<PAGE> 1
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
FOR THE QUARTER ENDED JUNE 30, 2000 COMMISSION FILE NO.
000-27607
CYSIVE, INC.
(Exact name of registrant as specified in its charter).
Delaware 54-1698017
-------------------------- ------------------
(State of Incorporation) (I.R.S. Employer
Identification Number)
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
----- -----
As of August 10, 2000, 27,984,043 shares of common stock were outstanding.
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CYSIVE, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements (Unaudited)
Balance Sheets as of December 31, 1999 and June 30, 2000......................................................... 2
Statements of Operations for the three months and six months ended June 30, 1999 and 2000........................ 3
Statements of Cash Flows for the six months ended June 30, 1999 and 2000......................................... 4
Notes to Financial Statements.................................................................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 6
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.......................................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders ............................................................... 13
Item 6. Exhibits and Reports on Form 8-K................................................................................... 13
</TABLE>
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PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CYSIVE, INC.
Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 2,433 $ 79,735
Investments............................................ 45,040 94,281
Accounts receivable, less allowance of $651 and $824
at December 31, 1999 and June 30, 2000,
respectively ........................................ 6,565 9,989
Prepaid expenses and other assets...................... 1,243 841
Deferred income taxes.................................. 383 412
--------- ---------
Total current assets.............................. 55,664 185,258
Furniture, fixtures and equipment, net..................... 641 4,675
Deferred income taxes...................................... 4,766 4,733
Other assets............................................... 283 380
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TOTAL ASSETS........................................... $ 61,354 $ 195,046
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 346 $ 1,068
Accrued payroll........................................ 2,592 4,286
Accrued liabilities.................................... 737 2,061
--------- ---------
Total current liabilities......................... 3,675 7,415
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 27,865,525 issued and
outstanding at December 31, 1999 and June 30, 2000,
respectively.............................................. 228 279
Additional paid-in capital................................. 79,767 205,559
Deferred stock compensation................................ (13,572) (11,671)
Accumulated deficit........................................ (8,744) (6,536)
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Total stockholders' equity........................ 57,679 187,631
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 61,354 $ 195,046
========= =========
</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 JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 2000 1999 2000
------------ ------------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues............................................................. $ 5,246 $ 15,209 $ 9,424 $ 27,504
Direct costs.................................................... 1,943 5,521 3,473 9,599
------------ ----------- ----------- ----------
Gross profit......................................................... 3,303 9,688 5,951 17,905
Operating expenses:
General and administrative.............................. 1,125 4,963 2,419 9,107
Sales and marketing..................................... 948 3,116 1,720 5,859
Stock compensation...................................... 13,266 935 13,284 1,901
------------ ----------- ----------- ----------
Total operating expenses............................................. 15,339 9,014 17,423 16,867
------------ ----------- ----------- ----------
Operating income (loss).............................................. (12,036) 674 (11,472) 1,038
Other income, net.................................................... 14 2,117 25 2,698
------------ ----------- ----------- ----------
Income (loss) before income taxes.................................... (12,022) 2,791 (11,447) 3,736
Income tax expense................................................... -- 934 -- 1,528
------------ ----------- ----------- ----------
Net income (loss) ................................................... $ (12,022) $ 1,857 $ (11,447) $ 2,208
============ =========== =========== ==========
Earnings (loss) per share:
Basic earnings (loss) per share............................. $ (0 74) $ 0.07 $ (0.70) $ 0.09
Diluted earnings (loss) per share .......................... $ (0 74) $ 0.05 $ (0.70) $ 0.06
Weighted average shares outstanding.................................. 16,254,000 27,738,327 16,254,000 25,810,547
Weighted average shares and common equivalent shares outstanding..... 16,254,000 40,452,461 16,254,000 39,441,353
</TABLE>
See accompanying notes
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CYSIVE, INC.
Statements of Cash Flows
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 2000
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................ $ (11,447) $ 2,208
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation............................................ 83 405
Amortization............................................ 11 26
Stock compensation expense.............................. 13,284 1,901
Deferred income taxes................................... - 4
Non-cash tax expense.................................... - 1,524
Loss on sale of furniture, fixtures and equipment, net.. 5 18
Provision for doubtful accounts......................... 190 173
Changes in assets and liabilities:
Accounts receivable................................ (2,334) (3,597)
Prepaid expenses and other assets.................. (297) 304
Accounts payable................................... 124 722
Accrued liabilities................................ 139 1,324
Accrued payroll.................................... 900 1,694
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NET CASH PROVIDED BY OPERATING ACTIVITIES.................... 658 6,706
Cash flows from investing activities:
Purchase of investments............................ - (246,029)
Sale of investments................................ - 196,788
Capital expenditures............................... (187) (4,483)
---------- -----------
NET CASH USED IN INVESTING ACTIVITIES........................ (187) (53,724)
Cash flows from financing activities:
Stockholder distributions.......................... (214) -
Proceeds from sale of common stock................. - 123,172
Exercise of common stock options................... - 1,148
---------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.......... (214) 124,320
Increase in cash and cash equivalents........................ 257 77,302
Cash and cash equivalents at beginning of period............. 612 2,433
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................... $ 869 $ 79,735
========== ===========
</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 and six months ended June 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 three
and six months ended June 30, 1999, 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 three and six months ended June 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 six months ended June 30, 2000, the Company
recorded approximately $935,000 and $1,901,000 as stock compensation expense,
respectively.
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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 six months ended June 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 certain non-qualified stock options. Additionally in 1999,
certain grantees of qualified and incentive stock options exercised some of
these options and sold the common stock issued upon such exercise. These sales
created an additional tax benefit of $11.1 million to the Company. The Company
recorded a valuation allowance of $11.1 million because it believes that it is
uncertain as to whether Cysive shall receive any future benefit arising from
their tax benefits.
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. The Company is required to comply with SAB 101 for
transactions entered into during the fiscal year beginning October 1, 2000. The
Company does not expect the adoption of SAB 101 to have a material impact in its
financial position.
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 will adopt this interpretation on its effective date of July 1, 2000.
7. LAWSUIT
In December 1999, a lawsuit was filed against the Company by a former
service provider. Management denies the alleged factual and legal bases of the
lawsuit and is defending the matter vigorously. Although the Company does not
expect this lawsuit to have a material adverse effect on the Company's financial
statements, an adverse judgment could have a material adverse effect on the
operating results of the Company for the period in which any adverse judgment
might occur.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis compares the three and six months
ended June 30, 2000 to the three and six months ended June 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 Form 10-Q may include
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995.
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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 ("we" or "our") 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 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 June 30, 1999 and 2000 our five largest
customers represented 81.5% and 52.6% of our revenues, respectively. For the
six months ended June 30, 1999 and 2000, our five largest customers represented
82.5% and 50.4% of our revenues, respectively.
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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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES 100.0 % 100.0 % 100.0 % 100.0 %
Direct costs....................... 37.0 36.3 36.9 34.9
------- ------ ------- ------
Gross profit............................ 63.0 63.7 63.1 65.1
OPERATING EXPENSES:
General and administrative..... 21.4 32.6 25.7 33.1
Sales and marketing............ 18.1 20.5 18.2 21.3
Stock compensation............. 252.9 6.2 141.0 6.9
------- ------ ------- ------
Total operating expenses................ 292.4 59.3 184.9 61.3
OPERATING INCOME (LOSS)................. (229.4) 4.4 (121.8) 3.8
Other income, net....................... 0.2 13.9 0.3 9.8
------- ------ ------- ------
INCOME (LOSS) BEFORE INCOME TAXES....... (229.2) 18.3 (121.5) 13.6
Income tax expense...................... -- 6.1 -- 5.6
------- ------ ------- ------
NET INCOME (LOSS)....................... (229.2)% 12.2 % (121.5)% 8.0 %
------- ------ ------- ------
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1999
Revenues. Revenues increased $10.0 million, or 189.9%, to $15.2 million
for the three months ended June 30, 2000 from $5.2 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 the number of billable hours and an
increase in our billable rates. In addition, as a result of our direct sales
efforts, our number of active customers increased by 13 to 30 for the three
months ended June 30, 2000 from 17 for the same period in 1999.
Direct Costs. Direct costs increased $3.6 million, or 184.0%, to $5.5
million for the three months ended June 30, 2000 from $1.9 million for the same
period in 1999. The number of employees increased 161% compared to the same
period in 1999. As a percentage of revenues, direct costs decreased to 36.3%
for the three months ended June 30, 2000 from 37.0% for the same period in
1999. This decrease in direct costs as a percentage of revenues was primarily
attributable to our higher billing rates.
Gross Profit. Gross profit increased $6.4 million, or 193.3%, to $9.7
million for the three months ended June 30, 2000 from $3.3 million for the same
period in 1999. The gross margin increased to 63.7% for the three months ended
June 30, 2000 from 63.0% for the same period in 1999 because of our higher
billing rates, despite slightly lower utilization rates for the three months
ended June 30, 2000 of 86% compared with 88% for the same period in 1999.
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General and Administrative. General and administrative expenses increased
$3.8 million, or 341.3%, to $4.9 million for the three months ended June 30,
2000 from $1.1 million for the same period in 1999. As a percentage of
revenues, general and administrative expenses increased to 32.6% for the three
months ended June 30, 2000 from 21.4% for the same period in 1999. This
increase was due primarily to the 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, the increase in
depreciation expense of new assets to support our infrastructure, the increase
in legal expenses as well as the increase in costs to support the increased
number of employees.
Sales and Marketing. Sales and marketing expenses increased $2.2 million,
or 228.5%, to $3.1 million for the three months ended June 30, 2000 from
$948,000 for the same period in 1999. As a percentage of revenues, sales and
marketing expenses increased to 20.5% for the three months ended June 30, 2000
from 18.1% for the same period in 1999. This increase was primarily due to the
expansion of our marketing department and direct sales force to 31 employees for
the three months ended June 30, 2000 from 13 for the same period in 1999 and the
increase in variable commissions 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 three months ended June 30, 2000.
Stock Compensation. We recorded $935,000 in stock compensation for the
three months ended June 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 three months ended June 30, 1999
was significantly larger than the same period in 2000 because certain options
vested immediately in the three months ended June 30, 1999 whereas the stock
compensation expense in the three months ended June 30, 2000 is an amortization
of our deferred stock compensation.
Operating Income (Loss). Operating income increased $12.7 million, or
105.6%, to $674,000 for the three months ended June 30, 2000 from an operating
loss of $12.0 million for the same period in 1999. As a result of the above
factors, the operating margin increased to 4.4% for the three months ended June
30, 2000 from an operating loss margin of 229.4% for the same period in 1999.
Excluding the impact of the stock compensation expense, operating income
increased $379,000, or 30.9%, to $1.6 million for the three months ended June
30, 2000 from $1.2 million over the same period in 1999. Operating margin,
excluding the impact of the stock compensation expense, decreased to 10.6% from
23.4% for the same period in 1999.
Other Income, Net. Other income, net increased $2.1 million to $2.1
million for the three months ended June 30, 2000 from $14,000 for the same
period in 1999 due to increased interest income earned from investments made in
the three months ended June 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
$14.8 million, or 123.2%, to $2.8 million for the three months ended June 30,
2000 from a loss before income taxes of $12.0 million for the same period in
1999. As a result of the above factors, the income before income taxes margin
increased to 18.3% for the three months ended June 30, 2000 from a loss margin
of 229.2% in the same period in 1999. Excluding the impact of the stock
compensation expense, income before income taxes increased $2.5 million, or
200.5%, to
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$3.7 million for the three months ended June 30, 2000 from $1.2 million over
the same period in 1999. Similarly, income before income taxes margin,
excluding the impact of the stock compensation expense, increased to 24.5% from
23.7% in 1999.
Income Tax Expense. We recorded income tax expense of $934,000 for the
three months ended June 30, 2000. We recorded no income tax expense for the
three months ended June 30, 1999 because we operated as an S-corporation under
the Internal Revenue Code during that period. Assuming we operated as a
C-corporation for the three months ended June 30, 1999 with a 40% effective tax
rate, income tax expense would have been $498,000.
Net Income (Loss). Net income increased $13.9 million or 115.5%, to $1.9
million for the three months ended June 30, 2000 from a net loss of $12.0
million for the same period in 1999. As a result of the above factors, the net
income margin increased to 12.2% for the three months ended June 30, 2000 from a
net loss margin of 229.2% 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 $2.0 million, or 273.2%, to $2.8 million for the three months
ended June 30, 2000 from $746,000 in the same period in 1999. Similarly, net
income margin, excluding the impact of the stock compensation expense in 2000
and 1999 and including the income tax expense in 1999, increased to 18.3% for
the three months ended June 30, 2000 from 14.3% in the same period in 1999.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
Revenues. Revenues increased $18.1 million, or 191.9%, to $27.5 million
for the six months ended June 30, 2000 from $9.4 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 the number of billable hours and an
increase in our billable rates. In addition, as a result of the direct sales
efforts, our number of active customers increased by 16 to 37 for the six months
ended June 30, 2000 from 21 for the same period in 1999.
Direct Costs. Direct costs increased $6.1 million, or 176.4%, to $9.6
million for the six months ended June 30, 2000 from $3.5 million for the same
period in 1999. As a percentage of revenues, direct costs decreased to 34.9%
for the six months ended June 30, 2000 from 36.9% for the same period in 1999.
This decrease in direct costs as a percentage of revenues was primarily
attributable to our higher billing rates and a higher utilization rate for the
six months ended June 30, 2000 of 90% compared with 85% for the same period in
1999.
Gross Profit. Gross profit increased $12.0 million, or 200.9%, to $17.9
million for the six months ended June 30, 2000 from $5.9 million for the same
period in 1999. The gross margin increased to 65.1% for the six months ended
June 30, 2000 from 63.1% for the same period in 1999 because our revenue growth
exceeded the rate of increase in direct costs.
General and Administrative. General and administrative expenses increased
$6.7 million, or 276.5%, to $9.1 million for the six months ended June 30, 2000
from $2.4 million for the same period in 1999. As a percentage of revenues,
general and administrative expenses increased to 33.1% for the six months ended
June 30, 2000 from 25.7% for the same period in 1999. This increase was due
primarily to the expansion of our recruiting and corporate administrative
staffs, the addition of new regional offices, the inclusion of costs associated
with
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<PAGE> 12
being a publicly-held company, the increase in depreciation expense of new
assets to support the infrastructure, the increase in legal expenses as well as
the increase in costs to support the increased number of employees.
Sales and Marketing. Sales and marketing expenses increased $4.1 million,
or 240.6%, to $5.8 million for the six months ended June 30, 2000 from $1.7
million for the same period in 1999. As a percentage of revenues, sales and
marketing expenses increased to 21.3% for the six months ended June 30, 2000
from 18.2% 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 six months ended June 30, 2000.
Stock Compensation. We recorded $1.9 million in stock compensation for
the six months ended June 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 six months ended June 30, 1999
was significantly larger than the same period in 2000 because certain options
vested immediately in the six months ended June 30, 1999 whereas the stock
compensation expense in the six months ended June 30, 2000 is an amortization
of our deferred stock compensation.
Operating Income (Loss). Operating income increased $12.5 million, or
109.0%, to $1.0 million for the six months ended June 30, 2000 from an
operating loss of $11.5 million for the same period in 1999. As a result of the
above factors, the operating margin increased to 3.8% for the six months ended
June 30, 2000 from an operating loss margin of 121.8% for the same period in
1999. Excluding the impact of the stock compensation expense, operating income
increased $1.1 million, or 62.2%, to $2.9 million for the six months ended June
30, 2000 from $1.8 million over the same period in 1999. Operating margin,
excluding the impact of the stock compensation expense, decreased to 10.7% from
19.2% for the same period in 1999.
Other Income, Net. Other income, net increased $2.7 million to $2.7
million for the six months ended June 30, 2000 from $25,000 for the same period
in 1999 due to increased interest income earned from investments made in the
six months ended June 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
$15.2 million, or 132.6%, to $3.7 million for the six months ended June 30,
2000 from a loss before income taxes of $11.5 million for the same period in
1999. As a result of the above factors, the income before income taxes margin
increased to 13.6% for the six months ended June 30, 2000 from a loss margin of
121.5% in the same period in 1999. Excluding the impact of the stock
compensation expense in 2000 and 1999, income before income taxes increased $3.8
million, or 206.9%, to $5.6 million for the six months ended June 30, 2000 from
$1.8 million over the same period in 1999. Similarly, income before income
taxes margin, excluding the impact of the stock compensation expense, increased
to 20.5% from 19.5% in 1999.
Income tax expense. We recorded income tax expense of $1.5 million for
the six months ended June 30, 2000. We recorded no income tax for the six
months ended June 30, 1999 because we operated as an S-corporation under the
Internal Revenue Code during that period.
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Assuming we operated as a C-corporation for the six months ended June 30, 1999
with a 40% effective tax rate, income tax expense would have been $1.0 million.
Net Income (Loss). Net income increased $13.7 million, or 119.3%, to $2.2
million for the six months ended June 30, 2000 from a net loss of $11.5 million
for the same period in 1999. As a result of the above factors, the net margin
increased to 8.0% for the six months ended June 30, 2000 from a net loss margin
of 121.5% 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 $3.3 million, or 408.2%, to $4.1 million for the six months ended
June 30, 2000 from $803,000 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, increased to 14.8% for the six months ended
June 30, 2000 from 8.5% 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).
Cash and cash equivalents were $2.4 million at December 31, 1999 and $79.7
million at June 30, 2000. Investments were $45.0 million at December 31, 1999
and $94.3 million at June 30, 2000. Net cash provided by operating activities
was $658,000 and $6.7 million for the six months ended June 30, 1999 and 2000,
respectively. Capital expenditures of $187,000 and $4.5 million for the six
months ended June 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.
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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
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.
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
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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 183 on
February 17, 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;
- 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,
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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 27% 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 February 17, 2000, 31, or 27%, 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.
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;
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- 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 form
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 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
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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 in sufficient 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, 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.
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 11, 2000, we filed a certificate of amendment to our articles of
incorporation with the Secretary of State for the State of Delaware. This
amendment increased the total number of shares of common stock authorized
from 75 million to 500 million. Our shareholders approved this
amendment at their annual meeting held on April 24, 2000.
Between April 1, 2000 and June 30, 2000, we granted to certain of our
employees options to purchase a total of 5.2 million shares of our common stock
under and pursuant to our Second Amended and Restated 1994 Stock Option Plan.
Between April 1, 2000 and June 30, 2000, we issued a total of 588,000 shares of
our common stock upon exercise of options.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On April 24, 2000, we held our annual meeting of stockholders. The
following proposals were adopted by the votes specified below (as adjusted to
reflect our 2-for-1 stock split occurring on May 8, 2000):
(i) The election of one Class I Director (Nelson A. Carbonell,
Jr.) to serve for a three year term ending on April 24, 2003. Mr. Carbonell
received a total of 20,550,052 shares of Common Stock voting in favor, with
5,956 withheld from the vote. In addition to the director listed above who
was elected at the meeting, the terms of the following directors continued
after the meeting: John M. Sabin, John R. Lund and Jon S. Korin.
(ii) The approval of an amendment to our Amended and Restated 1994
Stock Option Plan increasing the number of shares of Common Stock reserved
for purchase thereunder from 22,700,000 to 35,150,000. A total of 16,099,680
shares of Common Stock were voted in favor of this proposal, 3,627,612 shares
were voted against this proposal and 4,272 shares abstained from voting.
(iii) The approval of an amendment to our Certificate of
Incorporation increasing the number of shares of Common Stock authorized from
75 million to 500 million. A total of 18,055,118 shares of Common Stock were
voted in favor of this proposal, 2,503,022 shares were voted against this
proposal and 2,868 shares abstained from voting.
(v) The approval to ratify the appointment of Ernst & Young LLP as
our independent auditors. A total of 20,559,744 shares of Common Stock were
voted in favor of this proposal, 890 shares were voted against this proposal
and 378 shares abstained from voting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
27.1 Financial Data Schedule
b. Reports on Form 8-K:
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Current Report on Form 8-K, filed with the Commission on
April 21, 2000;
Current Report on Form 8-K, filed with the Commission on May
15, 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: August __, 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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