ITEM 1. BUSINESS
SUMMARY
UBICS, Inc. ("UBICS" or the "Company") provides information technology ("IT") professional services to large and mid-sized organizations. UBICS provides its clients with a wide range of professional services in such areas as client/server design and development, enterprise resource planning ("ERP") package 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. Over the last three years, the Company's revenues have grown from $30.3 million for 1998 to $42.3 million for 2000. During 2000, UBICS provided IT professional services to more than 190 clients in a range of industries and locations. The Company's clients include Advance Auto Parts, Caterpillar, El Paso Natural Gas, Fruit of the Loom, State Farm and The Hartford. UBICS' high standards for responsiveness and service quality promote growing client relationships and recurring revenues. The Company believes that its centralized, low-overhead operating model enables it to respond quickly to client demand for IT professional services. UBICS meets this demand through its employed IT professionals and its management of an extensive network of subcontractors. The Company currently has approximately 285 IT professionals deployed with its clients in the U.S.
One of the key factors supporting UBICS' growth has been its ability to recruit and deploy, on short notice, skilled IT professionals. The Company recruits IT professionals from India and other countries worldwide. In order to ensure a continuous supply of IT professionals the Company has established a recruiting and training center in India. The initial phase of the center was placed in operation in the fall of 1998 and an expansion was completed in 1999. The Company uses this center to enhance its recruiting efforts and to train its IT professionals prior to placement. The Company also selectively uses the substantial resources and established reputation of the UB Group, to support its recruiting efforts. The UB Group is a multinational group of companies headquartered in Bangalore, India with operations in Asia, the Far East, the Middle East, Africa, Europe and the U.S. The UB Group consists of companies under the control of Vijay Mallya, Chairman of the Company and the indirect beneficial owner of approximately 55% of the outstanding shares of common stock of the Company. Companies in the UB Group are principally engaged in the manufacture and sale of beer, spirits, pharmaceuticals, paint and coating products and in the hotel and resort business. The worldwide revenue of the companies in the UB Group is currently approximately $2 billion per annum.
The Company completed the acquisition of Cobalt Creative, Inc. in July 2000. The Company currently has offices in the Pittsburgh, Pennsylvania, San Francisco, California and Scottsdale, Arizona areas.
SERVICES
The Company's IT professionals help clients identify, analyze and solve data processing and computing problems in such areas as: (i) client/server design and development; (ii) ERP package implementation and customization; (iii) e-commerce applications design and development; (iv) applications maintenance programming; and (v) database and systems administration. These services are provided in a variety of computing environments utilizing leading technologies including client/server architectures, object-oriented programming languages and tools, distributed database management systems, computer-aided software engineering ("CASE") tools, ERP packages, groupware and advanced networking and communications technologies. The Company's engagements cover every aspect of the life cycle of computer systems, from strategy and design to development and implementation and, finally, to maintenance and support.
The majority of the Company's services are provided on a time-and-materials basis with UBICS IT professionals providing services as members of the client's project team. The Company's UB Interactive Division & Cobalt subsidiary provides web-site design services on a fixed-price basis. Generally, these services are provided on-site to clients whose current personnel do not have the requisite technical skills or to clients with specific projects requiring additional staffing that do not justify permanent personnel increases. The scope of the work performed by the Company ranges from specific, minor tasks of three months in duration involving a single IT professional to large, complex tasks that require several IT professionals for a year or longer. Examples of larger tasks include developing new client/server systems and maintaining mature mainframe systems that cannot be quickly replaced.
ERP software services consist primarily of assisting clients in implementing and customizing package application software on client/server systems. Clients seeking these services are generally businesses that are migrating from legacy mainframe applications or are implementing enterprise-wide client/server architectures. The Company is seeking to expand the volume of ERP software services that it provides by developing relationships with package software firms. In addition, the Company has purchased additional hardware and software and supporting facilities that will enable it to train its IT professionals in the use and implementation of such ERP package software. The Company also continually adjusts the scope of services which it provides in order to meet the changing needs of its clients.
The Company's UB Interactive Division and Cobalt Creative subsidiary provide a complete cycle of service, from strategic planning and project management, to the creative and technical services required in the areas of website design and development, digital media, corporate design and branding, e-commerce and virtual tours. While most of this work is done at UBICS' facilities in Canonsburg, Pennsylvania and Scottsdale, Arizona, customer participation is generally very high. Customers seeking these services range from small start-ups to niche firms to large companies. The project length and scope can range from one week to year long development and marketing campaigns.
The Company's services are described below:
SALES AND MARKETING
UBICS focuses its sales effort primarily on placing its IT professionals in high value-added positions within large and mid-sized organizations through a direct sales force currently consisting of 15 professionals. The Company serves the U.S. market primarily through its headquarters in the Pittsburgh, Pennsylvania area. UBICS leverages the mobility of its IT professionals and its centralized, low-overhead sales and marketing effort to service all areas of the U.S.
The Company's sales force is organized primarily by geographic region and/or practice lines. The Company's sales professionals are responsible for managing client relationships and identifying new business opportunities within their assigned regions and/or practice lines. UBICS' sales professionals are required to meet monthly targets for new accounts and placements, based upon the experience and tenure of the sales professional. Compensation of sales professionals is based heavily upon incentives for strong financial performance, including gross margin contribution, within their region and/or practice lines.
The Company's sales organization employs a variety of methods to identify potential clients and industry trends, including referrals from existing clients and the Company's IT professionals. The Company's sales
professionals begin the sales process by identifying and analyzing the prospective client's existing software configuration and development requirements, and the size and scope of its internal IT resources. The sales professional then submits a proposal with the resumes of IT professionals having skills that match the prospective client's project requirements. The Company's ability to closely match its IT professionals with the client's IT needs enables the Company's sales professionals to offer a 30 day guarantee. If the client is not satisfied with an IT professional's services during the first 30 days of an assignment, the Company will not charge the client for such professional's services. After the client has engaged the Company, the sales professional continuously monitors and builds the relationship between the client and the IT professionals to ensure client satisfaction and the successful progress and completion of the assignment.
While the Company's focus remains on expanding its sales and marketing efforts in the U.S., it has expanded its international operations by opening its recruiting and training center in India. Because UBICS currently has a sufficient supply of IT professionals awaiting deployment, the Company has deferred previously disclosed plans to establish offshore recruiting offices in various foreign locations (other than stated above).
In addition to UBICS' pursuit of new clients, the Company actively markets its services to its existing clients, seeking to proactively meet the needs of its clients and maximize placement success. The Company's success in developing and retaining clients is due, in large part, to its ability to maintain a continuous supply of qualified IT professionals. This is made possible by the Company's extensive network of nearly 80 subcontracting firms from which it can source qualified IT professionals to supplement, if necessary, its employed IT professionals. The Company believes that this network of subcontractors provides the Company with a significant sales and marketing advantage. The Company's relationship with these subcontractors ensures that the Company can effectively meet client needs quickly, thus establishing UBICS as a primary provider of IT professional services.
The Company's efforts in the area of web design have been towards building a focused and penetrative approach. Utilizing the customer base in all areas of the company, sales managers are compensated based on the development of additional services and products to these customers. Vertical focus areas within commercial real estate, architecture and software are identified through national, regional and local periodicals and research forums. The sales process begins with an initial phone call but outside sales is the primary communication model. A consultative and creative approach is taken to match the Company's services with the immediate needs of the potential customer. Once a formal proposal is submitted and approved, the customer is assigned a full time project manager who is responsible for delivery, quality, budget and coordination. Long term relationships are developed through adherence to strict timelines and quality standards.
CLIENTS
Substantially all of the Company's clients are large and mid-sized companies, systems integrators or other significant users of IT. During 2000, the Company provided services to over 190 clients in a range of industries in the U.S. During 2000, approximately 20% of the Company's revenues were derived from its top five clients--The Hartford, El Paso Natural Gas, Visual Services, MRJ Technology and Dana Corporation. The Hartford accounted for approximately 6%, 5% and 6% of the Company's revenues for 1998, 1999 and 2000, respectively.
The following is a partial list of organizations to which the Company has provided, or is providing, services:
TECHNOLOGY RETAIL INDUSTRIAL ---------- ------ ---------- Access Graphics Advance Auto Parts Caterpillar Ceridian Corp Charming Shoppes ABB Power Baan Boscov's Department El Paso Natural Gas Computer Associates Stores Ablestik Labs Hughes Network Systems Advent Johnson Controls Ansys Blockbuster General Electric Oracle Alfa Laval Separators
CONSUMER PRODUCTS FINANCIAL Fruit of the Loom Associates Dow Corning Ag First Credit Union Kent Electronics GE Capital Philips Electronics State Farm Greencheck Fans The Hartford
The Company seeks to provide high quality, responsive service in order to maximize its client retention rate and secure follow-on engagements. A significant number of the Company's clients have selected UBICS to provide additional services.
HUMAN RESOURCES
The Company's success depends in large part on its ability to attract, develop, motivate and retain highly skilled IT professionals. As of December 31, 2000, the Company had 291 IT professionals deployed at client sites. The Company currently has five full-time practice managers, all of whom have technical backgrounds that enable them to effectively evaluate the skills and qualifications of potential candidates. The Company also has a recruiting team dedicated to managing relationships with the Company's network of subcontractors. UBICS takes a proactive approach to recruiting based on skills requirements forecasts. The Company continually receives resumes from prospective employees in response to advertisements placed in trade publications and newspapers and on the internet. In addition, UBICS IT professionals are actively involved in identifying and referring new employees and screening candidates for new positions. The Company recruits primarily in India, but also has recruited from other areas of the world, including the U.S., the United Kingdom, the Middle East and the Far East.
As a result of its relationship with the UB Group, UBICS benefits from the established reputation and infrastructure that the UB Group has in India. The Company has also established a recruiting and training infrastructure in India.
UBICS employs a stringent selection method that consists of a three-stage interview process. During the first stage, a general interview is conducted to gather background information and references. The candidate next has a technical interview with a technical panel which comprises of experts in their respective skill areas. During the final step, the candidate is interviewed to assess the candidate's client interaction skills and to verify the candidate's suitability for assignment to a project in the U.S.
The Company believes that the qualifications of its IT professionals give it a competitive edge. To maintain and enhance their skills, UBICS IT professionals attend training workshops and seminars where they learn to use the latest tools and techniques. The Company utilizes its training facility in India, to train UBICS IT professionals in ERP software packages and other higher value-added technologies, and thereby enhance the skill base of such professionals.
The Company maintains a database which catalogs the technical profiles, location, availability, mobility and other factors relating to available IT professionals. This database enables the Company to quickly identify and deploy appropriate IT professionals for various client engagements.
The Company's IT professionals typically have Masters or Bachelors degrees in Computer Science or another technical discipline as well as at least two years of IT experience. As of December 31, 2000, the Company had 340 employees comprised of 260 IT professionals, 26 sales and marketing personnel and 54 general and administrative personnel. 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. UBICS engages legal counsel to prepare, file and process H-1B visa applications with the U.S. Immigration and Naturalization Service.
The Company also uses subcontracted IT professionals to effectively meet client needs when UBICS IT professionals are unavailable. The Company maintains strong relationships with nearly 80 vendor subcontractors located worldwide. As of December 31, 2000, 99 of its deployed IT professionals, or approximately 34%, were supplied by subcontractors. As the Company increases its investment in recruiting and retaining qualified IT professionals, it believes the ratio of UBICS IT professionals to IT professionals deployed from subcontractors will increase. It has been and continues to be to the Company's advantage, however, to maintain this subcontractor network to help meet its clients' needs. The Company applies the same process and standards in selecting IT professionals from subcontractors as it does in recruiting its employed IT professionals.
The Company has a focused employee retention strategy that includes career planning, training and benefits.
COMPETITION
The IT services industry is highly competitive and served by numerous national, regional and local firms, all of which are either existing or potential competitors of the Company. Primary competitors include participants from a variety of market segments, including "Big Five" accounting firms, systems consulting and implementation firms, applications software firms, service groups of computer equipment companies, general management consulting firms, contract programming companies and temporary staffing firms. Many of these competitors have substantially greater financial, technical and marketing resources and greater name recognition than the Company. In addition, there is a risk that clients may elect to increase their internal IT resources or limit the number of outside service providers to satisfy their applications solutions needs. The Company believes that the principal competitive factors in the IT services industry include the range of services offered, technical expertise, responsiveness to client needs, quality of service and perceived value. The Company believes that it competes favorably with respect to these factors.
The interactive and multimedia market is very diverse and competitive, making it difficult for the various competitors to distinguish themselves. In most regional markets, the Company competes against traditional advertising and IT companies as well as individuals operating out of a small office or home. With this vast difference, competition based on actual capability and depth is often overshadowed by price and relationship. The Company believes that it is well positioned from a pricing and size perspective and its biggest competitive edge is in penetration of services and products within specific industries.
INTELLECTUAL PROPERTY RIGHTS
The Company relies upon a combination of nondisclosure and other contractual arrangements, including entering into confidentiality agreements with its employees, and trade secret, copyright and trademark laws to protect its proprietary rights and the proprietary rights of third parties from whom the Company licenses intellectual property. The Company has filed a U.S. trademark registration application covering the service mark "UBICS" which, if granted, would give the Company the presumption of ownership in the U.S. of the "UBICS" mark for the services identified in the registration. Although the Company does not deem trademarks or service
marks to be material to its business, when in its best interests, the Company seeks such protection for its services. There can be no assurance that the steps taken by the Company in this regard will be adequate to deter misappropriation of proprietary information or that the Company will be able to detect unauthorized use and take appropriate steps to enforce its intellectual property rights.
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, 1999, this limit was reached in June and in the federal fiscal year ended September 30, 2000, this limit was reached in March. The inability to obtain additional H-1B permits during the federal fiscal years ended September 30, 1999 and 2000 resulted in increased use of subcontractor professionals by UBICS.
In October 2000, the U.S. government increased the limit of new H-1B permits to 195,000 for each of the next three federal fiscal years starting from fiscal year 2001.
In future years where 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
The U.S. government in connection with its increase in the limit on H-1B permits, 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.
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.
ITEM 2.
ITEM 2. PROPERTIES
The Company's corporate headquarters is located in the Borough of Canonsburg, Pennsylvania, approximately 22 miles south of Pittsburgh, Pennsylvania. The Company's senior management, administrative personnel, human resources and sales and marketing functions are housed in this 22,815 square foot facility which is leased by the Company pursuant to a lease agreement which expires on August 27, 2003. The Company believes that this location has sufficient space for its current and anticipated near-term needs. The Company leases two facilities in Scottsdale, Arizona to house Cobalt Creative's administrative personnel, production team, design team, and sales and marketing personnel. The first facility is approximately 1,400 square foot which is leased pursuant to a lease agreement which expires on December 31, 2001. The second facility of 3,653 square foot is leased by [the Company/by Cobalt?] pursuant to a lease agreement which expires on May 31, 2003. The Company also subleases a 4,439 square foot office in the San Francisco suburb of Sausalito, California for use as a sales and marketing office. The Company subleases this space from a member of the UB Group.
ITEM 3
ITEM 3 LEGAL PROCEEDINGS
The Company is not a party to any litigation that is expected to have a material adverse effect on the Company or its business.
ITEM 4
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its 2000 Annual Meeting of Shareholders (the "2000 Annual Meeting") on November 15, 2001.
(b) Two Directors of the Company, Vijay Mallya and Manohar B. Hira, were elected at the 2000 Annual Meeting to serve a term of three years. Directors whose terms continued after the 2000 Annual Meeting were Robert C. Harbage, Scott R. Heldfond, Christopher C. Melton, Sr., Rahul Merchant, and Kent D. Price.
(c) The following matters were voted upon at the 2000 Annual Meeting, with the results indicated:
1. Election of Director: The following votes were cast for the nominees standing for election as director of the Company for a three year term:
Nominee: Vijay Mallya Votes For: 6,480,611 Votes Withheld: 358,830
Nominee: Manohar B. Hira Votes For: 6,479,611 Votes Withheld: 359,830
2. Amendment of the Company's 1997 Stock Option Plan to increase the maximum number of shares of Common Stock authorized for issuance thereunder from 1,300,00 to 1,800,000:
Votes For: 6,474,761 Votes Against: 364,680 Abstentions: 0
PART II
ITEM 5
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information:
The sole class of outstanding equity securities of the Company is its common stock, par value $.01 per share (the "Common Stock"). The Common Stock is traded on the Nasdaq National Market under the symbol "UBIX". The following table sets forth, for the periods indicated the range of high and low closing sale prices for the Common Stock on the Nasdaq National Market. The Common Stock commenced trading on the Nasdaq National Market on October 31, 1997 at an initial public offering price of $10.00 per share.
Quarter Ended High Low - ------------- ---- ---
December 31, 1999 $ 3.500 $ 1.531 March 31, 2000 $ 11.750 $ 2.563 June 30, 2000 $ 5.250 $ 2.375 September 30, 2000 $ 3.438 $ 2.250 December 31, 2000 $ 2.375 $ 1.250
As of March 20, 2001, there were approximately 68 record holders of Common Stock.
The Company has never paid dividends on its Common Stock. The Company currently intends to retain all of its future earnings to fund growth and the operation of its business and therefore does not anticipate paying any cash dividends in the foreseeable future. The payment of future cash dividends, if any, will be at the discretion of the Company's Board of Directors and will depend upon, among other things, the Company's future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and such other factors as the Board of Directors may deem relevant.
On June 7, 2000, the Company issued 100,000 shares of its Common Stock to Robert C. Harbage in connection with the Company's hiring of Mr. Harbage as its President and Chief Executive Officer. The issuance of such shares was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2) of the Securities Act in that it was a transaction not involving any public offering.
(b) Use of Proceeds of Initial Public Offering:
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 estimated expenses incurred for the Company's account in connection with the Offering:
Underwriting discounts $1,050,000 Finder's fees -- Expenses paid to or for underwriters -- Other expenses 775,000* ----------
TOTAL $1,825,000
- ------------------- *Estimated.
The following table summarized the amount of net offering proceeds to the Company ($13,175,000) used for the purposes listed below:
Purchase and installation of machinery 3,104,000 and equipment Repayment of indebtedness 775,000 Temporary investments* 9,296,000 ------------
Total $13,175,000 ===========
- ------------- *Approximately $5,600,000 of such amount is currently invested in a Prudential money market mutual fund with the balance invested in certificates of deposit with PNC Bank.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
- -----------------
(1) Includes expenses of $257 incurred on behalf of the UB Group for the year ended December 31, 1996. Beginning January 1, 1997, such expenses ceased to be incurred by the Company.
(2) These expenses relate to the termination of the Company's proposed acquisition of R Systems, Inc.
ITEM 7.
ITEM 7. 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 8 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 factors that may cause actual results to differ materially from the forward-looking statements include ability to recruit and maintain qualified IT professionals, changes in laws and regulations specifically immigration laws, competition and economic conditions in the geographic regions in which the Company conducts its operations, general economic conditions, success of the Company's marketing efforts and the demand for outsourced IT professionals. 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, 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 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. 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 December 31, 2000, 55 IT professionals, or approximately 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 80 subcontractors located worldwide. During 2000, approximately 38% of the Company's revenues were derived from IT professionals deployed from subcontractors. As of December 31, 2000, IT professionals deployed from subcontractors comprised 99 of the Company's 291 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 586 clients in a range of industries and currently has IT professionals deployed at nearly 156 of these clients. The Company's five largest clients accounted for approximately 21% of revenues for 2000. 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 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 July 7, 2000, the Company completed the acquisition of Cobalt Creative, Inc., an Arizona corporation, by issuing 432,351 shares of the Company's Common Stock for 100% of the stock of Cobalt.
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 --------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------- 1998 1999 2000 ---- ---- ---- Revenues............................. 100.0% 100.0% 100.0% Cost of revenues..................... 68.9 73.2 74.1 ----- ----- ----- Gross profit......................... 31.1 26.8 25.9 Selling, general and administrative expenses.......................... 21.5 23.4 27.2 Merger related expenses (1).......... -- 2.3 -- ----- ----- ----- Income / (Loss) from operations...... 9.6 1.1 (1.3) Interest income, net................. 2.0 1.5 1.5 ----- ----- ----- Income before income taxes........... 11.6 2.6 0.2 Provision for income taxes........... 4.7 1.0 0.2 ----- ----- ----- Net income........................... 6.9% 1.6% 0.0% ===== ===== =====
- ------------ (1) These expenses relate to the termination of proposed acquisition of R Systems, Inc.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Revenues
Revenues for the year ended December 31, 2000 were $42.3 million, compared to $37.9 million for the year ended December 31, 1999, an increase of $4.4 million, or 12%. Approximately 80% 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 20% of the increase in revenues was due to higher average hourly billing rates. The number of deployed IT professionals increased to 291 at December 31, 2000 from 270 at December 31, 1999, and the Company broadened its client base since inception to 586 clients through December 31, 2000 from 427 clients through December 31, 1999.
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 2000 was $11.0 million, compared to $10.2 million for 1999, an increase of $0.8 million, or 8%. Gross profit as a percentage of revenues decreased to 25.9% for 2000, compared to 26.8 for 1999. The decrease in gross profit as a percentage of revenues resulted primarily from increase in the ratio of employee consultants waiting to be deployed and from increases in rates charged by subcontractors.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consists of costs associated with the Company's sales and marketing efforts, executive, finance and human resource functions, facilities, telecommunications and other general overhead expenses. Selling, general and administrative expenses for 2000 was $11.5 million, compared to $8.8 million for 1999, an increase of $2.7 million, or 30%. Selling, general and administrative expenses as a
percentage of revenues increased to 27.2% for 2000 from 23.4% for 1999. The increase in expenses was primarily due to one-time expenses aggregating $0.9 million and greater salary expense due to staff and executive restructurings in 2000. The one-time expenses included $450,000 payable to the Company's former Chief Executive Officer as part of his severance agreement, $100,000 paid to the Company's new Chief Executive Officer as a signing bonus pursuant to his employment agreement and $352,000 representing the value of 100,000 shares of common stock granted to the Company's new Chief Executive Officer pursuant to his employment agreement.
Merger-related expenses
Merger related expenses for 1999 were $0.9 million or 2.3% as a percentage of revenues. These are non-recurring in nature and relate to the termination of the Company's proposed acquisition of R Systems, Inc.
Interest Income, net
Interest income, net for 2000 was $659,000 compared to interest income of $556,000 for 1999. The increase resulted from reinvesting of interest earned on short term investments.
Provision for Income Taxes
The Company's effective tax rate was 93.1% for 2000 compared to 38.5% for 1999. The increase is mainly due to the effect of non-deductible goodwill on a relatively small pretax income in 2000.
Net Income
Net income for 2000 was $7,000, compared to $609,000 for 1999, a decrease of $602,000 or 99%. The net income as a percentage of revenues decreased to 0% for 2000, compared to 1.6% for 1999. The decrease in net income as a percentage of revenues resulted primarily from the reduction of gross profit as a percentage of revenues and increase in selling, general and administrative expenses as a percentage of revenues.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues
Revenues for the year ended December 31, 1999 were $37.9 million, compared to $30.3 million for the year ended December 31, 1998, an increase of $7.6 million, or 25%. Approximately 85% 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 15% of the increase in revenues was due to higher average hourly billing rates. The number of deployed IT professionals decreased to 270 at December 31, 1999 from 276 at December 31, 1998, and the Company broadened its client base since inception to 427 clients through December 31, 1999 from 313 clients through December 31, 1998.
Gross Profit
Gross profit for 1999 was $10.2 million, compared to $9.4 million for 1998, an increase of $0.8 million, or 8%. Gross profit as a percentage of revenues decreased to 26.8% for 1999, compared to 31.1% for 1998. The decrease in gross profit as a percentage of revenues resulted primarily from increase in the ratio of employee consultants waiting to be deployed and from increases in rates charged by subcontractors.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 1999 was $8.8 million, compared to $6.5 million for 1998, an increase of $2.3 million, or 36%. Selling, general and administrative expenses as a percentage of revenues increased to 23.4% for 1999 from 21.5% for 1998. The increase in expenses was primarily due to increases in salaries, and other personnel and administrative costs to support the Company's growth.
Merger-related expenses
Merger related expenses for 1999 were $0.9 million or 2.3% as a percentage of revenues. These are non-recurring in nature and relate to the termination of the Company's proposed acquisition of R Systems, Inc.
Interest Income, net
Interest income, net for 1999 was $556,000 compared to interest income of $611,000 for 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 38.5% for 1999 compared to 40.7% for 1998.
Net Income
Net income for 1999 was $609,000, compared to $2.1 million for 1998, a decrease of $1.5 million or 71%. Net income as a percentage of revenues decreased to 1.6% for 1999, compared to 6.9% for 1998. The decrease in net income as a percentage of revenues resulted primarily from the reduction of gross profit as a percentage of revenues, increase in selling, general and administrative expenses as a percentage of revenues and non-recurring expenses relating to the termination of the Company's proposed acquisition of R Systems, Inc.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal uses of $13.2 million cash generated out of the initial public offering (the "Offering") have been to fund receivables and other working capital, reflecting the Company's growth. Net cash used by operating activities was $747,000 for 2000 compared to net cash provided by operating activities of $1,331,000 for 1999. Net cash used by operating activities for 2000 is primarily due to increase in accounts receivable of $1,559,000 offset by net income and non-cash charges for depreciation, goodwill and stock based compensation aggregating $695,000. Net cash provided by operating activities for 1999 is primarily due to reduction in unbilled receivables of $610,000 and net income and non-cash charges for depreciation aggregating to $909,000.
Capital expenditures for 2000 and 1999 were $415,000 and $774,000 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 eventual 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 and the expansion is expected to be operational by the end of 2001 (including additional 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.
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 ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contract) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that 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 in 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 No 133 was originally effective for fiscal years beginning after June 15, 1999.
In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - - Deferral of the Effective Date of FASB Statement No. 133" ("SFAS 137") delaying the effective date of SFAS 133 for all fiscal quarters of all fiscal years beginning after June 15, 2000. Since the Company currently does not invest in derivative instruments, this will have no impact on the Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin No. 101, "Revenue Recognition" ("SAB No. 101"), to provide guidance on the recognition, presentation and disclosure of revenue in financial statements. SAB No. 101 explains the SEC's general framework for revenue recognition. SAB No. 101 does not change existing literature on revenue recognition, but rather clarifies the SEC's position on preexisting literature. Adoption of this SAB had no impact on the Company's financial position or results of operations.
ITEM 7A.
ITEM 7A. QUANTITATIVE 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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL FINANCIAL DATA
The financial statements and supplemental financial data required by this Item are set forth on the following pages.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying financial statements of UBICS, Inc. have been prepared by management, who are responsible for their integrity and objectivity. The statements have been prepared in conformity with generally accepted accounting principles and necessarily include amounts based on management's best estimates and judgments.
Management has established and maintains a system of internal controls designed to provide reasonable assurance that assets are safeguarded and that the Company's financial records reflect authorized transactions of the Company. The system of internal controls included widely communicated statements of policies and business practices that are designed to require all employees to maintain high ethical standards in the conduct of Company affairs. The internal controls are augmented by organizational arrangements that provide for appropriate delegation of authority and division of responsibility.
The Company's financial statements have been audited by Arthur Andersen LLP, independent public accountants, whose report thereon appears on page 18 of this Form 10-K. As part of its audit of the Company's financial statements, Arthur Andersen LLP considered the Company's system of internal controls to the extent it deemed necessary to determine the nature, timing and extent of its audit tests. Management has made available to Arthur Andersen LLP the Company's financial records and related data.
The Board of Directors will pursue its responsibility for the Company's financial reporting and accounting practices through its Audit Committee, a majority of the members of which are non-employee directors. The independent public accountants have direct access to the Audit Committee with and without the presence of management representatives, to discuss the results of their audit work and their comments on the adequacy of internal accounting controls, and the quality of financial reporting.
/s/Dr. Vijay Mallya Dr. Vijay Mallya Chairman and Director
/s/Babu Srinivas Babu Srinivas Vice President Finance and Acting Chief Financial Officer
March 20, 2001
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of UBICS, Inc.:
We have audited the accompanying consolidated balance sheets of UBICS, Inc. (a Delaware corporation) as of December 31, 1999 and 2000, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of UBICS, Inc. as of December 31, 1999 and 2000, and the results of their operations and their cash flows for each of the three years ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania, March 14, 2001
UBICS, INC.
CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts)
December 31, ------------------------ 1999 2000 ---- ---- ASSETS Current assets: Cash and cash equivalents ...................... $ 12,027 $ 10,477 Accounts receivable, net of allowance for doubtful accounts of $885 and $1,100, respectively ................................ 4,103 5,743 Unbilled receivables ........................... 2,363 2,412 Employee advances .............................. 52 83 Prepaids and other ............................. 299 683 Deferred tax asset ............................. 495 607 -------- -------- Total current assets ........................ 19,339 20,005 -------- -------- Property and equipment: Leasehold improvements ......................... 40 40 Vehicles ....................................... 89 89 Computer equipment and software ................ 1,732 2,214 Furniture and fixtures ......................... 662 696 Office and other equipment ..................... 42 93 -------- -------- Total property and equipment ................ 2,565 3,132 Accumulated depreciation ....................... (470) (849) -------- -------- Net property and equipment ................... 2,095 2,283 -------- -------- Goodwill, net of accumulated amortization of $0 and $56, respectively ................... -- 1,627 -------- -------- Notes receivable ............................. 250 983 -------- -------- Total assets ........................... $ 21,684 $ 24,898 ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ............................... $ 1,981 $ 2,649 Payroll liabilities ............................ 1,717 2,246 Other current liabilities ...................... 97 557 -------- -------- Total current liabilities 3,795 5,452 Deferred tax liabilities -- 122 -------- -------- Total liabilities ........................... 3,795 5,574 -------- -------- Common stock, subject to redemption, 183,200 shares issued and outstanding ............... -- 550 Stockholders' equity: Preferred stock, $0.01 par value, 2,000,000 shares authorized, no shares issued and outstanding ................................. -- -- Common stock, $0.01 par value, 20,000,000 shares authorized, 6,500,000 and 6,849,151 shares issued respectively................... 65 68 Additional paid-in capital ..................... 13,160 14,035 Treasury stock - 20,200 shares, at cost ........ (100) (100) Retained earnings .............................. 4,764 4,771 -------- -------- Total stockholders' equity .................. 17,889 18,774 -------- -------- Total liabilities and stockholders' equity ............................... $ 21,684 $ 24,898 ======== ========
The accompanying notes are an integral part of these financial statements.
UBICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts)
Year Ended December 31, ------------------------------------------ 1998 1999 2000 ---- ---- ---- Revenues .................... $ 30,314 $ 37,875 $ 42,324 Cost of revenues ............ 20,896 27,722 31,344 ---------- ---------- ---------- Gross profit .............. 9,418 10,153 10,980 Selling, general and administrative expenses.... 6,495 8,849 11,537 Merger related expenses ..... -- 869 -- ---------- ---------- ---------- Income / (Loss ) from operations ................ 2,923 435 (557) Interest income, net ........ 611 556 659 ---------- ---------- ---------- Income before income taxes... 3,534 991 102 ---------- ---------- ---------- Provision for income/taxes... 1,438 382 95 Net income ................ $ 2,096 $ 609 $ 7 ========== ========== ========== Basic and diluted earnings per share ................. $ 0.32 $ 0.09 $ 0.00 ========== ========== ========== Weighted average shares outstanding ............... 6,495,823 6,479,800 6,746,900 Diluted average shares outstanding ............... 6,529,667 6,489,258 6,830,545
The accompanying notes are an integral part of these financial statements.
UBICS, INC. (Dollars in thousands, except share amounts)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these financial statements.
UBICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Year Ended December 31, ----------------------------------- 1998 1999 2000 ---- ---- ----
Cash flows from operating activities: Net income ........................ $ 2,096 $ 609 $ 7 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation.................... 137 300 379 Amortization of goodwill........ -- -- 56 Stock based compensation ....... -- -- 253 Changes in operating assets and liabilities-- Accounts receivable, net ..... (1,375) 49 (1,559) Unbilled receivables ......... (1,007) 610 (49) Employee advances ............ 6 112 (31) Other long-term assets ....... (200) (50) (733) Due to affiliates, net ....... (141) 174 -- Deferred tax asset, net ...... (105) (289) 10 Prepaids and other ........... (89) (41) (378) Accounts payable ............. 1,111 (53) 511 Payroll liabilities .......... 568 89 477 Accrued taxes and other current liabilities ....... (589) (179) 310 ------- ------- ------- Net cash (used) provided by operating activities ......... 412 1,331 (747) ------- ------- ------- Cash flows from investing activities: Purchases of property and equipment ...................... (1,632) (774) (415) Merger related expenses ........... -- -- (388) ------- ------- ------- Net cash used by investing activities ......... (1,632) (774) (803) ------- ------- ------- Cash flows from financing activities: Acquisition of treasury stock ..... (100) -- -- ------- ------- ------- Net cash used by financing activities ......... (100) -- -- ------- ------- ------- Net increase (decrease) in cash and cash equivalents .............. (1,320) 557 (1,550) Cash and cash equivalents, at beginning of year ................. 12,790 11,470 12,027 ------- ------- ------- Cash and cash equivalents, at end of year ....................... $11,470 $12,027 $10,477 ======= ======= ======= Supplemental data: Cash payments for income taxes .... $ 2,097 $ 752 $ 297
Stock issued for purchase of Cobalt Creative, Inc. ........... $ -- $ -- $ 1,175
The accompanying notes are an integral part of these financial statements.
UBICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS:
UBICS, Inc. ("UBICS" or "the Company"), 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 web design and development, 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying financial statements reflect the application of the following significant accounting policies:
Principles of Consolidation
Consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.
Cash Equivalents
For purposes of the consolidated balance sheet, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
Revenue Recognition
The Company recognizes revenue on its time-and-materials contracts as the services are performed for clients and upon completion for its website design and development services, which are performed on a fixed price basis.
Unbilled Receivables
Unbilled receivables represent time and materials provided to customers in the last month of each fiscal period which are billed early in the following month.
Property and Equipment
Property and equipment are carried at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the properties as follows:
Years ----- Computer equipment and software....... 5 Furniture and fixtures................ 7 Office and other equipment............ 7 Leasehold improvements................ 5 Vehicles.............................. 5
Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate fair value of each class of financial instrument for which it is practicable to estimate that value:
Cash and Cash Equivalents--The carrying amount approximates fair value because of the short maturity of those instruments.
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.
3. MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK:
The Company has derived a significant portion of its revenues from a relatively limited number of clients.
The following table presents the Company's largest clients during each of the years ended December 31, 1998, 1999 and 2000 and the approximate percentage of revenue from each client for the respective periods:
Year Ended December 31, ----------------------- 1998 1999 2000 ---- ---- ---- The Hartford ............................. 9% 5% 6% El Paso Natural Gas ...................... 10% 7% 5% Visual Services 1% 1% 5% MRJ Technology ........................... --% -- 2% Dana Corporation 2% 4% 2% Others, individually and collectively less than 10% of revenue .................... --% 4% -% -- -- -- Total of Five Largest Clients ....... 22% 21% 20% == == ==
The Company grants credit to clients based upon management's assessment of their creditworthiness. The Company's revenues and resulting accounts receivable are derived primarily from large and mid-sized organizations in various industries throughout the U.S.
4. LEASE OBLIGATIONS:
The Company leases real estate and facilities at several locations. Lease expenses charged to operations were $388,091, $581,283 and $728,364, respectively, for the years ended December 31, 1998, 1999 and 2000.
Minimum future rental payments under non-cancelable operating leases for each of the next five years are as follows :
Year Ending December 31, ------------ 2001............... $688,293 2002............... 544,753 2003............... 362,840 2004............... 8,309 2005............... 1,487 ---------- Totals............. $1,605,682 ==========
5. RELATED PARTY TRANSACTIONS:
The Company subleases office space in San Francisco, California and Bangalore, India from members of the UB Group. Rent expenses charged to operations were $42,757, $142,246 and $138,000 respectively, for the years ended December 31, 1998, 1999 and 2000.
The Company paid $100,000 in 2000 as a finder's fee to e-seed Capital, LLC. in connection with the acquisition of Cobalt Creative, Inc. One of the directors of the Company is a director of e-seed Capital.
6. STOCK-BASED COMPENSATION:
Effective September 2, 1997, the Company adopted the 1997 Stock Option Plan (the "Plan") for directors, executive officers and other key employees. The Compensation Committee of the Board of Directors is authorized to grant stock options (with or without stock appreciation rights). The Plan provides for the issuance of up to 1,800,000 stock options at no less than the market value of the stock at the date of grant. The Company accounts for the Plan under Accounting Principles Board Opinion No. 25, "Accounting for Stock issued to Employees". Had compensation costs for the Plan been determined consistent with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), net income for the years ended December 31, 1998, December 31, 1999 and December 31, 2000 would have been reduced by $860,000, $720,000, and $539,000, respectively, and basic and diluted earnings per share would have been reduced by $0.13, $0.11, and $0.08 per share, respectively, for the same period.
The Company granted stock appreciation rights in connection with the grant of 300,000 stock options at an exercise price of $3.22 per share to the Company's new President & CEO. Since the market value of the Company's stock at December 31, 2000 was less than $3.22 per share, no compensation expense was recorded under this grant in 2000.
In 1999 and 2000, options covering a total of 125,000 and 824,000 shares, respectively, of Common Stock were granted under the Plan. The right to purchase shares upon exercise of these options expires 10 years from the date of grant or earlier if an option holder ceases to be employed by the Company. A summary of stock option activity follows:
STOCK OPTIONS OUTSTANDING AT DECEMBER 31, 1999
STOCK OPTIONS OUTSTANDING AT DECEMBER 31, 2000
Summary of stock options Stock Option Price - -------------------------------------------------------------------------------- Weighted average fair value of options granted during 1999* $4.26 ================================================================================ Weighted average fair value of options granted during 2000* $2.18 ================================================================================
* The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:
1999 2000 - ------------------------------------------------------------------------------- Risk free interest rate 4.4% 5.76% to 6.74% Expected dividend yield 0.0% 0.0% Expected life of options 3 years 3 years Expected volatility rate 75.0% 101% to 108% - -------------------------------------------------------------------------------
There were 478,000 shares reserved for future grants under the Plan at December 31, 2000.
7. INCOME TAXES:
The Company accounts for income taxes in accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes." Deferred income taxes are recognized for temporary differences between the tax and financial bases of the Company's assets and liabilities, using the enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.
The reconciliation of income taxes computed using the statutory U.S. income tax rate and the provision for income taxes was as follows for the years ended December 31, 1998, 1999 and 2000:
DECEMBER 31, ------------------------------------- 1998 1999 2000 ------------------------------------- Federal income taxes at the statutory rate ................ $1,275,727 $330,927 $87,428 State income taxes net of federal benefit ...................... 162,600 51,444 7,481 ---------- -------- ------- Provision for income taxes ...... $1,438,327 $382,371 $94,909 ========== ======== =======
The provision for income taxes as shown in the accompanying statement of operations for the years ended December 31, 1998, 1999 and 2000 included the following components:
DECEMBER 31, ----------------------------------------- 1998 1999 2000 ----------------------------------------- Current federal provision $1,453,134 $ 580,477 $177,553 Current state provision .. 190,988 90,659 29,729 Deferred federal provision (176,984) (249,550) (90,125) Deferred state provision . (28,811) (39,215) (22,248) ---------- --------- -------- Provision for income taxes $1,438,327 $ 382,371 $ 94,909 ========== ========= ========
The components of the deferred tax asset as of December 31, 1999 and 2000 were as follows:
DECEMBER 31, ---------------------- 1999 2000 --------------------- Allowance for doubtful accounts $354,688 $445,500 Accrued liabilities ........... 139,872 161,433 -------- -------- Deferred tax asset ............ $494,560 $606,933 ======== ======== Deferred tax liability ........ -- $122,358 Deferred tax asset, net ....... $494,560 $484,575
8. EARNINGS PER COMMON SHARE:
In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"), which establishes new standards for computing and presenting earnings per share.
Basic earnings per share is calculated by dividing net income by the weighted average number of shares outstanding during the year. Diluted earnings per share is calculated by dividing net income by the weighted average number of shares outstanding during the year adjusted for the assumed conversion of all dilutive securities.
The following table sets forth the computation of earnings per share for the periods indicated:
The exercise price of stock options to purchase an aggregate of 104,500, 411,000 and 402,000 shares in 1998, 1999 and 2000, respectively, was less than the average stock price for the year. As such, these options have been excluded from the calculation of diluted earnings per share as their effect would be anti-dilutive.
9. STOCK GRANT AND COMMON STOCK SUBJECT TO REDEMPTION
In connection with the employment of the Company's new President & CEO (new CEO), he was granted 100,000 shares of the Company's common stock. The market value of the shares at the date of the grant ($253,000) is included as selling, general and administrative expenses in 2000.
In addition, the new CEO purchased 183,200 shares of the Company's common stock from the Company's controlling stockholder for $732,800. The Company loaned the new CEO the funds to purchase these shares. In addition, the Company granted the new CEO a put related to these shares at $3.00 per share. The put value of these shares is shown as shares subject to redemption in the accompanying balance sheet.
Until the note is repaid, the Company will record compensation expense if the market value of the shares purchased exceeds the new CEO's purchase price. When the note is repaid, the Company will record compensation expense if the market value of these shares is lower than the new CEO's put price. No expense was recorded in 2000 under this agreement.
10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
Earnings per share amounts for each quarter are required to be computed independently and, therefore, may not equal the amount calculated for year end.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the information in the registrant's definitive proxy statement to be filed with the Commission on or about April 16, 2001 in connection with its 2001 annual meeting of stockholders (the "2001 Proxy Statement") under the captions "Election of Directors" and "Executive Officers".
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the information in the registrant's 2001 Proxy Statement under the caption "Executive Compensation", provided that the information in such Proxy Statement under the captions "Stock Performance Graph" and "Compensation Committee Report on Executive Compensation" are not incorporated by referenced herein.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the information in the registrant's 2001 Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management."
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the information in the registrant's 2001 Proxy Statement under the caption "Compensation Committee Interlocks and Insider Participation" and "Certain Transactions."
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements of the registrant are included on pages 19 to 30 of this Form 10-K and the report of independent public accountants is included on page 18 of this Form 10-K:
Consolidated Balance Sheets as of December 31, 1999 and 2000
Consolidated Statements of Operations for the years ended December 31, 1998, 1999 and 2000
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1998, 1999 and 2000
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1999 and 2000
2. Financial Statement Schedules
The following financial statement schedules shown below should be read in conjunction with the financial statements on pages 17 to 26 of this Form 10-K. All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or Notes thereto.
The following items appear immediately following the signature page:
Report of Independent Public Accountants on Supplemental Schedules Financial Statement Schedules:
Valuation and Qualifying Accounts for the three years ended December 31, 2000.
3. Exhibits:
3(i) Amended and Restated Certificate of Incorporation of UBICS, Inc.(1)
3(ii) Amended and Restated Bylaws of UBICS, Inc.(1)
10.1 UBICS, Inc. 1997 Stock Option Plan (2)
10.2 Noncompetition Agreement dated October 27, 1997 among the Company, Vijay Mallya and UB Information Consultancy Services, Ltd. (3)
10.3 Employment Agreement between the Registrant and Vijay Mallya (3)
10.4 Employment Agreement between the Registrant and Manohar B. Hira (3)
10.6 Employment Agreement between the Registrant and Babu Srinivas (3)
10.7 Employment Agreement dated September 1, 1999 between the Registrant and Dennis M. Stocker (4)
10.8 Agreement of Severance, Waiver and Release dated March 18, 1999 between the Company and Manohar B. Hira (5)
10.9 Services Agreement dated October 27, 1997 among the Company, Vijay Mallya and United Breweries Limited (3)
10.10 Form of Director Indemnification Agreement (3)
10.11 Form of Sublease and Consent among the Company, Marin Executive Park and United Breweries of American, Inc. (3)
10.12 Noncompetition Agreement dated October 27, 1997 among the Company, Vijay Mallya and United Breweries Limited (3)
10.13 Noncompetition Agreement dated October 27, 1997 among the Company, Vijay Mallya and UB International Limited (3)
10.14 Services Agreement dated October 27, 1997 among the Company, Vijay Mallya and UB International Limited (3)
10.15 Lease Agreement dated June 30, 1998 between the Company and Stealth Technology Associates (6)
10.16 Amendment to Agreement of Severance Waiver and Release dated December 1, 1999 between the Company and Manohar B. Hira (7)
10.17 Amendment No. 2 to Agreement of Severance Waiver and Release dated as of March 31, 1999 between the Company and Manohar B. Hira (7)
10.18 Amendment No. 3 to Agreement of Severance Waiver and Release dated as of March 31, 1999 between the Company and Manohar B. Hira (8)
10.19 Employment Agreement dated June 22, 1998 between the Company and Patrick Ghilani (8)
10.20 Agreement dated August 20, 1999 between the Company and Patrick Ghilani (8)
10.21 Amendment to Employment Agreement dated as of January 1, 2000 between the Company and Babu Srinivas (8)
10.22 Employment Agreement dated June 7, 2000 between the Company and Robert C. Harbage (9)
10.22 Acquisition and Stock Exchange Agreement dated July 5, 2000 among the Company, Cobalt Creative, Inc. and the Shareholders of Cobalt Creative, Inc. (9)
26 Subsidiaries of the Registrant
- ---------- (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 the registrant's Schedule 14A filed on November 15, 2000.
(3) 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.
(4) Incorporated by reference to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999.
(5) Incorporated by reference to the registrant's Annual Report on Form 10-K for the year ended December 31, 1998.
(6) Incorporated by reference to the registrant's Quarterly Report on Form 10-A for the quarter ended September 30, 1998.
(7) Incorporated by reference to the registrant's Annual Report on Form 10-K for the year ended December 31, 1998.
(8) Incorporated by reference to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001
(9) Incorporated by reference to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.
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)
By: /s/Robert Harbage ---------------------------------- Robert Harbage President & CEO March 30, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons have signed this report in the capacities indicated on March 30, 2001.
/s/Vijay Mallya -------------------------------------- Vijay Mallya Chairman and Director
/s/Robert Harbage -------------------------------------- Robert Harbage President, CEO and Director (Principal Executive Officer)
/s/Babu Srinivas -------------------------------------- Babu Srinivas Vice President - Finance and Accounting And Acting Chief Financial Officer (Principal Finance & Accounting Officer)
/s/Scott Heldfond -------------------------------------- Scott Heldfond Director
/s/Kent D. Price -------------------------------------- Kent D. Price Director
/s/Christopher C. Melton, Sr. -------------------------------------- Christopher C. Melton, Sr. Director
/s/Rahul Merchant -------------------------------------- Rahul Merchant Director
/s/ Manohar B. Hira -------------------------------------- Manohar B. Hira Director
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE
To the Board of Directors and Stockholders of UBICS, Inc.:
We have audited in accordance with auditing standards generally accepted in the United States, the financial statements included in this Form 10-K and have issued our report thereon dated March 14, 2001. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule set forth on the following page is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
/s/ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania March 14, 2001
SCHEDULE II
UBICS, INC.
VALUATION AND QUALIFYING ACCOUNTS (In thousands)
EXHIBIT INDEX
- ----------- (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 the registrant's Schedule 14A filed on November 15, 2000.
(3) 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.
(4) Incorporated by reference to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999.
(5) Incorporated by reference to the registrant's Annual Report on Form 10-K for the year ended December 31, 1998.
(6) Incorporated by reference to the registrant's Quarterly Report on Form 10-A for the quarter ended September 30, 1998.
(7) Incorporated by reference to the registrant's Annual Report on Form 10-K for the year ended December 31, 1998.
(8) Incorporated by reference to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001
(9) Incorporated by reference to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.