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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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<S> <C>
FOR THE QUARTER ENDED SEPTEMBER 30, 2000 COMMISSION FILE NO.
000-27607
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CYSIVE, INC.
(Exact name of registrant as specified in its charter).
<TABLE>
<S> <C>
Delaware 54-1698017
-------------------------- ------------------
(State of Incorporation) (I.R.S. Employer
Identification Number)
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10780 PARKRIDGE BLVD.
SUITE 400
RESTON, VIRGINIA 20191
(Address of principal executive offices) (Zip Code)
703.259.2300
(Registrant's telephone number, Including Area Code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report).
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
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As of November 13, 2000, 28,335,929 shares of common stock were outstanding.
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CYSIVE, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited)
Balance Sheets as of December 31, 1999 and September 30, 2000.......................................... 2
Statements of Operations for the three months and nine months ended
September 30, 1999 and 2000....................................................................... 3
Statements of Cash Flows for the nine months ended September 30, 1999
and 2000.......................................................................................... 4
Notes to Financial Statements.......................................................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................................................. 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings........................................................................................... 19
Item 2. Changes in Securities and Use of Proceeds................................................................... 19
Item 6. Exhibits and Reports on Form 8-K............................................................................ 19
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PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CYSIVE, INC.
Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
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ASSETS (Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents............................................ $ 2,433 $ 6,764
Investments.......................................................... 45,040 137,829
Accounts receivable, less allowance of $651 and $1,194 at
December 31, 1999 and September 30, 2000, respectively............. 6,565 9,727
Prepaid expenses and other assets.................................... 1,243 1,535
Deferred income taxes................................................ 383 742
----------------- -----------------
Total current assets............................................... 55,664 156,597
Furniture, fixtures and equipment, net.................................. 641 5,556
Investments............................................................. -- 28,184
Deferred income taxes................................................... 4,766 4,967
Other assets............................................................ 283 380
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TOTAL ASSETS......................................................... $ 61,354 $ 195,684
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 346 $ 753
Accrued payroll...................................................... 2,592 4,251
Accrued liabilities.................................................. 737 3,351
----------------- -----------------
Total current liabilities.......................................... 3,675 8,355
Commitments and contingencies........................................... -- --
Stockholders' equity:
Preferred stock, $0.01 par value; 10,000,000 shares authorized;
no shares issued and outstanding..................................... -- --
Common stock, $0.01 par value; 500,000,000 shares authorized;
22,818,596 and 28,159,949 issued and outstanding at
December 31, 1999 and September 30, 2000, respectively.............. 228 282
Additional paid-in capital.............................................. 79,767 212,239
Deferred stock compensation............................................. (13,572) (16,731)
Accumulated deficit..................................................... (8,744) (8,461)
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Total stockholders' equity......................................... 57,679 187,329
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................. $ 61,354 $ 195,684
================= =================
</TABLE>
See accompanying notes
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CYSIVE, INC.
Statements of Operations
(Unaudited)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 2000 1999 2000
--------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues............................................... $ 7,282 $ 13,418 $ 16,706 $ 40,922
Direct costs........................................ 2,544 6,379 6,017 15,978
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Gross profit........................................... 4,738 7,039 10,689 24,944
Operating expenses:
General and administrative..................... 2,201 7,844 4,619 16,951
Sales and marketing............................ 1,647 2,742 3,368 8,601
Stock compensation............................. 28 1,825 13,312 3,727
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Total operating expenses............................... 3,876 12,411 21,299 29,279
------------- ------------ ------------ -------------
Operating income (loss)................................ 862 (5,372) (10,610) (4,335)
Other income, net...................................... 11 2,369 36 5,067
------------- ------------ ------------ -------------
Income (loss) before income taxes...................... 873 (3,003) (10,574) 732
Income tax expense (benefit)........................... - (1,078) - 449
------------- ------------ ------------ -------------
Net income (loss) ..................................... $ 873 $ (1,925) $ (10,574) $ 283
============= ============ ============ =============
Earnings (loss) per share:
Basic earnings (loss) per share...................
$ 0.05 $ (0.07) $ (0.65) $ 0.01
Diluted earnings (loss) per share ................
$ 0.03 $ (0.07) $ (0.65) $ 0.01
Weighted average shares outstanding.................... 16,254,000 26,992,083 16,254,000 25,795,873
Weighted average shares and common
equivalent shares outstanding....................... 27,236,554 26,992,083 16,254,000 39,087,297
</TABLE>
See accompanying notes
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CYSIVE, INC.
Statements of Cash Flows
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 2000
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Cash flows from operating activities:
Net income (loss)...................................................................... $ (10,574) $ 283
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation........................................................................ 136 762
Amortization........................................................................ 16 46
Stock compensation expense.......................................................... 13,312 3,727
Deferred income taxes............................................................... - (560)
Non-cash tax expense................................................................ - 1,009
Loss on sale of furniture, fixtures and equipment, net.............................. 3 110
Provision for doubtful accounts..................................................... 590 543
Changes in assets and liabilities:
Accounts receivable.............................................................. (3,984) (3,705)
Prepaid expenses and other assets................................................ (572) (389)
Accounts payable................................................................. 455 407
Accrued payroll.................................................................. 1,876 1,659
Accrued liabilities.............................................................. 169 2,614
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NET CASH PROVIDED BY OPERATING ACTIVITIES.............................................. 1,427 6,506
Cash flows from investing activities:
Purchase of investments.......................................................... - (557,382)
Sale of investments.............................................................. - 436,409
Capital expenditures............................................................. (347) (5,832)
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NET CASH USED IN INVESTING ACTIVITIES.................................................. (347) (126,805)
Cash flows from financing activities:
Stockholder distributions........................................................ (575) -
Proceeds from sale of common stock............................................... - 123,189
Exercise of common stock options................................................. - 1,443
---------------- ----------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.................................... (575) 124,632
Increase in cash and cash equivalents.................................................. 505 4,331
Cash and cash equivalents at beginning of period....................................... 612 2,433
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................................. $ 1,117 $ 6,764
================ ================
</TABLE>
See accompanying notes
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CYSIVE, INC.
Notes to Financial Statements
1. BASIS OF PRESENTATION
The accompanying financial statements of Cysive, Inc. ("Cysive" or the
"Company") are unaudited and, in the opinion of management, reflect all normal
and recurring adjustments, which are necessary for a fair presentation as of the
dates and for the periods presented. The financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Consequently, these financial statements do not include
all the disclosures normally required by generally accepted accounting
principles for annual financial statements. Accordingly, these financial
statements should be read in conjunction with the Company's audited financial
statements and notes thereto for the period ended December 31, 1999, included in
the Annual Report on Form 10-K filed by the Company with the Securities and
Exchange Commission on February 22, 2000. The results of operations for the
three-month and nine-month periods ended September 30, 2000 are not necessarily
indicative of results for the full year.
All references to the number of shares of common stock and options
reflect a 2-for-1 stock split in the form of a stock dividend effected on May 8,
2000.
2. SECONDARY PUBLIC OFFERING
On March 17, 2000, the Company and certain selling stockholders completed
a secondary public offering. The Company issued and sold 3.0 million shares of
common stock resulting in total net proceeds to the Company of $123.2 million
(after underwriting discounts and commissions and offering costs).
3. EARNINGS (LOSS) PER SHARE
The Company presents both basic earnings (loss) per share and diluted
earnings (loss) per share. Basic earnings (loss) per share is based on the
weighted average number of shares outstanding during the period. Diluted
earnings (loss) per share reflects the per share effect of dilutive common stock
equivalents. In calculating the diluted earnings (loss) per share for the nine
months ended September 30, 1999 and for the three months ended September 30,
2000, common stock equivalents are excluded because their effect would be
anti-dilutive.
4. COMPENSATION EXPENSE
In 1999, Cysive granted stock options to purchase 6,007,500 shares of
common stock at exercise prices below fair market value of the common stock on
the date of grant. Options to purchase 2,692,720 shares of common stock vested
upon issuance and as a result, during the nine months ended September 30, 1999,
the Company recorded $13.3 million in stock compensation expense. The Company
recorded the remaining $15.1 million as deferred stock compensation. This is
amortized on a quarterly basis over the period in which the remaining options
vest. During the three and nine months ended September 30, 2000, the Company
recorded approximately $1.8 million and $3.7 million, respectively, as stock
compensation expense.
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5. INCOME TAX EXPENSE
The Company operated as an S-corporation under the Internal Revenue Code
since it commenced operations in 1994 until September 30, 1999, at which time
the Company converted to a C-corporation. Accordingly, the Company was not
subject to federal and most state income taxes up through September 1999,
including the three and nine months ended September 30, 1999 due to the
S-corporation status.
Additionally, as a result of this conversion to a C-corporation, the
Company recorded a deferred net tax benefit of $4.8 million for the cumulative
differences between the historical cost and tax basis of certain assets and
liabilities. Included in the $4.8 million net tax benefit was $5.0 million of
deferred tax assets which represents the tax benefit the Company would realize
upon the sale of common stock issued upon the exercise of certain non-qualified
stock options. Additionally, during 2000, certain grantees of qualified and
incentive stock options exercised a portion of these options and periodically
sold the common stock issued upon such exercise. These sales created an
additional tax benefit of $12.1 million to the Company. The Company recorded a
valuation allowance of $12.1 million because we believe that it is uncertain as
to whether we shall receive any future benefit arising from this tax benefit.
6. RECENT PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements, ("SAB 101"). SAB 101 requires that
four basic criteria must be met before revenue can be recognized: (1) persuasive
evidence of an arrangement exists; (2) delivery has occurred or services
rendered; (3) the fee is fixed and determinable; and (4) collectibility is
reasonably assured.
On March 31, 2000, the FASB issued FASB Interpretation No. 44, Accounting
for Certain Transactions Involving Stock Compensation ("FIN 44"), an
interpretation of APB 25. FIN 44 clarifies guidance for certain issues that
arose in the application of APB 25. Some of the more significant conclusions
reached by FIN 44 include the definition of an employee, accounting treatment of
options granted to non-employee members of the board of directors, awards
granted between entities, a change in an individual's employment status, stock
option repricing and other modifications including the term and vesting. The
Company has adopted this interpretation on its effective date of July 1, 2000.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities," as amended in June 2000 by Statement of Financial Accounting
Standards No. 138 ("SFAS 138"), "Accounting for Certain Derivative Instruments
and Certain Hedging Activities," which requires companies to recognize all
derivatives as either assets or liabilities in the balance sheet and measure
such instruments at fair value. SFAS 133 was subsequently amended by Statement
of Financial Accounting Standards No. 137 ("SFAS 137"), "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133," and consequently, Cysive was required to adopt the
provisions of SFAS 133 no later than the beginning of the Company's fiscal year
ending December 31, 2000. Adoption of SFAS 133, as amended by SFAS 138, is not
expected to have a material impact on the Company's financial statements.
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7. LAWSUIT
In December 1999, a former service provider filed a lawsuit against the
Company. On September 14, 2000, a jury returned a decision in favor of the
Company and no appeal has been filed.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis compares the three and nine months
ended September 30, 2000 to the three and nine months ended September 30, 1999
and should be read together with our financial statements and notes thereto
appearing elsewhere in this Form 10-Q and together with our Annual Report on
Form 10-K filed with the Securities and Exchange Commission on February 22,
2000.
The matters discussed herein and elsewhere in this 10-Q may include
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements include, without
limitation, any statement that may predict, forecast, indicate or imply future
results, performance or achievements and may contain the words "believe,"
"anticipate," "expect," "estimate," "project," "will be," "will continue," "will
likely result" or similar words or phrases. The matters discussed herein involve
risks and uncertainties which could result in operating performance that is
materially different from that implied in the forward- looking statements. Risks
that could cause actual results to differ materially from those in the
forward-looking statements include, but are not limited to, our ability to
manage growth and attract and retain highly trained and experienced employees;
the loss of or a significant reduction in the work performed for any of our
largest customers; changes in the demand for professional Internet services;
increased competition in the Internet and electronic business industry; and our
ability to respond to new technological advances in the Internet and e-business
industry. Additional information concerning these and other risks and
uncertainties is contained from time to time in our filings with the Securities
and Exchange Commission. Given these risks and uncertainties, investors should
not place undue reliance on forward-looking statements as a prediction of actual
results.
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 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.
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
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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, for the three months ended September 30, 1999 and 2000, our five
largest customers represented 66.4% and 45.3% of our revenues, respectively. For
the nine months ended September 30, 1999 and 2000, our five largest customers
represented 69.4% and 44.2% of our revenues, respectively.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, the relative
composition of revenue and selected statements of operations data as a
percentage of revenue:
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 2000 1999 2000
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REVENUES 100.0 % 100.0 % 100.0 % 100.0 %
Direct costs.................................... 34.9 47.5 36.0 39.0
----------- ----------- ------------ ---------
Gross profit....................................... 65.1 52.5 64.0 61.0
OPERATING EXPENSES:
General and administrative.................... 30.2 58.5 27.6 41.4
Sales and marketing........................... 22.6 20.4 20.2 21.0
Stock compensation............................ 0.4 13.6 79.7 9.2
----------- ----------- ------------ ---------
Total operating expenses........................... 53.2 92.5 127.5 71.6
OPERATING INCOME (LOSS)............................ 11.9 (40.0) (63.5) (10.6)
Other income, net.................................. 0.1 17.7 0.2 12.4
----------- ----------- ------------ ---------
INCOME (LOSS) BEFORE INCOME TAXES.................. 12.0 (22.3) (63.3) 1.8
Income tax expense (benefit)....................... -- (8.0) -- 1.1
----------- ----------- ------------ ---------
NET INCOME (LOSS).................................. 12.0 % (14.3) % (63.3) % 0.7 %
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THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
Revenues. Revenues increased $6.1 million, or 84.3%, to $13.4 million for
the three months ended September 30, 2000 from $7.3 million for the same period
in 1999. This increase in revenues was due primarily to an increase in the
number of billable employees, an increase in customers and an increase in our
billable rates. The number of active customers increased to 30 for the three
months ended September 30, 2000 from 16 for the same period in 1999.
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Direct Costs. Direct costs increased $3.9 million, or 150.7%, to $6.4
million for the three months ended September 30, 2000 from $2.5 million for the
same period in 1999. The number of employees increased 143% compared to the same
period in 1999. As a percentage of revenues, direct costs increased to 47.5% for
the three months ended September 30, 2000 from 34.9% for the same period in
1999. This increase in direct costs as a percentage of revenues was primarily
attributable to an increase in the number of our employees and their related
costs.
Gross Profit. Gross profit increased $2.3 million, or 48.6%, to $7.0
million for the three months ended September 30, 2000 from $4.7 million for the
same period in 1999. The gross margin decreased to 52.5% for the three months
ended September 30, 2000 from 65.1% for the same period in 1999 due primarily to
the lower utilization rates for the three months ended September 30, 2000 of 62%
compared with 93% for the same period in 1999.
General and Administrative. General and administrative expenses increased
$5.6 million, or 256.5%, to $7.8 million for the three months ended September
30, 2000 from $2.2 million for the same period in 1999. As a percentage of
revenues, general and administrative expenses increased to 58.5% for the three
months ended September 30, 2000 from 30.2% for the same period in 1999. A large
part of this increase (approximately $2.4 million) was due to the recognition of
bad debt expense and an increase in legal and accounting accruals related to our
litigation with CorPay Solutions, Inc., which is described in more detail under
the heading "Legal Proceedings" in this Form 10Q. In addition, the increase was
due to our expansion of our recruiting and corporate administrative staffs, the
addition of new regional offices, the inclusion of costs associated with being a
publicly-held company, an increase in depreciation expense of new assets to
support our infrastructure, the increase in legal expenses as well as our
increase in costs to support our increased number of employees.
Sales and Marketing. Sales and marketing expenses increased $1.1 million,
or 66.5%, to $2.7 million for the three months ended September 30, 2000 from
$1.6 million for the same period in 1999. As a percentage of revenues, sales and
marketing expenses decreased to 20.4% for the three months ended September 30,
2000 from 22.6% for the same period in 1999. This increase in actual expenses
was primarily due to the expansion of our marketing department and direct sales
force to 31 for the three months ended September 30, 2000 from 16 for the same
period in 1999 and the increase in variable compensation linked to the increase
in sales and billing rates. The decrease in sales and marketing as a percentage
of revenue is due to the decrease in marketing and brand building programs in
the three months ended September 30, 2000 and a focus on recruiting advertising,
which is included in general and administrative costs.
Stock Compensation. We recorded $1.8 million in stock compensation for
the three months ended September 30, 2000 as compared to $28,000 in the same
period in 1999. This expense represents the difference between the deemed fair
market value of the common stock underlying vested stock options and their
exercise price. The stock compensation expense for the three months ended
September 30, 1999 was significantly less than the same period in 2000 because
in 2000 we used a straight-line amortization of the deferred stock compensation
for options granted at a price deemed lower than fair market value in
connection with our initial public offering.
Operating Income (Loss). Operating income decreased $6.2 million, or
723.1%, to an operating loss of $5.4 million for the three months ended
September 30, 2000 from operating income of $862,000 for the same period in
1999. As a result of the above factors, the operating
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loss margin decreased to 40.0% for the three months ended September 30, 2000
from an operating margin of 11.9% for the same period in 1999. Excluding the
impact of the stock compensation expense, operating income decreased $4.4
million, or 498.5%, to an operating loss of $3.5 million for the three months
ended September 30, 2000 from operating income of $890,000 over the same period
in 1999. Operating margin, excluding the impact of the stock compensation
expense, decreased to negative operating margin of 26.4% from an operating
margin of 12.2% for the same period in 1999.
Other Income, Net. Other income, net increased $2.4 million to $2.4
million for the three months ended September 30, 2000 from $11,000 for the same
period in 1999 due to increased interest income earned from investments made in
the three months ended September 30, 2000 compared to interest income earned on
lower cash balances in the same period in 1999.
Income (Loss) before Income Taxes. Income (loss) before income taxes
decreased $3.9 million, or 444.0%, to a loss before income taxes of $3.0 million
for the three months ended September 30, 2000 from income before income taxes
of $873,000 for the same period in 1999. As a result of the above factors, the
income before income tax margin decreased to a negative margin of 22.3% for the
three months ended September 30, 2000 from an income before income tax margin
of 12.0% in the same period in 1999. Excluding the impact of the stock
compensation expense, income before income taxes decreased $2.1 million, or
230.7%, to a loss before income taxes of $1.2 million for the three months
ended September 30, 2000 from income before income taxes of $901,000 over the
same period in 1999. Similarly, income before income tax margin, excluding the
impact of the stock compensation expense, decreased to a negative margin of
8.8% from an income before income tax margin of 12.4% in 1999.
Income Tax Expense (Benefit). We recorded an income tax benefit of $1.1
million for the three months ended September 30, 2000. We recorded no income
taxes for the three months ended September 30, 1999 because we operated as an
S-corporation under the Internal Revenue Code during that period.
Net Income (Loss). Net income decreased $2.8 million, or 320.5%, to a net
loss of $1.9 million for the three months ended September 30, 2000 from net
income of $873,000 for the same period in 1999. As a result of the above
factors, the net margin decreased to a net loss margin of 14.3% for the three
months ended September 30, 2000 from a net income margin of 12.0% in the same
period in 1999. Excluding the impact of the stock compensation expense and
including the estimated income tax expense in 1999, net income decreased $1.0
million or 184.2% to a net loss of $455,000 for the three months ended September
30, 2000 from net income of $541,000 in the same period in 1999. Similarly, net
income margin, excluding the impact of the stock compensation expense and
including the estimated income tax expense in 1999, increased to a net loss
margin of 3.4% for the three months ended September 30, 2000 from 7.4% in the
same period in 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1999
Revenues. Revenues increased $24.2 million, or 145.0%, to $40.9 million
for the nine months ended September 30, 2000 from $16.7 million for the same
period in 1999. This increase in revenues was due primarily to an increase in
the number of billable employees, an
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increase in customers and an increase in our billable rates. In addition, as a
result of the direct sales efforts, our number of active customers increased to
45 for the nine months ended September 30, 2000 from 25 for the same period in
1999.
Direct Costs. Direct costs increased $10.0 million, or 165.5%, to $16.0
million for the nine months ended September 30, 2000 from $6.0 million for the
same period in 1999. As a percentage of revenues, direct costs increased to
39.0% for the nine months ended September 30, 2000 from 36.0% for the same
period in 1999. This increase in direct costs as a percentage of revenues was
primarily attributable to an increase in the number of our employees and their
related costs.
Gross Profit. Gross profit increased $14.2 million, or 133.4%, to $24.9
million for the nine months ended September 30, 2000 from $10.7 million for the
same period in 1999. The gross margin decreased to 61.0% for the nine months
ended September 30, 2000 from 64.0% for the same period in 1999 because our
direct costs exceeded the rate of increase in revenue growth. The decrease in
the gross margin percentage is due primarily to the lower utilization rates for
the nine months ended September 30, 2000 of 78% compared with 85% for the same
period in 1999 offset by higher billing rates in 2000.
General and Administrative. General and administrative expenses increased
$12.4 million, or 267.0%, to $17.0 million for the nine months ended September
30, 2000 from $4.6 million for the same period in 1999. As a percentage of
revenues, general and administrative expenses increased to 41.4% for the nine
months ended September 30, 2000 from 27.6% for the same period in 1999. This
increase was due primarily to the expansion of our recruiting and corporate
administrative staffs by 22 employees, the addition of 3 new regional offices,
the inclusion of costs associated with being a publicly-held company, the
increase in depreciation expense of new assets to support our infrastructure,
the increase in legal expenses and the increase in bad debt expense, as well as
the increase in costs to support our increased number of employees.
Sales and Marketing. Sales and marketing expenses increased $5.2 million,
or 155.4%, to $8.6 million for the nine months ended September 30, 2000 from
$3.4 million for the same period in 1999. As a percentage of revenues, sales and
marketing expenses increased to 21.0% for the nine months ended September 30,
2000 from 20.2% for the same period in 1999. This increase was primarily due to
the expansion of our marketing department and direct sales force and the
increase in variable compensation linked to the increase in sales and billing
rates. In addition, we incurred additional expenses by increasing our marketing
and brand building programs in the first half of 2000.
Stock Compensation. We recorded $3.7 million in stock compensation for
the nine months ended September 30, 2000 compared to $13.3 million in the same
period in 1999. This expense represents the difference between the deemed fair
market value of the common stock underlying vested stock options and their
exercise price. The stock compensation expense for the nine months ended
September 30, 1999 was significantly larger than the same period in 2000 because
we recorded a stock compensation expense for all immediately vested options in
the nine months ended September 30, 1999. The stock compensation expense in the
nine months ended September 30, 2000 is an amortization of deferred stock
compensation.
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Operating Income (Loss). Operating loss decreased $6.3 million, or 59.1%,
to $4.3 million for the nine months ended September 30, 2000 from $10.6 million
for the same period in 1999. As a result of the above factors, the operating
loss margin decreased to 10.6% for the nine months ended September 30, 2000 from
an operating loss margin of 63.5% for the same period in 1999. Excluding the
impact of the stock compensation expense, operating income decreased $3.3
million, or 122.5%, to a loss of $608,000 for the nine months ended September
30, 2000 from income of $2.7 million over the same period in 1999. Operating
margin, excluding the impact of the stock compensation expense, decreased to a
loss margin of 1.5% from operating margin of 16.2% for the same period in 1999.
Other Income, Net. Other income, net increased $5.0 million to $5.1
million for the nine months ended September 30, 2000 from $36,000 for the same
period in 1999 due to increased interest income earned from investments made in
the nine months ended September 30, 2000 compared to interest income earned on
lower cash balances in the same period in 1999.
Income (loss) before income taxes. Income before income taxes increased
$11.3 million, or 106.9%, to $732,000 for the nine months ended September 30,
2000 from a loss before income taxes of $10.6 million for the same period in
1999. As a result of the above factors, the income before income tax margin
increased to 1.8% for the nine months ended September 30, 2000 from a negative
margin of 63.3% in the same period in 1999. Excluding the impact of the stock
compensation expense, income before income taxes increased $1.7 million, or
62.9%, to $4.4 million for the nine months ended September 30, 2000 from $2.7
million over the same period in 1999. Similarly, income before income tax
margin, excluding the impact of the stock compensation expense, decreased to
10.9% in 2000 from 16.4% in 1999.
Income tax expense. We recorded income tax expense of $449,000 for the
nine months ended September 30, 2000. We recorded no income tax for the nine
months ended September 30, 1999 because we operated as an S-corporation under
the Internal Revenue Code during that period.
Net Income (Loss). Net income increased $10.9 million, or 102.7%, to
$283,000 for the nine months ended September 30, 2000 from a net loss of $10.6
million for the same period in 1999. As a result of the above factors, the net
margin increased to 0.7% for the nine months ended September 30, 2000 from a net
loss margin of 63.3% in the same period in 1999. Excluding the impact of the
stock compensation expense and including the income tax expense in 1999, net
income increased $1.9 million, or 112.7%, to $3.6 million for the nine months
ended September 30, 2000 from $1.7 million over the same period in 1999.
Similarly, net income margin, excluding the impact of the stock compensation
expense and including the income tax expense in 1999, decreased to 8.9% for the
nine months ended September 30, 2000 from 10.2% in the same period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
On March 17, 2000, the Company and certain selling stockholders completed
a secondary public offering. The Company issued and sold 3.0 million shares of
common stock resulting in total net proceeds of $123.2 million (after
underwriting discounts and commissions and offering costs).
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Cash and cash equivalents were $2.4 million at December 31, 1999 and $6.8
million at September 30, 2000. Net cash provided by operating activities was
$1.4 million and $6.5 million for the nine months ended September 30, 1999 and
2000, respectively. Capital expenditures of $347,000 and $5.8 million for the
nine months ended September 30, 1999 and 2000, respectively, were used primarily
for computer equipment, office equipment and leasehold improvements related to
our growth.
The Company anticipates that the net proceeds from its secondary public
offering, together with existing sources of liquidity and funds generated from
operations, should be adequate to fund its currently anticipated cash needs
through at least the next 12 months. To the extent the Company is unable to fund
its operations from cash flows, it 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.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
If any of the events described below actually occur, our business,
financial condition, or results of operations could be materially adversely
affected. This Form 10-Q contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially including those
anticipated in such forward-looking statements as a result of a variety of
factors, including those set forth in the following risk factors and elsewhere
in, or incorporated by reference into, this Form 10-Q.
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 nine 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 1999, WE DERIVED 64.5% OF OUR REVENUES 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
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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 1999, our five largest customers
represented 64.5% of our revenues: Sylvan Prometric, 27.8%; Equifax Secure,
Inc., 11.4%; Classified Ventures, Inc., 9.9%; Cisco Systems, Inc., 8.1%; and
CareerPath.com, Inc. 7.3%. 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. We are currently engaged in
litigation with CorPay Solutions, Inc., for failure to pay its outstanding
invoices, which litigation is described in more detail under the heading "Legal
Proceedings" in this Form 10-Q.
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 REDUCE OUR EARNINGS
We have grown rapidly and expect to continue to grow rapidly by both
hiring new employees and serving new businesses and geographic markets. We plan
to open new offices in 2000. 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 on January 1, 1998 to 303 on
September 30, 2000. 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.
BECAUSE OUR CUSTOMERS RETAIN US ON A PROJECT-BY-PROJECT BASIS, RATHER THAN UNDER
LONG-TERM CONTRACTS, WE MAY BE UNABLE 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
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;
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-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 expected this to continue. As a result, the
cancellation or deferral of even a small number of projects 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 28.8% 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, although residing in the United
States, 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 September 30, 2000, 42, or 28.8%, of our software engineers were
working under H-1B visas. The U.S. 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. Further, we
have extended offers to employees of other companies who are working under H-1B
visa in the United States. We cannot employ these H-1B workers until the U.S.
Immigration and Naturalization Service approves a separate H-1B visa petition
filed by us. Due to a current backlog at the U.S. Immigration and Naturalization
Service that has delayed these potential hires from transferring sponsorship to
Cysive, they have not been able to begin working for us. If this delay were to
continue, our ability to recruit and hire these personnel would be impaired. 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.
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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:
-internal information technology departments of current and
potential customers;
-Internet professional services providers, such as Proxicom, Inc.,
Scient Corporation and Viant Corporation;
-large information technology consulting services providers, such
as Andersen Consulting LLP, Electronic Data Systems Corporation,
International Business Machines Corporation and
PricewaterhouseCoopers LLP; 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, large 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.
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
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standards and changing customer preferences. Our 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.
IF WE FAIL TO MEET OUR CUSTOMERS' EXPECTATIONS, WE COULD DAMAGE OUR REPUTATION
AND HAVE DIFFICULTY ATTRACTING NEW BUSINESS OR BE SUED
Our projects are complex and critical to our customers. As a result, if
we fail or are unable to meet a customer's expectations, we could damage our
reputation. This could adversely affect our ability to attract new business from
that customer or others. If we fail to perform adequately on a project, a
customer could sue us for damages. Our contracts generally limit our liability
for damages that may arise from negligent acts, errors, mistakes or omissions in
rendering services to our customers. However, we cannot be sure that these
contractual provisions will protect us from liability for damages if we are
sued. Furthermore, our general liability insurance coverage may not continue to
be available on reasonable terms or insufficient amounts to cover one or more
large claims, or the insurer may disclaim coverage as to any future claim.
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 or our future revenues could be
derived from emerging companies 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.
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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.
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PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as set forth below, we are not a party to any material pending
legal proceedings. On August 23, 2000, we terminated a time and materials
contract with CorPay Solutions, Inc. (the "Contract") for failure to pay its
outstanding invoices. Under the terms and conditions of the Contract, the
parties agreed to settle their disputes through binding arbitration.
Accordingly, on August 29, 2000, we filed a demand for arbitration seeking to
recover all amounts owed by CorPay Solutions Inc. under our outstanding invoices
(approximately $2.2 million). CorPay Solutions, Inc. has filed a counterclaim
seeking the return of all amounts paid to us (approximately $4.5 million),
alleging that we breached the Contract by, among other things, failing to
perform the services called for in the Contract. We vigorously deny all
allegations raised in the counterclaim
A three day hearing is scheduled to begin on December 13, 2000 before a
panel of three AAA arbitrators. Although we do not expect the outcome of this
case to have a material adverse effect on our business, operating income or
financial condition, an adverse judgment would have a material adverse effect on
the operating results reported by us for the period in which any adverse
judgment might occur.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
For the three months ended September 30, 2000, we granted to certain of
our employees options to purchase a total of 899,500 shares of common stock
under and pursuant to our Second Amended and Restated 1994 Stock Option Plan.
For the three months ended September 30, 2000, we issued a total of 1,338,234
shares of common stock upon exercise of options.
On September 27, 2000, certain employees of the Company rescinded
previously reported option exercise for an aggregate of 1,043,810 shares of our
common stock. Subsequently options for approximately 600,000 of these shares
were exercised. The shares issued upon the exercise of these options are
included in the amount set forth in the preceding paragraph.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
27.1 Financial Data Schedule
b. Reports on Form 8-K:
Current Report on Form 8-K, filed with the Commission on
August 1, 2000;
Current Report on Form 8-K, filed with the Commission on
August 24, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Form 10-Q to be signed on its behalf by the
undersigned thereunto duly authorized.
CYSIVE, INC.
Date: November 14, 2000 /s/ JOHN R. LUND
--------------------------------------------
By: John R. Lund
Vice President, Chief Financial
Officer, Treasurer and
Secretary
(Chief Financial and Accounting Officer)
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