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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
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: 000-28185
----------------
C-BRIDGE INTERNET SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-2001899
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
219 Vassar Street, 02139
Cambridge, Massachusetts (Zip Code)
(Address of principal executive
offices)
(617) 497-1707
(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 for 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:
As of October 31, 2000, there were 21,117,673 shares of common stock
outstanding.
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C-BRIDGE INTERNET SOLUTIONS, INC.
TABLE OF CONTENTS
PART I--FINANCIAL INFORMATION:
<TABLE>
<C> <S> <C>
Item 1: Financial Statements
Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999.............................................. 3
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2000 and 1999...................... 4
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2000 and 1999................................... 5
Notes to Consolidated Financial Statements..................... 6-7
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 8-13
Item 3: Quantitative and Qualitative Disclosures about Market Risk..... 14
PART II--OTHER INFORMATION:
Item 1: Legal Proceedings.............................................. 15
Item 2: Changes in Securities and Use of Proceeds...................... 15
Item 6: Exhibits and Reports on Form 8-K............................... 15
SIGNATURES.............................................................. 16
</TABLE>
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
C-BRIDGE INTERNET SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................ $ 57,228,196 $ 65,312,334
Accounts receivable, net of allowance of $448,983
and $100,000, respectively...................... 9,060,025 3,499,356
Unbilled receivables............................. 9,777,729 1,792,133
Other current assets............................. 2,836,898 584,794
------------ ------------
Total current assets........................... 78,902,848 71,188,617
------------ ------------
Property and Equipment, at cost:
Computer equipment............................... 5,726,317 1,812,637
Furniture and fixtures........................... 1,614,838 208,003
Computer software................................ 1,496,727 965,433
Leasehold improvements........................... 1,094,731 40,181
------------ ------------
9,932,613 3,026,254
Less--Accumulated depreciation and amortization.. 2,027,571 682,536
------------ ------------
7,905,042 2,343,718
------------ ------------
Goodwill and other assets, net..................... 10,768,529 1,361,326
------------ ------------
Total assets................................... $ 97,576,419 $ 74,893,661
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of equipment loans and capital
lease obligations............................... $ 210,380 $ 191,206
Accounts payable................................. 3,676,563 2,018,741
Accrued liabilities.............................. 5,594,856 3,431,285
Deferred revenue................................. 3,777,015 1,877,628
------------ ------------
Total current liabilities...................... 13,258,814 7,518,860
------------ ------------
Equipment Loans and Capital Lease Obligations, net
of current portion................................ 107,974 263,100
------------ ------------
Stockholders' Equity:
Preferred stock, $.01 par value--
Authorized--5,000,000 shares
Issued and outstanding--None.................... -- --
Common stock, $.01 par value--
Authorized--50,000,000 shares
Issued--21,603,304 and 18,906,258 shares,
respectively.................................... 216,034 189,063
Additional paid-in capital......................... 100,541,472 82,394,326
Deferred compensation.............................. (4,049,531) (5,107,259)
Accumulated deficit................................ (12,345,344) (10,211,429)
Treasury stock, at cost--512,708 and 510,000
shares, respectively.............................. (153,000) (153,000)
------------ ------------
Total stockholders' equity..................... 84,209,631 67,111,701
------------ ------------
Total liabilities and stockholders' equity..... $ 97,576,419 $ 74,893,661
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
C-BRIDGE INTERNET SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
--------------------------- ---------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net Revenues:
Professional
services............. $24,166,727 $ 5,137,845 $51,572,687 $11,342,538
Educational services.. 1,679,717 1,466,457 5,233,993 2,495,627
----------- ----------- ----------- -----------
Total net revenues.. 25,846,444 6,604,302 56,806,680 13,838,165
----------- ----------- ----------- -----------
Costs and Expenses:
Direct costs of
professional services
(exclusive of noncash
compensation expense
presented below)..... 11,641,667 2,921,054 25,405,923 6,456,562
Direct costs of
educational services
(exclusive of noncash
compensation expense
presented below)..... 933,571 573,776 2,416,259 1,142,283
Selling and marketing
(exclusive of noncash
compensation expense
presented below)..... 5,410,013 852,491 13,124,888 1,884,550
General and
administrative
(exclusive of noncash
compensation expense
presented below)..... 8,450,881 2,451,763 18,971,946 4,720,717
Amortization of
acquired intangible
assets............... 463,851 -- 463,851 --
Compensation expense
related to stock
options and
warrants............. 578,048 2,327,332 1,597,342 2,752,079
----------- ----------- ----------- -----------
Total operating
expenses........... 27,478,031 9,126,416 61,980,209 16,956,191
----------- ----------- ----------- -----------
Loss from
operations......... (1,631,587) (2,522,114) (5,173,529) (3,118,026)
Interest Expense........ (14,535) (36,543) (49,262) (165,367)
Interest Income......... 862,188 -- 2,706,650 --
Other Income, net....... 20,194 3,713 382,226 352,685
----------- ----------- ----------- -----------
Net loss............ $ (763,740) $(2,554,944) $(2,133,915) $(2,930,708)
=========== =========== =========== ===========
Basic and Diluted Net
Loss per Share (Note
2)..................... $ (.04) $ (.22) $ (.11) $ (.27)
=========== =========== =========== ===========
Basic and Diluted
Weighted Average Shares
Outstanding............ 20,941,514 11,407,496 20,026,521 10,713,089
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
C-BRIDGE INTERNET SOLUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months Ended
---------------------------
September 30, September 30,
2000 1999
------------- -------------
(unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss......................................... $(2,133,915) $(2,930,708)
Adjustments to reconcile net loss to net cash
used in operating activities--
Depreciation and amortization.................. 1,808,885 281,568
Noncash stock based compensation............... 1,597,342 2,752,079
Repayment of debt by third party............... -- (348,000)
Changes in current assets and liabilities, net of
acquisition
Accounts receivable............................ (5,560,669) (2,109,637)
Unbilled receivables........................... (7,985,596) (1,223,001)
Other current assets........................... (2,252,104) (57,098)
Accounts payable............................... 1,657,822 181,334
Accrued expenses............................... 2,163,571 1,403,183
Deferred revenue............................... 1,899,387 1,222,924
----------- -----------
Net cash used in operating activities........ (8,805,277) (827,356)
----------- -----------
Cash Flows from Investing Activities:
Purchases of property and equipment.............. (6,906,359) (526,951)
Acquisition, net of cash acquired................ (2,156,334) --
Increase in other assets......................... (594,042) --
----------- -----------
Net cash used in investing activities........ (9,656,735) (526,951)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from the sale of common stock, net of
issuance costs................................ 9,093,173 2,000,000
Repayments of line of credit, net of proceeds.. -- (927,650)
Repayments of capital leases................... (135,951) (76,439)
Repayments of amounts due to affiliates........ -- (11,610)
Proceeds from exercise of stock options........ 1,420,652 328,489
Deferred financing costs....................... -- (145,000)
----------- -----------
Net cash provided by financing activities.... 10,377,874 1,167,790
----------- -----------
Net Decrease in Cash and Cash Equivalents.......... (8,084,138) (186,517)
Cash and Cash Equivalents, Beginning of Period..... 65,312,334 190,409
----------- -----------
Cash and Cash Equivalents, End of Period........... $57,228,196 $ 3,892
=========== ===========
Supplemental Disclosure of Noncash Financing
Activities:
Assets acquired under capital lease............ $ -- $ 99,449
=========== ===========
Assets acquired in connection with outsourcing
agreement..................................... $ -- $ 233,397
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during period for interest........... $ 45,680 $ 145,169
=========== ===========
Cash paid during period for income taxes....... $ 53,234 $ --
=========== ===========
Open Enterprise Corporation Acquisition:
Cash paid........................................ $(2,580,022) $ --
Common stock issued.............................. (7,053,428) --
Fair value of assets acquired.................... 659,215 --
Fair value of vested options issued.............. (67,249) --
Liabilities assumed.............................. (235,527) --
----------- -----------
Goodwill......................................... $(9,277,011) $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements included herein
have been prepared by C-bridge Internet Solutions, Inc. and its subsidiaries
(together, the "Company"), pursuant to the rules and regulations of the
Securities and Exchange Commission. The information furnished in the condensed
consolidated financial statements includes normal recurring adjustments and
reflects all adjustments which are, in the opinion of management, necessary for
a fair presentation of such condensed consolidated financial statements.
Results of operations for the three and nine month periods presented are not
necessarily indicative of the results to be expected for the year ended
December 31, 2000 or for any future period. Certain information and footnote
disclosures normally included in the consolidated financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations, although the Company
believes that the disclosures are adequate to make the information presented
not misleading. These condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements, and the notes
thereto, included in the Company's Annual Report on Form 10-K/A for the year
ended December 31, 1999.
2. NET LOSS PER SHARE
Basic and diluted net loss per share are the same for all periods presented
due to the Company's net losses for the three and nine month periods ended
September 30, 2000 and 1999. Antidilutive securities, which consist of options
and warrants to purchase common stock that are not included in the calculation
of diluted net loss per share, were 7,437,810 and 7,529,566 as of September 30,
2000 and 1999, respectively.
3. SEGMENT AND GEOGRAPHIC INFORMATION
The Company views its operations and manages its business as two segments,
strategic and technology consulting services and educational services. The
Company's reportable segments are strategic business units that provide
distinct services to the end customer. They are managed separately because each
business requires different marketing and management strategies. The Company's
approach is based on the way that management organizes the segments within the
Company for making operating decisions and assessing performance.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies contained in the Company's
Annual Report on Form 10-K/A for the year ended December 31, 1999. The Company
does not allocate operating expenses between its two reportable segments.
Accordingly, the Company's measure of performance for each reportable segment
is based on total net revenues and direct costs of services, which are reported
separately in the accompanying consolidated statements of operations. The
Company does not identify assets and liabilities by segment. Accordingly,
identifiable assets, capital expenditures, and depreciation and amortization
are not reported by segment.
The Company has historically had clients that individually comprise greater
than 10% of total net revenues. For the nine months ended September 30, 2000,
two clients individually accounted for 15% and 13% of total net revenues, while
for the nine months ended September 30, 1999 four clients individually
accounted for 24%, 18%, 18%, and 12% of total net revenues.
6
<PAGE>
4. ACQUISITION
On July 5, 2000, the Company completed the acquisition of Open Enterprise
Corporation (OEC). This acquisition was accounted for under the purchase method
of accounting in accordance with Accounting Principles Board Opinion No. 16,
Business Combinations. In connection with the acquisition, the Company issued
approximately 399,000 shares of common stock and paid approximately $2.6
million in exchange for all of the outstanding common stock of OEC. The Company
recorded approximately $9.3 million of goodwill, which is being amortized over
five years, and approximately $512,000 of deferred compensation expense for
certain unvested stock options, which is being expensed based on the vesting of
these stock options. OEC's operations prior to the acquisition were not
material to the Company's.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. LITIGATION
On January 7, 2000, Jack W. Rizika, as Assignee of the Assignee for the
Benefit of Creditors of Cambridge Technology Group, Inc. (CTG), brought suit in
the Commonwealth of Massachusetts Superior Court for Middlesex County against
the Company, John J. Donovan, and the Willingdon, Windsor, and Appleby Trusts,
alleging that CTG had advanced approximately $2.1 million to C-Bridge in 1997
and 1998 and that before the Assignment for the Benefit of Creditors, CTG "had
agreed to forgive this debt in its entirety for no consideration." Rizika
asserted four causes of action against C-Bridge including a fraudulent transfer
claim under the UFTA, a civil conspiracy claim, a claim for relief under
Chapter 93A of Massachusetts' consumer protection statute, and a claim for an
accounting. On May 12, 2000, C-Bridge filed a motion to dismiss the complaint.
The motion to dismiss was denied and the parties are entering discovery.
6. SUBSEQUENT EVENT
On November 3, 2000, the Company entered into a definitive agreement with
BEKK Consulting A/S (Bekk) of Norway. Under the terms of the agreement, the
Company will purchase all of Bekk's outstanding capital stock for approximately
$13 million, with approximately $3.9 million to be paid in cash and the balance
to be paid in common stock of the Company. The agreement also provides that up
to an additional $4.3 million may be paid to Bekk on January 31, 2002, based
upon it achieving certain revenue and profit targets during 2001. The
aquisition will be accounted for under the purchase method of accounting.
Bekk's current operations are not material to the Company.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-looking Statements
This Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and section 21E of the
Securities Act of 1934, as amended. Statements beginning with such words as
"believes", "intends", "plans", and "expects" and similar expressions include
forward-looking statements that are based on management's expectations given
facts as currently known by management. Actual results may differ materially
from those discussed in these forward-looking statements. Factors that could
cause the Company's future results to differ materially from the expectations
described herein include, but are not limited to, the profitability of the
Company's contracts, the Company's ability to retain existing clients and
attract new clients, the Company's ability to hire, train, and retain qualified
employees, the Company's ability to continue to develop effective sales and
marketing capabilities, the Company's ability to keep pace with the Internet's
rapid technological changes, evolving industry standards and changing client
requirements, worldwide business use of the Internet, the growth in the number
of web access devices per user, the occurrence of any failure of the Internet,
the continued improvement of security on the Internet, general economic and
industry conditions, as well as other factors noted in the Company's
Registration Statement on Form S-1 dated December 16, 1999, as filed with the
Securities and Exchange Commission and in the Company's Annual Report on Form
10-K/A for the year ended December 31, 1999.
Overview
C-bridge Internet Solutions, Inc. (the "Company") is a full service provider
of Internet-based solutions designed to help companies conduct eBusiness. The
Company has experienced consistent revenue growth since its inception in
October of 1996.
The Company's revenues are derived primarily from providing Internet
professional services and it anticipates that revenue growth will be driven
primarily by the number and scope of its client engagements and by the growth
of its professional services headcount. During the third quarter of 2000, the
Company earned professional services revenues from 32 clients and three
professional services clients accounted for approximately 39% of the Company's
total net revenues. Revenues from any given client will vary from period to
period; however, the Company expects that significant customer concentration
will continue for the foreseeable future. To the extent that any significant
client uses less of the Company's services or terminates its relationship with
the Company, revenues could decline substantially. In addition, the loss of any
significant client could materially and adversely affect the Company's business
and results of operations.
The Company also generates revenues from providing educational services. In
May 1999, the Company entered into an outsourcing agreement with one of its
sales lead sources, CEE, to provide the operational aspects of their executive
education seminars. The Company markets and sells its services through
executive education seminars, indirectly with partners, and directly through
its sales organization. A material portion of sales leads and revenues for 2000
and a majority of leads and revenues for 1999 have come through executive
education seminars.
Revenues and earnings may fluctuate from quarter to quarter based on factors
within and outside the Company's control, including the variability in market
demand for the Internet and for Internet professional services, the length of
the sales cycle associated with service offerings, the number and scope of
projects, seasonal factors and the efficiency of utilizing professional
services employees.
For the quarter ended September 30, 2000, approximately 97% of professional
services revenues were generated pursuant to time and materials contracts.
Revenues from time and materials contracts are generally recognized as services
are provided. Revenues generated pursuant to fixed-fee contracts are generally
recognized as services are rendered using the percentage-of-completion method
of accounting. Revenues exclude reimbursable expenses charged to clients.
8
<PAGE>
Despite a growth in revenues, the Company has not been profitable and
expects to continue to incur net losses. Net losses may not decrease
proportionately with the increase in revenues primarily because of increased
expenses related to the hiring of additional employees, expansion of the number
of offices, increased investment in knowledge management, methodologies and
operations infrastructure, and increased marketing and sales efforts. To the
extent that future revenues do not increase significantly in the same periods
in which operating expenses increase, operating results would be adversely
affected.
The largest portions of the Company's costs result from employee
compensation and the related overhead and facilities costs. The Company
currently expects to continue to grow its headcount. Accordingly, if revenues
do not increase at a rate equal to expenses, the Company's business, financial
condition or results of operations could be materially and adversely affected.
In addition, liquidity may also be adversely affected if revenues do not
increase at a rate equal to these additional expenses.
Client engagements currently average three to six months in duration. If a
client engagement ends earlier than expected, professional services employees
must be re-deployed and any resulting non-billable time will adversely affect
professional services margins. The Company also expects per capita professional
services costs to increase over time due to wage increases and inflation.
Professional services margins are affected by trends in hiring and in
professional services employee utilization, and, as such, will vary in the
future. Any significant inability to increase billable rates, a decline in
billable rates or time billed to clients or the loss of a significant client
would materially adversely affect professional services margins.
At September 30, 2000, the Company had 665 employees.
Results of Operations Three Months Ended September 30, 2000 Compared to Three
Months Ended September 30, 1999
Total Net Revenues
Total net revenues increased 291% to $25.8 million for the quarter ended
September 30, 2000 from $6.6 million for the quarter ended September 30, 1999.
Professional Services Revenues
Professional services revenues increased 370% to $24.2 million for the
quarter ended September 30, 2000 from $5.1 million for the quarter ended
September 30, 1999. This increase reflects the demand for Internet professional
services and increases in both the size and number of the Company's client
engagements. For the quarter ended September 30, 2000, professional services
revenues from three clients totaled 39% of total net revenues, reflecting a
decreasing but continued concentration of revenues from a small number of
clients. Professional services revenues from four clients totaled 53% of total
net revenues for the quarter ended September 30, 1999.
Educational Services Revenues
Educational services revenues increased 15% to $1.7 million for the quarter
ended September 30, 2000 from $1.5 million for the quarter ended September 30,
1999. Educational services revenues represented 6% of total net revenues for
the quarter ended September 30, 2000 and 22% of total net revenues for the
quarter ended September 30, 1999.
Direct Costs of Professional Services
Direct costs of professional services consist primarily of the compensation
and benefits of employees engaged in the delivery of professional services and
of non-reimbursable project expenses related to client projects. Direct costs
of professional services margins reflect revenues less the professional
services expenses
9
<PAGE>
whether or not the employee's time is billed to a client. Direct costs of
professional services increased 299% to $11.6 million for the quarter ended
September 30, 2000 from $2.9 million for the quarter ended September 30, 1999.
This increase was primarily due to the growth of professional services
headcount and a general increase in wages for professional services employees.
The Company increased its professional services headcount to 445 at September
30, 2000 from 119 at September 30, 1999. Direct costs of professional services
represented 48% of professional services revenues and 45% of total net revenues
for the quarter ended September 30, 2000 and 57% of professional services
revenues and 44% of total net revenues for the quarter ended September 30,
1999.
Direct Costs of Educational Services
Direct costs of educational services consist of the salaries, benefits and
direct expenses for personnel related to the Company's educational services. It
also includes the direct expenses of delivering educational services. Direct
costs of educational services increased 63% to $934,000 for the quarter ended
September 30, 2000 from $574,000 for the quarter ended September 30, 1999.
Direct costs of educational services represented 56% of educational services
revenues and 4% of total net revenues for the quarter ended September 30, 2000
and 39% of educational services revenues and 9% of total net revenues for the
quarter ended September 30, 1999.
Selling and Marketing Expenses
Selling and marketing expenses consist of salaries, commissions, benefits
and related expenses for personnel engaged in sales and marketing activities.
It also includes public relations, trade shows, promotional expenses and other
expenses directly related to sales and marketing. Selling and marketing
expenses increased 535% to $5.4 million for the quarter ended September 30,
2000 from $852,000 for the quarter ended September 30, 1999. This increase was
primarily due to an increase in selling and marketing headcount, travel related
expenses and an increase in direct expenses related to sales and marketing
programs. Selling and marketing expenses represented 21% of total net revenues
for the quarter ended September 30, 2000 and 13% of total net revenues for the
quarter ended September 30, 1999. The Company expects selling and marketing
expenses to increase in absolute dollars.
General and Administrative Expenses
General and administrative expenses consist of compensation, benefits, and
related expenses for personnel engaged in executive and general management,
recruiting, human resources, information technology, finance, administration,
and development and maintenance of the Company's service methodologies. It also
includes expenses for recruiting, training, leasing and maintaining office
space, professional fees and all other general corporate expenses. General and
administrative expenses increased 245% to $8.5 million for the quarter ended
September 30, 2000 from $2.5 million for the quarter ended September 30, 1999.
This increase was due primarily to an increase in recruiting and training
expenses and an increase in general and administrative headcount. General and
administrative expenses represented 33% of total net revenues for the quarter
ended September 30, 2000 and 37% of total net revenues for the quarter ended
September 30, 1999. The Company expects general and administrative expenses to
increase in absolute dollars.
Amortization of Acquired Intangible Assets
Amortization of acquired intangible assets represents the amortization of
goodwill recorded in connection with the Company's OEC acquisition. During the
quarter ended September 30, 2000, the Company recorded approximately $9.3
million of goodwill related to the OEC acquisition, which is being amortized
over five years.
Compensation Expense Related to Stock Options and Warrants
Compensation expense related to stock options and warrants consists of the
non-cash compensation expense related to the granting of stock options and
warrants. The Company previously recorded deferred compensation expense of $9.5
million related to certain stock option grants. During the quarter ended
10
<PAGE>
September 30, 2000, the Company recorded an additional $512,000 of deferred
compensation expense for certain stock option grants related to the OEC
acquisition. Deferred compensation expense is recognized based on the vesting
of these stock options. During the quarter ended September 30, 2000, the
Company recorded approximately $578,000 of compensation expense related to
stock options and warrants. This consisted of approximately $547,000 related to
deferred compensation expense and approximately $31,000 related to non-
qualified options that are accounted for under variable plan accounting. During
the quarter ended September 30, 1999, the Company recorded approximately $2.3
million of compensation expense mainly related to the issuance of stock options
and warrants.
Interest and Other Income
Net interest and other income was income of $868,000 for the quarter ended
September 30, 2000 as compared to expense of $33,000 for the quarter ended
September 30, 1999. This change was primarily due to interest income related to
the proceeds from the Company's initial public offering.
Provision for Income Taxes
The Company had a net operating loss carryforward of $3.1 million at
December 31, 1999, which may be used to offset future taxable income, if any.
This carryforward is subject to review and possible adjustment by the Internal
Revenue Service. The Internal Revenue Code contains provisions that may limit
use of the carryforward in the event there are significant changes in ownership
of the Company. The Company has not recognized any potential tax benefits,
consisting primarily of the net operating loss carryforward, as it is more
likely than not that these benefits will not be realizable in future years' tax
returns.
Results of Operations Nine Months Ended September 30, 2000 Compared to Nine
Months Ended September 30, 1999
Total Net Revenues
Total net revenues increased 311% to $56.8 million for the nine months ended
September 30, 2000 from $13.8 million for the nine months ended September 30,
1999.
Professional Services Revenues
Professional services revenues increased 355% to $51.6 million for the nine
months ended September 30, 2000 from $11.3 million for the nine months ended
September 30, 1999. This increase reflects the demand for Internet professional
services and increases in both the size and number of the Company's client
engagements. For the nine months ended September 30, 2000, professional
services revenues from two clients totaled 28% of total net revenues,
reflecting a decreasing but continued concentration of revenues from a small
number of clients. Professional services revenues from three clients totaled
54% of total net revenues for the nine months ended September 30, 1999.
Educational Services Revenues
Educational services revenues increased 110% to $5.2 million for the nine
months ended September 30, 2000 from $2.5 million for the nine months ended
September 30, 1999. The increase in 2000 is due to the fact that the
outsourcing arrangement with CEE started in May 1999. Accordingly, the nine
months ended September 30, 1999 only includes five months of revenue, whereas
the nine months ended September 30, 2000 includes nine months of revenue.
Educational services revenues represented 9% of total net revenues for the nine
months ended September 30, 2000 and 18% of total net revenues for the nine
months ended September 30, 1999.
Direct Costs of Professional Services
Direct costs of professional services consist primarily of the compensation
and benefits of employees engaged in the delivery of professional services and
of non-reimbursable project expenses related to client
11
<PAGE>
projects. Direct costs of professional services margins reflect revenues less
the professional services expenses whether or not the employee's time is billed
to a client. Direct costs of professional services increased 293% to $25.4
million for the nine months ended September 30, 2000 from $6.5 million for the
nine months ended September 30, 1999. This increase was primarily due to the
growth of professional services headcount and a general increase in wages for
professional services employees. The Company increased its professional
services headcount to 445 at September 30, 2000 from 119 at September 30, 1999.
Direct costs of professional services represented 49% of professional services
revenues and 45% of total net revenues for the nine months ended September 30,
2000 and 57% of professional services revenues and 47% of total net revenues
for the nine months ended September 30, 1999.
Direct Costs of Educational Services
Direct costs of educational services consist of the salaries, benefits and
direct expenses for personnel related to the Company's educational services. It
also includes the direct expenses of delivering educational services. Direct
costs of educational services increased 112% to $2.4 million for the nine
months ended September 30, 2000 from $1.1 million for the nine months ended
September 30, 1999. Direct costs of educational services represented 46% of
educational services revenues and 4% of total net revenues for the nine months
ended September 30, 2000 and 46% of educational services revenues and 8% of
total net revenues for the nine months ended September 30, 1999.
Selling and Marketing Expenses
Selling and marketing expenses consist of salaries, commissions, benefits
and related expenses for personnel engaged in sales and marketing activities.
It also includes public relations, trade shows, promotional expenses and other
expenses directly related to sales and marketing. Selling and marketing
expenses increased 596% to $13.1 million for the nine months ended September
30, 2000 from $1.9 million for the nine months ended September 30, 1999. This
increase was primarily due to an increase in selling and marketing headcount,
travel related expenses and an increase in direct expenses related to sales and
marketing programs. Selling and marketing expenses represented 23% of total net
revenues for the nine months ended September 30, 2000 and 14% of total net
revenues for the nine months ended September 30, 1999. The Company expects
selling and marketing expenses to increase in absolute dollars.
General and Administrative Expenses
General and administrative expenses consist of compensation, benefits, and
related expenses for personnel engaged in executive and general management,
recruiting, human resources, information technology, finance, administration,
and development and maintenance of the Company's service methodologies. It also
includes expenses for recruiting, training, leasing and maintaining office
space, professional fees and all other general corporate expenses. General and
administrative expenses increased 302% to $18.9 million for the nine months
ended September 30, 2000 from $4.7 million for the nine months ended September
30, 1999. This increase was due primarily to an increase in recruiting and
training expenses and an increase in general and administrative headcount.
General and administrative expenses represented 33% of total net revenues for
the nine months ended September 30, 2000 and 34% of total net revenues for the
nine months ended September 30, 1999. The Company expects general and
administrative expenses to increase in absolute dollars.
Amortization of Acquired Intangible Assets
Amortization of acquired intangible assets represents of the amortization of
goodwill recorded in connection with the Company's OEC acquisition. During the
quarter ended September 30, 2000, the Company recorded approximately $9.3
million of goodwill related to the OEC acquisition, which is being amortized
over five years.
Compensation Expense Related to Stock Options and Warrants
Compensation expense related to stock options and warrants consists of the
non-cash compensation expense related to the granting of stock options and
warrants. The Company previously recorded deferred
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compensation expense of $9.5 million related to certain stock option grants.
During the quarter ended September 30, 2000, the Company recorded an additional
$512,000 of deferred compensation expense for certain unvested stock options
related to the OEC Acquisition. During the nine months ended September 30,
2000, the Company recorded approximately $1.6 million of compensation expense
related to stock options and warrants. This consisted of approximately $1.6
million related to deferred compensation expense and approximately $29,000
related to non-qualified options that are accounted for under variable plan
accounting. During the nine months ended September 30, 1999, the Company
recorded approximately $2.8 million of compensation expense mainly related to
the issuance of stock options and warrants.
Interest and Other Income
Net interest and other income was income of $3.0 million for the nine months
ended September 30, 2000 as compared to income of $187,000 for the nine months
ended September 30, 1999. This change was primarily due to interest income
related to the proceeds from the Company's initial public offering and payments
received in connection with the settlement of litigation.
Liquidity and Capital Resources
Since inception, the Company has funded operations through the sale of
equity securities, bank borrowings and lease financing arrangements.
At September 30, 2000, the Company's cash and cash equivalents were $57.2
million. Working capital increased to $65.6 million at September 30, 2000 from
$63.7 million at December 31, 1999. The increase was primarily due to net
proceeds of $8.9 million received from the exercise of the underwriters' over-
allotment option during January 2000, offsetting the Company's use of cash for
operations for the nine month period. Based on the current business plan, the
Company believes that its current cash will be sufficient to meet working
capital and capital expenditure requirements at least through the next twelve
months. However, there can be no assurance that the Company will not require
additional financings within this time frame or that such additional financing,
if needed, will be available on acceptable terms, if at all.
Cash used in operating activities was $8.8 million for the nine months ended
September 30, 2000 as a result of the significant working capital requirements
associated with the Company's growth. Cash used in operating activities was
$827,000 for the nine months ended September 30, 1999.
For the nine months ended September 30, 2000 and 1999, the Company had
capital expenditures of $6.9 million and $527,000, respectively. In addition,
in July 2000, the Company used approximately $2.2 million in net cash for its
acquisition of OEC. In connection with the OEC acquisition, the Company also
issued approximately 399,000 shares of common stock.
Cash provided by the exercise of stock options was $1.4 million for the nine
months ended September 30, 2000 and $328,000 for the nine months ended
September 30, 1999. The Company's borrowings at September 30, 2000 consist of
$318,000 due under equipment financing obligations.
Recent Accounting Pronouncements
The Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) No. 101, Revenue Recognition, in December 1999. The Company has
adopted this new accounting guidance for all periods presented. The adoption of
the guidance provided in SAB No. 101 did not have a material impact on any
period presented.
In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation-An Interpretation of APB Opinion No.
25. Interpretation No. 44 clarifies the application of APB No. 25 in certain
situations, as defined. The adoption of Interpretation No. 44 effective July 1,
2000 had no effect on the Company's consolidated results of operations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative Financial Instruments, Other Financial Instruments and Derivative
Commodity Instruments
As of September 30, 2000, the Company did not participate in any derivative
financial instruments or other financial and commodity instruments for which
fair market value disclosure would be required under SFAS No. 133. All of the
Company's investments are money market accounts or U.S. Treasury Bills with
maturities of ninety days or less that are carried on the Company's books at
amortized cost, which approximates fair market value. Accordingly, the Company
has no quantitative information concerning the market risk of participating in
such instruments.
Primary Market Risk Exposures
The Company's primary market risk exposure is in the area of interest rate
risk. The Company's investment portfolio of cash and cash equivalents is
subject to interest rate fluctuations, but the Company believes this risk is
immaterial due to the short-term nature of the investments.
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<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 7, 2000, Jack W. Rizika, as Assignee of the Assignee for the
Benefit of Creditors of Cambridge Technology Group, Inc. (CTG), brought suit in
the Commonwealth of Massachusetts Superior Court for Middlesex County against
the Company, John J. Donovan, and the Willingdon, Windsor, and Appleby Trusts,
alleging that CTG had advanced approximately $2.1 million to C-Bridge in 1997
and 1998 and that before the Assignment for the Benefit of Creditors, CTG "had
agreed to forgive this debt in its entirety for no consideration." Rizika
asserted four causes of action against C-Bridge including a fraudulent transfer
claim under the UFTA, a civil conspiracy claim, a claim for relief under
Chapter 93A of Massachusetts' consumer protection statute, and a claim for an
accounting. On May 12, 2000, C-Bridge filed a motion to dismiss the complaint.
The motion to dismiss was denied and the parties are entering discovery.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d). The total net proceeds to the Company from the initial public offering in
December 1999 and the managing underwriters exercise of their over-
allotment option in January 2000 were approximately $66.7 million.
The Company has used, and continues to expect to use, the proceeds from
the sale of stock for general corporate purposes, including working
capital. A portion of the proceeds may also be used for the acquisitions
of businesses that are complimentary to the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibits
<TABLE>
<C> <S>
10.1 Lease agreement dated July 1, 2000 between the Company and Waterways
Authority related to office space located at 207 Kent Street, Sydney,
Australia.
27.1 Financial Data Schedule
</TABLE>
(b). Reports on form 8-K
None to report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
C-Bridge Internet Solutions, Inc.
Date: November 13, 2000 By: /s/ Joseph M. Bellini
---------------------------------
Joseph M. Bellini,
Chief Executive Officer
Date: November 13, 2000 By: /s/ Richard O. Wester
---------------------------------
Richard O. Wester,
Chief Financial Officer
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