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PROSPECTUS [GRAPHIC]
[CYSIVE.LOGO]
3,350,000 Shares
Common Stock
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This is an initial public offering of shares of common stock of Cysive, Inc. We
are offering 3,000,000 shares in this offering. A selling stockholder is
offering an additional 350,000 shares. We will not receive any proceeds from the
sale of the shares by the selling stockholder. No public market currently exists
for our common stock.
We have been approved for quotation of our common stock on the Nasdaq National
Market under the symbol "CYSV."
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INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 5.
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Per Share Total
<S> <C> <C>
Public offering price $17.00 $56,950,000
Underwriting discount and commissions $ 1.19 $ 3,986,500
Proceeds, before expenses, to us $15.81 $47,430,000
Proceeds to selling stockholder $15.81 $ 5,533,500
</TABLE>
The underwriters have an option to purchase 252,500 additional shares of common
stock from us and 250,000 additional shares from the selling stockholder at the
initial public offering price to cover any over-allotments of shares at anytime
until 30 days after the date of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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THOMAS WEISEL PARTNERS LLC
FIRST UNION SECURITIES, INC.
FRIEDMAN BILLINGS RAMSEY
The date of this prospectus is October 15, 1999
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INSIDE FRONT COVER
[Cysive is a leading software engineering firm that designs and builds complex,
highly customized systems supporting large scale e-business]
[e-business systems graphics]
[Cysive
An e-business system provides customers with comprehensive access to all of the
information and transactional capabilities the business has to offer.]
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.................... 1
Risk Factors.......................... 5
Special Note Regarding Forward-Looking
Statements.......................... 10
Use of Proceeds....................... 11
Dividend Policy....................... 11
S Corporation Distribution............ 11
Capitalization........................ 12
Dilution.............................. 13
Selected Financial Data............... 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 15
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PAGE
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Business.............................. 23
Management............................ 38
Related Party Transactions............ 45
Principal and Selling Stockholders.... 46
Description of Capital Stock.......... 47
Shares Eligible for Future Sale....... 51
Underwriting.......................... 53
Validity of the Shares................ 55
Experts............................... 55
Where You Can Find More Information... 55
Index to Financial Statements......... F-1
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PROSPECTUS SUMMARY
OUR COMPANY
Cysive is a leading software engineering firm that designs and builds
complex, highly customized systems supporting large scale e-businesses.
E-businesses are companies that conduct a significant portion of their business
through electronic commerce channels which are integrated with existing internal
systems, such as accounting, billing, manufacturing and inventory control. Since
commencing operations in 1994, we have used advanced Internet technologies to
build our customers' e-business capabilities. We design software systems which
can handle high volumes of customer transactions, operate reliably 24 hours per
day, seven days per week and expand to meet the growth requirements of large
scale e-businesses. Due to the advanced technologies necessary to complete our
projects, we employ software engineers with an average of 10 years of experience
who use a well-defined process to deliver reliable and secure, customized
systems on a timely basis.
Given our technology expertise, we target corporate customers who require
highly complex systems to meet the growth demanded by their e-business
strategies. In addition to Cisco Systems, Inc.'s Internetworking Products
Center, which we built in collaboration with Cisco, we have built systems for
customers including Classified Ventures, Inc./Cars.com, DaimlerChrysler
Corporation, Equifax Secure, Inc., First Union Corporation, Sylvan Prometric and
UUNet Technologies, Inc. Our industry leadership is reflected in the quality of
our customer base and our high revenue per software engineer as compared to our
competitors.
OUR MARKET OPPORTUNITY
In the mid-1990s, a first wave of commercial Internet usage achieved
widespread adoption. At this time, the immediate objective for most companies
was to establish a web site, which was typically maintained separately from the
enterprise systems at the core of the business. Today, we believe a second wave
is beginning, spearheaded by the companies whose use of the Internet has evolved
from a marketing orientation to a business, or transactional, orientation. These
companies are building their information technology systems to transact
directly, seamlessly and instantaneously with customers, suppliers, partners and
distributors around the world. To truly automate all of the functions associated
with an e-business transaction, companies cannot simply link Internet customers
directly to their existing internal systems, which were built for a defined
number of specifically trained employees. An advanced technology approach is
necessary in which business logic, or all of the business procedures and rules,
is built into a core software application that bridges these existing systems
with the Internet. A successful e-business system must present business
functions to customers in a simple format, yet provide comprehensive access to
all of the information and transactional capabilities the business has to offer.
Advantages achieved by e-businesses that were the first to conduct business
on the Internet will be lost if their transactional systems cannot handle
increased user demand. Therefore, we believe a greater portion of future
corporate Internet spending will be in the implementation and integration of
advanced Internet systems. Companies like Cysive that have the Internet
technology expertise, a defined, repeatable and rigorous process and a strong,
proven track record in building e-business systems will drive business on the
Internet.
OUR SOLUTION
Cysive engineers and deploys advanced systems that enable our customers to
transact business electronically. To build e-business systems demanded by our
customers, we emphasize the following key elements:
ADVANCED E-BUSINESS SYSTEMS. We focus on designing and building complex,
highly customized systems based on Internet technologies rather than broadly
providing strategy, consulting and design
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services. Our expertise lies in building the systems driving large scale
e-businesses, which we believe differentiates us from our competitors in the
market.
HIGHLY EXPERIENCED SOFTWARE ENGINEERS. The complexity of the systems we
build requires us to employ software engineers with proven technology expertise
and many years of experience. Our software engineers have an average of 10 years
of experience. This significant level of experience enhances our teams'
productivity and enables us to maximize our utilization rates by making our
software engineers interchangeable across varying projects regardless of the
technologies employed.
SWAT TEAM APPROACH. The high productivity of our experienced software
engineers enables us to build extensive e-business systems with our Software and
Technologies, or SWAT, teams that are comprised of a small number of engineers.
For example, we built Cisco's system with a team of only six software engineers.
By using our SWAT teams, we shorten the delivery time of a project and increase
the likelihood of success, reducing the overall project cost to the customer.
Through this approach, we are able to focus our customers on the total value of
the project, rather than on hourly billing rates. As a result of our high levels
of productivity, we consistently generate revenues per software engineer in
excess of $325,000.
RIGOROUS DEVELOPMENT PROCESS. For every project undertaken, our software
engineers adhere to the Cysive development process. Having a well-defined
process helps to mitigate risk and ensure consistent quality, and enables us to
build e-business systems more rapidly.
SOPHISTICATED KNOWLEDGE MANAGEMENT. We have spent considerable resources to
stay apprised of the latest technologies and methods for implementing these
technologies. Our technology group continually evaluates new products to
identify advanced technologies and is also responsible for on-going proficiency
training. In addition, we have a centralized knowledge base which our software
engineers access through our intranet and use to share their project
experiences.
THOROUGH QUALITY ASSURANCE PROCESS. We adhere to a thorough quality
assurance process to identify and manage risk. In addition to risk management,
our quality assurance approach facilitates the sharing of ideas and technologies
among project managers, enables us to scale our business while maintaining high
levels of quality and allows us to make objective, value-added recommendations
to our customers during the course of a project.
OUR GROWTH STRATEGY. Our objective is to strengthen our position as a
leading e-business engineering firm. The key elements of our growth strategy are
to:
- attract and retain highly experienced software engineers;
- expand existing and establish new customer relationships;
- expand Cysive's brand recognition;
- enhance our geographic presence; and
- continue to build and deploy advanced technologies.
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THE OFFERING
Common stock offered by us............ 3,000,000 shares
Common stock offered by selling
stockholder........................... 350,000 shares
Common stock outstanding after the
offering.............................. 11,127,000 shares
Use of proceeds....................... We will receive net proceeds from
this offering of $46.7 million. We
intend to use the net proceeds of
this offering for general corporate
purposes, including working capital,
expansion of operations and sales and
marketing activities. We will not
receive any proceeds from the sale of
shares by the selling stockholder.
Nasdaq National Market symbol......... CYSV
Common stock outstanding after this offering excludes 6,240,138 shares of
common stock issuable upon exercise of outstanding options as of October 13,
1999, at a weighted average exercise price of $1.36 per share.
ABOUT THIS PROSPECTUS
- You should read this summary together with the more detailed information
and financial statements and the related notes included elsewhere in this
prospectus.
- All references in this prospectus relating to the number of outstanding
shares of our common stock and options reflect our 2.25-to-1 stock split
effected on September 24, 1999.
- Unless otherwise specifically stated, the information in this prospectus
does not take into account the possible issuance of additional shares of
common stock to the underwriters to cover over-allotments.
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We founded Cysive in 1993 as a Virginia corporation, and reorganized on
September 24, 1999 as a Delaware corporation. Our principal office is located at
11480 Sunset Hills Road, Suite 200 E, Reston, VA 20190. Our telephone number is
703.742.0865. We maintain a web site at www.cysive.com. Information contained on
our web site is not incorporated by reference into this prospectus.
Cysive is a trademark of Cysive, Inc. This prospectus also includes
trademarks and trade names of other parties.
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SUMMARY FINANCIAL DATA
The following table summarizes our financial data and has been derived from
our audited financial statements for each of the years in the three-year period
ended December 31, 1998 and our unaudited financial statements for the six-month
periods ended June 30, 1998 and 1999, included elsewhere in this prospectus. The
pro forma statement of operations data are unaudited and are presented to
reflect the provision for federal and state income taxes as if we had been
subject to federal and state income taxation as a C corporation. We have
adjusted our balance sheet data to reflect: (1) the sale of the 3,000,000 shares
of common stock offered by us and the initial use of the net proceeds, after
deducting the underwriting discount and commissions and estimated offering
expenses; (2) the recording of deferred income taxes resulting from the change
from an S corporation to a C corporation; and (3) the payment of a distribution
representing the estimated earned and previously undistributed taxable S
corporation income, estimated to be $1.4 million as of June 30, 1999. For
further detail and explanation of period-to-period changes, the information
shown below should be read together with "Selected Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the related notes included
elsewhere in this prospectus.
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YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
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1996 1997 1998 1998 1999
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(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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STATEMENT OF OPERATIONS DATA
Revenues........................................... $5,557 $7,711 $9,142 $3,193 $ 9,424
Direct costs....................................... 2,056 2,798 3,742 1,809 3,473
---------- ----------- ----------- ---------- -----------
Gross profit....................................... 3,501 4,913 5,400 1,384 5,951
Operating expenses:
General and administrative....................... 2,009 2,754 2,725 1,009 2,418
Sales and marketing.............................. 232 760 1,824 672 1,720
Stock compensation............................... -- -- 69 -- 13,285
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Total operating expenses...................... 2,241 3,514 4,618 1,681 17,423
Operating income (loss)............................ 1,260 1,399 782 (297) (11,472)
Other income, net.................................. 17 23 14 15 25
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Net income (loss).................................. $1,277 $1,422 $ 796 $ (282) $(11,447)
========== =========== =========== ========== ===========
Weighted average shares outstanding................ 6,777,000 6,777,000 6,777,000 6,777,000 8,127,000
Weighted average shares and common stock
equivalents...................................... 7,473,800 7,766,211 7,993,659 6,777,000 8,127,000
Pro forma net income (loss)........................ $489 $(12,482)
=========== ===========
Pro forma earnings (loss) per share:
Basic............................................ $0.07 $(1.53)
Diluted.......................................... $0.06 $(1.53)
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JUNE 30, 1999
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PRO FORMA
ACTUAL AS ADJUSTED
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(IN THOUSANDS)
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BALANCE SHEET DATA
Cash and cash equivalents................................... $ 869 $46,753
Working capital............................................. 3,507 49,574
Total assets................................................ 5,948 52,016
Stockholders' equity........................................ 4,129 49,942
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RISK FACTORS
An investment in our common stock involves risks. You should carefully
consider the risks described below and the other information in this prospectus
including our financial statements and the related notes before you decide to
buy our common stock. The trading price of our common stock could decline due to
any of these risks, and you could lose all or part of your investment.
BECAUSE WE RELY ON HIGHLY TRAINED AND EXPERIENCED PERSONNEL TO DESIGN AND BUILD
COMPLEX SYSTEMS FOR OUR CUSTOMERS, OUR INABILITY TO ATTRACT AND RETAIN QUALIFIED
EMPLOYEES WOULD IMPAIR OUR ABILITY TO PROVIDE OUR SERVICES TO EXISTING AND NEW
CUSTOMERS
Our future success depends in large part on our ability to attract and
retain highly trained and experienced software engineers as well as recruiters,
other technical personnel and sales and marketing professionals of various
experience levels. If we fail to attract and retain these personnel, we may be
unable to complete existing projects or bid for new projects of similar size,
which could reduce our revenues. While attracting and retaining experienced
software engineers is critical to our business and growth strategy, maintaining
our current level of software engineer experience, averaging 10 years, may be
particularly difficult. Skilled software engineers are in short supply, and this
shortage is likely to continue for some time. As a result, competition for these
people is intense, and the industry attrition rate for them is high.
Additionally, we plan to open new offices in a number of geographic markets to
attract and retain new employees. Our failure to open new offices or to open
them in areas which experienced software engineers would find attractive could
limit our ability to attract and retain qualified personnel. Moreover, even if
we are able to grow and expand our employee base, the resources required to
attract and retain these employees may adversely affect our operating margins.
IN 1998 AND THE FIRST SIX MONTHS OF 1999, MORE THAN 65% OF OUR REVENUES WERE
DERIVED FROM OUR FIVE LARGEST CUSTOMERS, AND WE EXPECT TO CONTINUE TO RELY ON A
LIMITED NUMBER OF CUSTOMERS FOR A SIGNIFICANT PORTION OF OUR REVENUES; AS A
RESULT, THE LOSS OF OR A SIGNIFICANT REDUCTION IN THE WORK PERFORMED FOR ANY OF
THEM COULD RESULT IN REDUCED REVENUES AND EARNINGS
We currently derive and expect to continue to derive a significant portion
of our revenues from a limited number of customers. As a result, the loss of or
significant reduction in the work performed for any significant customer could
reduce our revenues. In 1998, our five largest customers represented 65.3% of
our revenues: Cisco Systems, Inc., 19.6%; Classified Ventures, Inc./Cars.com,
18.0%; Sylvan Prometric, 12.5%; DaimlerChrysler Corporation, 8.5%; and First
Union Corporation, 6.7%. For the six-month period ended June 30, 1999, our five
largest customers represented 82.5% of our revenues: Sylvan Prometric, 35.1%;
Classified Ventures, Inc./Cars.com, 15.2%; Equifax Secure, Inc., 13.4%; Cisco
Systems, Inc., 10.2%; and UUNet Technologies, Inc., 8.6%. The volume of work
that we perform for a specific customer is likely to vary from period to period,
and a significant customer in one period may not use our services in a
subsequent period. In addition, a failure to collect a large account receivable
from any of these customers could significantly reduce our assets and
profitability.
BECAUSE THE NUMBER OF OUR CUSTOMERS, EMPLOYEES AND OFFICES HAS GROWN RAPIDLY
SINCE JANUARY 1, 1998, AND WE EXPECT THIS GROWTH RATE TO CONTINUE, WE MAY HAVE
DIFFICULTY MANAGING OUR GROWTH EFFECTIVELY, WHICH COULD ADVERSELY AFFECT THE
QUALITY OF OUR SERVICES AND OUR ABILITY TO REMAIN PROFITABLE
We have grown rapidly and expect to continue to grow rapidly by both hiring
new employees and serving new businesses and geographic markets. Our growth has
placed and will continue to place a significant strain on our management and
operating and financial systems. In addition, our management has limited
experience managing a business of our current size. Our employee base grew from
42 to 132 between January 1, 1998 and October 13, 1999, and our sales and
marketing vice presidents have only joined Cysive in the last 18 months. As a
result, our personnel, systems, procedures and controls may be inadequate to
support our future operations. Our current growth rate may not be sustainable
for the long-term.
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BECAUSE OUR CUSTOMERS RETAIN US ON A PROJECT-BY-PROJECT BASIS, RATHER THAN UNDER
LONG-TERM CONTRACTS, WE MAY NOT BE ABLE TO ACCURATELY PREDICT OUR REVENUES,
WHICH MAY ADVERSELY AFFECT OUR OPERATING MARGINS
Our operating expenses, including employee salaries, rent and
administrative expenses, are relatively fixed and cannot be reduced on short
notice to compensate for unanticipated variations in the number or size of
projects in progress. Because we incur costs based on our expectations of future
revenues, our failure to predict our revenues accurately may result in our costs
becoming a larger percentage of our revenues which would reduce our margins. If
a customer defers, modifies or cancels a project, we may be unable to rapidly
redeploy our employees to other projects to minimize underutilization of
employees and avoid a negative impact to our operating results.
OUR QUARTERLY REVENUES AND OPERATING RESULTS ARE LIKELY TO FLUCTUATE
SIGNIFICANTLY, CAUSING OUR STOCK PRICE TO DECLINE
Our quarterly revenues and operating results have varied in the past and
are likely to vary significantly from quarter to quarter. This fluctuation may
cause our operating results to be below the expectations of securities analysts
and investors, and the price of our stock may fall. Factors that could cause
quarterly fluctuations include:
- the loss of a significant customer or project;
- our employee utilization rate, including our ability to transition
employees quickly from completed or terminated projects to new projects;
- the introduction of new services or changes in pricing policies by us or
our competitors;
- our ability to manage costs, including employee costs and support
services costs; and
- costs related to the expected opening or expansion of our offices.
In any given quarter, most of our revenues have been attributable to a
limited number of customers and we expect this to continue. As a result, the
cancellation or deferral of even a small number of contracts in a particular
quarter could significantly reduce our revenues, which would hurt our quarterly
financial performance. In addition, a substantial portion of our costs are
relatively fixed and based upon anticipated revenues. A failure to book an
expected order in a given quarter or the need to provide training to our
employees on new technologies as occurred in the fourth quarter of 1997 and the
first half of 1998 would not be offset by a corresponding reduction in costs and
could adversely affect our operating results. As a result of these factors, we
believe that period-to-period comparisons of our revenues and operating results
are not necessarily meaningful.
WE DEPEND ON OUR CHIEF EXECUTIVE OFFICER, AND HIS LOSS MAY ADVERSELY AFFECT OUR
ABILITY TO ATTRACT AND RETAIN CUSTOMERS, MAINTAIN A COHESIVE CULTURE AND COMPETE
EFFECTIVELY
We believe that our success depends on the continued employment of our
Chief Executive Officer, Nelson A. Carbonell, Jr. If Mr. Carbonell were unable
or unwilling to continue in his present position, he would be very difficult to
replace and our business could be adversely affected. Mr. Carbonell is
particularly important to our business in providing strategic direction,
managing our operations and creating and maintaining a cohesive culture. He has
also been involved in establishing and expanding customer relationships.
APPROXIMATELY 38% OF OUR CURRENT SOFTWARE ENGINEERS ARE NOT U.S. CITIZENS AND
MAY BE FORCED TO LEAVE CYSIVE WHEN THEIR TEMPORARY VISAS EXPIRE, AND WE MAY BE
UNABLE TO ATTRACT AND RETAIN ADDITIONAL FOREIGN NATIONALS DUE TO LIMITS IMPOSED
ON THE NUMBER OF VISAS ISSUED BY THE U.S. GOVERNMENT
We depend on software engineers who are not U.S. citizens, and the loss of
a significant number of these personnel would make it difficult to serve our
customers and grow our business. These software engineers are permitted to work
in the United States for up to six years under temporary H-1B visas. Most of our
software engineers working under H-1B visas were originally sponsored by former
employers and, as a result, hold visas which expire in less than six years from
their date of employment by Cysive. As of October 13, 1999, 32, or 38.1%, of our
software engineers were working under H-1B visas. The U.S.
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Immigration and Naturalization Service limits the number of new H-1B visas
issued in each fiscal year, and if this limit is reached, our supply of
potential software engineers will be limited. In addition, changes in existing
U.S. immigration laws that make it more difficult for potential employees to
obtain H-1B visas could impair our ability to compete for and provide services
to customers and could adversely affect our business, financial condition and
results of operations.
COMPETITION FROM LARGER, MORE ESTABLISHED COMPETITORS WITH GREATER FINANCIAL
RESOURCES AND FROM NEW ENTRANTS COULD RESULT IN PRICE REDUCTIONS, REDUCED
PROFITABILITY AND LOSS OF CURRENT OR FUTURE CUSTOMERS
The e-business engineering market is intensely competitive and faces rapid
technological change. We expect competition to continue and intensify, which
could result in price reductions, reduced profitability and the loss of current
or future customers. Our competitors fall into four major categories:
- Internet professional services providers;
- internal information technology departments of current and potential
customers;
- large information technology consulting services providers; and
- traditional information technology services providers.
Many of our competitors have longer operating histories and customer
relationships, greater financial, technical, marketing and public relations
resources, larger customer bases and greater brand or name recognition than we
have. Our competitors may be able to respond more quickly to technological
developments and changes in customer needs. This ability may place us at a
disadvantage in responding to our competitors' pricing strategies, technological
advances, advertising campaigns, strategic partnerships and other initiatives.
In addition, there are low barriers to entry into our business because the costs
to provide information technology services are relatively low. We do not own any
technologies that preclude or inhibit competitors from entering our industry.
Therefore, we expect to continue to face additional competition from new
entrants into our industry.
WE ENTER INTO NON-COMPETE AGREEMENTS WITH SOME OF OUR CUSTOMERS, WHICH REDUCES
THE NUMBER OF OUR POTENTIAL CUSTOMERS AND SOURCES OF REVENUES
A substantial portion of our business involves the development of software
applications for specific projects. Ownership of customer-specific software is
generally retained by the customer, although we retain rights to some of the
applications, processes and other intellectual property developed in connection
with projects. We sometimes agree, however, not to reuse this customer-specific
software when building systems for a customer's competitors. In addition, we
occasionally agree not to build any type of system for a customer's competitors
for limited periods of time, which have been as long as two years. These non-
compete agreements reduce the number of our potential customers and our sources
of revenues.
BECAUSE OUR BUSINESS OF SOFTWARE ENGINEERING INVOLVES CREATING AND USING
INTELLECTUAL PROPERTY, MISAPPROPRIATION OF AND DISPUTES REGARDING INTELLECTUAL
PROPERTY COULD HARM OUR REPUTATION, ADVERSELY AFFECT OUR COMPETITIVE POSITION
AND COST US MONEY
If third parties infringe or misappropriate our trade secrets, trademarks
or other proprietary information, or if disputes arise with customers concerning
intellectual property we create for them and/or license from them, our
reputation, competitive position and relationships with customers could be
damaged. We could be required to spend significant amounts of time and financial
resources to defend our company, and our managerial resources could be diverted.
OUR BUSINESS IS TECHNOLOGY DRIVEN, AND IF WE HAVE DIFFICULTY RESPONDING TO
CHANGING TECHNOLOGY, INDUSTRY STANDARDS AND CUSTOMER PREFERENCES, WE COULD LOSE
CUSTOMERS, WHICH WOULD REDUCE OUR REVENUES
We have derived and expect to continue to derive a substantial portion of
our revenues from creating e-business systems that are based upon the latest,
most advanced technologies and are capable of adapting to future technologies.
Our success depends on our ability to offer services that stay at the forefront
of continuing changes in technology, evolving industry standards and changing
customer preferences. Our
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failure to create e-business systems that use these technologies could cause us
to lose current and potential business opportunities, resulting in reduced
revenues. Additionally, to the extent technology becomes standardized or
simplified, there may be less demand for our services.
OUR BUSINESS COULD BE NEGATIVELY AFFECTED BY YEAR 2000 ISSUES
Year 2000 issues may adversely affect our business and our customers'
businesses. On January 1, 2000, many computer systems could fail or malfunction
because they may be unable to distinguish 21st century dates from 20th century
dates. As a result, computer systems used by many companies, including us, our
customers and our potential customers, may need upgrades to comply with year
2000 requirements. These customers and potential customers may choose to
allocate their available funds to these upgrades instead of purchasing our
services, which could result in reduced revenues for Cysive. We do not currently
have any information concerning the year 2000 compliance status of our customers
nor do we intend to request this information. In addition, any failure by our
internal systems or the systems that we create for our customers could have a
material adverse effect on our operations and could result in costly litigation.
The worst case scenario for year 2000 problems for us would be the need to cease
normal operations for an indefinite period of time while we attempt to respond
to our own or, help with our customers' year 2000 problems, without having full
internal operational capabilities. For information on how we are addressing year
2000 issues, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Year 2000 Readiness Disclosure."
CURRENTLY, OUR BUSINESS DEPENDS ON INTEGRATING INTERNET-RELATED TECHNOLOGY INTO
OUR CUSTOMERS' BUSINESSES, AND, AS A RESULT, OUR BUSINESS WILL SUFFER IF USE OF
THE INTERNET AS A MEANS FOR COMMERCE DECLINES
If commerce on the Internet does not continue to grow or grows slower than
expected, the need for our e-business enabling services could decline, resulting
in fewer projects and reduced revenues. Consumers and businesses may reject the
Internet as a viable commercial medium for a number of reasons, including:
- actual or perceived lack of security of information;
- lack of access and ease of use;
- congestion of Internet traffic or other usage delays;
- inconsistent quality of service;
- increases in access costs to the Internet;
- evolving government regulation;
- uncertainty regarding intellectual property ownership;
- costs associated with the obsolescence of existing infrastructure; and
- economic viability of the Internet commerce model.
SOME OF OUR CUSTOMERS ARE SMALL OR HAVE LITTLE OR NO OPERATING HISTORY, RAISING
THE POSSIBILITY THAT THEY MAY LACK SUFFICIENT CASH FLOW TO PAY OUR FEES
We believe that an increasing portion of our future revenues could be
derived from emerging companies, like our current customer LeapIT.com, formed
specifically to conduct business over the Internet. These companies often have
little or no earnings or cash flow, and their businesses are more likely to fail
than those of more mature companies. As a result, they may be unable to pay our
fees in a timely fashion or at all.
OUR DIRECTORS, EXECUTIVE OFFICERS AND THEIR AFFILIATES WILL OWN APPROXIMATELY
70% OF OUR COMPANY AND, CONSEQUENTLY, WILL CONTROL STOCKHOLDER ACTIONS AFTER
THIS OFFERING AND MAY VOTE THEIR SHARES IN WAYS IN WHICH YOU DISAGREE
Upon completion of this offering, our directors, executive officers and
their affiliates will own approximately 70% of our outstanding common stock. As
a result, these stockholders will be able to exercise control over all matters
requiring stockholder approval, including the election of directors and
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approval of significant corporate transactions. They will also be able to block
an unsolicited tender offer. Accordingly, this concentration of ownership could
delay or prevent a third party from acquiring control of Cysive at a premium
over the then-current market price of our common stock.
OUR COMMON STOCK HAS NOT TRADED PUBLICLY AND MAY NOT TRADE ACTIVELY AFTER THIS
OFFERING
Prior to this offering, you could not buy or sell our common stock
publicly. Accordingly, we cannot assure you that an active public trading market
for our stock will develop or be sustained after this offering.
THE INITIAL PUBLIC OFFERING PRICE MAY NOT BE INDICATIVE OF THE MARKET PRICE OF
OUR COMMON STOCK AFTER THIS OFFERING
We determined the initial public offering price for our common stock
through negotiation with the underwriters. The market price after this offering
may vary significantly from the initial offering price in response to any of the
following factors, some of which are beyond our control:
- changes in financial estimates or investment recommendations by
securities analysts relating to our stock;
- announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures, technological
innovations or capital commitments;
- loss of a major customer;
- additions or departures of key personnel; and
- fluctuations in the stock price and volume of traded shares especially in
the traditionally volatile Internet-related and technology sectors.
THE MARKET PRICE OF OUR COMMON STOCK, LIKE THE MARKET PRICES OF THE STOCKS OF
OTHER INTERNET-RELATED AND TECHNOLOGY COMPANIES, MAY FLUCTUATE WIDELY AND
RAPIDLY
The securities of many companies have experienced extreme price and volume
fluctuations in recent years, often unrelated to the companies' operating
performance. Specifically, market prices for securities of Internet-related and
technology companies have frequently reached elevated levels following their
initial public offerings. These levels may be unsustainable and may not bear any
relationship to these companies' operating performances. If the market price of
our common stock reaches an elevated level following this offering, it may
materially and rapidly decline. In the past, following periods of volatility in
the market price of a company's securities, stockholders have often instituted
securities class action litigation against the company. If we were involved in a
class action suit, it could be costly and divert the attention of management.
Furthermore, if adversely determined, a class action suit would negatively
impact our profitability and have a material adverse effect on our business,
financial condition and results of operations.
WE HAVE BROAD DISCRETION OVER THE USE OF THE $46.7 MILLION OF PROCEEDS FROM THIS
OFFERING AND MAY FAIL TO USE THEM EFFECTIVELY TO GROW OUR BUSINESS
We have significant flexibility in using the proceeds we receive from this
offering and may fail to use the proceeds effectively to grow our business.
Because the proceeds are not required to be allocated to any specific investment
or transaction, you cannot determine at this time the value or appropriateness
of our use of the proceeds.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION AND PAY A HIGHER PRICE
FOR OUR COMMON STOCK THAN EXISTING STOCKHOLDERS
If you purchase common stock in this offering, you will pay more for your
shares than the amounts paid by existing stockholders for their shares. As a
result, you will experience immediate and substantial dilution of approximately
$12.53 per share.
9
<PAGE> 13
THE SALE OR AVAILABILITY FOR SALE OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK
COULD ADVERSELY AFFECT OUR STOCK PRICE
Sales of a substantial number of shares of common stock after this
offering, or the perception that these sales could occur, could adversely affect
the market price of our common stock and impair our ability to raise capital
through the sale of additional equity securities. After this offering, we will
have 11,127,000 shares of our common stock outstanding. All of the shares sold
in the offering will be freely transferable without restriction or further
registration, except for any shares purchased by our "affiliates," as defined in
Rule 144. Of the 8,127,000 shares of common stock outstanding prior to this
offering, 7,777,000 shares will be "restricted securities" as defined in Rule
144 and may be sold in absence of registration in accordance with Rule 144 or
Rule 701 under the Securities Act or another exemption from registration.
OUR FORMER STATUS AS AN S CORPORATION COULD EXPOSE US TO LIABILITY EXCEEDING
$1.5 MILLION AND ADVERSELY AFFECT OUR PROFITABILITY
Since our founding in 1993, we have been treated as an S corporation under
the Internal Revenue Code of 1986, as amended. In connection with the completion
of this offering, we will convert to a C corporation. If the IRS or any state
taxing authority were to challenge our prior S corporation status, we could be
liable to pay corporate taxes on our income, at the effective corporate tax
rate, for all or a part of the period in which we operated as an S corporation,
plus interest and possibly penalties. These taxes, interest and penalties could
exceed $1.5 million. It is estimated that the potential liability for corporate
taxes due to our change from an S corporation to a C corporation is $1.0
million.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute
forward-looking statements. Forward-looking statements relate to future events
or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "could," "believes," "estimates," "predicts,"
"potential" or "continue" or the negative of these terms or other comparable
terminology. These statements are only predictions. Actual events or results may
differ materially. In evaluating these statements, you should specifically
consider various factors, including the risks outlined under "Risk Factors."
These factors may cause our actual results to differ materially from any
forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future events or results.
10
<PAGE> 14
USE OF PROCEEDS
We estimate the net proceeds from the sale of the 3,000,000 shares of
common stock offered by this prospectus will be $46.7 million, or $50.7 million
if the underwriters exercise their over-allotment option in full, after
deducting the underwriting discount and commissions and estimated offering
expenses. We will not realize any proceeds from the sale of common stock by the
selling stockholder.
Our primary purposes for this offering are to obtain additional equity
capital, create a public market for our common stock and facilitate future
access to public markets. In the 12 months ending September 30, 2000, we expect
to use the net proceeds from the offering generally as follows:
<TABLE>
<CAPTION>
USE AMOUNT
--- ------
<S> <C> <C>
Capital expenditures........................................ $ 9.7 million
Sales and marketing......................................... 3.6 million
Geographic expansion........................................ 2.8 million
Working capital............................................. 4.1 million
S-corporation distribution, discussed below................. 0.6 million
Investments................................................. 25.9 million
-----
Total............................................. $46.7 million
=====
</TABLE>
The foregoing amounts are based on current conditions and may vary. We will
not be paying state or federal income taxes with any proceeds of the offering.
Pending these uses, we will invest the net proceeds of this offering in
investment grade, interest-bearing securities.
DIVIDEND POLICY
We currently intend to retain all of our earnings for the future operation
and growth of our business and do not intend to pay cash dividends in the
foreseeable future. Since we commenced operations in 1994, we have paid $3.2
million and will pay additional distributions, estimated to be $1.4 million, to
our stockholders in the form of cash distributions to enable them to pay income
taxes on our income, as described under "S Corporation Distribution" below and
Note 2 of the notes to our financial statements included elsewhere in this
prospectus. The payment of cash dividends in the future will depend upon our
results of operations and financial condition and any other factors as the board
of directors may consider or deem appropriate.
S CORPORATION DISTRIBUTION
We have been treated as an S corporation under Subchapter S of the Internal
Revenue Code of 1986, as amended, since we were founded in 1993. As a result of
our S corporation status, our taxable income has been taxed, for federal and
state income tax purposes, directly to our stockholders. Our S corporation
status will terminate upon completion of this offering, and accordingly, we will
have to pay federal and state income taxes. For more information on this
subject, see Note 2 of the notes to our financial statements included elsewhere
in this prospectus.
We intend to distribute to our stockholders of record immediately prior to
the offering, on a pro rata basis, the undistributed balance of cumulative
income taxed or taxable to these stockholders immediately prior to the
completion of this offering. This amount will be limited to the lesser of the
federal or applicable state accumulated taxable income to avoid any dividend
characterization. As of June 30, 1999, $1.4 million of our taxable income was
taxed or is taxable to our stockholders and not distributed. The actual
distribution will be adjusted through the date of the closing of this offering.
You will not receive any of this distribution.
11
<PAGE> 15
CAPITALIZATION
The following table presents our capitalization as of June 30, 1999 on: (1)
an actual basis; and (2) a pro forma as adjusted basis to reflect: (a) the sale
of the common stock offered by this prospectus after deducting the underwriting
discount and commissions and estimated offering expenses; (b) the recording of
deferred income taxes resulting from the change from an S corporation to a C
corporation; and (c) the payment of the S corporation distribution in the amount
of $1.4 million. You should read this information together with our financial
statements and the related notes included elsewhere in this prospectus. The
number of shares of common stock issued and outstanding does not include
5,641,200 shares of common stock reserved for issuance upon exercise of
outstanding options.
<TABLE>
<CAPTION>
JUNE 30, 1999
-----------------------------
PRO FORMA
ACTUAL AS ADJUSTED
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, 10,000,000 shares
authorized, no shares issued or outstanding, actual and
pro forma, as adjusted;................................... -- --
Common stock, $0.01 par value, 75,000,000 shares authorized,
8,127,000 shares issued or outstanding, actual; 75,000,000
shares authorized, 11,162,530 shares issued and
outstanding, pro forma as adjusted........................ $ 81 $ 112
Additional paid-in capital.................................. 24,459 71,713
Deferred stock compensation................................. (10,032) (10,032)
Retained earnings (deficit)................................. (10,379) (11,851)
-------- --------
Total stockholders' equity............................. 4,129 49,942
-------- --------
Total capitalization.............................. $ 4,129 $ 49,942
======== ========
</TABLE>
12
<PAGE> 16
DILUTION
As of June 30, 1999, the pro forma net tangible book value of our common
stock was approximately $3.3 million, or $0.40 per share of common stock, after
giving effect to the proposed S corporation distribution as if it had occurred
as of June 30, 1999. Pro forma net tangible book value per share represents the
amount of our stockholders' equity less intangible assets, divided by 8,162,530
shares of common stock outstanding as of June 30, 1999.
Dilution per share to new investors represents the difference between the
amount per share paid by purchasers of common stock in this offering and the pro
forma net tangible book value per share of common stock immediately after
completion of this offering. After giving effect to the sale by us of 3,000,000
shares of common stock in this offering, after deducting the underwriting
discount and commissions and estimated offering expenses, our pro forma net
tangible book value as of June 30, 1999 would have been $50.9 million or $4.47
per share. This amount represents an immediate increase in net tangible book
value of $4.07 per share to existing stockholders and an immediate dilution in
net tangible book value of $12.53 per share to purchasers of common stock in
this offering. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $17.00
Pro forma net tangible book value per share as of June 30,
1999................................................... $0.40
Increase per share of common stock attributable to new
investors.............................................. 4.07
-----
Pro forma net tangible book value per share after the
offering.................................................. 4.47
------
Dilution per share to new investors......................... $12.53
======
</TABLE>
The following table presents on a pro forma basis as of June 30, 1999, the
difference between the number of shares of common stock purchased from Cysive,
the total consideration paid to Cysive and the average price paid by existing
stockholders and by new investors, before deduction of the underwriting discount
and commissions and estimated offering expenses payable by us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE PAID
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders...................... 8,162,530 73.1% $ 1,711,815 3.2% $ 0.21
New investors.............................. 3,000,000 26.9 51,000,000 96.8 17.00
---------- ----- ----------- -----
Total............................ 11,162,530 100.0% $52,711,815 100.0%
===== =====
</TABLE>
The table above assumes no exercise of stock options outstanding at October
13, 1999. As of October 13, 1999, we had options outstanding to purchase a total
of 6,240,138 shares of common stock at a weighted average exercise price of
$1.36 per share under our Amended and Restated 1994 Stock Option Plan. To the
extent any of these outstanding options are exercised, there will be further
dilution to new investors.
13
<PAGE> 17
SELECTED FINANCIAL DATA
The following statement of operations data for each of the years in the
five-year period ended December 31, 1998 and the balance sheet data as of
December 31, 1994, 1995, 1996, 1997 and 1998 have been derived from Cysive's
financial statements, which have been audited by Ernst & Young LLP, independent
auditors. The statement of operations data for the six months ended June 30,
1998 and 1999 and the balance sheet data as of June 30, 1999 are unaudited and
are derived from our unaudited financial statements. In our opinion, the
unaudited financial data include all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the information
shown in those data. The pro forma net income and pro forma earnings per share
data are unaudited and are presented to reflect the provision for federal and
state income taxes as if we had been required to pay federal and state income
taxes as a C corporation during each of the periods presented. Results of
operations for interim periods are not necessarily indicative of results to be
expected for the full year. For further detail and explanation of
period-to-period changes, selected financial data should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and the related notes included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------------- -----------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues...................... $948 $2,993 $5,557 $7,711 $9,142 $ 3,193 $ 9,424
Direct costs.................. 534 1,557 2,056 2,798 3,742 1,809 3,473
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit.................. 414 1,436 3,501 4,913 5,400 1,384 5,951
Operating expenses:
General and
administrative............ 110 497 2,009 2,754 2,725 1,009 2,418
Sales and marketing......... 141 241 232 760 1,824 672 1,720
Stock compensation.......... -- -- -- -- 69 -- 13,285
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses................ 251 738 2,241 3,514 4,618 1,681 17,423
Operating income (loss)....... 163 698 1,260 1,399 782 (297) (11,472)
Other income (expense), net... -- (1) 17 23 14 15 25
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)............. $163 $ 697 $1,277 $1,422 $ 796 $ (282) $(11,447)
========== ========== ========== ========== ========== ========== ==========
Earnings (loss) per share:
Basic....................... $0.03 $0.10 $0.19 $0.21 $0.12 $(0.04) $(1.41)
Diluted..................... $0.03 $0.10 $0.17 $0.18 $0.10 $(0.04) $(1.41)
Weighted average shares
outstanding................. 5,677,398 6,775,311 6,777,000 6,777,000 6,777,000 6,777,000 8,127,000
Weighted average shares and
common stock equivalents.... 5,677,398 6,775,311 7,473,800 7,766,211 7,993,659 6,777,000 8,127,000
Pro forma net income (loss)... $489 $(12,482)
========== ==========
Pro forma earnings (loss) per
share:
Basic....................... $0.07 $(1.53)
Diluted..................... $0.06 $(1.53)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------- JUNE 30,
1994 1995 1996 1997 1998 1999
---- ---- ------ ------ ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents................................... $ 23 $294 $ 456 $ 690 $ 612 $ 869
Working capital............................................. 157 722 1,032 1,948 2,150 3,507
Total assets................................................ 306 970 1,753 2,421 3,163 5,948
Stockholders' equity........................................ 173 837 1,478 2,214 2,519 4,129
</TABLE>
14
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with "Selected Financial
Data" and our financial statements and the related notes included elsewhere in
this prospectus.
OVERVIEW
We design and build complex, highly customized systems supporting large
scale e-businesses. Prior to 1997, we built large scale, distributed systems
using approaches and technologies that are the foundations for current Internet
applications. At that time, our advanced technology focus required a sales
effort led by technology savvy project managers. In late 1996 and early 1997,
our technology group evaluated and developed software prototypes using key
Internet technologies such as Java, XML and CORBA. After successfully deploying
our first e-business system in mid-1997, we began to target customers who were
making significant investments in their e-business applications. As a result,
there was a fundamental shift in our business strategy away from general purpose
distributed systems to customized e-business applications. As part of this
strategy, in the fourth quarter of 1997 and the first half of 1998, we spent
considerable resources to accomplish two specific goals. Our first goal was to
train all of our software engineers with advanced Internet technologies that had
been researched and prototyped by our technology group. Our second goal was to
deploy a direct sales force capable of selling e-business applications. These
initiatives significantly impacted our results of operations for these three
quarters. Specifically, the generation of a sales pipeline of e-business
applications and the deployment of our sales force affected our revenues and
sales and marketing expenses. In addition, the completion of two of our largest
distributed systems combined with the extensive training of our software
engineers caused our utilization rates and gross margins to decline during these
quarters. As reflected in our latest results, these investments positioned us to
emerge in the second half of 1998 as a leading e-business engineering firm.
We derive our revenues from software engineering services which are
provided primarily on a time and materials basis. Revenues are recognized and
billed monthly by multiplying the number of hours expended by our software
engineers in the performance of the contract by the established billing rates.
Our customers reimburse us for direct expenses allocated to a project such as
airfare, lodging and meals. Consequently, these direct reimbursements are
excluded from revenues.
Our financial results may fluctuate from quarter-to-quarter based on
factors such as the number of projects, the amount and timing of our customers'
expenditures, employee utilization rates, hourly billing rates and general
economic conditions. Revenues from a few large customers may constitute a
significant portion of our total revenues in a particular quarter or year. For
example, in 1998, our five largest customers represented 65.3% of our revenues.
For the six-month period ended June 30, 1999, our five largest customers
represented 82.5% of our revenues. The following table identifies these
customers and the percentage of our revenues derived from each.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 SIX MONTHS ENDED JUNE 30, 1999
- --------------------------------------------------------- ---------------------------------------------------------
CUSTOMER % OF REVENUES CUSTOMER % OF REVENUES
- ------------------------------------------ ------------- ------------------------------------------ -------------
<S> <C> <C> <C>
Cisco Systems, Inc. 19.6% Sylvan Prometric 35.1%
Classified Ventures, Inc./Cars.com 18.0% Classified Ventures, Inc./Cars.com 15.2%
Sylvan Prometric 12.5% Equifax Secure, Inc. 13.4%
DaimlerChrysler Corporation 8.5% Cisco Systems, Inc. 10.2%
First Union Corporation 6.7% UUNet Technologies, Inc. 8.6%
</TABLE>
Revenues from any given customer will vary from period to period; however,
we expect that significant customer concentration will continue for the
foreseeable future. To the extent that any significant customer uses less of our
services or terminates its relationship with us, our revenues may decline
substantially. We attempt to mitigate our revenue concentration issues by
contractual wind-down provisions and by rapid redeployment of our software
engineers.
The number of Cysive employees increased from 19 as of January 1, 1996 to
90 as of June 30, 1999. We actively recruit software engineers and support staff
and expect the total number of employees to
15
<PAGE> 19
increase significantly during the remaining months of 1999 and into the
foreseeable future. Direct costs consist primarily of compensation and benefits
for our software engineers and the non-billable portion of other direct project
costs. Allocated costs related to specific employees performing quality
assurance reviews for customers are also included in direct costs. We expect
that our per capita direct costs will increase over time due to wage increases
and inflation. In addition, these costs may increase after the offering because
prospective employees may perceive that the stock option component of our
compensation package is not as valuable as it was prior to the offering. Our
gross margins are affected by trends in the utilization rate of our software
engineers, defined as the percentage of our software engineers' time billed to
customers, divided by the total available hours in a period, less holidays. If a
project ends earlier than scheduled, we may need to redeploy our project
personnel. Any resulting non-billable time may adversely affect our gross
margins.
General and administrative expenses consist primarily of compensation and
benefits for our management, finance and administration, human resources,
information technology, recruiting and the non-billable portion of our quality
assurance and regional management personnel. In addition, general and
administrative expenses include depreciation and amortization, general operating
expenses such as telephones, office supplies, travel, outside professional
services, training and facilities costs and allocated costs related to the
administration of the quality review function, including maintaining our
knowledge base, researching new technologies and writing technical reviews. We
expect general and administrative expenses to increase as we add additional
personnel, expand our information systems, open new offices, increase our
recruiting efforts and incur additional costs related to the growth of our
business and operations as a public company.
Sales and marketing expenses consist primarily of salaries, commissions,
benefits, marketing programs and travel costs associated with our sales and
marketing efforts. We sell our services through a direct sales force organized
by geographic region. We expect sales and marketing expenses to increase as we
continue to build a direct sales force and expand our marketing programs.
Stock compensation expense consists of grants of options to purchase
3,003,750 shares of common stock at an exercise price below the fair market
value of the common stock on the date of grant, resulting in a non-cash
compensation charge of $28.4 million, of which $23.2 million has been recorded
through June 30, 1999. Stock compensation expense of $13.3 million was recorded
in the quarter ended June 30, 1999. The remaining balance of $9.9 million will
be amortized over the remaining vesting schedule as follows:
<TABLE>
<CAPTION>
YEAR ENDED AMOUNT OF
DECEMBER 31, DEFERRED STOCK COMPENSATION
- ------------ ---------------------------
<S> <C>
1999 $ 27,900
2000 2,706,118
2001 2,468,545
2002 4,230,903
2003 493,094
</TABLE>
16
<PAGE> 20
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the relative
composition of revenues and selected statement of operations data as a
percentage of revenues:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------- ----------------
1996 1997 1998 1998 1999
----- ----- ----- ----- -------
<S> <C> <C> <C> <C> <C>
Revenues......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Direct costs..................................... 37.0 36.3 40.9 56.7 36.9
----- ----- ----- ----- -------
Gross profit..................................... 63.0 63.7 59.1 43.3 63.1
Operating expenses:
General and administrative..................... 36.1 35.7 29.8 31.6 25.7
Sales and marketing............................ 4.2 9.9 20.0 21.0 18.2
Stock compensation............................. -- -- 0.8 -- 141.0
----- ----- ----- ----- -------
Total operating expenses............... 40.3 45.6 50.6 52.6 184.9
Operating income (loss).......................... 22.7 18.1 8.5 (9.3) (121.8)
Other income, net................................ 0.3 0.3 0.2 0.5 0.3
----- ----- ----- ----- -------
Net income (loss)................................ 23.0% 18.4% 8.7% (8.8)% (121.5)%
===== ===== ===== ===== =======
</TABLE>
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Revenues. Revenues increased $6.2 million, or 195.1%, to $9.4 million for
the six months ended June 30, 1999 from $3.2 million for the same period in
1998. This increase in revenues primarily reflects the more mature direct sales
model established in mid-1998, the benefits of which were not fully realized
until early 1999. As a result of our direct sales efforts, our number of
customers increased to 21 for the six months ended June 30, 1999 from 12 for the
same period in 1998. In addition, as we completed several large distributed
systems and migrated to e-business applications, our average billing rates
increased.
Direct Costs. Direct costs increased $1.7 million, or 92.0%, to $3.5
million for the six months ended June 30, 1999 from $1.8 million for the same
period in 1998. As a percentage of revenues, direct costs decreased to 36.9% for
the six months ended June 30, 1999 from 56.7% for the same period in 1998. This
significant decrease as a percentage of revenues was primarily attributable to
our low utilization rates in 1998, which resulted from the completion of two of
our largest distributed systems and the extensive training of all of our
software engineers during the first half of 1998. The average utilization rate
increased to 88.5% for the six months ended June 30, 1999 from 54.2% for the
same period in 1998.
Gross Profit. Gross profit increased $4.6 million, or 329.9%, to $6.0
million for the six months ended June 30, 1999 from $1.4 million for the same
period in 1998. Because our revenue growth exceeded the rate that direct costs
increased, the gross margin increased to 63.1% for the six months ended June 30,
1999 from 43.3% for the same period in 1998.
General and Administrative. General and administrative expenses increased
$1.4 million, or 139.7%, to $2.4 million for the six months ended June 30, 1999
from $1.0 million for the same period in 1998. As a percentage of revenues,
general and administrative expenses decreased to 25.7% for the six months ended
June 30, 1999 from 31.6% for the same period in 1998. This decrease was due
primarily to our ability to spread our costs over a greater revenue base,
particularly with respect to depreciation and amortization. This operating
leverage, however, was partially offset by the expansion of our office in the
metropolitan area of San Jose, CA in September 1998 as well as additional
corporate administrative hires.
Sales and Marketing. Sales and marketing expenses increased $1.0 million,
or 156.0%, to $1.7 million for the six months ended June 30, 1999 from $672,000
for the same period in 1998. As a percentage of revenues, sales and marketing
expenses decreased to 18.2% for the six months ended June 30, 1999 from 21.0%
for the same period in 1998. This decrease was primarily due to the significant
expansion of our direct sales force in the first half of 1998 without the
benefit of revenues generated by
17
<PAGE> 21
those hires. This decrease was partially offset by additional hires in the
marketing group and the execution of our marketing program in the first half of
1999.
Stock Compensation. We recorded $13.3 million in stock compensation
expense in the six-month period ended June 30, 1999. This expense represents the
difference between the deemed fair market value of the underlying options and
their exercise price.
Operating Income (Loss). Operating loss increased $11.2 million to $11.5
million for the six months ended June 30, 1999 from an operating loss of
$297,000 for the same period in 1998. The operating loss margin increased to
121.8% for the six months ended June 30, 1999. Excluding the impact of the stock
compensation expense for the six months ended June 30, 1999, operating income
increased $2.0 million to $1.7 million for the six months ended June 30, 1999
from an operating loss of $297,000 for the same period in 1998. Excluding the
impact of the stock compensation expense, the operating margin increased to
19.2% for the six months ended June 30, 1999.
Other Income, Net. Other income, net increased $10,000, or 63.6%, to
$25,000 for the six months ended June 30, 1999 from $15,000 for the same period
in 1998 primarily due to gains on the sale of fixed assets and the timing of
matching charitable contributions made on behalf of our employees.
Net Income (Loss). Net loss increased $11.2 million to $11.4 million for
the six months ended June 30, 1999 from a loss of $282,000 for the same period
in 1998 due primarily to the stock compensation expense recorded in the
six-month period ended June 30, 1999. As a result of the above factors, the net
loss margin increased to 121.5% for the six months ended June 30, 1999.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues. Revenues increased $1.4 million, or 18.6%, to $9.1 million in
1998 from $7.7 million in 1997. This increase in revenues reflected a larger
number of customers, which totaled 23 in 1998 as compared to 15 in 1997. In
addition, our higher revenues were a result of our ability to increase our
billing rates in 1998 as we more fully migrated our business model to e-business
applications. The benefits of this larger customer base and our higher billing
rates, however, were offset in part by two factors. First, our business model
shifted, affecting the fourth quarter of 1997 and the first two quarters of
1998. Second, we completed projects in early 1998 for our two largest customers
in 1997. As discussed above, we made significant investments in our direct sales
force, the benefits of which were not realized until the second half of 1998.
Consequently, while we ended 1998 with a greater number of customers, most of
their associated projects did not start until the second half of the year.
Direct Costs. Direct costs increased $944,000, or 33.7%, to $3.7 million
in 1998 from $2.8 million in 1997. As a percentage of revenues, direct costs
increased to 40.9% in 1998 from 36.3% in 1997. This significant increase as a
percentage of revenues was primarily due to our low utilization rates in the
first half of 1998 which correlated with the completion of two large scale
distributed systems and our efforts to train all of our software engineers. The
average utilization rate decreased to 70.5% in 1998 from 79.9% in 1997.
Gross Profit. Gross profit increased $487,000, or 9.9%, to $5.4 million in
1998 from $4.9 million in 1997. Because direct costs increased at a higher rate
than our revenue growth, the gross margin decreased to 59.1% in 1998 from 63.7%
in 1997.
General and Administrative. General and administrative expenses decreased
$29,000, or 1.0%, to $2.7 million in 1998 from $2.8 million in 1997. As a
percentage of revenues, general and administrative expenses decreased to 29.8%
in 1998 from 35.7% in 1997. This decrease as a percentage of revenues was
primarily attributable to our ability to spread our costs over a greater revenue
base. The benefits of this operating leverage were partially offset by the
opening of a new office in the metropolitan area of San Jose, CA in May 1998 and
the expansion of our Reston, VA office in August 1998.
Sales and Marketing. Sales and marketing expenses increased $1.1 million,
or 139.8%, to $1.8 million in 1998 from $761,000 in 1997. As a percentage of
revenues, sales and marketing expenses increased to
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<PAGE> 22
20.0% in 1998 from 9.9% in 1997. This increase was primarily due to the
significant expansion of our direct sales force in the first half of 1998. In
addition, at the end of 1998 we hired a dedicated marketing staff and
implemented a more extensive marketing program.
Stock Compensation. Stock compensation reflects non-qualified stock
options granted at exercise prices below fair market value, which vested upon
the achievement of select performance goals at the end of 1998.
Operating Income (Loss). Operating income decreased $617,000, or 44.1%, to
$782,000 in 1998 from $1.4 million in 1997. As a result of the above factors,
the operating margin decreased to 8.5% in 1998 from 18.1% in 1997.
Other Income, Net. Net other income decreased $9,000, or 40.2%, to $14,000
in 1998 from $23,000 in 1997. This decrease was primarily due to the interest
expense we incurred from borrowings under our line of credit during 1998 to
support our internal growth.
Net Income (Loss). Net income decreased $626,000, or 44.0%, to $796,000 in
1998 from $1.4 million in 1997. As a result of the above factors, the net margin
decreased to 8.7% in 1998 from 18.4% in 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues. Revenues increased $2.2 million, or 38.8%, to $7.7 million in
1997 from $5.6 million in 1996. This increase in revenues primarily reflected an
increase in the number of customers to 15 in 1997 from eight in 1996.
Direct Costs. Direct costs increased $743,000, or 36.1%, to $2.8 million
in 1997 from $2.1 million in 1996. As a percentage of revenues, direct costs
decreased slightly to 36.3% in 1997 from 37.0% in 1996. The slight decrease
during 1997 as a percentage of revenues was primarily attributable to our higher
utilization rates in 1997. The average utilization rate increased to 79.9% in
1997 from 72.8% in 1996.
Gross Profit. Gross profit increased $1.4 million, or 40.3%, to $4.9
million in 1997 from $3.5 million in 1996. Because of increased revenues derived
from larger headcount and an increase in utilization rates, the gross margin
increased to 63.7% in 1997 from 63.0% in 1996.
General and Administrative. General and administrative expenses increased
$744,000, or 37.0%, to $2.8 million in 1997 from $2.0 million in 1996. As a
percentage of revenues, general and administrative expenses decreased slightly
to 35.7% in 1997 from 36.1% in 1996. Our higher expenses resulted from an
increase in the number of general and administrative personnel, expansion of our
facilities in Reston, VA and a full year of expenses from the opening of a new
office in the metropolitan area of Chicago, IL in May 1996. The slight decrease
as a percentage of revenues reflects the greater operating leverage from
spreading these expenditures over a larger revenue base.
Sales and Marketing. Sales and marketing expenses increased $529,000, or
227.7%, to $760,000 in 1997 from $232,000 in 1996. As a percentage of revenues,
sales and marketing expenses increased to 9.9% in 1997 from 4.2% in 1996. This
increase was primarily due to increased travel and marketing activities.
Operating Income (Loss). Operating income increased $139,000, or 11.1%, to
$1.4 million in 1997 from $1.3 million in 1996. As a result of the above
factors, the operating margin decreased to 18.1% in 1997 from 22.7% in 1996.
Other Income, Net. Net other income increased $6,000, or 35.5%, to $24,000
in 1997 from $17,000 in 1996. This increase was primarily due to the interest
income earned on higher average cash balances maintained during 1997.
Net Income (Loss). Net income increased $146,000, or 11.4%, to $1.4
million in 1997 from $1.3 million in 1996. As a result of the above factors, the
net margin decreased to 18.4% in 1997 from 23.0% in 1996.
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<PAGE> 23
QUARTERLY RESULTS OF OPERATIONS
The following table presents unaudited quarterly financial data for the
periods indicated. We derived this data from our unaudited financial statements,
and in our opinion, they include all adjustments, which consist only of normal
recurring adjustments, necessary to present fairly the financial results for the
periods. Our quarterly operating results have varied significantly in the past
and will continue to do so in the future due to a number of factors including,
but not limited to, changes in average billing rates, utilization rates and
personnel additions, as well as the timing of expenses. Accordingly, our results
for any given quarter or series of quarters are not necessarily indicative of
our results for any future period. However, our quarterly operating results may
represent trends which aid in understanding our business.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30,
1997 1997 1997 1997 1998 1998 1998
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATION DATA
Revenues........................ $1,727 $2,016 $2,130 $1,839 $1,633 $1,560 $2,585
Gross profit.................... 1,136 1,295 1,404 1,077 720 664 1,617
Operating expenses:
General and administrative.... 649 702 692 711 440 569 729
Sales and marketing........... 201 206 188 165 218 453 486
Stock compensation............ -- -- -- -- -- -- 28
Operating income (loss)......... 286 387 524 201 62 (358) 374
Net income (loss)............... $ 294 $ 394 $ 533 $ 201 $ 73 $ (354) $ 381
====== ====== ====== ====== ====== ====== ======
AS A PERCENTAGE OF REVENUES
Revenues........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit.................... 65.8 64.2 65.9 58.6 44.1 42.6 62.6
Operating expenses:
General and administrative.... 37.6 34.8 32.5 38.7 26.9 36.5 28.2
Sales and marketing........... 11.6 10.2 8.9 9.0 13.4 29.1 18.8
Stock compensation............ -- -- -- -- -- -- 1.1
Operating income (loss)......... 16.6 19.2 24.5 10.9 3.8 (23.0) 14.5
Net income (loss)............... 17.0% 19.5% 25.0% 10.9% 4.5% (22.7)% 14.7%
====== ====== ====== ====== ====== ====== ======
<CAPTION>
QUARTER ENDED
---------------------------------
DEC. 31, MAR. 31, JUNE 30,
1998 1999 1999
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
STATEMENT OF OPERATION DATA
Revenues........................ $3,364 $4,178 $ 5,246
Gross profit.................... 2,399 2,648 3,303
Operating expenses:
General and administrative.... 987 1,294 1,124
Sales and marketing........... 666 771 949
Stock compensation............ 41 19 13,266
Operating income (loss)......... 705 564 (12,036)
Net income (loss)............... $ 696 $ 575 $(12,022)
====== ====== ========
AS A PERCENTAGE OF REVENUES
Revenues........................ 100.0% 100.0% 100.0%
Gross profit.................... 71.3 63.4 63.0
Operating expenses:
General and administrative.... 29.4 30.9 21.4
Sales and marketing........... 19.8 18.5 18.1
Stock compensation............ 1.2 0.4 252.9
Operating income (loss)......... 20.9 13.5 (229.4)
Net income (loss)............... 20.7% 13.8% (229.2)%
====== ====== ========
</TABLE>
Revenues. For the three quarters ended September 30, 1997, the
quarter-to-quarter revenue increases were primarily a result of increases in
utilization rates from 73% to 93%. Revenues declined from the quarter ended
December 31, 1997 through the quarter ended June 30, 1998 because the
utilization rates decrease from 75% to 52% which was offset by a billing rate
increase of $45.00 average per hour over the same period. For the period ended
September 30, 1998 through June 30, 1999, revenues increased primarily as a
result of increases in utilization rates from 86% to 92% and increases in
billable personnel from 31 to 58.
Operating expenses. General and administrative expenses as a percentage of
revenues generally declined during the periods shown, reflecting greater
operating leverage from spreading these expenditures over a larger revenue base.
Increases in the second and fourth quarters relate to our annual technical
offsite meeting held in the second quarter and our annual company meeting held
in the fourth quarter. Sales and marketing expenses as a percentage of revenues
decreased from March 31, 1997 through December 31, 1997 due to increased
operating leverage. Beginning in the first quarter of 1998 through the second
quarter of 1999, the sales and marketing expenses as a percentage of revenues
increased due to the expansion of our direct sales force and the establishment
of a marketing function. Stock compensation expense beginning in the quarter
ended September 30, 1998 through the quarter ended June 30, 1999 represented the
vesting of options granted at a value below fair market value.
LIQUIDITY AND CAPITAL RESOURCES
In September 1999, we renewed our line of credit with Merrill Lynch
Business Financial Services Inc. under which we are entitled to draw up to $2.5
million in borrowings. We intend to use any borrowings under the line of credit
for working capital purposes. The interest rate on amounts borrowed under the
line of credit is calculated using the 30-day dealer commercial paper rate as
quoted in The Wall Street
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<PAGE> 24
Journal, plus 2.65% per annum. The credit facility expires in September 2000.
Any borrowings under the line of credit will be secured by all of our assets.
The line of credit requires our financial ratios to be in compliance with the
debt covenants. At June 30, 1999, we had no outstanding borrowings under the
line of credit.
Cash and cash equivalents were $869,000 at June 30, 1999, $612,000 at
December 31, 1998 and $690,000 at December 31, 1997. Net cash provided by
operating activities was $659,000 for the period ended June 30, 1999, $731,000
in 1998, $1.0 million in 1997 and $1.1 million in 1996. Capital expenditures of
$187,000 for the six months ended June 30, 1999, $249,000 in 1998, $80,000 in
1997 and $279,000 in 1996, were used primarily for computer equipment, office
equipment and leasehold improvements related to our growth. Capital expenditures
for the remainder of 1999 are expected to be $210,000 and will be made
principally for computer equipment, internally used software purchases and
leasehold improvements to support our growth.
We expect to fund $604,000 of the S corporation distribution out of the
proceeds of this offering and the balance of the S corporation distribution will
be paid out of cash from operating activities.
We anticipate that the net proceeds of this offering, together with
existing sources of liquidity and funds generated from operations, should be
adequate to fund our currently anticipated cash needs through at least the next
18 months. To the extent we are unable to fund our operations from cash flows,
we may need to obtain financing from external sources in the form of either
additional equity or indebtedness. There can be no assurance that additional
financing will be available at all, or that, if available, the financing will be
obtainable on favorable terms.
YEAR 2000 READINESS DISCLOSURE
Many currently installed computer systems and software products are coded
to accept only two-digit year entries in the date code field. Consequently, on
January 1, 2000, many of these systems could fail or malfunction because they
may be unable to distinguish 21st century dates from 20th century dates. As a
result, computer systems and software used by many companies, including us, our
customers and our potential customers, may need upgrades to comply with year
2000 requirements.
To become ready for year 2000, in 1999 we upgraded our network and
operating systems and purchased year 2000 compliant servers, workstations,
software packages and peripheral devices. We have also purchased year 2000
compliance testing software which we have used to test our systems. These tests
resulted in no material failures. As a result of our upgrades, new purchases and
our year 2000 testing, we believe that our principal internal systems are year
2000 compliant. However, the Company will continue to assess and test our
internal systems to ensure that all additions and/or modifications to our
systems meet the Company's specifications for year 2000 compliance. Because we
and our customers depend, to a very substantial degree, upon the proper
functioning of our computer systems, a failure of our systems to correctly
recognize dates beyond December 31, 1999 could materially disrupt our operations
and adversely affect our business, financial condition and results of
operations.
The year 2000 problem may also affect third-party software products that
are incorporated into the business systems that we create for our customers. Our
customers license software directly from third party suppliers, but at our
customers' request, we will discuss year 2000 issues with these suppliers and
will perform internal testing on their products. We do not guarantee that the
software licensed by these suppliers is year 2000 compliant. Any failure on our
part to provide year 2000 compliant e-business systems to our customers could
result in financial loss, harm to our reputation and liability to others.
We do not currently have any information concerning the year 2000
compliance status of our customers nor do we intend to examine our customers for
year 2000 compliance. Our current or potential customers may incur significant
expenses to achieve year 2000 compliance. If our customers are not year 2000
compliant, they may experience material costs to remedy problems or may face
litigation costs. In either case, year 2000 issues could reduce or eliminate the
budgets that current or potential customers could have for purchases of our
services. In addition, we anticipate that some of our customers will put
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<PAGE> 25
restrictions on new software being placed into operation within their systems
environment in the final four to six weeks of 1999. As a result, our business,
financial condition and results of operations could be adversely affected.
We have funded the costs to become year 2000 compliant from operating cash
flows and have not separately accounted for these costs in the past. To date,
these costs have not been material. We will incur additional costs related to
year 2000 compliance for administrative personnel to manage the process of
remaining year 2000 compliant. The possibility exists that we may experience
problems and costs with year 2000 compliance, which could divert management's
time from ordinary business activities and have a material adverse effect on our
business, financial condition and operating results. The worst case scenario for
year 2000 problems for us would be the need to cease normal operations for an
indefinite period of time while we attempt to respond to our own year 2000
problems.
Our year 2000 contingency plan is now completed. The cost of maintaining
our plan is not expected to be material.
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<PAGE> 26
BUSINESS
OVERVIEW
Cysive is a leading software engineering firm that designs and builds
complex, highly customized systems supporting large scale e-businesses.
E-businesses are companies that conduct a significant portion of their business
through electronic commerce channels which are integrated with their existing
internal systems, such as accounting, billing, manufacturing and inventory
control. Since commencing operations in 1994, we have used advanced Internet
technologies to build our customers' e-business capabilities. We design software
systems which can handle high volumes of customer transactions, operate reliably
on a 24/7 basis and expand to meet the growth requirements of large scale
e-businesses. Due to the advanced technologies necessary to complete our
projects, we employ software engineers with an average of 10 years of experience
who use a well-defined process to deliver reliable and secure custom systems on
a timely basis.
Given our technology expertise, we target corporate customers who require
highly complex systems to meet the growth demanded by their e-business
strategies. For example, our software engineers, in collaboration with Cisco
Systems, Inc., built Cisco's Internetworking Products Center, or IPC. The IPC is
one of the world's largest Internet commerce sites and accounted for
approximately 60% of Cisco's fiscal 1999 total revenues of $12.2 billion. In
addition to Cisco, we have built systems for customers including Classified
Ventures, Inc./Cars.com, DaimlerChrysler Corporation, Equifax Secure, Inc.,
First Union Corporation, Sylvan Prometric and UUNet Technologies, Inc. Our
industry leadership is reflected in the quality of our customer base and our
high revenue per software engineer as compared to our competitors.
INDUSTRY BACKGROUND
In the mid-1990s, a first wave of commercial Internet usage achieved
widespread adoption. The Internet brought technology standardization to business
through a common set of protocols, languages and applications, such as HTTP,
HTML and web browsers. Although many companies comprehended the magnitude of
potential technological and communications advancements provided by the
Internet, they lacked the resources to implement Internet-based technologies.
The immediate objective for most companies at this time was to establish an
Internet presence. These companies used the Internet to communicate with
customers and launched their web sites as colorful online marketing brochures.
With little ability to automate business processes or execute transactions,
these sites were maintained separately from the enterprise systems at the core
of the business which, in turn, had not been designed to communicate with the
standards-based software of the Internet. Simple, small-scale functions such as
customer inquiries to the web sites were handled through text-based scripts,
such as CGI and Perl, which had neither the structure nor the capability of a
software program, but sufficed for this early-stage environment. As a result,
many of today's Internet professional services providers focus on providing
strategy, design and technology services to enable companies to build an initial
presence on the Internet rather than the specialized technology expertise
required to create successful e-businesses which are capable of accommodating
rapid growth.
Today, we believe a second wave is beginning, spearheaded by the companies
whose use of the Internet has evolved from a marketing orientation to a
business, or transactional, orientation. For these companies, the web site has
quickly evolved from a simple marketing tool into an advanced software
application at the core of their businesses. International Data Corporation
estimates U.S. corporate Internet spending to increase from $85 billion in 1999
to $203 billion by 2002. Many companies are building their information
technology systems to transact directly, seamlessly and instantaneously with
customers, suppliers, partners and distributors around the world. These
e-business capabilities are rapidly creating new markets, communications
channels and revenue growth opportunities, while enabling companies to reduce
costs, improve operating efficiencies, shorten cycle times and improve
communications.
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<PAGE> 27
To truly automate all of the functions associated with an e-business
transaction, companies cannot simply link Internet customers directly to their
existing internal systems. These existing systems were designed for a defined
number of specifically trained employees. In addition, each system typically was
built to provide a very specific function such as accounting, billing, product
configuration, manufacturing or inventory control. As a result, with each system
serving distinct purposes, it is extremely difficult for a customer to have a
user-friendly, customer service focused experience without significant
integration of existing internal systems.
To integrate the existing internal systems, an advanced technology approach
is necessary in which business logic, or all of the business procedures and
rules, is built into a set of core software applications that bridges these
existing systems with the Internet. These core software applications handle all
of the business functions that previously could only be executed by specially
trained personnel, including preferred customer discounting, credit approval,
product configuration, pricing, billing, accounting, inventory control and order
and delivery scheduling. A successful e-business system must present business
functions to customers in a simple format, yet provide comprehensive access to
all of the information and transactional capabilities the business has to offer.
In addition, the software systems that integrate the Internet with the existing
internal systems must be carefully designed to handle extremely large volumes of
Internet traffic and ensure 24/7 reliability. These types of systems require
software engineering expertise in areas like: load balancing to spread traffic
across servers; caching to make data access immediate; thread and connection
pooling to optimally use system resources; and data conversion to convert data
into usable Internet formats. These systems use a component-based design which
is flexible and extensible to meet the needs of the business as it grows.
Advantages achieved by e-businesses that were the first to conduct business
on the Internet will be lost if their transactional systems cannot handle
increased user demand. Therefore, we believe a greater portion of future
corporate Internet spending will be in the implementation and integration of
advanced Internet systems. Companies like Cysive that have the Internet
technology expertise, a defined, repeatable and rigorous process and a proven
track record in building e-business systems will drive business on the Internet.
THE CYSIVE SOLUTION
Cysive engineers and deploys advanced systems that enable our customers to
transact business electronically. To build the e-business systems demanded by
our customers, we emphasize the following key elements:
ADVANCED E-BUSINESS SYSTEMS
The core of our business is to design and build complex, highly customized
systems based on Internet technologies. Our expertise lies in building the
systems driving large scale e-businesses. For example, Cysive built the software
application for First Union Corporation's online automated account stand-in
system which is accessible through multiple channels by First Union's more than
16 million retail and corporate customers. When First Union's mainframe-based
systems become overloaded, this system stands-in for all online channels,
including interactive voice response and the Internet. We believe our ability to
successfully deploy truly large scale systems is a key point of differentiation
in our market. Furthermore, the knowledge and confidence gained from building
customized systems critical to our customers' businesses generates a high level
of repeat business from our customers. For example, in the first half of 1999,
75% of our customers from whom we generated over $100,000 of revenues were
customers in prior years. In addition, our focus on the latest, most advanced
technology helps us to recruit highly experienced software engineers who desire
a culture and environment that takes pride in implementing the newest
technologies.
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<PAGE> 28
HIGHLY EXPERIENCED SOFTWARE ENGINEERS
The integration of existing and emerging technologies required to build our
customers' e-business systems is highly complex and requires expertise across a
broad array of technologies. Our software engineers must have extensive
knowledge in advanced technologies like XML, Java, C++, Distributed Objects,
like CORBA and DCom, and Relational and Object Database Management Systems. In
addition, they must have experience interfacing with older system technologies.
As a result, we employ software engineers with proven technology expertise and
many years of experience. Our software engineers have an average of 10 years of
experience. Furthermore, 92% of our software engineers have technical
undergraduate degrees and 51% have advanced degrees. This significant level of
experience enhances our teams' productivity and enables us to maximize our
utilization rates by making our software engineers interchangeable across
varying projects regardless of the technologies employed.
SWAT TEAM APPROACH
The high productivity of our experienced software engineers enables us to
build extensive e-business systems with Software and Technologies, or SWAT,
teams that are comprised of a small number of engineers. For example, with a
team of only six software engineers, we built Cisco Systems' Internetworking
Product Center, which, according to Cisco, generated approximately 60% of
Cisco's fiscal 1999 total revenues. We believe smaller teams increase
efficiency, enhance the ability of a team to share ideas, expertise and project
development information and reduce the margin for error. As a result, we believe
that by using our SWAT teams, we shorten the delivery time of a project and
increase the likelihood of success, reducing the overall project cost to the
customer. Through this approach, we are able to focus our customers on the total
value of the project, rather than on hourly billing rates. In addition, our
efficient, SWAT team approach allows us to quickly redeploy teams once a project
is completed and to grow our business without having to add large numbers of
software engineers. As a result of our high levels of productivity, we
consistently generate revenues per software engineer in excess of $325,000.
RIGOROUS DEVELOPMENT PROCESS
For every project undertaken, our software engineers adhere to the Cysive
development process. This approach begins with a comprehensive assessment of a
customer's needs followed by the development of a series of milestones comprised
of three distinct phases: analysis; design and development; and testing and
deployment. Having this well-defined process helps to mitigate risk and ensure
consistent quality, and enables us to build e-business systems more rapidly. The
Cysive development process also ensures that our customers have the flexibility
to continuously modify their projects as their needs evolve. By streamlining our
processes and producing noticeable efficiencies, the Cysive development process
helps to build customer confidence and consequently generate greater repeat
business.
SOPHISTICATED KNOWLEDGE MANAGEMENT
We have spent considerable resources to stay apprised of the latest
technologies and methods for implementing these technologies. Our technology
group continually evaluates new products to identify the most advanced
technologies and is also responsible for on-going proficiency training. We also
have a centralized knowledge base which our software engineers access through
our intranet and use to share their project experiences. This knowledge base is
accessible by Cysive software engineers anytime from any remote location through
our corporate intranet. Together, the technology group and our knowledge base
help to disseminate our accumulated project experience to all employees, enhance
the reusability of processes and accelerate the professional development of our
software engineers by keeping them abreast of new technologies.
THOROUGH QUALITY ASSURANCE PROCESS
We adhere to a thorough quality assurance process to identify and manage
risk. To distribute knowledge across our company and to help maintain
objectivity within each project, we use a project
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<PAGE> 29
manager from outside of a given project team to serve as the quality assurance
supervisor who monitors and evaluates a project's development. The supervisor is
responsible for a monthly review meeting and report focused on the scope,
schedule and cost of the project. As a result, all project managers are subject
to as well as oversee the quality assurance process. In addition to risk
management, our quality assurance approach facilitates the sharing of ideas and
technologies among project managers, enables us to grow our business while
maintaining high levels of quality and allows us to make objective, value-added
recommendations to our customers during the course of a project.
CYSIVE GROWTH STRATEGY
Our objective is to strengthen our position as a leading e-business
engineering firm. The key elements of our growth strategy are to:
ATTRACT AND RETAIN HIGHLY EXPERIENCED SOFTWARE ENGINEERS
Attracting and retaining qualified software engineers is critical to our
growth. We identify and attract seasoned software engineers through a broad
range of sources, including internal referrals, other technology companies and
technical associations, the Internet and advertisements in technical
periodicals. We place a strong emphasis on hiring software engineers who have
several years of industry experience and proven technical expertise. To ensure
that we hire qualified software engineers, we employ a seven-step recruiting
process that incorporates multiple examinations to evaluate a candidate's
technical qualifications. Our focus on complex projects, coupled with our
exacting recruiting standards, has created a culture that fosters proven
competence with advanced technologies and helps us to attract and retain highly
qualified personnel. For example, since January 1, 1999, we have hired 45% of
our existing software engineers based on internal referrals and believe that our
attrition rate of less than 5% is well below the industry average.
EXPAND EXISTING AND ESTABLISH NEW CUSTOMER RELATIONSHIPS
Our ability to further penetrate our existing customer base and establish
relationships with new customers is essential to our growth. Because our
strategy revolves around delivering highly customized e-business systems for our
customers' critical business applications, we approach the customer relationship
from a long-term perspective. We target corporate customers who are investing
significant resources on Internet-focused business strategies that require
complex technology systems. While further penetration of our existing customer
base is important, we aggressively seek new customer relationships through our
direct sales efforts, new marketing activities, referral-driven sales and
strategic technology partnerships.
EXPAND CYSIVE'S BRAND RECOGNITION
Our reputation and track record with customers are key to our success. To
augment the reputation and track record that we have established from
successfully implementing many e-business systems, we are launching an
aggressive marketing campaign aimed at chief executive officers, chief
information officers and electronic commerce managers to build brand recognition
and generate sales leads. Our success in communicating the Cysive brand will
drive our visibility with potential customers, industry partners and prospective
employees.
ENHANCE OUR GEOGRAPHIC PRESENCE
Continued geographic expansion gives us access to a broader base of highly
qualified software engineers and customers. We plan to establish a local
presence in several of the key technology markets to increase our visibility
with and ability to evaluate a larger number of potential software engineers.
Decreasing the travel burden placed on our software engineers should
significantly enhance our ability to hire and retain people with the skill level
we desire and help us to maintain our low attrition rates. Moreover, a broader
geographic presence will help us to service our existing customers better and to
establish new relationships. In addition, we intend to capitalize on local
offices to enhance our regional marketing efforts. We have already established
offices in the metropolitan areas of Washington, D.C., San
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Jose, CA, Atlanta, GA and Chicago, IL and plan to open offices in the
metropolitan areas of Los Angeles, CA and Dallas, TX.
CONTINUE TO BUILD AND DEPLOY ADVANCED TECHNOLOGIES
Deployment of advanced technologies is essential to our ability to deliver
customized e-business systems. The core systems that our software engineers
build for our customers serve as the foundation for future application
developments and, therefore, need to be reliable and secure. These systems must
also be able to sustain rapid growth without requiring significant modification.
These systems cannot be developed solely by using packaged applications but
instead require the integration of an array of existing and new technologies.
Maintaining a leadership position in understanding and using the latest
technologies is critical to our growth, and we will continue to dedicate
significant resources in this area. For example, we have established a
technology group with the primary objectives of keeping our software engineers
abreast of the latest innovations in technology and enabling each of them to
bring the acquired expertise to any customer project. Our software engineers
staff this group on a rotating basis to learn the practical intricacies of the
latest technologies and are able to subsequently disseminate their learning
across all areas of our company.
CASE STUDIES
The following are descriptions of representative projects which we have
completed, or in the case of Sylvan Prometric and Equifax Secure, Inc., are
ongoing. Financial and statistical data included in these descriptions have been
provided by the applicable customers.
CISCO SYSTEMS, INC.
Cysive SWAT Team Six software engineers over a period of 14 months.
Customer Description Cisco operates one of the world's largest Internet
commerce sites, generating electronic commerce
revenues of $32 million per day. The order
processing engine supporting this site is the
Internetworking Product Center, or IPC, through
which Cisco's largest enterprise customers have
exclusive access to tailor large, complex
networking solutions online and place their orders
directly with Cisco.
Customer Challenge In early 1997, the IPC handled 300 orders per day
over the Internet. As the IPC's popularity
increased, customer demand exceeded its capacity.
To ensure that the system could handle
significantly higher levels of customer demand,
Cisco needed to overhaul the IPC with a
state-of-the-art electronic commerce engine.
Cysive Deliverable Cysive worked with Cisco to identify system
requirements to support the growing complexity and
volume requirements of Cisco's online order demand.
The resulting server-side Java-based order
processing engine, built by Cysive's software
engineers in collaboration with Cisco and run on a
Cisco network, provides reliability, accelerated
performance and the ability to accommodate rapid
growth.
Key Features - By allowing the IPC to share data and system
resources across multiple transactions and by
maintaining continuous server connections
throughout long, complex transactions, the IPC
can process nearly 300% more orders, accounting
for nearly 60% of Cisco's $12.2 billion in
revenues for its 1999 fiscal year.
- Significant performance improvements were
realized. The speed of one-third of the most
commonly used application transactions increased
five to 10 times over previous levels, while the
speed of the remaining two-thirds doubled.
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- The new component-based IPC system provides
greater overall flexibility. Because we built the
system as a reusable set of components, in a
follow-on project we reused approximately 60% of
the code for another application in a new area of
the business, cutting the subsequent development
time in half.
CLASSIFIED VENTURES, INC./CARS.COM
Cysive SWAT Team Six software engineers over a period of four
months.
Customer Description Cars.com is a division of Classified Ventures, a
Chicago-based company formed by eight leading media
companies including The Tribune Company, Central
Newspapers, Inc., Gannett Co. Inc., The New York
Times Co. and The Washington Post Company. To begin
transitioning its offline classified listings
business to an Internet-based model, Classified
Ventures sought to develop Cars.com, a web site
that allows users to quickly search and locate
vehicles by make, model, location, price, mileage
and other attributes from across the nation.
Customer Challenge Cars.com needed a system that would allow a high
volume of users to quickly and easily find the car
they want, read auto reviews and expert car buying
advice, and obtain information on loans and leases.
After a competitor's system failed to meet high
volume demand, Classified Ventures turned to
Cysive.
Cysive Deliverable Cysive redesigned the Cars.com site, creating a
flexible system that can handle extremely high user
volumes. As of August 1999, the site served over
1.5 million page views per day with one million
unique visitors per month. In June 1999, Media
Metrix ranked the site as the second most
trafficked automotive site on the Internet. The
system enables real-time data from over 130
affiliate newspapers across the United States.
Key Features - Every page request on the Cars.com site employs
technology called Java servlets. Servlet
applications do not require the program to re-
execute for each request, which can slow down
performance. This design enables the system to
handle more transactions simultaneously.
- One of the key challenges to creating a flexible
system adaptable to millions of transactions per
day is to ensure that information is up-to-date
and reliable. At these traffic volumes, even the
most advanced databases are challenged to both
read and provide information and write and
maintain information. We created a system that
addresses this challenge by optimizing database
resources.
- We designed and delivered specialized caching
techniques that keep reusable information in the
middle tier of the application so it can be
quickly accessed without returning to the
database. This design helps to ensure data
integrity, performance and reliability.
- The component-based system allows for a high
degree of reuse as the system extends to include
new functions, enabling Cars.com to adapt and
change to market conditions. In addition, we have
been able to reuse many of these components for
other Classified Ventures projects.
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EQUIFAX SECURE, INC.
Cysive SWAT Team Eight software engineers over a period of four
months.
Customer Description Equifax Secure, Inc., a wholly owned subsidiary of
Equifax, Inc., provides electronic commerce
solutions that enable enterprises to authenticate
consumer identity, secure business applications and
manage digital certificates and directories for
highly secure, private electronic commerce over the
Internet and other networks.
Customer Challenge Equifax Secure's objective was to build a high
performance system on which to run Equifax Secure's
electronic commerce solution. Equifax Secure
solutions significantly reduce the risk, cost and
complexity of assuring the privacy and security of
electronic transactions over the Internet and other
networks. Equifax Secure offers a fee-based service
for corporate customers across a wide range of
industries that need to identify Internet users
with a high degree of certainty. Equifax Secure's
customers include companies such as eBay and
Security First National Bank.
Cysive Deliverable We built the Internet application software that
supports Equifax Secure's patent-pending, remote
consumer authentication process. The system queries
consumers for specific personal information,
matches the response to information in Equifax's
databases and other sources and evaluates the
information as to its reliability, reporting the
results back to the Equifax Secure customer.
Key Features - The system is designed to handle up to 4,000
concurrent users and handle 400 transactions per
minute.
- The system has been designed for flexibility and
to adapt to the future needs of Equifax. It
employs a component-based system that has
specific business functionality for consumer
authentication that is layered on top of
generalized services for infrastructure and data
access. These last two can be reused for
follow-on applications, reducing the cost and
time to market for Equifax Secure.
FIRST UNION CORPORATION
Cysive SWAT Team Three software engineers over a period of three
months.
Customer Description One of the nation's largest financial institutions,
First Union provides financial services to more
than 16 million retail and corporate customers.
Customer Challenge The ability to deliver account information to
customers with reliability and security is central
to First Union's business. First Union's objective
was to provide 100% reliable customer service in a
cost-effective manner, delivering account
information through automated channels such as
interactive voice response telephony and the
Internet. As the number of its customers increased,
First Union realized that it needed back-up for its
legacy systems to deal with unexpected volume
spikes and power outages, or for scheduled outages,
to maintain reliable 24/7 delivery of information.
Cysive Deliverable Cysive built a system that delivers balance and
transaction information to First Union account
holders. We designed the system to stand-in for all
online channels including the interactive voice
response
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telephony and the Internet, and to expand as First
Union's business grows.
Key Features - The new system can handle high volumes of
information with reliability and security. By
caching or storing the data for the most popular
customer inquiries between the mainframe and the
online channels, the design reduces the burden on
the system and improves performance.
- The system is designed to reduce the risk of
service failure by employing a highly available
software application running on highly available
servers. The application is designed to balance
transactions across multiple servers. If one or
more servers goes down, the application
automatically moves customer traffic to the
remaining redundant servers without an
interruption in service. The new system, in its
initial implementation, has stood in for 50% to
70% of voice response unit inquiries.
- By automating the account inquiry traffic, the
new system provides timely account information to
First Union customers, thereby reducing the
number of inquiries directed to the customer
service support center. The new system has the
potential to reduce First Union's costs on a per
call basis up to 80%.
SYLVAN PROMETRIC
Cysive SWAT Team 16 software engineers deployed on two different
ongoing projects.
Customer Description Sylvan Prometric is the technology-based testing
division of Sylvan Learning Systems, Inc., a
leading worldwide provider of computer-based
testing services. Sylvan operates 3,500 testing
centers in 130 countries and supports 35 monetary
currencies and 25 languages. Sylvan currently
delivers over 500,000 tests per month.
Customer Challenge Scheduling and registration of Sylvan Prometric
test candidates is a business process central to
the success of the company. To maintain its
leadership position, Sylvan continually seeks to
enhance and improve its processes and technologies.
Sylvan Learning Systems acquired a large competitor
several years ago and, to date, has been operating
with multiple, disparate scheduling and
registration systems. These systems needed to be
fully integrated to maximize the competitive value
of Sylvan's growing distribution channels and to
leverage Internet connectivity for its customers.
Cysive Deliverable We are developing a comprehensive system for all
worldwide registration and scheduling of test
candidates through the Internet, call centers and
an automated voice response telephony system. We
also are developing an underlying corporate
intranet-based system to provide Sylvan with an
efficient, lower cost means for managing key
business processes.
Key Features - Using Internet-based technologies and
infrastructures, Cysive is building a single,
centralized scheduling and registration resource
for Sylvan. With features such as automated
registration and scheduling for tests, electronic
reporting of test results and the ability to
store customer information including candidate
eligibility, candidate demographics and testing
history, Sylvan should be able to improve
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the efficiency and customer service of its
testing services while reducing operating costs.
- We are building an underlying intranet-based
system through which Sylvan can manage its
business processes such as: reporting
capabilities for global business operations;
integrating the financial system; and enabling
test centers around the world to administer their
own specific solutions for scheduling and
registration.
- This approach will consolidate and streamline all
activities associated with the scheduling and
registration process. Today, Sylvan handles most
registrations using call center representatives.
With the new system, Sylvan expects to generate
80% of the registrations through the Internet and
individual testing centers, significantly
reducing call center operating costs and
improving customer service and business
performance.
THE CYSIVE DEVELOPMENT PROCESS
Cysive uses a multi-phase development process that simplifies the
management of and reduces the risks associated with project development. Our
development approach starts with a comprehensive assessment that identifies the
scope, design, schedule and cost of building a customer's e-business system.
After this initial assessment, the project consists of incremental milestones
that produce deliverables over a time period which typically spans eight to 16
weeks. These milestones allow for a controlled, customized and repeatable
process that reduces costs and ensures delivery. Within each milestone, our
development process comprises three phases: analysis, design and development,
and testing and deployment. Throughout each milestone, Cysive project managers
perform routine quality assurance reviews to ensure we deliver the system on
time, on budget and with the appropriate functionality.
COMPREHENSIVE INITIAL ASSESSMENT
The Cysive assessment evaluates the customer's e-business strategy and
gives an immediate, clear and concise understanding of the e-business system
needed to meet our customer's business objectives. We provide a system blueprint
that details the high level design, including the system's key components and
processes, and the requirements, including every function and interaction, the
new system will deliver. We also produce a detailed project plan with our
recommendations for the organization, process, schedule, staffing and cost of
the project.
The assessment determines the project milestones required for successful
delivery. Each milestone has an inventory of specific related functions, and
within each milestone we complete the three phases of the Cysive development
process. By building, testing and deploying the system in milestone increments,
we ensure timely and accurate delivery of the system. Moreover, the milestones
can often be completed in parallel, significantly reducing the time to market of
the system.
THE DEVELOPMENT PROCESS: ANALYSIS PHASE
The analysis phase produces detailed requirements and system design
specifications to ensure smooth, predictable project execution. As part of this
phase, we deliver the following:
- Requirements Specification: We produce a detailed description of
functional needs as well as non-functional requirements, including
performance, reliability and security requirements.
- High Level Object Model: We develop a model that highlights the
software components of the system, its business functions and
interrelationships.
- Updated Project Plan: We update the schedule, tasks, resource
requirements and organization chart in the project plan.
- Technical and Software Design Specification: We specify software
partitioning, other products, protocols and deployment options.
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- Frameworks and Graphical User Interface Prototypes: We partially
develop the system that provides an early demonstration of its
functionality and conduct end-to-end testing to reduce risk.
THE DEVELOPMENT PROCESS: DESIGN AND DEVELOPMENT PHASE
During the design and development phase, we refine the system and write and
test the source code. As part of this phase, we deliver the following:
- Design Documentation: We provide sequence diagrams and a greater
level of detail to the object model developed in the prior phase.
- Source Code Written: We write the code to implement each business
function in the system.
- Testing: We begin with unit testing, followed by incremental
integration and regression testing.
- Functional System Demonstration: As we complete each milestone, a
demonstration of the systems' functionality becomes available for
review.
THE DEVELOPMENT PROCESS: TESTING AND DEPLOYMENT PHASE
The final phase of the Cysive development process starts during the
analysis phase when the project team evaluates and selects the best testing
tools for a customer's system test. A three-step testing process begins with:
- System Test and User Acceptance Planning: We detail the processes
for conducting the system test, define how and when performance and
stress testing will be conducted, detail reporting and tracking of
software defects and outline test team member roles.
- System Test: The system test requires completion of all milestones,
integration and regression testing. The system test team works
together with the development team to identify any defects in the
software, make appropriate fixes and execute additional test cycles
until all defects are eliminated.
- User Acceptance Test/Pilot: The last step in the testing phase
includes final testing of the software and release to a subset of
the user community. The pilot process develops a core group of users
to debug the system in its actual production environment and to help
accelerate training when made available to a broader user community.
- System Deployment: After final testing, we deploy the system and
monitor its performance through feedback from future milestones of
the project.
QUALITY ASSURANCE
Cysive's thorough quality assurance process mitigates risk and addresses
critical issues as they arise to ensure that we deploy our customers' e-business
systems successfully and on schedule. The mandatory process involves monthly
two-day evaluations conducted by a senior level software engineer who serves as
a supervisor to a project team. To distribute knowledge across our company and
to help maintain objectivity within each project, we use a project manager from
outside of a given project team to serve as the quality assurance supervisor who
monitors and evaluates a project's development. This supervisor is responsible
for a monthly review meeting and report focused on the scope, schedule and cost
of the project. This senior level supervisor evaluates the status reports,
assists in the resolution of technical problems and ensures adherence to the
development process. In addition, the supervisor is responsible for continually
assessing a customer's internal processes and helps to make objective,
value-added recommendations to our customers. This process imposes a discipline
to our projects that helps to shorten time-to-deployment cycles by as much as
one to three months. In addition to ensuring a high quality deliverable, the
quality assurance process helps to give our software engineers valuable project
experience. By making every one of our senior software engineers responsible for
quality assurance, the process facilitates the sharing of knowledge and helps us
to maintain high levels of quality as we scale the
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business. In addition, throughout the quality assurance process, project
documentation and data are continually fed into our knowledge base.
KNOWLEDGE MANAGEMENT
We spend considerable resources implementing practices by which we stay
apprised of the latest technologies and the methods for applying these
technologies which we refer to as our knowledge management process.
TECHNOLOGY GROUP
Our technology group comprises four full-time software engineers who lead
our efforts in research and development, training and information exchange.
Members of the technology group serve as practice leaders for our software
engineers in the latest technologies, languages, tools and environments.
Accordingly, their primary job is to continually lead the evaluation of new
products to identify advanced technologies and disseminate this information
throughout our company using the knowledge base. As a result of the resources we
commit and the expertise of our technology team, our software engineers employ
the latest proven software engineering tools, multi-tier systems and frameworks.
By pre-screening all of our tools and technologies, we are able to design
advanced systems and consistently deliver proven results on critical business
projects. In addition, while our technology group has industry leading
experience in technologies including XML, Java, C++, Internet application
servers, Distributed Objects including CORBA and DCom, and Relational and Object
Database Management Systems, we spend significant resources on developing the
most advanced technologies. For example, our technology group is currently
researching new technologies like Natural Language Processing and Model-Based
Reasoning. In addition, our technology group is responsible for ongoing
proficiency training and the certification testing for all of our software
engineers.
KNOWLEDGE BASE
Over the past two years, Cysive has spent significant resources building an
extensive knowledge base. The knowledge base, which our software engineers
access from remote locations via a secure corporate intranet, is the central
repository for detailed information on every customer project Cysive conducts.
For each system being built, the knowledge base contains a project file
detailing customer information, a description of the project including the
requirements analysis, project plans, system designs and quality assurance
reviews, and a list of the technology products utilized on the project. Finally,
the knowledge base also contains relevant white papers, technical tips and
technology articles that may be of interest to our software engineers.
This knowledge base, which enables us to leverage and reapply our
accumulated experience, is a critical resource for both our software engineers
and management. Using the knowledge base's powerful search and display tools,
users can quickly traverse information links to related information and
documents. As a result, our software engineers can readily reference plans and
specifications from prior projects. This real-time access to information enables
our software engineers to condense the delivery time and to mitigate the
potential problems of a project by identifying those techniques and products
that have already been successfully employed in similar systems. In addition, by
providing information on project progress and customer needs, the knowledge base
helps management prepare for customer meetings and project reviews.
A key component of the knowledge base is the technology pipeline, which is
our repository of evaluations of technologies, tools and products. Prior to use
on a customer project, all products are carefully evaluated. The technology
pipeline contains reviews of over 115 products in 22 technology categories.
While the technology pipeline is an invaluable resource for our software
engineers, it is also an important method by which we conduct training and
development. The evaluation process that we employ involves all of our software
engineers. While between projects, our software engineers, under the direction
of our technology team, work on one or more of the seven stages we have outlined
in the evaluation of a
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product. Having our software engineers conduct these evaluations affords them
the opportunity to continually work with a variety of new technologies. A
product can then be used on a customer project once it has successfully
completed all of the stages of the Cysive evaluation process. Initial
implementation of new technologies are generally performed by the software
engineers who were part of the technology's evaluation team. In this manner, we
ensure that our customers receive both a proven technology and a team of
software engineers with expertise to deliver that technology.
CULTURE
We continue to build our corporate culture around a common set of values
based on excellence, discipline and results. Our software engineers understand
that we hire only high caliber technical people because our customers demand a
high level of execution. We believe we have instilled in our software engineers
the sense of challenge as well as pride in having helped to build some of the
most technically complex systems in today's e-business environment. By growing
our business internally, we have been able to instill this value set to all of
our professionals on an individual basis. Our culture contributes to our low
attrition rate of less than 5%.
While we focus on excellence and quality, we also foster and maintain a
culture based on innovation, challenge and teamwork to attract and retain the
level of software engineer we demand. In addition, we attempt to create an
environment that promotes cooperative relationships and encourages teamwork. To
ensure rapid deployment of our software engineers, we promote flexibility, speed
and open communication. In addition, to ensure continued development of our
technical staff, we place a high priority on training. We conduct training in a
number of important ways by:
- requiring time for training, so that our software engineers have the
opportunity to assess and master emerging technologies;
- mandating an initial two-week boot camp for new employees;
- conducting two annual company meetings centered around technical
themes;
- sending our software engineers to conferences after which they are
required to write white papers for internal distribution;
- providing training in preparation for three levels of technical
certification;
- purchasing reference materials for our software engineers who in
return write reviews of the materials; and
- offering ongoing internal technology seminars.
RECRUITING
Cysive's continued success and growth depends on our ability to attract and
retain high caliber technical talent. We have a stringent recruiting process
that ensures the technical capability of all of our hires. Given the importance
of recruiting to our company, every professional within Cysive is dedicated to
our recruiting efforts, from our six technical recruiting experts to our
software engineers, management and sales and marketing staff.
We target software engineers with extensive experience and demonstrated
expertise working throughout the technology development lifecycle, from analysis
and design through the development, testing and deployment of complex technical
solutions. Only software engineers with this depth and range of technology
expertise possess the skills required to design and build e-business systems
that integrate advanced Internet-based technologies with multiple existing
internal systems.
We employ a seven-step hiring process. After initially seeking and
identifying candidates who meet our rigorous standards, our recruiting experts
conduct an initial phone interview with technical questions to screen for high
caliber talent. Candidates then take an hour-long technical test, proceed to a
project manager-level technical screen, face-to-face interviews with a regional
director, project manager and software engineers and a discussion with a senior
executive officer. We maintain a detailed candidate pipeline that tracks all
steps of the process. The capability to analyze this data by skill level, years
of
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experience, region, salary, source, recruiter, visa status and time-to-close
allows us to constantly monitor and improve our recruiting efforts.
To attract potential software engineers, we target multiple functional
areas. We have a number of recruiting efforts aimed at the local, regional and
national markets to help us identify the industry's most seasoned technical
talent. Since January 1, 1997, we have built a reference database which is
comprised of internal referrals from our software engineers and has accounted
for 45% of our hires to date. We also research and identify companies and
technical associations with suitable technical talent and employ advanced
Internet search capabilities to identify potential candidates. Finally, we
advertise in technical and trade periodicals that appeal to software engineers.
SALES AND MARKETING
Our sales efforts are targeted at corporate customers who are investing
significant resources in their e-business strategies and consequently require
complex technology systems to meet the growth of these strategies. We have a
sales force of 15 professionals that covers three geographic regions: east,
central and west. In each region, we have a senior regional sales manager and a
supporting team of account managers. By structuring our sales organization along
geographic lines and separating account management from delivery, we are better
able to capitalize on regional opportunities and provide higher levels of local
account management and support to our customers. In working with our customers,
we employ a collaborative sales approach that combines the business and
technical knowledge of our salespeople and software engineers. While the account
managers have responsibility for the business aspects of a customer
relationship, they are also held accountable for project progress and delivery.
As a result, they must work closely with the project teams to ensure the
successful completion of all customer projects.
Given our successful completion of several high profile e-business systems,
many sales leads result from referrals. In addition, our sales force actively
generates leads through a combination of direct mail, targeted events with
industry thought leaders and cooperative marketing with industry partners. To
augment our sales efforts, we also have a separate marketing effort comprised of
four professionals. Cysive's marketing group focuses on two key objectives.
First, we focus on building brand recognition at a national level to drive
business growth and support our recruiting efforts. Second, we focus on
developing and cultivating leads for the sales force amongst our target audience
of chief executive officers, chief information officers and electronic commerce
managers. To achieve these objectives, we employ a consistent communication
strategy based on standards for our logo, corporate identity, visual elements
and messages across all marketing channels. In addition, to enhance our brand
reputation and credibility, we utilize:
- a public relations program focused on building awareness and
recognition through industry and business press, industry analysts
and major industry forums;
- a comprehensive web site focused on customer case studies and
testimonials;
- national and regional advertising;
- on-site marketing programs at customer projects to enhance
visibility within the customer environment; and
- seminars to increase the visibility of our executives and provide
lead generation opportunities.
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CUSTOMERS
The following is a representative list of our customers for 1998 and the
current year.
<TABLE>
<S> <C>
AT&T Corp. John Deere & Co., Inc.
CareerPath.com, Inc. Knight Ridder New Media
Cisco Systems, Inc. LeapIT.com
Classified Ventures, Inc./Cars.com Medibuy, Inc.
DaimlerChrysler Corporation MicroStrategy, Inc.
Equifax Secure, Inc. Qualcomm, Inc.
First Union Corporation Sylvan Prometric
Fleet Bank UOP, Inc.
Hub Group, Inc. UUNET Technologies, Inc.
</TABLE>
In 1998, our five largest customers represented 65.3% of our revenues:
Cisco Systems, Inc., 19.6%; Classified Ventures, Inc./Cars.com, 18.0%; Sylvan
Prometric, 12.5%; DaimlerChrysler Corporation, 8.5%; and First Union
Corporation, 6.7%. For the six-month period ended June 30, 1999, our five
largest customers represented 82.5% of our revenues: Sylvan Prometric, 35.1%;
Classified Ventures, Inc./Cars.com, 15.2%; Equifax Secure, Inc., 13.4%; Cisco
Systems, Inc., 10.2%; and UUNet Technologies, Inc. 8.6%. The volume of work that
we perform for a specific customer is likely to vary from period to period, and
a significant customer in one period may not use our services in a subsequent
period. In addition, a failure to collect a large account receivable from any of
these customers could significantly reduce our assets and adversely affect our
business, financial condition and results of operations.
COMPETITION
The e-business engineering market is intensely competitive and faces rapid
technological change. We expect the competition to continue and intensify, which
could result in price reductions, reduced profitability and loss of current or
future customers. Our competitors fall into four major categories:
- Internet professional services providers, such as Proxicom, Inc.,
Scient Corporation and Viant Corporation;
- internal information technology departments of current and potential
customers;
- large information technology consulting services providers, such as
Andersen Consulting LLP, Electronic Data Systems Corporation,
International Business Machines Corporation and
PricewaterhouseCoopers, LLC; and
- traditional information technology services providers, such as
Sapient Corporation.
Many of our competitors have longer operating histories and customer
relationships, greater financial, technical, marketing and public relations
resources, larger customer bases and greater brand or name recognition than we
have. Our competitors may be able to respond more quickly to technological
developments and changes in customer needs. This may place us at a disadvantage
in responding to our competitors' pricing strategies, technological advances,
advertising campaigns, strategic partnerships and other initiatives. In
addition, there are low barriers to entry into our business because the costs to
provide information technology services are relatively low. We do not own any
technologies that preclude or inhibit competitors from entering our industry.
Therefore, we expect to continue to face additional competition from new
entrants into our industry.
We believe that the principal competitive factors in our business are:
- advanced technical knowledge;
- the reputation and experience of professionals delivering services;
- customer value and service;
- the success and reliability of the delivered system; and
- the ability to attract and retain highly skilled, experienced
professionals.
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We believe that we presently compete favorably with respect to each of
these factors. The market for our services is evolving, however, and we may be
unable to compete successfully in the future.
EMPLOYEES
As of October 13, 1999, we had 132 employees, of whom 84 were software
engineers. Of these 84 software engineers, 32, or 38.1%, are working in the
United States under an H-1B visa. Moreover, 25 of our software engineers who are
working under H-1B visas have applied for permanent residency with the U.S.
Immigration and Naturalization Service. We believe our relationship with our
employees is good. None of our employees is represented by a union.
INTELLECTUAL PROPERTY RIGHTS
Our proprietary knowledge base and other intellectual property rights that
we develop for our customers are an integral part of our business. While
ownership of custom work product is generally retained by the customer, we
retain a royalty-free license to use some or all of the applications, processes
and intellectual property developed in connection with customer projects. This
information is accessible on our knowledge base only to our employees via our
secure corporate intranet. We enter into confidentiality agreements with our
employees, generally require that our software engineers and customers enter
into similar agreements and limit access to and distribution of our knowledge
base. In addition, we will enter into non-competition agreements with all of our
key employees upon completion of this offering. The steps we have taken in this
regard may not be adequate to deter misappropriation of our proprietary
information, and we may be unable to detect unauthorized use and take
appropriate steps to enforce our intellectual property rights.
FACILITIES
Our principal headquarters is located in Reston, VA. The lease for our
headquarters expires in June 2003. We also have offices in the metropolitan
areas of Chicago, IL, San Jose, CA, Atlanta, GA and plan to open offices in the
metropolitan areas of Los Angeles, CA and Dallas, TX. We do not own any real
estate. We do not consider any specific leased location to be material to our
operations and believe that equally suitable alternative locations are available
in all areas where we currently do business.
LEGAL PROCEEDINGS
We are not a party to any pending material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEE AND DIRECTORS
The following table presents information about each of our executive
officers, key employee and directors.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
Nelson A. Carbonell, Jr................... 36 Chairman of the Board, President, Chief
Executive Officer and Founder
John R. Lund.............................. 37 Chief Financial Officer, Treasurer,
Secretary and Director
Michael E. Price.......................... 51 Chief Technology Officer
Robert C. Rubinstein...................... 58 Chief Operating Officer
Joseph M. Rymsza.......................... 32 Vice President, Sales
John M. Saaty............................. 31 Vice President, Marketing
Penny J. Jobin............................ 43 Director of Recruiting
Jon S. Korin.............................. 45 Director
Eric J. Magleby........................... 38 Director and Founder
John M. Sabin............................. 44 Director
</TABLE>
Nelson A. Carbonell, Jr. founded Cysive and has served as President, Chief
Executive Officer and Chairman of the board of directors since we commenced
operations in 1994. From February 1991 until March 1994, Mr. Carbonell served as
Director of Commercial Systems, Inc. at PRC, Inc., now a subsidiary of Litton
Industries. PRC Inc. is a leading provider of information technology and
systems-based solutions for the U.S. government and commercial customers. Mr.
Carbonell serves on the Executive Committee of the Washington-Baltimore Young
President's Organization. Mr. Carbonell received a B.S. in Electrical
Engineering from George Washington University in 1985.
John R. Lund has served as our Treasurer since December 1995, our Chief
Financial Officer since April 1997 and our Secretary since April 1999. From
December 1995 until April 1997, Mr. Lund served as our Vice President of
Finance. From December 1994 until December 1995, Mr. Lund was Vice President of
Finance for Public Sector, Inc., a subsidiary of PRC, Inc. From January 1992
until December 1994, Mr. Lund served as Director of Management Reporting and
Budgets for PRC, Inc. Mr. Lund received a B.S. in Accounting from Brigham Young
University in June 1986. Mr. Lund has been a director since April 1999.
Michael E. Price has served as our Chief Technology Officer since November
1997. From October 1995 until November 1997, Mr. Price served as our Vice
President of Technology. From October 1993 until October 1995, Mr. Price served
as a member of the technical staff of MRJ Technology Solutions, a provider of
information systems and engineering services primarily to the U.S. government.
Robert C. Rubinstein has served as our Chief Operating Officer since July
1999. From March 1999 until July 1999, Mr. Rubinstein served as our Vice
President of Consulting. From August 1997 until March 1999, Mr. Rubinstein
served as Vice President of the Communications Operations and Maintenance
Support Sector of MRJ Technology Solutions, managing their Computer &
Communications Support and Communications Operations and Maintenance Support
contracts. From August 1994 until August 1997, Mr. Rubinstein served as the
Director of the Network Systems Division of MRJ and was responsible for
government and commercial networking and enterprise application development. Mr.
Rubinstein received a B.A. in Mathematics from California State University at
Los Angeles in 1963.
Joseph M. Rymsza has served as our Vice President of Sales since March
1998. From October 1991 until February 1998, Mr. Rymsza served in numerous
domestic and international sales management capacities for Object Design, Inc.,
a developer of object-oriented databases. Mr. Rymsza received a B.S.E.E. in
Electrical and Computer Engineering from the University of Notre Dame in 1989.
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<PAGE> 42
John M. Saaty has served as our Vice President of Marketing since July
1999. From December 1998 until June 1999, Mr. Saaty served as our Director of
Marketing. From August 1995 until November 1998, Mr. Saaty served as a brand
manager for Intel Corp. responsible for microprocessor brand strategy and
marketing, and as a product marketing manager for consumer desktop PCs. Mr.
Saaty received a B.A. in English from Northwestern University in 1990 and an
M.B.A. in Marketing from The Wharton School of the University of Pennsylvania in
1995.
Penny J. Jobin has served as our Director of Recruiting since September
1995. From January 1993 until August 1995, Ms. Jobin served as Director of
Technical Recruiting at Paul-Tittle Associates, an executive search firm in
McLean, Virginia. Ms. Jobin received a B.S. in Business Administration from
George Mason University in 1980.
Jon S. Korin has served as a Director since April 1997. Mr. Korin has
served as vice president of strategic development for PRC, Inc. since June 1993.
He is a board member and past president of the National Capital chapter of the
Association for Corporate Growth and a board member of the IT Services Division
of the Information Technology Association of America. Mr. Korin received a B.S.
from The Wharton School of the University of Pennsylvania in May 1976 and
attended the New York University Graduate School of Business.
Eric J. Magleby has served as a Director and an account manager since we
commenced operations in 1994. From February 1994 until April 1999, Mr. Magleby
was also our Executive Vice President. Prior to joining Cysive in 1993, Mr.
Magleby worked in various sales and management positions at PRC, Inc. Mr.
Magleby received a B.S. in 1985 and M.S. in 1990 from Brigham Young University.
John M. Sabin has served as a Director since April 1997. Mr. Sabin
currently acts as a business consultant primarily in the hotel and lodging
industry. From May 1998 until September 1999, Mr. Sabin served as Executive Vice
President and Chief Financial Officer of Hudson Hotels Corporation. Hudson
Hotels Corporation is public hotel ownership and management company. From
February 1997 until May 1998, Mr. Sabin served as Senior Vice President and
Treasurer of Vistana, Inc., a public company that owns, operates and develops
time share resorts, and served as Chief Financial Officer of Vistana from
February 1997 until November 1997. From June 1996 until February 1997, Mr. Sabin
served as Vice President of Finance of Choice Hotels International, Inc., a
public hotel franchisor, and served as Vice President of Mergers and
Acquisitions from June 1995 to February 1997. From December 1993 until October
1996, he served as Vice President of Finance and Assistant Treasurer of Manor
Care, Inc., the former parent of Choice Hotels International, Inc. Mr. Sabin is
a Director and non-Executive Chairman of the Board of Competitive Technologies,
Inc., a public technology licensing and transfer company. Mr. Sabin received his
B.S., M.Acc. and M.B.A. degrees from Brigham Young University and a J.D. degree
from the J. Reuben Clark Law School at Brigham Young University.
BOARD COMPOSITION
We currently have five directors. Upon completion of this offering, the
terms of office of the directors will be divided into three classes: Class I,
whose term will expire at the annual meeting of stockholders to be held in 2000;
Class II, whose term will expire at the annual meeting of stockholders to be
held in 2001; and Class III, whose term will expire at the annual meeting of
stockholders to be held in 2002. The Class I directors are Messrs. Carbonell and
Magleby, the Class II directors are Messrs. Lund and Sabin and the Class III
director is Mr. Korin. At each annual meeting of stockholders after the initial
classification or special meeting held in place of an annual meeting, the
successors to directors whose terms will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following election or similar special meeting. If the board of directors
increases the number of directors, the newly created directorships will be
distributed among the three classes so that each class of directors will, as
nearly as possible, consist of one-third of the directors. This classification
of our board of directors may delay or prevent changes in control or management
of Cysive.
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<PAGE> 43
BOARD COMMITTEES
Our board of directors has established an audit committee, a compensation
committee and an executive committee. The audit committee consists of Messrs.
Sabin and Korin and assists the board of directors in fulfilling its
responsibilities of ensuring that management maintains an adequate system of
internal controls. The audit committee also:
- recommends an independent audit firm to audit financial statements and to
perform services related to the audit;
- reviews the scope and results of the audit with the independent auditors;
- considers the adequacy of the internal accounting control procedures;
- and considers auditors' independence.
The compensation committee determines the salaries and incentive
compensation of Cysive's officers and provides recommendations for the salaries
and incentive compensation of other employees and software engineers. The
compensation committee also administers Cysive's various incentive compensation,
stock and benefit plans. The compensation committee consists of Messrs. Sabin,
Magleby and Korin.
The executive committee determines the objectives and performance criteria
of each member of Cysive's management team. The executive committee consists of
Messrs. Carbonell and Lund.
DIRECTOR COMPENSATION
Each non-employee director currently receives $1,000 of cash compensation
and reimbursement for reasonable travel expenses for each board meeting
attended. In addition, each director receives a stock option for the purchase of
20,000 shares of common stock for each year of service.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to or earned by our
Chief Executive Officer and all other executive officers whose salary and bonus
for services rendered in all capacities for the year ended December 31, 1998
exceeded $100,000. We use the term "named executive officers" to refer to these
people in this prospectus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------
NAME AND PRINCIPAL POSITION(S) SALARY BONUS
- ------------------------------------------------------------ -------- --------
<S> <C> <C>
Nelson A. Carbonell, Jr., Chairman, President and Chief
Executive Officer......................................... $167,500 $143,422
John R. Lund, Chief Financial Officer....................... 118,077 58,144
Michael E. Price, Chief Technology Officer.................. 118,221 58,144
Joseph M. Rymsza, Vice President, Sales..................... 151,139 25,000
</TABLE>
Mr. Rymsza's salary includes sales commissions earned in the amount of $49,571.
40
<PAGE> 44
OPTION GRANTS IN LAST FISCAL YEAR
The following table shows grants of stock options to each of our named
executive officers during the year ended December 31, 1998. The percentages in
the table below are based on options to purchase 1,543,500 shares of common
stock, granted under our stock option plan in the year ended December 31, 1998
to our employees and directors. The exercise price per share of each option was
equal to the fair market value of the common stock on the date of grant as
determined by the board of directors. Potential realizable values are net of
exercise price before taxes and are based on the assumption that our common
stock appreciates at the annual rate shown, compounded annually, from the date
of grant until the expiration of the 10-year term. These numbers are calculated
based on the requirements of the SEC and do not reflect our estimate of future
stock price growth.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ---------------------
NAME GRANTED FISCAL YEAR PRICE DATE 5% 10%
- -------------------------------- ---------- ------------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Nelson A. Carbonell, Jr......... -- -- -- -- -- --
John R. Lund.................... 88,763 5.8% $1.38 1/19/08 $ 77,035 $195,221
46,238 3.0% 0.83 1/19/08 24,135 61,163
Michael E. Price................ 135,000 8.7% 1.38 1/19/08 117,163 296,914
Joseph M. Rymsza................ 257,193 16.7% 1.38 3/1/08 223,212 565,661
80,307 5.2% 0.83 3/1/08 41,918 106,230
</TABLE>
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table presents summary information with respect to stock
options owned by the named executive officers at December 31, 1998, and with
respect to stock options exercised by the named executive officers during the
fiscal year ended December 31, 1998. No options were exercised in 1998. There
was no public trading market for the common stock as of December 31, 1998.
Accordingly, the values of unexercised in-the-money options shown below have
been calculated on the basis of the initial public offering price of $17.00 per
share, less the applicable exercise price per share, multiplied by the number of
shares underlying those options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY
DECEMBER 31, 1998 OPTIONS AT DECEMBER 31, 1998
--------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------------- ----------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Nelson A. Carbonell, Jr...................... 1,237,500 -- $20,035,125 --
John R. Lund................................. 135,000 202,500 2,165,400 $3,201,306
Michael E. Price............................. 202,500 135,000 3,294,675 2,108,700
Joseph M. Rymsza............................. 112,500 225,000 1,779,334 3,536,584
</TABLE>
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with Messrs. Carbonell and Lund.
Each agreement has an initial term of three years and will be extended for two
additional years unless we or the employee elects to terminate the agreement 60
days prior to the third anniversary of the effective date of the employment
agreements. Under these agreements, Mr. Carbonell and Mr. Lund will receive an
initial annual base salary of $185,000 and $135,000, respectively, that may be
increased by our board of directors based on performance objectives they
establish. Mr. Lund also will receive an option to acquire 150,000 shares of
common stock at the initial public offering price. With respect to this option,
one-fourth will vest on each anniversary of the closing date of this offering,
provided that the option will vest in full upon both a change in control and a
termination of Mr. Lund's employment agreement within one year of the change of
control. In addition to the compensation referenced above, each employee is
eligible to
41
<PAGE> 45
receive an annual bonus, conditioned upon individual and company wide
performance criteria established by the board of directors. Employees are
eligible to receive the following percentage of their base salary as bonuses:
Nelson A. Carbonell, Jr., 150% and John R. Lund, 75%. In addition, if the
Company and an employee meet and exceed the performance criteria, the employee
may receive an additional bonus equal to a portion of the Company's revenues in
excess of the original targets.
If, during the term of one of these agreements, we terminate the employee's
employment without cause or the employee terminates his employment for good
reason, the employee will be entitled to receive his base salary and all
employee benefits for a period of one year from the date of the termination of
employment. Under the terms of these agreements, these employees have agreed to
preserve the confidentiality and the proprietary nature of all information
relating to our business during the term of the agreement and for three years
after the term of the agreement ends. In addition, each of these employees has
agreed to non-competition and non-solicitation provisions that will be in effect
during the term of his agreement and for two years after the term of the
agreement ends.
STOCK PLANS
STOCK OPTIONS
The 1994 Option Plan provides for the grant of restricted stock and other
stock-based awards and stock options. 11,350,000 shares of common stock are
authorized to be issued under the 1994 Option Plan, of which options to purchase
3,759,862 shares of common stock are available for grant under the 1994 Option
Plan as of October 13, 1999. The number of shares authorized to be issued under
the 1994 Option Plan will also be increased by 15% of any increase in Cysive's
outstanding shares (other than increases resulting from the stock issuance under
the 1994 Option Plan). Options to purchase 6,240,138 shares of common stock at a
weighted average exercise price of $1.36 per share were outstanding under the
1994 Option Plan as of October 13, 1999.
The 1994 Option Plan will be amended and restated concurrently with the
closing of this offering to permit the granting of options to purchase shares of
common stock intended to qualify as incentive options under the Internal Revenue
Code and options that do not qualify as incentive options. The exercise price of
each non-qualified options will be determined by the compensation committee but
may not be less than 85% of the fair market value of our common stock on the
date of grant. For incentive options, the exercise price may not be less than
100%, or 110% in the case of 10% stockholders, of the fair market value of our
common stock on the date of grant.
The term of each option will be fixed by the compensation committee and may
not exceed 10 years from the date of grant. The compensation committee will
determine at what time or times each option may be exercised and the period of
time, if any, after retirement, death, disability or termination of employment
during which options may be exercised. Options may be made exercisable in
installments. The exercisability of options may be accelerated by the
compensation committee.
The compensation committee may also award:
- shares of common stock to participants. These stock awards may be
conditioned on the achievement of performance goals and/or continued
employment with us through a specified restricted period. If the
performance goals and any other restrictions are not attained, the
participant will forfeit his or her restricted shares. The purchase price
of restricted shares of common stock will be determined by the committee.
- deferred stock units, which are ultimately payable in the form of
unrestricted shares of common stock. A deferred stock award may be
conditioned or restricted in whatever manner the compensation committee
may determine. These conditions and restrictions may include the
achievement of performance goals and/or continued employment with us
through a specified restricted period. If the performance goals and other
restrictions are not attained, the participant will forfeit his or her
deferred stock units. During the deferral period, the deferred stock
units may be credited with dividend equivalent rights.
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<PAGE> 46
- shares of common stock at no cost or for a purchase price determined by
the compensation committee which are free from any restrictions under the
stock option plan. Unrestricted shares of common stock may be issued to
participants in recognition of past services or other valid
consideration, and may be issued in lieu of cash compensation to be paid
to participants.
- performance stock awards to participants entitling the participants to
receive shares of common stock upon the achievement of performance goals
and other conditions determined by the compensation committee.
- dividend equivalent rights entitling the recipient to receive credits for
dividends that would be paid if the recipient had held a specified number
of shares of common stock. Dividend equivalent rights may be granted as a
component of another award or as a freestanding award. Dividend
equivalent rights credited under the stock option plan may be paid
currently or be deemed to be reinvested in additional shares of common
stock, and may accrue additional dividend equivalent rights after
reinvestment at fair market value at the time of deemed reinvestment.
Dividend equivalent rights may be settled in cash, common stock or a
combination of cash and shares, in a single installment or installments,
as specified in the award. Awards payable in cash on a deferred basis may
provide for crediting and payment of interest equivalents.
- a right to receive a number of shares or, in the discretion of the
compensation committee, an amount in cash or a combination of shares and
cash, based on the increase in the fair market value of the shares
underlying the right during a stated period specified by the compensation
committee. The compensation committee may approve the grant of these
stock appreciation rights related or unrelated to stock options. Upon
exercise of a stock appreciation right that is related to a stock option
granted, the holder of the related option will surrender the option for
the number of shares as to which the stock appreciation right is
exercised and will receive payment of an amount computed as provided in
the stock appreciation right award. Generally, a stock appreciation right
granted in connection with a stock option will be exercisable at the time
or times, and only to the extent that, the related stock option is
exercisable, and will not be transferable except to the extent that the
related option may be transferable.
PERFORMANCE AND ANNUAL INCENTIVE AWARDS
Our stock option plan authorizes the compensation committee to grant
multi-year and annual incentive awards based upon achievement of pre-established
performance goals, including awards that qualify as "performance-based
compensation" for purposes of the Internal Revenue Code. The grant, exercise
and/or settlement of a performance award may be made contingent upon achievement
of pre-established performance goals. Achievement of performance goals will be
measured over a performance period of up to 10 years, as specified by the
committee.
The amount of an incentive award is based upon the achievement of a
performance goal or goals based upon business criteria during a given
performance period specified by the committee. The committee may specify the
amount of the incentive award as a percentage of these business criteria, a
percentage in excess of a threshold amount or as another amount which need not
bear a strictly mathematical relationship to these business criteria.
OTHER STOCK-BASED AWARDS
The committee is authorized to grant to participants other awards that may
be based on or related to our common stock, including:
- convertible or exchangeable debt securities;
- other rights convertible or exchangeable into shares;
- purchase rights for shares;
- incentive awards with value and payment contingent upon performance; and
- incentive awards valued by reference to the performance of specified
subsidiaries or business units.
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<PAGE> 47
1999 EMPLOYEE STOCK PURCHASE PLAN
The Cysive, Inc. 1999 Employee Stock Purchase Plan will permit eligible
employees to purchase shares of common stock at a discount. All Cysive employees
whose customary employment is more than 20 hours per week and for more than five
months in any calendar year are eligible to participate in this plan, provided
that any employee who would own 5% or more of the total combined voting power or
value of Cysive's stock immediately after any grant is not eligible to
participate. During purchase periods, we will withhold amounts through payroll
deductions for eligible employees who elect to participate in this plan. At the
end of each purchase period, we will use accumulated payroll deductions to
purchase stock at a price equal to no less than 85% of the market price on the
first or last business day of each offering period on behalf of our eligible
employees who are participating in the plan. We have reserved 1,125,000 shares
of common stock for issuance under this plan.
401(k) PLAN
We sponsor the Cysive 401(k) Profit Sharing Plan, a defined contribution
plan intended to qualify under Section 401 of the Internal Revenue Code.
Employees who are at least 21 years old are generally eligible to participate
and may enter the Plan as of the first day of any calendar quarter. Participants
may make pre-tax contributions to the plan of up to 15% of their eligible
earnings, so long as these contributions do not exceed a statutorily prescribed
annual limit. Each participant is fully vested in his or her contributions and
the investment earnings. We make matching contributions to the plan equal to
100% of the first 6% of a participant's contribution. Each participant is vested
in our contributions and the corresponding investment earnings after three years
of service. Contributions by the participants or Cysive to the plan, and the
income earned on these contributions, are generally not taxable to the
participants until withdrawn. Contributions by us are generally deductible when
made. Participant and company contributions are held in trust as required by
law. Individual participants may direct the trustee to invest their accounts in
authorized investment alternatives.
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<PAGE> 48
RELATED PARTY TRANSACTIONS
In January 1999 Nelson A. Carbonell, Jr., Chairman, President and Chief
Executive Officer, and Eric J. Magleby, a director, exercised options to
purchase shares of our common stock in the following amounts and exercise
prices:
<TABLE>
<CAPTION>
EXERCISE
PRICE
SHARES PER
PURCHASED SHARE
---------- --------
<S> <C> <C>
Nelson A. Carbonell, Jr................................. 1,237,500 $0.81
Eric J. Magleby......................................... 112,500 $0.81
</TABLE>
Messrs. Carbonell and Magleby funded the exercise prices for these options
through cash distributions from Cysive.
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<PAGE> 49
PRINCIPAL AND SELLING STOCKHOLDERS
The following shows the number and percentage of outstanding shares of our
common stock that were owned as of October 13, 1999 and as adjusted to reflect
the sale of common stock in this offering by:
- each person known by us to own beneficially more than 5% of the common
stock
- each director, named executive officer and key employee;
- all directors and executive officers as a group; and
- the selling stockholder.
Unless indicated otherwise below, the address for each listed director and
officer is Cysive, Inc., 11480 Sunset Hills Road, Suite 200E, Reston, VA 20190.
Except as indicated by footnote, the persons named in the table have sole voting
and investment power with respect to all shares of common stock shown as
beneficially owned by them. The total number of shares of common stock
outstanding used in calculating the percentage for each listed person includes
the shares of common stock underlying options held by that person that are
exercisable within 60 days of October 13, 1999 but excludes shares of common
stock underlying options held by any other person.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING AFTER THE OFFERING
----------------------- SHARES TO ----------------------
NAME NUMBER PERCENTAGE BE SOLD NUMBER PERCENTAGE
- ----------------------------------------- ---------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Nelson A. Carbonell, Jr.(1).............. 6,937,610 74.4% -- 6,937,610 56.3%
Eric J. Magleby(2)....................... 2,330,500 28.7% 350,000 1,980,500 17.8%
John R. Lund(3).......................... 382,500 4.5% -- 382,500 3.3%
Michael E. Price(3)...................... 236,250 2.8% -- 236,250 2.1%
Joseph M. Rymsza(3)...................... 168,750 2.0% -- 168,750 1.5%
John M. Sabin(4)......................... 36,000 * -- 36,000 *
Jon S. Korin(3).......................... 33,750 * -- 33,750 *
---------- ------- ---------
All executive officers, key employee and
directors as a group (8 persons)(5).... 10,161,923 99.7% 350,000 9,811,923 74.2%
========== ======= =========
</TABLE>
* Less than 1% of the outstanding common stock.
(1) Mr. Carbonell's shares include 5,737,500 shares owned in joint tenancy by
Mr. Carbonell and his wife, Michele Carbonell, and 1,200,110 shares issuable
upon the exercise of currently exercisable options.
(2) Mr. Magleby's shares represent 2,330,500 shares owned in joint tenancy by
Mr. Magleby and his wife, Monette Magleby. If the underwriters exercised
their over-allotment option in full, Mr. Magleby would sell an additional
250,000 shares in the offering, reducing his beneficial ownership after the
offering to 1,730,500 shares.
(3) The shares beneficially owned by Messrs. Lund, Price, Rymsza and Korin,
represent shares of issuable upon exercise of currently exercisable options.
(4) The shares beneficially owned by Mr. Sabin include 33,750 shares issuable
upon exercise of currently exercisable options.
(5) The shares beneficially owned by all executive officers and directors as a
group include 2,092,673 shares issuable upon exercise of currently
exercisable options.
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<PAGE> 50
DESCRIPTION OF CAPITAL STOCK
We founded our company in 1993 as a Virginia corporation and reorganized as
a Delaware corporation on September 24, 1999.
GENERAL
Our authorized capital stock consists of 75,000,000 shares of common stock,
par value $0.01 per share, and 10,000,000 shares of preferred stock, par value
$0.01 per share. We do not have any outstanding shares of preferred stock.
As of October 13, 1999, there were 8,127,000 shares of common stock
outstanding held by five stockholders of record. Based on the number of shares
outstanding on September 24, 1999, following this offering we will have
outstanding 11,127,000 shares of common stock. In addition, as of September 24,
1999, there were outstanding stock options for the purchase of a total of
6,240,138 shares of common stock at a weighted average exercise price of $1.36
per share.
COMMON STOCK
We are authorized to issue 75,000,000 shares of common stock. Each
stockholder of record is entitled to one vote for each outstanding share of our
common stock owned by that stockholder on every matter properly submitted to the
stockholders for their vote. After satisfaction of the dividend rights of
holders of preferred stock, holders of common stock are entitled to any dividend
declared by the board of directors out of funds legally available for this
purpose, and, after the payment of liquidation preferences to holders of
preferred stock, holders of common stock are entitled to receive, on a pro rata
basis, all our remaining assets available for distribution to the stockholders
in the event of our liquidation, dissolution or winding up. Holders of common
stock do not have any preemptive right to become subscribers or purchasers of
additional shares of any class of our capital stock. The outstanding shares of
common stock are, and the shares of common stock offered in this offering will
be, when issued and paid for, fully paid and nonassessable. The rights,
preferences and privileges of holders of common stock may be adversely affected
by the rights of the holders of shares of any series of preferred stock that we
may designate and issue in the future.
PREFERRED STOCK
Our certificate of incorporation allows us to issue, without stockholder
approval, preferred stock having rights senior to those of the common stock.
Following completion of this offering, no shares of preferred stock will be
outstanding. Our board of directors will be authorized, without further
stockholder approval, to issue up to 10,000,000 shares of preferred stock in one
or more series and to fix the rights, preferences, privileges and restrictions
of any series of preferred stock, including dividend rights, conversion rights,
voting rights, terms of redemption and liquidation preferences and to fix the
number of shares constituting any series and the designations of these series.
Our issuance of preferred stock may have the effect of delaying or
preventing a change in control of Cysive. Our issuance of preferred stock could
decrease the amount of earnings and assets available for distribution to the
holders of common stock or could adversely affect the rights and powers,
including voting rights, of the holders of common stock. The issuance of
preferred stock could also have the effect of decreasing the market price of the
common stock. We currently have no plans to issue any shares of preferred stock.
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<PAGE> 51
LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS
As permitted by the Delaware General Corporation Law, our certificate of
incorporation provides that our directors are not personally liable to us or our
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law, relating to
unlawful dividends or unlawful stock purchases or redemptions; or
- for any transaction from which the director derives an improper personal
benefit.
As a result of this provision, we and our stockholders may be unable to
obtain monetary damages from a director for breach of his or her duty of care.
Our bylaws provide for the indemnification of our directors and officers to
the fullest extent authorized by the Delaware General Corporation Law, except
that we will indemnify a director or officer in connection with an action
initiated by that person only if the action was authorized by our board of
directors. The indemnification provided under our bylaws includes the right to
be paid expenses in advance of the final disposition of a proceeding for which
indemnification may be had, provided that the payment of these expenses incurred
by a director or officer in advance of the final disposition of a proceeding may
be made only upon delivery to us of an undertaking by or on behalf of the
director or officer to repay all amounts paid in advance if it is ultimately
determined that the director or officer is not entitled to be indemnified. Under
our bylaws, if we do not pay a claim for indemnification within 60 days after we
have received a written claim, the director or officer may bring an action to
recover the unpaid amount of the claim and, if successful, the director or
officer also will be entitled to be paid the expense of prosecuting the action
to recover these unpaid amounts.
Under our bylaws, we have the power to purchase and maintain insurance on
behalf of any person who is or was one of our directors, officers, employees or
agents, or is or was serving at our request as a director, officer, employee,
partner or agent of another corporation or of a partnership, joint venture,
limited liability company, trust or other enterprise, against any liability
asserted against the person or incurred by the person in any of these
capacities, or arising out of the person's fulfilling one of these capacities,
and related expenses, whether or not we would have the power to indemnify the
person against the claim under the provisions of the Delaware General
Corporation Law. We intend to purchase director and officer liability insurance
on behalf of our directors and officers.
ANTI-TAKEOVER PROVISIONS
GENERAL
Our certificate of incorporation and bylaws contain provisions that are
intended to enhance the likelihood of continuity and stability in the
composition of and the policies formulated by our board of directors. In
addition, provisions of Delaware law may hinder or delay an attempted takeover
of Cysive other than through negotiation with our board of directors. These
provisions could have the effect of reducing the price of our common stock and
discouraging attempts to acquire Cysive or remove incumbent management even if
some or a majority of our stockholders believe this action to be in their best
interest, including attempts that might result in the stockholders' receiving a
premium over the market price for the shares of common stock held by
stockholders.
CLASSIFIED BOARD
Our certificate of incorporation provides for the division of our board of
directors into three classes of directors serving staggered three-year terms.
Our certificate of incorporation further provides that the
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<PAGE> 52
approval of the holders of at least two-thirds of the shares entitled to vote
and the approval of a majority of our entire board of directors are necessary
for the alteration, amendment or repeal of sections of our certificate of
incorporation relating to the election and classification of our board of
directors, limitation of director liability, indemnification and the vote
requirements for these amendments to our certificate of incorporation. These
provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management.
REMOVAL OF DIRECTORS; VACANCIES
Our certificate of incorporation provides that directors may be removed
only for cause. In addition, vacancies and newly created directorships resulting
from any increase in the size of the board of directors may be filled only by
the affirmative vote of a majority of the directors then in office, even if they
do not constitute a quorum, or by a sole remaining director. These provisions
would prevent stockholders from removing incumbent directors without cause and
filling the resulting vacancies with their own nominees.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER PROPOSALS AND STOCKHOLDER NOMINATIONS
OF DIRECTORS
Our bylaws establish an advance notice procedure with regard to the
nomination, other than by the board of directors, of candidates for election to
the board of directors and with regard to matters to be brought before an annual
meeting of our stockholders by a stockholder. For nominations and other business
to be brought properly before an annual meeting by a stockholder, the
stockholder must deliver notice to us not less than 60 days nor more than 90
days prior to the first anniversary of the preceding year's annual meeting.
Separate provisions based on public notice by us specify how this advance notice
requirement operates if the date of the annual meeting is advanced by more than
30 days or delayed by more than 60 days from the anniversary date. The
stockholder's notice must contain specified information regarding the
stockholder and its holdings, as well as background information regarding any
director nominee, together with that person's written consent to being named in
the proxy statement as a nominee and to serving as a director if elected, and a
brief description of any business desired to be brought before the meeting, the
reasons for conducting the business at the meeting and any material interest of
the stockholder in the business proposed. In the case of a special meeting of
stockholders called for the purpose of electing directors, nominations by a
stockholder may be made only by delivery to us, no later than 10 days following
the day on which public announcement of the special meeting is made, of a notice
that complies with the above requirements. Although our bylaws do not give our
board of directors any power to approve or disapprove stockholder nominations
for the election of directors or any other business desired by stockholders to
be conducted at an annual meeting, the bylaws:
- may have the effect of precluding a nomination for the election of
directors or precluding the conduct of business at a particular annual
meeting if the proper procedures are not followed; or
- may discourage or deter a third party from conducting a solicitation of
proxies to elect its own slate of directors or otherwise attempting to
obtain control of Cysive, even if the conduct of this solicitation or the
attempt to obtain control might be beneficial to us and our stockholders.
SPECIAL STOCKHOLDERS' MEETINGS
Under our certificate of incorporation and bylaws, special meetings of
stockholders, unless otherwise prescribed by statute, may be called only:
- by the board of directors, the chairperson, the chief executive officer
or the president; or
- by the holders of at least a majority of our securities outstanding and
entitled to vote generally in the election of directors.
LIMITATIONS ON STOCKHOLDER ACTION BY WRITTEN CONSENT
Our certificate of incorporation and bylaws also provide that any action
required or permitted to be taken at a stockholders' meeting may be taken
without a meeting, without prior notice and without a vote,
49
<PAGE> 53
if the action is taken by persons who would be entitled to vote at a meeting and
who hold shares having voting power equal to not less than the minimum number of
votes of each class or series that would be necessary to authorize or take the
action at a meeting at which all shares of each class or series entitled to vote
were present and voted.
SECTION 203 OF DELAWARE LAW
In addition to the foregoing provisions of our certificate of incorporation
and bylaws, we will be governed by the provisions of Section 203 of the Delaware
General Corporation Law. Section 203 prohibits publicly held Delaware
corporations from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Generally, an "interested stockholder" is
a person who, together with affiliates and associates, owns, or within three
years did own, 15% or more of the corporation's outstanding voting stock. These
provisions could have the effect of delaying, deferring or preventing a change
in control of Cysive or reducing the price that investors might be willing to
pay in the future for shares of our common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is First Union
National Bank.
LISTING
Our common stock has been approved for quotation on the Nasdaq National
Market under the trading symbol "CYSV."
50
<PAGE> 54
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market could
adversely affect our common stock's prevailing market price. Upon completion of
this offering, we will have outstanding 11,127,000 shares of our common stock,
assuming no exercise of the underwriters over-allotment option and no exercise
of outstanding options. Of these shares, all of the shares sold in this offering
will be freely tradable without restriction or further registration under the
Securities Act, unless the shares are purchased by "affiliates" of Cysive as
that term is defined in Rule 144 under the Securities Act.
The remaining 7,777,000 shares of common stock held by existing
stockholders are "restricted securities" as that term is defined in Rule 144
under the Securities Act. Restricted securities may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Securities Act Rule 144 or 701. We summarize these two rules below. The
provisions of Rules 144 and 701 provide that the restricted securities will be
available for sale in the public market on the date which is one year from the
date they were issued, so long as the sellers of restricted securities comply
with the volume limitations and other conditions of Rule 144.
RULE 144
Under Rule 144, 6,402,250 shares of common stock will be freely tradable 90
days after this offering closes. Sales of these shares of common stock will be
limited under lock-up agreements with the underwriters. In general, under Rule
144, beginning 90 days after the closing of this offering, a person who has
owned shares of our common stock for at least one year would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 111,127 shares immediately after this offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to that sale.
Sales under Rule 144 are also governed by manner of sale provisions and
notice requirements, and current public information about Cysive must be
available.
Under Rule 144(k), 24,750 shares of common stock will be freely tradable
after this offering closes. None of these shares of common stock will be
restricted from sale under lock-up agreements. Under Rule 144(k), a person who
is not one of our affiliates at any time during the 90 days preceding a sale,
and who has owned the shares proposed to be sold for at least two years, is
entitled to sell the shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, "Rule 144(k) shares" may be sold immediately upon
the completion of this offering.
RULE 701
As of October 13, 1999, a total of 3,888,656 shares of common stock had
been issued or were issuable upon the exercise of options. All of these shares
will be eligible for sale in reliance on Rule 701 beginning 90 days after the
closing of this offering. Of these shares of common stock, transfers of
3,337,610 will be restricted by lock-up agreements. In general, under Rule 701
as currently in effect, any of our employees who have purchased shares from us
in connection with a compensatory plan or other agreement is eligible to resell
those shares 90 days after the effective date of this offering in reliance on
Rule 144, but without compliance with restrictions, including the holding
period, contained in Rule 144.
STOCK OPTIONS
As soon as practicable after this offering, we intend to file a
registration statement under the Securities Act covering 11,350,000 shares of
common stock reserved for issuance under our stock plans. As of October 13,
1999, options to purchase 6,240,138 shares of common stock were outstanding. The
51
<PAGE> 55
registration statement is expected to be filed and become effective as soon as
practicable after the effective date of this offering. Accordingly, shares
registered under this registration statement will, provided options have vested
and Rule 144 volume limitations applicable to our affiliates are complied with,
be available for sale in the open market shortly after this offering closes, and
in the case of our officers, directors and stockholders who have entered into
lock-up agreements, after the 180-day lock-up agreements expire.
LOCK-UP AGREEMENTS
All of Cysive's officers and directors, and several of its stockholders,
who will beneficially own 7,777,000 shares of common stock after this offering
closes, will sign lock-up agreements with the underwriters under which they will
agree, among other things, not to offer, sell or agree to sell, directly or
indirectly, or otherwise dispose of any shares of common stock or any securities
convertible into or exercisable or exchangeable for shares of common stock, for
a period of 180 days after the date of this prospectus. Transfers or
dispositions can be made sooner with the prior written consent of Thomas Weisel
Partners LLC. This consent may be given at any time without public notice.
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<PAGE> 56
UNDERWRITING
Under the terms and conditions in an agreement among the underwriters and
us, each of the underwriters named below, through their representatives, Thomas
Weisel Partners LLC, First Union Securities, Inc. and Friedman, Billings, Ramsey
& Co., Inc., has severally agreed to purchase from us and the selling
stockholder the number of shares of common stock opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------- ---------
<S> <C>
Thomas Weisel Partners LLC............................... 1,538,250
First Union Securities, Inc. ............................ 1,010,850
Friedman, Billings, Ramsey & Co., Inc. .................. 380,900
Lehman Brothers Inc. .................................... 60,000
Morgan Stanley & Co., Incorporated....................... 60,000
Prudential Securities Incorporated....................... 60,000
William Blair & Company L.L.C. .......................... 40,000
Dain Rauscher Incorporated............................... 40,000
U.S. Bancorp Investments, Inc. .......................... 40,000
C.E. Unterberg, Towbin................................... 40,000
Legg Mason Wood Walker, Incorporated..................... 40,000
Needham & Company, Inc. ................................. 40,000
---------
Total.......................................... 3,350,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters are conditioned upon a number of factors, including approval of
legal matters by counsel. The nature of the underwriters' obligations commits
them to purchase and pay for all of the shares of common stock listed above if
any are purchased.
The underwriting agreement provides that we will indemnify the underwriters
against liabilities specified in the underwriting agreement under the Securities
Act of 1933, or will contribute to payments that the underwriters may be
required to make relating to these liabilities.
OVER-ALLOTMENT OPTION
We and the selling stockholder have granted a 30-day over-allotment option
to the underwriters to purchase up to 502,500 additional shares of common stock
at the public offering price less the underwriting discount and commissions as
shown on the cover page of this prospectus. If the underwriters exercise this
option in whole or in part, then each of the underwriters will be severally
committed, provided the conditions described in the underwriting agreement are
satisfied, to purchase the additional shares of common stock in proportion to
their respective purchase commitments shown in the above table.
COMMISSIONS AND DISCOUNTS
The underwriters propose to offer the shares of common stock directly to
the public at the public offering price shown on the cover page of this
prospectus, and at that price less a concession not in excess of $0.71 per share
of common stock to other dealers specified in a master agreement among
underwriters that are members of the National Association of Securities Dealers,
Inc. The underwriters may allow, and those dealers may reallow, concessions not
in excess of $0.10 per share of common stock to these other dealers. After this
offering, the offering price, concessions and other selling terms may be changed
by the underwriters. The common stock is offered upon receipt and acceptance by
the underwriters and to other conditions, including the right to reject orders
in whole or in part.
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<PAGE> 57
This table summarizes the compensation to be paid to the underwriters by us
and the selling stockholder and the expenses payable by us:
<TABLE>
<CAPTION>
TOTAL
-------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting discount and commissions paid by us......... $1.19 $3,570,000 $3,870,475
Underwriting discount and commissions paid by the selling
stockholder............................................ 1.19 416,500 714,000
Expenses................................................. 0.22 750,000 750,000
</TABLE>
The underwriters do not expect to confirm sales of common stock to any
accounts over which they exercise discretionary authority.
RESERVED SHARES
The underwriters, at our request, have reserved for sale at the initial
public offering price up to 162,625 shares of common stock to be sold in the
offering for sale to persons designated by us. The number of shares available
for sale to the general public will be reduced to the extent that any reserved
shares are purchased. Any reserved shares not purchased in this manner will be
offered by the underwriters on the same basis as the other shares offered in the
offering.
NO SALES OF SIMILAR SECURITIES
All of our officers and directors, and several of our stockholders and
option holders, have agreed that they will not offer, sell, agree to sell,
directly or indirectly, or otherwise dispose of any shares of common stock
without the prior written consent of Thomas Weisel Partners LLC for a period of
180 days after the date of this prospectus.
In addition, we have agreed that for a period of 180 days after the date of
this prospectus we will not, without the prior written consent of Thomas Weisel
Partners LLC, offer, sell or otherwise dispose of any shares of our capital
stock, except for the shares of common stock being offered and the shares of
common stock issuable upon the exercise of options and warrants outstanding on
the date of this prospectus.
INFORMATION REGARDING THOMAS WEISEL PARTNERS LLC
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners LLC has been named as a lead-manager or co-manager
on 76 filed public offerings of equity securities, of which 49 have been
completed, and has acted as a syndicate member in an additional 38 public
offerings of equity securities. Thomas Weisel Partners LLC does not have any
material relationship with us or any of our officers, directors or controlling
persons, except with respect to its contractual relationship with us under the
underwriting agreement entered into in connection with this offering.
NASDAQ NATIONAL MARKET LISTING
Prior to this offering, there has been no public market of the common
stock. The initial offering price was determined by negotiations between us and
the representatives of the underwriters. Some of the factors to be considered in
these negotiations were our results of operations in recent periods, estimates
of our prospects and the industry in which we compete, an assessment of our
management, the general state of the securities markets at the time of this
offering and the prices of similar securities of generally comparable companies.
We have been approved for quotation of our common stock on the Nasdaq National
Market under the symbol "CYSV." We cannot assure you, however, that an active or
orderly trading market will develop for the common stock or that the common
stock will trade in the public market subsequent to this offering at or above
the initial offering price.
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<PAGE> 58
MARKET STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
To facilitate this offering, persons participating in the offering may
engage in transactions that stabilize, maintain or otherwise affect the price of
the common stock during and after this offering. Specifically, the underwriters
may over-allot or otherwise create a short position in the common stock for
their own account by selling more shares of common stock than we have sold to
them. The underwriters may elect to cover any short position by purchasing
shares of common stock in the open market or by exercising the over-allotment
option granted to the underwriters. In addition, the underwriters may stabilize
or maintain the price of the common stock by bidding for or purchasing shares of
common stock in the open market and may impose penalty bids. Under these penalty
bids, selling concessions that are allowed to syndicate members or other
broker-dealers participating in this offering are reclaimed if shares of common
stock previously distributed in this offering are repurchased, usually to
stabilize the market. The effect of these transactions may be to stabilize or
maintain the market price at a level above that which might otherwise prevail in
the open market. No representation is made as to the magnitude or effect of any
stabilization or other transactions. These transactions may be affected on the
Nasdaq National Market or otherwise and may be discontinued at any time after
they are commenced.
VALIDITY OF THE SHARES
Hogan & Hartson L.L.P., Washington, D.C., will pass upon the validity of
the issuance of the common stock being offered. Hale and Dorr LLP, Washington,
D.C., will pass upon selected legal matters in connection with this offering for
the underwriters.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements and schedule at December 31, 1998 and 1997, and for each of the three
years in the period ended December 31, 1998, as set forth in their reports. We
have included our financial statements and schedule in the prospectus and
elsewhere in the registration statement in reliance on Ernst & Young LLP's
reports, given on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange commission a registration
statement on Form S-1 under the Securities Act of 1933 with respect to the
common stock being offered. This prospectus contains all information about
Cysive and our common stock that would be material to an investor. The
registration statement includes exhibits and schedules to which you should refer
for additional information about us. You may inspect a copy of the registration
statement and the exhibits and schedules to the registration statement without
charge at the offices of the Securities and Exchange Commission at Judiciary
Plaza, 450 Fifth Street, Washington, D.C. 20549. You may obtain copies of all or
any part of the registration statement from the Public Reference Section of the
SEC, 450 Fifth Street, Washington, D.C. 20549 upon the payment of the prescribed
fees. You may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC maintains a web site at
www.sec.gov that contains reports, proxy and information statements and other
information regarding registrants like us that file electronically with the SEC.
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<PAGE> 59
CYSIVE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Stockholders' Equity.......................... F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 60
REPORT OF ERNST & YOUNG, LLP, INDEPENDENT AUDITORS
Board of Directors
Cysive, Inc.
We have audited the accompanying balance sheets of Cysive, Inc. (formerly
Alta Software, Inc.) as of December 31, 1997 and 1998, and the related
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 Cysive, Inc. at December 31,
1997 and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Vienna, Virginia
January 14, 1999, except for
Note 12, as to which
the date is September 24, 1999.
F-2
<PAGE> 61
CYSIVE, INC.
BALANCE SHEETS
(INFORMATION AS OF AND RELATING TO THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
IS UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------- ---------------------------
1999
1997 1998 1999 PRO FORMA
---------- ---------- ------------ ------------
(NOTE 11)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents............ $ 690,283 $ 611,654 $ 869,244 $ 73,259
Accounts receivable, less allowance
of $150,000, $160,000 and $350,000
at December 31, 1997 and 1998 and
the six months ended June 30, 1999,
respectively....................... 1,438,082 2,070,196 4,213,719 4,213,719
Prepaid expenses and other assets.... 27,343 112,095 242,742 242,742
Deferred income taxes................ -- -- -- 183,543
---------- ---------- ------------ ------------
Total current assets............ 2,155,708 2,793,945 5,325,705 4,713,263
Furniture, fixtures and equipment,
net.................................. 257,433 338,452 426,240 426,240
Other assets............................ 8,022 30,190 196,056 196,056
---------- ---------- ------------ ------------
Total assets.................... $2,421,163 $3,162,587 $ 5,948,001 $ 5,335,559
========== ========== ============ ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable..................... $ 15,044 $ 27,219 $ 150,950 $ 150,950
Accrued liabilities.................. 192,485 616,715 1,667,854 1,667,854
---------- ---------- ------------ ------------
Total current liabilities....... 207,529 643,934 1,818,804 1,818,804
Deferred income taxes................... -- -- -- 255,136
Commitments............................. -- -- -- --
Stockholders' equity:
Preferred stock, $1.00 par value,
1,000,000 shares authorized, no
shares issued or outstanding....... -- -- -- --
Common stock, $0.01 par value,
75,000,000 shares authorized;
6,777,000, 6,777,000, 8,127,000 and
8,162,530 issued and outstanding at
December 31, 1997 and 1998 and June
30, 1999 and June 30, 1999 pro
forma, respectively................ 67,770 67,770 81,270 81,625
Additional paid-in capital........... 179,414 176,485 24,459,465 25,063,125
Deferred stock compensation.......... (177,987) (105,829) (10,032,389) (10,032,389)
Retained earnings (deficit).......... 2,144,437 2,380,227 (10,379,149) (11,850,742)
---------- ---------- ------------ ------------
Total stockholders' equity...... 2,213,634 2,518,653 4,129,197 3,261,619
---------- ---------- ------------ ------------
Total liabilities and
stockholders' equity.......... $2,421,163 $3,162,587 $ 5,948,001 $ 5,335,559
========== ========== ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 62
CYSIVE, INC.
STATEMENTS OF OPERATIONS
(INFORMATION AS OF AND RELATING TO THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
IS UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------ -------------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues......................... $5,556,676 $7,711,138 $9,141,966 $3,193,186 $ 9,423,910
Direct costs................... 2,055,541 2,798,005 3,741,559 1,808,886 3,473,020
---------- ---------- ---------- ---------- ------------
Gross profit..................... 3,501,135 4,913,133 5,400,407 1,384,300 5,950,890
Operating expenses:
General and administrative..... 2,009,553 2,753,812 2,725,290 1,009,122 2,418,573
Sales and marketing............ 232,118 760,572 1,823,983 671,884 1,720,173
Stock compensation............. -- -- 69,229 -- 13,284,250
---------- ---------- ---------- ---------- ------------
Total operating
expenses............. 2,241,671 3,514,384 4,618,502 1,681,006 17,422,996
Operating income (loss).......... 1,259,464 1,398,749 781,905 (296,706) (11,472,106)
Other income, net................ 17,373 23,543 14,080 15,185 24,840
---------- ---------- ---------- ---------- ------------
Net income (loss)................ $1,276,837 $1,422,292 $ 795,985 $ (281,521) $(11,447,266)
========== ========== ========== ========== ============
Pro forma tax expense............ 306,763 1,034,242
Pro forma net income (loss)...... $ 489,222 $(12,481,508)
========== ============
Earnings (loss) per share:
Basic.......................... $0.19 $0.21 $0.12 $(0.04) $(1.41)
Diluted........................ $0.17 $0.18 $0.10 $(0.04) $(1.41)
Weighted average shares
outstanding.................... 6,777,000 6,777,000 6,777,000 6,777,000 8,127,000
Weighted average shares and
common stock equivalents....... 7,473,800 7,766,211 7,993,659 6,777,000 8,127,000
Pro forma earnings (loss) per
share:
Basic.......................... $0.07 $(1.53)
Diluted........................ $0.06 $(1.53)
Pro forma weighted average
shares......................... 6,812,530 8,162,530
Pro forma weighted average shares
and common stock equivalents... 8,029,189 8,162,530
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 63
CYSIVE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(INFORMATION AS OF AND RELATING TO THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
IS UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL DEFERRED RETAINED
-------------------- PAID-IN STOCK EARNINGS
SHARES AMOUNT CAPITAL COMPENSATION (DEFICIT) TOTAL
---------- ------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995..................... 6,777,000 $67,770 $ 1,427 $ -- $ 768,005 $ 837,202
Stockholder distribution... -- -- -- -- (636,224) (636,224)
Net income................. -- -- -- -- 1,276,837 1,276,837
---------- ------- ----------- ------------ ------------ ------------
Balance at December 31,
1996..................... 6,777,000 67,770 1,427 -- 1,408,618 1,477,815
Stockholder distribution... -- -- -- -- (686,473) (686,473)
Deferred stock
compensation............. -- -- 177,987 (177,987) -- --
Net income................. -- -- -- -- 1,422,292 1,422,292
---------- ------- ----------- ------------ ------------ ------------
Balance at December 31,
1997..................... 6,777,000 67,770 179,414 (177,987) 2,144,437 2,213,634
Stockholder distribution... -- -- -- -- (560,195) (560,195)
Issuance of compensatory
stock options............ -- -- 41,329 -- -- 41,329
Deferred stock
compensation............. -- -- (44,258) 72,158 -- 27,900
Net income................. -- -- -- -- 795,985 795,985
---------- ------- ----------- ------------ ------------ ------------
Balance at December 31,
1998..................... 6,777,000 67,770 176,485 (105,829) 2,380,227 2,518,653
Stockholder distribution... -- -- -- -- (1,312,110) (1,312,110)
Common stock issued upon
exercise of options...... 1,350,000 13,500 1,084,500 -- -- 1,098,000
Issuance of compensatory
stock options............ -- -- 13,284,250 -- -- 13,284,250
Deferred stock
compensation............. -- -- 9,914,230 (9,926,560) -- (12,330)
Net loss................... -- -- -- -- (11,447,266) (11,447,266)
---------- ------- ----------- ------------ ------------ ------------
Balance at June 30, 1999... 8,127,000 $81,270 $24,459,465 $(10,032,389) $(10,379,149) $ 4,129,197
========== ======= =========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 64
CYSIVE, INC.
STATEMENTS OF CASH FLOWS
(INFORMATION AS OF AND RELATING TO THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
IS UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------- --------------------------
1996 1997 1998 1998 1999
---------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................ $1,276,837 $1,422,292 $ 795,985 $(281,521) $(11,447,266)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation........................... 87,967 144,763 163,816 79,895 83,461
Amortization........................... 44,444 115,555 3,712 -- 10,839
Stock compensation..................... -- -- 69,229 -- 13,284,250
Loss on sale of furniture, fixtures and
equipment, net....................... -- -- 664 -- 4,782
Provision for doubtful accounts........ -- 150,000 10,000 -- 190,000
Changes in assets and liabilities:
Accounts receivable.................. (305,356) (754,038) (642,114) 304,258 (2,333,523)
Prepaid expenses and other assets.... (9,533) (10,156) (106,920) (29,482) (296,513)
Accounts payable..................... 18,241 (4,026) 12,175 35,638 123,731
Accrued liabilities.................. (35,466) (63,477) 424,230 207,921 1,038,809
---------- ---------- ----------- --------- ------------
Net cash provided by operating
activities............................. 1,077,134 1,000,913 730,777 316,709 658,570
Cash flows from investing activities:
Capital expenditures................... (278,855) (80,011) (249,211) (79,619) (186,870)
---------- ---------- ----------- --------- ------------
Net cash used in investing activities.... (278,855) (80,011) (249,211) (79,619) (186,870)
Cash flows from financing activities:
Stockholder distributions.............. (636,224) (686,473) (560,195) (424,052) (214,110)
Advances under line of credit.......... -- -- 1,523,777 -- --
Repayments of line of credit........... -- -- (1,523,777) -- --
---------- ---------- ----------- --------- ------------
Net cash used in financing activities.... (636,224) (686,473) (560,195) (424,052) (214,110)
Increase (decrease) in cash and cash
equivalents............................ 162,055 234,429 (78,629) (186,962) 257,590
Cash and cash equivalents at beginning of
period................................. 293,799 455,854 690,283 690,283 611,654
---------- ---------- ----------- --------- ------------
Cash and cash equivalents at end of
period................................. $ 455,854 $ 690,283 $ 611,654 $ 503,321 $ 869,244
========== ========== =========== ========= ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 65
CYSIVE, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF AND RELATING TO THE SIX MONTHS ENDED JUNE 30, 1998 AND 1999
IS UNAUDITED)
NOTE 1 -- ORGANIZATION
Cysive, Inc. (formerly Alta Software, Inc.) (the "Company" or "Cysive") is
a leading software engineering firm that designs and builds complex, highly
customized systems supporting large scale e-businesses. Since commencing
operations in 1994, Cysive has used advanced Internet technologies to build its
customers' e-business capabilities. Cysive designs software systems which can
handle high volumes of transactions, operate reliably on a 24/7 basis and expand
to meet the growth requirements of large scale e-business. The Company operates
in one business segment.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company derives substantially all of its revenues from time and
materials contracts. On these contracts, revenues are computed by multiplying
the number of project personnel hours expended in the performance of the
contract by the contract billing rates plus other directly billable costs.
Reserves for possible losses on contracts, if any, are recognized in full when
determined. Any prepayments by clients are recorded as deferred revenue and are
recognized as services are provided. Reimbursable project costs are excluded
from revenue as the Company incurs these costs on behalf of its customers.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
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.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less at the time of
purchase to be cash equivalents.
FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and accounts receivable.
The cash is held by a financial institution. For accounts receivable, the
Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. The Company maintains
reserves for credit losses which, historically, have been within management's
expectations. The carrying amount of the receivables approximates their fair
value.
FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment are stated at historical cost, net of
accumulated depreciation and amortization. Repairs and maintenance are charged
to operations as incurred, while significant
F-7
<PAGE> 66
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
improvements are capitalized. Furniture, fixtures and equipment are depreciated
or amortized over their estimated useful life, on the straight-line basis, using
the following useful lives:
<TABLE>
<S> <C>
Computers and related equipment Three years
Software Three years
Furniture Five years
Leasehold Improvements Shorter of lease term or useful
life
</TABLE>
INCOME TAXES
The Company and its shareholders have elected to be treated as an S
corporation under the Internal Revenue Code. Under the provisions of the tax
code, the Company's shareholders include their pro rata share of the Company's
income in their personal income tax returns. Accordingly, the Company was not
subject to federal and most state income taxes during the historical periods
presented. The Company currently anticipates completing an initial public
offering of its common stock in 1999 (see Note 12), which will result in the
termination of the Company's S corporation status. At that time, the Company
will convert to a C corporation and will begin accounting for income taxes under
the liability method. As of December 31, 1998, the tax bases exceeded the
reported amounts of the Company's assets and liabilities by $1.5 million.
The Company intends to distribute to stockholders of record immediately
prior to the offering, on a pro rata basis, the undistributed balance of
cumulative income taxed or taxable to these stockholders.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25") using the intrinsic value method. The Company has made pro
forma disclosures required by Statement of Financial Accounting Standards No.
123 ("SFAS 123") "Accounting for Stock Based Compensation" using the fair value
method.
COMPUTATION OF HISTORICAL EARNINGS PER SHARE
Basic earnings per share is calculated using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
calculated using the weighted average number of common and dilutive common
equivalent shares outstanding during the period, using the treasury stock method
for options.
SIGNIFICANT CUSTOMERS
For the year ended December 31, 1996, three customers individually
represented 65%, 27% and 4% of the Company's revenues. For the year ended
December 31, 1997, three customers individually represented 50%, 17% and 10% of
the Company's revenues. For the year ended December 31, 1998, three customers
individually represented 20%, 18% and 13% of the Company's revenues. For the six
months ended June 30, 1999, three customers individually represented 35%, 15%
and 13% of the Company's revenues.
ADVERTISING COSTS
All advertising and promotion costs are expensed as incurred. During the
years ended December 31, 1996, 1997 and 1998, the Company expensed $40,000,
$88,000 and $194,000, respectively, as advertising costs.
F-8
<PAGE> 67
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Some amounts in the prior years financial statements have been reclassified
to conform to the current year presentation.
NOTE 3 -- UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial information of the Company for the six months ended
June 30, 1998 and 1999 included herein has been prepared by the Company, without
audit, according to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Select information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles for complete financial statements have been condensed or
omitted according to the rules and regulations relating to interim financial
statements. In the opinion of management, the accompanying unaudited interim
financial information reflects all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position of the
Company at June 30, 1998 and 1999, and the results of its operations and its
cash flows for the six months ended June 30, 1998 and 1999. Results of
operations for the interim period ended June 30, 1999 are not necessarily
indicative of the results expected for the full year.
NOTE 4 -- FURNITURE, FIXTURES AND EQUIPMENT
Major classes of furniture, fixtures and equipment consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1997 1998 1999
--------- --------- -----------
<S> <C> <C> <C>
Computers and related equipment.................... $ 402,888 $ 547,130 $ 515,723
Software........................................... -- 64,412 66,668
Furniture.......................................... 62,493 99,636 205,143
Leasehold improvements............................. 44,417 44,417 78,008
--------- --------- ---------
509,798 755,595 865,542
Less accumulated depreciation and amortization..... (252,365) (417,143) (439,302)
--------- --------- ---------
$ 257,433 $ 338,452 $ 426,240
========= ========= =========
</TABLE>
NOTE 5 -- ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1997 1998 1999
-------- -------- ------------
<S> <C> <C> <C>
Payroll and payroll taxes........................... $122,097 $295,816 $ 346,199
Bonuses............................................. -- 141,496 907,694
Vacation............................................ 52,584 96,798 179,858
Deferred revenue.................................... -- 69,477 5,976
Other............................................... 17,804 13,128 228,127
-------- -------- ----------
$192,485 $616,715 $1,667,854
======== ======== ==========
</TABLE>
NOTE 6 -- LINE OF CREDIT
In June 1998, the Company entered into a line of credit with a financial
institution from which the Company may draw up to $1.0 million. In March 1999
and September 1999, the Company increased the amount available for withdrawal to
$1.5 million and $2.5 million, respectively. The line of credit expires in
F-9
<PAGE> 68
NOTE 6 -- LINE OF CREDIT (CONTINUED)
September 2000. Interest accrues on outstanding balances at the 30-day
commercial paper rate as quoted in the Wall Street Journal, plus 2.65% per
annum. The line of credit is secured by all assets of the Company. At December
31, 1997 and 1998 and June 30, 1999, there were no outstanding borrowings.
Commitment fees of 0.5% paid per $500,000 of credit facility during 1998 and
1999 were not material.
NOTE 7 -- EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Savings Plan (the "Plan") in which employees are
eligible to participate beginning on the first day of the quarter subsequent to
their hire date and attaining age 21. The Plan allows employees to contribute up
to 15% of their bi-weekly compensation, subject to the statutory limitations.
The Company matches employee contributions up to the first six percent of each
participant's bi-weekly compensation, subject to statutory limitations. The
Company contributions to the Plan are discretionary as authorized by the Board
of Directors. Expense reflected in the statements of operations relating to the
Plan was $155,000, $210,000 and $257,000 for the years ended December 31, 1996,
1997 and 1998, respectively.
NOTE 8 -- STOCKHOLDERS' EQUITY
EQUITY TRANSACTION
In January 1999, two employees and stockholders of the Company exercised
options for the purchase of 1,350,000 shares for $1.1 million, which was funded
through a distribution in the same amount to the stockholders.
STOCK OPTIONS
In December 1994, the Company established a stock option plan (the "1994
Option Plan") under which 2,250,000 shares of common stock were reserved for
issuance upon exercise of options granted to employees, officers and directors
of the Company. The Board of Directors increased the number of shares available
under the plan to 4,500,000 in November 1995, to 6,750,000 in April 1997 and
subsequently to 11,350,000 in April 1999. The price for the incentive stock
options is to be not less than the fair market value at the date of grant as
determined by the Board of Directors. The 1994 Option Plan provides for
incentive, non-qualified and restricted stock options. Non-employees are not
eligible for incentive stock options.
In July 1997, the Company issued non-qualified options to purchase 322,961
shares to select Company directors and an employee (the "Employee") at an
exercise price of $0.83 per share which was considered to be below fair market
value at the time of the option grants. Accordingly, the Company recorded
deferred stock compensation of $177,987. In March 1998, the Company issued
non-qualified options to purchase 40,154 shares to an officer at an exercise
price of $0.83 per share which was considered to be below fair market value at
the time of the option grant. The Company recorded deferred stock compensation
of $22,129. In June 1998, the Employee left the Company and $66,387 was reversed
from deferred stock compensation since no options had vested. In June 1998, the
Company also amortized $27,900 to expense to reflect the 25% vested portion of
the deferred stock compensation.
In the six months ended June 30, 1999, the Company issued fully vested
incentive stock options to purchase 327,987 shares and fully vested
non-qualified options to purchase 1,280,763 shares at exercise prices of $1.67
and $0.83 per share (each of which was considered to be below fair market
value), respectively. In accordance with APB 25, the Company recorded $13.3
million in compensation expense. In connection with the grant of other certain
options to employees during the six months ended June 30, 1999, the Company
recorded deferred stock compensation of approximately $9.9 million, based on the
difference between the exercise prices of those options at their respective
grant dates and the deemed fair value for accounting purposes of the shares of
common stock subject to such options. Such amounts are included as a reduction
of stockholders' equity and are being amortized on a graded vesting method over
a
F-10
<PAGE> 69
NOTE 8 -- STOCKHOLDERS' EQUITY (CONTINUED)
period of four years. The deemed fair value for accounting purposes was
determined relative to the mid-point ($12.00) of the anticipated initial public
offering price range as of the date of the initial filing. See Note 12 --
Subsequent Events. In addition, 46,238 options issued in 1998 at an exercise
price of $0.83 per share (which was considered to be below fair market value)
vested and the Company recorded $18,600 in compensation expense.
Options granted under this plan expire no more than five years from the
date of grant for 10% stockholders and ten years from the date of grant for all
other recipients. Except as otherwise noted above, options granted through April
19, 1999 under this plan vest in accordance with the following schedule: one
year from the date of the grant, 25%, two years from the date of the grant, 25%,
and three years from the date of the grant, the remaining 50%. Options granted
subsequent to July 18, 1999 vest 25% per year for four years.
The Company has reserved 11,350,000 shares of common stock issuable upon
exercise of options granted under the 1994 Option Plan, of which options to
purchase 4,358,800 shares of common stock are available for grant under the 1994
Option Plan as of June 30, 1999.
The Company adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation cost has been recognized related to options granted
at fair value during 1996, 1997 and 1998.
Common stock option activity was as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
---------- --------
<S> <C> <C>
Outstanding at December 31, 1995........................... 2,064,375 $0.78
Granted.................................................. 631,125 $1.19
Exercised................................................ -- --
Cancelled or expired..................................... (72,000) $1.02
----------
Outstanding at December 31, 1996........................... 2,623,500 $0.87
Granted.................................................. 865,125 $1.17
Exercised................................................ -- --
Cancelled or expired..................................... (275,062) $0.87
----------
Outstanding at December 31, 1997........................... 3,213,563 $0.96
Granted.................................................. 1,543,500 $1.39
Exercised................................................ -- --
Cancelled or expired..................................... (405,563) $1.21
----------
Outstanding at December 31, 1998........................... 4,351,500 $1.08
Granted.................................................. 2,704,950 $1.23
Exercised................................................ (1,350,000) $0.81
Cancelled or expired..................................... (65,250) $1.39
----------
Outstanding at June 30, 1999............................... 5,641,200 $1.22
==========
Exercisable at June 30, 1999 3,218,344 $0.99
</TABLE>
F-11
<PAGE> 70
NOTE 8 -- STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information regarding stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------- ----------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------------------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.00 -- $0.85............................ 2,163,920 3.7 $0.80 1,522,805 $0.79
$0.86 -- $1.52............................ 2,187,580 8.8 $1.37 535,230 $1.26
--------- ---------
$0.00 -- $1.52............................ 4,351,500 6.3 $1.08 2,058,035 $0.88
========= =========
</TABLE>
Had compensation expense related to the stock option plans been determined
based on the fair value at the grant date for options granted after 1995
consistent with the provisions of SFAS No. 123, the Company's pro forma net
income and earnings per share would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1997 1998
---------- ---------- --------
<S> <C> <C> <C>
Net income (loss) -- pro forma..................... $1,208,157 $1,279,562 $552,470
========== ========== ========
Pro forma earnings (loss) per common share......... $0.18 $0.19 $0.08
Pro forma earnings (loss) per common
share -- assuming dilution....................... $0.16 $0.17 $0.07
</TABLE>
The effect of applying SFAS No. 123 on 1996, 1997 and 1998 pro forma net
income as stated above is not necessarily representative of the effects on
reported net income for future years due to, among other things, the vesting
period of the stock options and the fair value of additional stock options in
future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing fair value model with the following
weighted-average assumptions used for grants after 1995: volatility of 0%;
dividend yield of 0%; expected life of the option term of three, four and five
years, respectively; and risk-free interest rate of 6.5%. The weighted average
fair values of the options granted in 1996 with a stock price equal to the
exercise price is $0.21 per share. The weighted average fair values of the
options granted in 1997 with a stock price equal to the exercise price and with
a stock price greater than the exercise price are $0.24 and $0.70 per share,
respectively. The weighted average fair value of the options granted in 1998
with a stock price equal to the exercise price and with a stock price greater
than the exercise price are $0.57 and $1.18 per share, respectively.
F-12
<PAGE> 71
NOTE 9 -- EARNINGS (LOSS) PER SHARE
The following table summarizes the computation of basic and diluted
earnings (loss) per share for the years ended December 31, 1996, 1997 and 1998
and for the six-month periods ended June 30, 1998 and 1999:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------ --------------------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Numerator:
Net income (loss)................ $1,276,837 $1,422,292 $795,985 $ (281,521) $(11,447,266)
========== ========== ========== ========== ============
Denominator:
Weighted average shares........ 6,777,000 6,777,000 6,777,000 6,777,000 8,127,000
Weighted average effect of
common stocks equivalents... 696,800 989,211 1,216,659 --* --**
---------- ---------- ---------- ---------- ------------
7,473,800 7,766,211 7,993,659 6,777,000 8,127,000
========== ========== ========== ========== ============
Earnings (loss) per share:
Basic.......................... $0.19 $0.21 $0.12 $(0.04) $(1.41)
Diluted........................ $0.17 $0.18 $0.10 $(0.04) $(1.41)
</TABLE>
* Excludes 1,247,548 shares, as effect is anti-dilutive.
** Excludes 4,318,555 shares, as effect is anti-dilutive.
Effective September 24, 1999 and as discussed in Note 12, the Company
effected a 2.25-for-1 common stock split. The above share and per share amounts
have been adjusted for the split.
NOTE 10 -- COMMITMENTS
LEASE OBLIGATIONS
The Company is obligated under various non-cancelable leases for office
facilities and select computer equipment. These leases generally provide for
renewal options and escalation increases. In 1998, the Company amended a
non-cancelable operating lease and also entered into a new non-cancelable
operating lease for office space in California.
Future minimum payments under non-cancelable operating leases with initial
terms of one year or more as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 330,939
2000........................................................ 274,232
2001........................................................ 247,842
2002........................................................ 255,510
2003........................................................ 151,028
Thereafter.................................................. --
----------
Total minimum lease payments...................... $1,259,551
==========
</TABLE>
Rental expense on operating leases was $70,000, $108,000 and $237,000 for
the years ended December 31, 1996, 1997 and 1998, respectively.
NOTE 11 -- PRO FORMA ADJUSTMENTS (UNAUDITED)
PRO FORMA BALANCE SHEET
Effective upon consummation of the IPO (See Note 12), the Company intends
to declare an S corporation distribution to its existing shareholders
representing all previous earned and undistributed S corporation taxable
earnings. Through June 30, 1999, such amount is estimated to be approximately
F-13
<PAGE> 72
NOTE 11 -- PRO FORMA ADJUSTMENTS (UNAUDITED) (CONTINUED)
$1.4 million. Of this total distribution, approximately $796,000 will be paid
out of Company earnings. The pro forma balance sheet at June 30, 1999 gives
effect to this item.
The pro forma balance sheet at June 30, 1999 also gives effect to a
deferred tax asset resulting from the stock compensation expense recorded in the
six months ended June 30, 1999. This deferred tax asset has been fully reserved
in accordance with Statement of Financial Accounting Standards Board No. 109,
"Accounting for Income Taxes".
PRO FORMA STATEMENTS OF OPERATIONS
The unaudited pro forma adjustments on the statements of operations for the
year ended December 31, 1998 and for the six months ended June 30, 1999 reflect
a provision for income taxes based upon pro forma income as if the Company had
not been an S corporation.
PRO FORMA NET INCOME (LOSS) PER SHARE
Pro forma basic net income (loss) per share for the year ended December 31,
1998 and for the six months ended June 30, 1998 has been computed by dividing
pro forma net income by the weighted average shares outstanding. Pro forma
weighted average shares and common stock equivalents includes 35,530 shares to
be issued in connection with the Company's initial public offering. Pro forma
diluted net income (loss) per share for the year ended December 31, 1998 and the
six months ended June 30, 1998 has been computed by dividing pro forma net
income by the pro forma weighted average shares outstanding.
NOTE 12 -- SUBSEQUENT EVENTS
During July 1999, the Board of Directors authorized the Company to file a
registration statement with the Securities and Exchange Commission for an
initial public offering of shares of its common stock. On September 24, 1999,
the Company effected a 2.25-for-1 common stock split. All references to common
shares and per common shares, except for references to authorized common shares,
in the accompanying financial statements have been restated to give effect to
the common stock split.
F-14
<PAGE> 73
PROSPECTUS October 15, 1999 [GRAPHIC]
[CYSIVE.LOGO]
3,350,000 Shares
Common Stock
THOMAS WEISEL PARTNERS LLC
FIRST UNION SECURITIES, INC.
FRIEDMAN BILLINGS RAMSEY
- --------------------------------------------------------------------------------
You may rely on the information contained in this prospectus. Neither we nor any
of the underwriters or the selling stockholder have authorized anyone to provide
information different from that contained in this prospectus. When you make a
decision about whether to invest in our common stock, you should not rely upon
any information other than the information in this prospectus. Neither the
delivery of this prospectus nor sale of common stock means that information
contained in this prospectus is correct after the date of this prospectus. This
prospectus is not an offer to sell or solicitation of an offer to buy these
shares of the common stock in any circumstances under which the offer or
solicitation is unlawful.
Until November 9, 1999 (25 days after the commencement of this offering), all
dealers that buy, sell or trade these shares of common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
