RELATED PARTY TRANSACTIONS:
As of December 31, 1998 and June 30, 1999, the Company had a net receivable
from the UB Group, totaling $174 and $206, respectively, resulting from expenses
incurred by the Company on behalf of the UB Group.
5. EARNINGS PER SHARE:
Under Financial Accounting Standards Board Statement on Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share," earnings per share are
classified as basic earnings per share and diluted earnings per share. Basic
earnings per share included only the weighted average common shares outstanding.
Diluted earnings per share included the weighted average common shares
outstanding and any dilutive common stock equivalent shares in the calculation.
All prior periods have been restated to reflect the Company's adoption of SFAS
No. 128. Treasury shares are treated as retired for earnings per share purposes.
In 1999, stock options of 418,000 shares are not included in the diluted
earnings per share calculations as the Company's average market price for the
period was less than the exercise price.
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The following table reflects the calculation of earnings per share under
SFAS No. 128:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 1998 1999
---- ----
<S> <C> <C>
(Dollars in thousands, except per share data)
BASIC EARNINGS (LOSS) PER SHARE
Net income (loss) $ 574 $ (156)
DIVIDED BY:
Weighted average common shares 6,500,000 6,479,800
Basic earnings (loss ) per share 0.09 (0.02)
--------- ---------
DILUTED EARNINGS (LOSS) PER SHARE:
Net income (loss) $ 574 $ (156)
DIVIDED BY:
Weighted average common shares 6,500,000 6,479,800
Dilutive effect of options 153,122 --
--------- ---------
Dilutive average common shares 6,653,122 6,479,800
Diluted earnings (loss) per share $0.09 $(0.02)
<CAPTION>
SIX MONTHS ENDED JUNE 30 1998 1999
---- ----
<S> <C> <C>
(Dollars in thousands, except per share data)
BASIC EARNINGS PER SHARE
Net income $1,215 $ 137
DIVIDED BY:
Weighted average common shares 6,500,000 6,479,800
Basic earnings per share 0.19 0.02
--------- ---------
DILUTED EARNINGS PER SHARE:
Net income $1,215 $ 137
DIVIDED BY:
Weighted average common shares 6,500,000 6,479,800
Dilutive effect of options 140,252 --
--------- ---------
Dilutive average common shares 6,640,252 6,479,800
Diluted earnings per share $0.18 $0.02
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the financial statements and notes thereto
included in Item 1 of this report.
The following Management's Discussion and Analysis of Results of
Operations and Financial Condition contains certain forward looking statements
that involve substantial risks and uncertainties. When used in this section, the
words "anticipate," "believe," "estimate," "expect" and similar expressions as
they relate to the Company or its management are intended to identify such
forward looking statements. The Company's actual results, performance or
achievements could differ materially from the results expressed in, or implied
by, these forward looking statements.
OVERVIEW
UBICS, Inc. ("UBICS" or the "Company"), founded in 1993, provides 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, ERP package implementation and
customization, e-commerce applications design and development, applications
maintenance programming and database and systems administration. UBICS' services
are provided on a time-and-materials basis to client-managed projects, with
UBICS IT professionals providing integral support as project team members. The
Company currently has offices in the Pittsburgh, Pennsylvania and San Francisco,
California areas. UBICS is an affiliate of the UB Group, a multinational group
of companies headquartered in India (the "UB Group").
The Company's revenues are based on the hourly billing of its IT
professionals. Revenue is recognized as services are provided. Generally, the
Company has increased the average billing rates of its IT professionals as the
demand for skilled and experienced professionals has expanded, in particular for
IT professionals placed on ERP package implementation and customization
projects. As of June 30, 1999, 66 IT professionals, or over one-fifth of the
Company's deployed IT professionals, were placed on such projects.
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 50 subcontractors located worldwide.
Approximately 41% of the Company's revenues were derived from IT professionals
deployed from subcontractors for the three months ended June 30, 1999. As of
June 30, 1999, IT professionals deployed from subcontractors comprised 98 of the
Company's 277 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.
Since inception the Company has developed relationships with 374
clients in a range of industries and currently has IT professionals deployed at
over 163 of these clients. Although the Company's five largest clients accounted
for approximately 20% of revenues for the second quarter of 1999, this revenue
concentration has been declining since the Company's inception. The Company's
strategy is to continue to provide services to clients across the U.S. in a
range of industries, in order to reduce credit risk from conditions or
occurrences within any specific industry or region in which these clients
operate.
RECENT DEVELOPMENTS
On July 1, 1999, UBICS announced that it would not complete its
previously announced acquisition of privately held, California-based R Systems,
Inc. The acquisition was to be completed by June 30, 1999
8
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following a stockholder vote during UBICS's Annual Meeting. Because of delays in
receiving Securities and Exchange Commission clearance of UBICS's proxy
materials, the annual meeting could not be held and the acquisition could not be
closed by the June 30 transaction deadline. The parties were unable to agree on
an extension of the acquisition agreement and therefore the transaction was
terminated. Expenses related to the transaction of approximately $900,000 were
recorded during the quarter ended June 30, 1999 (See "Merger-Related Expenses"
below).
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statements of operations data as a percentage of revenues:
PERCENTAGE OF REVENUES
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues............................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues..................... 68.4 72.5 67.2 72.6
----- ----- ----- -----
Gross profit......................... 31.6 27.5 32.8 27.4
Selling, general and
administrative expense ............ 20.2 22.3 19.8 22.9
Merger-related expense -- 9.0 -- 4.6
----- ----- ----- -----
Income (loss ) from operations....... 11.4 (3.8) 13.0 (0.1)
Interest income 2.3 1.4 2.5 1.4
----- ----- ----- -----
(expense), net.......................
Income (loss) before income taxes.... 13.7 (2.4) 15.4 1.3
Provision (credit)for income taxes... 5.5 (0.8) 6.2 0.6
----- ----- ----- -----
Net income (loss )................... 8.2 % (1.6)% 9.2% 0.7%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Revenues
Revenues for the quarter ended June 30, 1999 were $9.6 million,
compared to $7.0 million for the quarter ended June 30, 1998, an increase of
$2.6 million, or 38%. Approximately 78% of the increase in revenues was due to
an increase in the number of IT professionals deployed to provide services to
new and existing clients and approximately 22% of the increase in revenues was
due to higher average hourly billing rates resulting from a shift toward higher
value-added services including ERP-related services as well as increased demand
for IT professionals.
Gross Profit
Gross profit for the second quarter of 1999 was $2.6 million, compared
to $2.2 million for the second quarter of 1998, an increase of $0.4 million, or
20%. Gross profit as a percentage of revenues decreased to 27.5% for the second
quarter of 1999, compared to 31.6% for the second quarter of 1998. Approximately
25% of the decrease in gross profits as percentage of revenues resulted from
increase in the rates paid for subcontractor professionals and approximately 75%
of such decrease resulted from an increase in the number of employee
professionals waiting to be deployed.
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Selling, General and Administrative Expense
Selling, general and administrative expense for the quarter ended June
30, 1999 was $2.1 million, compared to $1.4 million for the same quarter of
1998, an increase of $0.7 million, or 52%. Selling, general and administrative
expense as a percentage of revenues increased to 22.3% for the second quarter of
1999 from 20.2% for the second quarter of 1998. The increase in expense was
primarily due to increases in costs to support the Company's growth, including a
$310,000 increase in salaries and commissions paid to employees and a $70,000
increase in rental payments resulting from the relocation of the Company's
principal offices in 1998.
Merger-Related Expense
Merger-related expense for the quarter ended June 30, 1999 totaled $0.9
million or 9.0% as a percentage of revenue. These expenses relate to the
termination of the Company's proposed acquisition of R Systems, Inc and two of
its affiliates on July 2, 1999 and are non-recurring in nature.
Interest Income (Expense) Net
Interest income for the second quarter of 1999 was $130,000, compared
to interest income of $162,000 for the second quarter of 1998. The decrease
resulted from a reduction in the amount of net proceeds of the Company's 1997
initial public offering available for investment.
Provision for Income Taxes
The Company's effective tax rate was 33.9% for the quarter ended June
30, 1999 compared to 39.8% for the quarter ended June 30, 1998.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Revenues
Revenues for the six months ended June 30, 1999 were $18.7 million,
compared to $13.2 million for the six months ended June 30, 1998 an increase of
$5.5 million, or 42%. Approximately 76% of the increase in revenues was due to
an increase in the number of IT professionals deployed to provide services to
new and existing clients and approximately 24% of the increase in revenues was
due to higher average hourly billing rates resulting from a shift toward higher
value-added services including ERP-related services as well as increased demand
for IT professionals.
Gross Profit
Gross profit for the first six months of 1999 was $5.1 million,
compared to $4.3 million for the first six months of 1998, an increase of $0.8
million, or 19%. Gross profit as a percentage of revenues decreased to 27.4% for
the six months ended June 30 1999, compared to 32.8% for the same period of
1998. Approximately 27% of the decrease in gross profits as a percentage of
revenues resulted from increases in the rates paid for subcontractor
professionals and approximately 73% of such decrease resulted from an increase
in the number of employee professionals waiting to be deployed.
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Selling, General and Administrative Expense
Selling, general and administrative expense for the six months ended
June 30, 1999 was $4.3 million, compared to $2.6 million for the same period of
1998, an increase of $1.7 million or 64%. Selling, general and administrative
expense as a percentage of revenues increased to 22.9% for the six months ended
June 30, 1999 from 19.8% for the six months ended June 30, 1998. The increase in
expense was primarily due to increases in costs to support the Company's growth,
including a $700,000 increase in salaries and commissions paid to employees and
a $140,000 increase in rental payments resulting from the relocation of the
Company's principal offices in 1998.
Merger-Related Expense
Merger-related expense for the six months ended June 30, 1999 totaled
$0.9 million, or 4.6% as a percentage of revenues. These expenses relate to the
termination of the Company's proposed acquisition of R Systems, Inc. described
above and are of non-recurring in nature.
Interest Income (Expense) Net
Interest income for the first six months of 1999 was $260,000, compared
to interest income of $327,000 for the first six months of 1998. The decrease
resulted from a reduction in the amount of net proceeds of the Company's 1997
initial public offering available for investment.
Provision for Income Taxes
The Company's effective tax rate was 42.7% for the six months ended
June 30, 1999 compared to 40.3% for the six months ended June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
In November 1997, the Company generated net proceeds of approximately
$13.2 million from its underwritten initial public offering of 1,500,000 shares
of Common Stock (the "Offering"). The Company used approximately $775,000 of the
net proceeds of the Offering to repay its outstanding indebtedness under a
$1,000,000 Committed Line of Credit from PNC Bank, National Association (the
"Line of Credit"). The Company also has used a portion of the net proceeds of
the Offering for general corporate purposes and intends to use a portion of such
net proceeds for the capital expenditures described below.
The Company's principal uses of cash have been to fund receivables and
other working capital, reflecting the Company's growth. Amounts outstanding
under the Line of Credit bear interest at a variable annual rate equal to 0.5%
in excess of PNC's prime rate (as of June 30, 1999, the annual interest rate
under the Line of Credit was 8.0%). As of June 30, 1999 the Company had no
outstanding borrowings under the Line of Credit. Net cash provided by operating
activities was $488,000 for the first six months of 1999 compared to net cash
used by operating activities of $247,000 for the same period in 1998.
Capital expenditures for the first six months of 1999 and 1998 were
$298,000 and $488,000, respectively. The Company intends to use approximately
$2.0 million of its available cash to expand its existing operations, including
approximately $1.2 million for the expansion of the Company's recruiting and
training center in India. The initial phase of the center was placed in
operation in the fall of 1998 (including the purchase of hardware and software
with respect thereto). Because the Company currently has a sufficient supply of
IT professionals awaiting deployment, as well as a shift in the Company's
strategic focus in favor of domestic sales growth, 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.
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The Company currently anticipates that the remaining proceeds from the
Offering, 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.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133), SFAS No 133 establishes
accounting and reporting standards require that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS No 133 requires that the changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. SFAS 133 is
effective for fiscal years beginning after June 15, 1999.
The Company has not yet quantified the impact of adopting SFAS No 133
but does not believe that it will have a significant impact.
YEAR 2000 COMPLIANCE
The "Year 2000" issue concerns the potential exposures related to the
automated generation of business and financial misinformation resulting from the
use of computer programs which have been written using two digits rather than
four, to define the applicable year of business transactions. The Company has
evaluated its principal staffing and financial systems, which are licensed from
and maintained by third party software development companies, and believes that
such systems are Year 2000 compliant. The Company is currently in the process of
implementing additional staffing and financial systems which management expects
to be Year 2000 compliant. The Company's telephone, voice mail and e-mail
systems, which are its principal non-IT systems, have also been determined to be
Year 2000 compliant. The Company's total costs with respect to Year 2000
compliance as of June 30, 1999 have not been material. Because UBICS has
determined that all of its principal internal systems Year 2000 compliant,
management does not anticipate that any remaining costs associated with assuring
that its internal systems will be Year 2000 compliant will be material to its
business, operations or financial condition.
UBICS believes that the reasonably likely worst case scenario involving
Year 2000 with respect to each material IT and non-IT system involves a failure
resulting from Year 2000 problems affecting service providers such as utilities,
which could render UBICS's own internal systems and those of all other
businesses served by such providers inoperable for an extended period of time.
If utilities or other service providers encounter such problems, the ability of
UBICS to conduct business may be materially adversely affected until such
problems are resolved. Further, if UBICS's clients experience similar disruption
in utilities and other essential services, they may elect to postpone and cancel
IT projects involving UBICS until such disruptions are resolved, which could
materially adversely affect UBICS's results of operations or financial
condition. UBICS currently does not have contingency plans with respect to such
failures but will continue to evaluate whether such plans might be necessary
with respect to particular third party providers based on the status of its
assessment of third party readiness described below.
The Company is conducting an assessment to determine the preparedness
level of its significant clients, vendors, and other service providers with
respect to Year 2000 issues and the subsequent impact on the Company. Management
has identified the following potentially significant risks relating to the Year
2000:
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o If a significant client of the Company encounters Year 2000 problems,
such client could be forced to reduce its expenditures on IT projects
involving the Company's IT professionals, either because the client
would have to divert resources from such projects to address its Year
2000 problem or because of the adverse financial effects of such
problems on the client. UBICS is attempting to determine its potential
exposure to such risk through its assessment of third party
preparedness.
o Clients which incur significant costs in achieving Year 2000 compliance
could be forced or could elect to reallocate funds being used for
projects involving the Company's IT professionals to address Year 2000
compliance issues. In addition, as a result of uncertainties relating
to the completion of Year 2000 compliance work as companies achieve
such compliance, there may be changes in normal buying patterns for IT
services by companies, which could make it difficult to forecast demand
for IT services. The Company does not believe its current projects will
be adversely affected by problems its clients may encounter resulting
from lack of Year 2000 compliance because most such projects will be
completed before the Year 2000. However, reallocation of IT-related
expenditures by a client in connection with achieving Year 2000
compliance could affect the duration of the Company's existing projects
with such client or the availability to the Company of future IT
projects.
o If UBICS's service providers, such as utilities and courier delivery
service providers, encounter Year 2000 problems, UBICS's ability to
conduct business could experience short-term disruptions which could
have a material adverse impact on results of operations.
o A small number of the Company's IT professionals perform Year 2000 work
for certain clients as an adjunct to other projects performed for such
clients. The Company has a $5 million professional liability insurance
policy which covers, among other things, Year 2000 compliance work
performed by UBICS at client sites. Some of the Company's clients have
requested the Company to warrant that the services performed by the
Company's IT professionals are Year 2000 compliant. The Company is
evaluating such requests from clients to determine whether and the
extent to which it is appropriate for UBICS to make such
certifications.
The Company's review of client and vendor readiness with respect to
Year 2000 has been completed. As of June 30, 1999, approximately 10% of the
third parties contacted by UBICS had certified as to Year 2000 compliance,
approximately 35% had indicated that they expected to be compliant by a date
prior to the end of 1999, and approximately 55% either had not responded or had
indicated that they would not certify as to their Year 2000 status. The Company
currently does not believe that a contingency plan to help limit the impact of
potentially significant failures of clients, vendors or other third parties with
respect to Year 2000 compliance will be needed since most of its key clients and
vendors have indicated that they expect to be compliant. The Company will
continue to monitor the situation, however, and may incur internal staff costs
and related expenses if the need arises but is unable to form an estimate of
such costs at this time.
U.S. REGULATION OF IMMIGRATION
The Company's services historically have been performed in the U.S. and
the Company has recruited most of its IT professionals outside the U.S. The
Company's business, therefore, is subject to U.S. immigration laws. Over 90% of
the Company's IT professionals are citizens of other countries, with most of
those in the U.S. working under H-1B temporary work permits. There is a limit on
the number of new H-1B permits that may be approved in any U.S. government
fiscal year. In the federal fiscal year ended September 30, 1997, this limit was
reached in August and in the federal fiscal year ended September 30, 1998, this
limit was reached in May. The inability to obtain additional H-1B permits during
the federal fiscal year ended September 30, 1998 resulted in increased use of
subcontractor professionals by UBICS. If in the current federal fiscal year or
in
13
<PAGE> 14
future years the limit on H-1B permits is reached, the Company may again be
unable to obtain enough H-1B permits to meet its requirements. If the Company
were unable to obtain H-1B permits for its IT professionals in sufficient
quantities or at a sufficient rate, the Company's business, operating results
and financial condition could be materially adversely affected.
During 1998 the U.S. government increased the limit on the number of
new H-1B permits to 115,000 for each of the 1999 and 2000 federal fiscal years,
and to 107,500 for fiscal year 2001 before reverting to existing limits from
fiscal year 2002 onwards. The U.S. government in addition to increasing the
limits, has also imposed a fee to be paid by companies for new approvals and for
renewals. UBICS does not anticipate that the imposition of such fees will have a
material adverse impact on its results of operations. However, in February 1999,
the U.S. Immigration and Naturalization Service ("INS") announced that
approximately 70,000 new H-1B permits had already been issued for the 1999
federal fiscal year, and subsequently INS announced that it had put a temporary
hold on further H-1B visa processing to enable INS to determine the number of
H-1B permits (if any) remaining for issuance during such fiscal year. In June
1999, INS announced that the H-1B visa limit for the current federal fiscal year
had been reached and that H-1B visa applications filed on or after April 9, 1999
would not be approved until the 2000 federal fiscal year. UBICS believes that in
light of current demand for IT services and the number of permits issued or
applied for by UBICS prior to the April 9, 1999 cutoff, the H-1B visa limit will
not have a material adverse impact on its results of operations.
Furthermore, Congress and administrative agencies with jurisdiction
over immigration matters have periodically expressed concerns over the levels of
legal and illegal immigration into the U.S. These concerns have often resulted
in proposed legislation, rules and regulations aimed at reducing the number of
work permits that may be issued. Any changes in such laws making it more
difficult to hire foreign nationals or limiting the ability of the Company to
retain foreign employees could require the Company to incur additional
unexpected labor costs and expenses. Any such restrictions or limitations on the
Company's hiring practices could have a material adverse effect on the Company's
business, operating result and financial condition.
DEPENDENCE ON IT PROFESSIONALS PROVIDED BY SUBCONTRACTORS
During 1998 and the first six months of 1999 approximately 41% and 41%,
respectively, of the revenues of UBICS were derived from IT professionals
employed by subcontractors. Such dependence on subcontractors may adversely
affect the Company's result of operations due to the generally lower gross
profit margins on projects staffed by subcontractor IT professionals. While
Company expects the use of subcontractors relative to employed IT professionals
to decline over time, there can be no assurance that the Company will be able to
recruit IT professionals or obtain visas in sufficient numbers or that the rates
paid to subcontractors will not increase.
RAPID TECHNOLOGICAL CHANGE
The IT services industry is characterized by rapid technological
change, evolving industry standards, changing client preferences and new product
introductions. The success of the Company will depend in part on its ability to
offer services that keep pace with changes in the IT services industry. There
can be no assurance that the Company will be successful in addressing these
developments on a timely basis or that, if these developments are addressed, the
Company will be successful in the marketplace. In addition, there can be no
assurance that products or technologies developed by others will not render the
Company's services uncompetitive or obsolete. Failure of the Company to address
these developments could have a material adverse effect on its business
operating results and financial condition.
14
<PAGE> 15
A significant number of organizations are adopting different approaches
to addressing their IT challenges, including building new IT systems,
redesigning existing systems and integrating these disparate systems into a
cohesive IT infrastructure. As a result, the Company's ability to remain
competitive will be dependent on several factors, including its ability to
attract employees with appropriate skills sets or contract with subcontractors
with personnel having appropriate skills sets, including skills in advanced
technologies, and to train employees in advanced technologies. The failure to
hire, train and retain employees with such skills, or to find subcontractors
whose personnel possess such skills, could have a material adverse impact on the
Company's business.
15
<PAGE> 16
.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings -- Not Applicable
Item 2. Changes in Securities and Use of Proceeds -- Not applicable
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) The following information relates to the Company's use of the
net proceeds of the Company's initial public offering (the
"Offering"):
On October 27, 1997, the Company's registration statement on
Form S-1, No. 333-35171, became effective. The Company sold a total of
1,500,000 shares of common stock, par value $.01 per share at a price
per share of $10.00 pursuant to the Offering. The Offering, which was
managed by Parker/Hunter Incorporated, as lead underwriter, and Scott &
Stringfellow, Inc., as co-manager, closed on November 4, 1997.
The following table summarizes the expenses incurred for the
Company's account in connection with the Offering:
<TABLE>
<CAPTION>
<S> <C>
Underwriting discounts $1,050,000
Finder's fees --
Expenses paid to or for underwriters --
Other expenses 775,000
----------
TOTAL $1,825,000
</TABLE>
The following table summarizes the amount of net offering
proceeds to the Company ($13,175,000) used for the purposes
listed below:
<TABLE>
<CAPTION>
<S> <C>
Construction of plant, building
and facilities $ 0
Purchase and installation of machinery 1,768,000
and equipment
Acquisition of other business(es) 0
Repayment of indebtedness 775,000
Working capital 1,007,000
Temporary investments* 9,625,000
Other Purposes 0
-----------
Total $13,175,000
</TABLE>
- --------------
* Approximately $5,000,000 of such amount is currently invested in a
Prudential money market mutual fund with the balance invested in
certificates of deposit with PNC Bank.
16
<PAGE> 17
Item 3. Defaults Upon Senior Securities -- Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders -- Not Applicable
Item 5. Other Information -- Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
<S> <C>
10.1 UBICS, Inc. 1997 Stock Option Plan(1)
10.2 Noncompetition Agreement dated October 27, 1997 among the
Company, Vijay Mallya and UB Information Consultancy Services
Ltd.(2)
10.3 Employment Agreement between the Registrant and Vijay
Mallya(2)
10.4 Employment Agreement between the Registrant and Manohar B.
Hira(2)
10.5 Employment Agreement between the Registrant and O'Neil
Nalavadi(2)
10.6 Employment Agreement between the Registrant and Babu
Srinivas(2)
10.7 Agreement of Severance, Waiver and Release dated March 18,
1999 between the Company and Manohar B. Hira (3)
10.8 Lease dated May 28, 1996 between the Company and Marin
Executive Park, as amended(1)
10.9 Services Agreement dated October 27, 1997 among the Company,
Vijay Mallya and United Breweries Limited(2)
10.10 Letter Agreement dated July 26, 1996 between PNC Bank,
National Association and the Registrant, and Amendment to Note
and Letter Agreement dated November 1, 1996, Second Amendment
to Note and Letter Agreement dated April 1, 1997, Third
Amendment to Note and Letter Agreement dated August 29, 1997
and Fourth Amendment to Note and Letter Agreement dated
September 5, 1997(1)
10.11 Form of Director Indemnification Agreement(2)
10.12 Form of Sublease and Consent among the Company, Marin
Executive Park and United Breweries of America, Inc.(2)
10.13 Noncompetition Agreement dated October 27, 1997 among the
Company, Vijay Mallya and United Breweries Limited(2)
10.14 Noncompetition Agreement dated October 27, 1997 among the
Company, Vijay Mallya and UB International Limited(2)
10.15 Services Agreement dated October 27, 1997 among the Company,
Vijay Mallya and UB International Limited(2)
10.16 Lease Agreement dated June 30, 1998 between the Company and
Stealth Technology Associates (4)
10.17 Amendment to Loan Documents dated December 18, 1999 between
PNC Bank, National Association and the Company (3)
27 Financial Data Schedule
</TABLE>
- ---------------
(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 Post-Effective Amendment No. 1 to the
registrant's Registration Statement on Form S-1, No. 333-35171, filed
October 29, 1997.
(3) Incorporated by reference to the registrant's Annual Report on Form
10-K for the fiscal year ended December 3, 1998, filed on March 31,
1999.
(4) Incorporated by reference to the registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed for the three months
ended June 30, 1999.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
UBICS, Inc.
(Registrant)
Date: August 10, 1999
By: /s/ Manohar B. Hira
--------------------------------
Manohar B. Hira
President
By: /s/ O'Neil Nalavadi
----------------------------------
O'Neil Nalavadi
Senior Vice President and Chief
Financial Officer
18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
No. Description Page
- --- ----------- ----
<S> <C> <C>
10.1 UBICS, Inc. 1997 Stock Option Plan(1)
10.2 Noncompetition Agreement dated October 27, 1997 among the Company,
Vijay Mallya and UB Information Consultancy Services Ltd.(2)
10.3 Employment Agreement between the Registrant and Vijay Mallya(2)
10.4 Employment Agreement between the Registrant and Manohar B. Hira(2)
10.5 Employment Agreement between the Registrant and O'Neil Nalavadi(2)
10.6 Employment Agreement between the Registrant and Babu Srinivas(2)
10.7 Agreement of Severance, Waiver and Release dated March 18, 1999 between
the Company and Manohar B. Hira (3)
10.8 Lease dated May 28, 1996 between the Company and Marin Executive Park,
as amended(1)
10.9 Services Agreement dated October 27, 1997 among the Company, Vijay
Mallya and United Breweries Limited(2)
10.10 Letter Agreement dated July 26, 1996 between PNC Bank, National
Association and the Registrant, and Amendment to Note and Letter
Agreement dated November 1, 1996, Second Amendment to Note and Letter
Agreement dated April 1, 1997, Third Amendment to Note and Letter
Agreement dated August 29, 1997 and Fourth Amendment to Note and Letter
Agreement dated September 5, 1997(1)
10.11 Form of Director Indemnification Agreement(2)
10.12 Form of Sublease and Consent among the Company, Marin Executive Park
and United Breweries of America, Inc.(2)
10.13 Noncompetition Agreement dated October 27, 1997 among the Company,
Vijay Mallya and United Breweries Limited(2)
10.14 Noncompetition Agreement dated October 27, 1997 among the Company,
Vijay Mallya and UB International Limited(2)
10.15 Services Agreement dated October 27, 1997 among the Company, Vijay
Mallya and UB International Limited(2)
10.16 Lease Agreement dated June 30, 1998 between the Company and Stealth
Technology Associates (4)
10.17 Amendment to Loan Documents dated December 18, 1999 between PNC Bank,
National Association and the Company (3)
27 Financial Data Schedule
</TABLE>
- --------------------
(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 Post-Effective Amendment No. 1 to the
registrant's Registration Statement on Form S-1, No. 333-35171, filed
October 29, 1997.
(3) Incorporated by reference to the registrant's Annual Report on Form
10-K for the fiscal year ended December 3, 1998, filed on March 31,
1999.
(4) Incorporated by reference to the registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998.
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED BALANCE SHEET OF UBICS, INC. AS OF JUNE 30, 1999 AND THE UNAUDITED
INCOME STATEMENT OF UBICS, INC. FOR THE SIX MONTHS ENDED JUNE 30, 1999, INCLUDED
IN THE QUARTERLY REPORT OF UBICS, INC. ON FORM 10-Q FOR THE FISCAL QUARTER ENDED
JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 11,660
<SECURITIES> 0
<RECEIVABLES> 5,510
<ALLOWANCES> 575
<INVENTORY> 0
<CURRENT-ASSETS> 20,631
<PP&E> 2,089
<DEPRECIATION> (304)
<TOTAL-ASSETS> 22,666
<CURRENT-LIABILITIES> 5,249
<BONDS> 0
0
0
<COMMON> 65
<OTHER-SE> 17,352
<TOTAL-LIABILITY-AND-EQUITY> 22,666
<SALES> 0
<TOTAL-REVENUES> 9,632
<CGS> 0
<TOTAL-COSTS> 6,983
<OTHER-EXPENSES> 3,015
<LOSS-PROVISION> 575
<INTEREST-EXPENSE> 130
<INCOME-PRETAX> (236)
<INCOME-TAX> (80)
<INCOME-CONTINUING> (156)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (156)
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
</TABLE>
