Back to GetFilings.com

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

For the Quarterly Period Ended March 31, 2003

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission File No.
000-27607

CYSIVE, INC.
(Exact name of registrant as specified in its charter).

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)

     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

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     Yes      No X

     As of May 14, 2003, 28,460,207 shares of common stock were outstanding.

CYSIVE, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION

- 1 -

PART I.
FINANCIAL INFORMATION

ITEM 1. Financial Statements

CYSIVE, INC.

Balance Sheets
(In thousands, except share and per share data)

See accompanying notes

- 2 -

CYSIVE, INC.

Statements of Operations
(In thousands, except share and per share data)
(Unaudited)

See accompanying notes

- 3 -

CYSIVE, INC.

Statements of Cash Flows
(In thousands)
(Unaudited)

See accompanying notes

- 4 -

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 that 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 of 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, 2002, included in the Annual Report on Form 10-K filed by the Company with the Securities and Exchange Commission on March 19, 2003. The results of operations for the three months ended March 31, 2003 are not necessarily indicative of results for the full year.

     Certain amounts in the prior period financial statements have been reclassified to conform to the current quarter presentation.

     Stock-Based Compensation

     The Company accounts for its stock-based compensation in accordance with Accounting Principles Board Opinion (APB) No. 25 “Accounting for Stock Issued to Employees” using the intrinsic value method. The pro forma disclosures required by Statement of Financial Accounting Standards (SFAS) No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure” using the fair value method appear in the table below.

     Had compensation expense related to stock option plans been determined based on the fair value at the grant date for options granted after 1995 consistent with the provisions of SFAS No. 148, the Company’s pro forma net loss and loss per share would have been as follows (in thousands, except per share data):

     The effect of applying SFAS No. 148 on the three months ended March 31, 2003 and 2002 pro forma net loss as stated above is not necessarily representative of the effects on reported net loss for future periods due to, among other things, the vesting period of the stock options, the fair value of future grants of stock options and the potential issuance of restricted stock.

- 5 -

     Restructuring

     In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities,” which requires restructurings initiated after December 31, 2002 to be accounted for using the provisions therein, with earlier application encouraged. The Company accounted for restructurings initiated prior to December 31, 2002 using the accounting provisions of Emerging Issues Task Force (EITF) Issue No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” (Issue 94-3). Under SFAS No. 146, the accounting provisions of Issue 94-3 will continue to apply to restructurings initiated prior to December 31, 2002, and therefore, the adoption of this standard has no impact on the Company’s financial statements with respect to these restructurings. The impact of the adoption of this standard with respect to future restructurings and financial statements for future periods is not known or reasonably estimable.

2. Revenue recognition

     The Company accounts for the licensing of software in accordance with American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, “Software Revenue Recognition” (as amended by SOP 98-4 and SOP 98-9) and related interpretations. The Company recognizes revenue when (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the sales price is fixed or determinable; and (iv) collectibility is reasonably assured. Maintenance and term license revenues are generally recognized ratably over the contract period. For software arrangements with multiple elements, revenue recognition is dependent upon whether vendor-specific objective evidence (VSOE) of fair value exists for each of the elements and whether or not significant customization services are required. When significant customization services are not required and VSOE does not exist for all the elements of a software arrangement and the only undelivered element is maintenance, the entire licensing fee is recognized ratably over the contract period. When significant customization services are required in conjunction with software license sales, the software license fees and the related consulting services revenues are recognized in accordance with AICPA SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts,” using the percentage-of-completion method based on hours-worked as compared with estimated total hours-worked at completion.

     Deferred revenues are comprised of deferrals for license fees, maintenance and services billed to customers in advance of the related revenue recognition.

3. Software development costs

     SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,” requires the capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on the Company’s product development process, technological feasibility is established upon the completion of a working model. Costs incurred by the Company between the completion of the working model and the point at which the product is ready for general release have been insignificant. Accordingly, the Company has charged all such costs to research and development expense in the period incurred.

4. Stock compensation expense

     In 1999, prior to its initial public offering, the Company granted stock options to purchase shares of common stock at exercise prices deemed below fair market value of the common stock on the date of grant. In 2000, the Company granted non-qualified stock options to purchase shares of common stock at a 15% discount from the fair market value. The Company recorded deferred stock compensation for the difference between the grant price and fair market value of the options granted. The deferred stock compensation is amortized ratably on a quarterly basis over the period in which the remaining options

- 6 -

vest, which extends through September 2003, less the benefit of any stock options cancelled. Stock options granted in 2001 and 2002 were at exercise prices equal to the fair market value of the common stock on the date of grant, and therefore, no compensation expense has been recognized related to these grants. No stock options were granted during the three months ended March 31, 2003.

     During the first quarter of 2003, the Company recognized $145,000 of stock compensation expense related to outstanding stock options that were issued with exercise prices below fair market value. The deferred stock compensation component of stockholders’ equity was further reduced by $50,000 during the first quarter of 2003 due to stock options cancelled as a result of employee terminations in the quarter.

     During the first quarter of 2002, the Company recognized $3,214,000 of stock compensation expense. During that quarter, the Company cancelled certain employee-held stock options, resulting in an acceleration of compensation expense related to the value of these options, and the Company recognized $2,208,000 of expense related to these cancellations. During that quarter, the Company also recognized $834,000 of stock compensation expense related to outstanding stock options that were issued with exercise prices below fair market value. Additionally, in January 2002, the Company purchased 65,926 shares of its own common stock from employees. Of these, 63,676 shares were purchased from employees within six months of issuance as a result of stock option exercises. Accordingly, the Company recognized stock compensation expense of $132,000 related to these purchases. During the quarter ended March 2002, the Company also recognized $40,000 of stock compensation expense related to certain restricted stock granted in 2001.

5. Loss per share

     The Company presents basic and diluted loss per share as one line item. Basic and diluted loss per share is based on the weighted average number of shares outstanding during the period. Common stock equivalents are excluded from the calculation of diluted loss per share, as their effect would be anti-dilutive.

     Based on the closing price of $2.58 per share for the Company’s common stock on March 31, 2003, and using the treasury stock method for determining the amount of common stock equivalents, the number of common stock equivalent shares related to stock options outstanding as of March 31, 2003 was 4,093,093.

6. Comprehensive loss

     Comprehensive loss includes net loss and unrealized gains and losses on investments. For the three months ended March 31, 2003 and 2002, comprehensive loss was $2.8 million and $9.1 million, respectively.

7. Interest-bearing investments

     Investments are generally comprised of variable rate securities that provide for optional or early redemption within twelve months, and the contractual maturities are generally greater than twelve months. Investments with effective maturity dates of one year or less at the balance sheet date are classified as current, and investments with effective maturity dates of more than one year are classified as non-current. There may be significant changes on a quarterly basis in the amounts classified as current or non-current based on the effective maturity dates of the particular investments at the balance sheet dates.

     The Company classifies its investments as available-for-sale. Investments in securities that are classified as available-for-sale and have readily determinable fair values are measured at fair market value in the balance sheets. Any unrealized gains or losses are reported as a separate component of stockholders’ equity, if deemed material. Realized gains and losses and declines in market value judged to

- 7 -

be other than temporary are included in investment income. Interest and dividends are also included in investment income.

8. Accrued restructuring

     During the fourth quarter of 2000, the Company took specific actions to reduce its overall cost structure in anticipation of declining sales. As a result, the Company recorded a $4.7 million pre-tax restructuring expense primarily related to 1) the elimination of certain non-technical support roles, resulting in severance costs; 2) the closing of a satellite office, resulting in the write-down of assets; and 3) the accrual for professional fees related to the office closing or potential claims from severed employees. During the three months ended March 31, 2003, the Company paid approximately $90,000 for rental costs related to this restructuring. Cumulative lease obligation and related office costs incurred as of March 31, 2003 totaled $773,000. During the quarter, the office space was sublet from April 2003 through the remaining term with sublease payments commencing June 1, 2003 and estimated to total $315,000, net of brokerage commissions, over the remaining term. Principally as a result of entering into this sublease, the Company reduced the accrued liability for this restructuring by $337,000 through a credit to restructuring expense. As of March 31, 2003, estimated amounts remaining to be paid total $436,000 and are for rents payable, net of sublease income, through August 2005.

     During the third quarter of 2002, the Company approved a restructuring plan which included the following: the termination of 49 employees, consisting of engineering, sales and general and administrative employees; the closing of three satellite offices; and the intent to sublet, if possible, significant portions of its office space. As a result, the Company recorded a $5.9 million pre-tax restructuring expense during the third quarter of 2002 to cover severance costs ($873,000), estimated remaining lease obligations net of anticipated sublet income ($4,241,000), the write-off of leasehold improvements ($457,000), and the write-down of furniture and equipment to net realizable value ($374,000). During the three months ended March 31, 2003, the Company paid approximately $219,000 for rental costs related to this restructuring. Cumulative lease obligation and related office costs incurred as of March 31, 2003 totaled $711,000. Estimated amounts remaining to be paid as of March 31, 2003, total $3.7 million and are for rents payable, net of sublease income, through April 2010.

9. Subsequent events

     On May 13, 2003, the Company announced that it had retained Broadview International LLC to assist the Company in considering strategic alternatives, including a possible sale of the Company. The Company further announced that it was in discussions with various third parties regarding a possible acquisition of the Company and that it had formed a special committee of independent directors for the purpose of evaluating strategic alternatives and any offers the Company may receive. There can be no assurance, however, that any transaction will occur, and, if any transaction does occur, what the structure or terms would be of such a transaction.

     In April 2003, the Company executed a termination agreement on its office space in New York City. As a result, the Company will be relieved from a future lease obligation of approximately $1.7 million in exchange for a payment of $690,000 and the transfer of its New York office furniture and leasehold improvements, which have a combined net book value of $286,000. The Company expects to record, in the second quarter of 2003, additional restructuring expense of approximately $1.0 million relating to this lease termination.

- 8 -

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations

     The following discussion and analysis compares the three months ended March 31, 2003 to the corresponding period ended March 31, 2002 for Cysive and should be read together with our financial statements and notes thereto appearing elsewhere in this Form 10-Q and with our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 19, 2003.

     Certain statements contained in this Quarterly Report on Form 10-Q, including information with respect to the Company’s future business plans, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology are intended to identify forward-looking statements. These factors may cause our actual results to differ materially from a forward-looking statement. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including, but not limited to, our continued significant losses; the implementation of our new unproven business model; uncertain demand for our product; our ability to manage growth and attract and retain highly trained and experienced employees; increased competition in the electronic business industry; and our ability to respond to new technological advances in the software products 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. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, until the effective date of our future reports required by applicable securities laws.

Overview

     Cysive, Inc. is a provider of interaction server technology that enables users to interact with enterprise applications and data across multiple communications channels, devices and intermittent connections. We develop and deliver software that enables users to interact with enterprises over multiple communications channels and devices such as Web browsers, Web Services, rich client applications, mobile phones, PDAs and voice. Our software product creates a seamless user experience for interactions that range from simple requests for information, to complex, multi-step business processes and long-running transactions that interact with many enterprise systems.

     Historically, nearly all of our revenues have resulted from the delivery of custom software and services solutions to our customers. Due to increasing competition, declining margins and business volatility, in 2001 we began the transition of our business model from a software engineering services model to a software products model. Accordingly, during 2001 we developed the Cysive Cymbio Interaction Server™, or Cysive Cymbio®, a multi-channel, enterprise software product that uses widely supported technologies and open standards to enable users to interact with enterprises over multiple communications channels, devices and intermittent connections. The Cysive Cymbio Interaction Server enhances a user’s experience, improves return on existing information technology investments, and reduces call center, systems management and maintenance costs. At the conclusion of the year ended December 31, 2002, our business model transition was complete.

     We believe that after spending several years, and expending significant resources implementing numerous non-integrated and often incompatible software products, such as application servers, portals, enterprise application integration tools, business process management suites and Web Services platforms,

- 9 -

enterprises continue to face key challenges in handling multi-channel interactions involving complex, multi-stage transactions, with intermittently connected users employing a myriad of access devices. We also believe enterprises are moving to a multi-channel access approach using Web, Web Services, wireless and voice to interact with their employees, customers, suppliers, partners and distributors. Enterprises often lack a facility to manage these disparate systems, resulting in increased costs for the enterprise, and a less satisfactory experience for the user. Technology advances, such as the Cysive Cymbio Interaction Server, enable companies to integrate complex interactions between users and enterprises via multiple channels and devices, providing an improved user experience more quickly and inexpensively.

     During the three months ended March 31, 2003, we executed three renewals for maintenance and support for Cysive Cymbio. As of March 31, 2003, the maintenance and support amounts related to these renewals are included in deferred revenues. We did not license our product to any new customers during this quarter.

     Our financial results may fluctuate from quarter-to-quarter based on factors such as the number of license sales, the amount and timing of our customers’ expenditures, 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-month periods ended March 31, 2003 and 2002, our five largest customers represented 100.0% and 84.3% of our revenues, respectively.

- 10 -

Results of Operations

     The following table presents, for the periods indicated, the relative composition of revenues and selected statements of operations data as a percentage of revenues:

(1)     Direct costs of services and software license are stated as a percentage of services and software license revenues, respectively.
NM – Not meaningful.

Revenues (in thousands):

     The decrease in services revenue for the three months ended March 31, 2003 as compared to the three months ended March 31, 2002 was primarily due to our transition to a software license sales business model. As of the end of 2002, we exited the custom software engineering services business and concentrated our efforts on software sales and related maintenance and support services. Services revenue represented 60.2% and 99.9% of total revenues for the three months ended March 31, 2003 and 2002, respectively. As of March 31, 2003, we had four billable software engineers as compared to 38 for the same period in the prior year.

- 11 -

     Software license revenues result from the licensing of our product, Cysive Cymbio. To date, we have sold only a limited number of Cysive Cymbio licenses. Demand for our product is uncertain and, therefore, the revenue stream from future license sales is also uncertain. Additionally, the timing of revenue recognition related to future software license sales is uncertain, as it is, in part, dependent on when vendor specific objective evidence for the value of maintenance services, included as a part of these sales, is established.

Direct costs (in thousands):

     The decrease in direct costs for the three months ended March 31, 2003 as compared to the three months ended March 31, 2002 was primarily due to the restructuring in the third quarter of 2002 resulting from our decision to exit the custom software engineering services business. Direct costs from software licenses represented third party technology license fees and product packaging. Third party license fees are generally amortized on a straight-line basis over the term of each license.

Operating expenses (benefit) (in thousands):

     Sales and Marketing. The decrease in sales and marketing expenses for the three months ended March 31, 2003 as compared to the three months ended March 31, 2002 was primarily due to a reduction in sales staff headcount and lower variable compensation as sales have declined. Spending on advertising and public relations has also declined. As of March 31, 2003, we had 15 sales and marketing staff, including three technical support personnel who conduct product demonstrations and address technical issues regarding our product. Sales and marketing expenses are expected to increase as we initiate new promotional and advertising campaigns, and potentially hire additional sales and marketing staff.

     General and Administrative. The decrease in general and administrative expenses for the three months ended March 31, 2003 as compared to the three months ended March 31, 2002 was primarily due to lower support staff headcount, as well as reductions in facilities costs, office and equipment expense, depreciation expense, meeting costs and travel expense. For the near term, general and administrative expenses are expected to continue at a level similar to that experienced during the first quarter of 2003.

     Research and Development. Research and development expenses for the three months ended March 31, 2003 was relatively comparable to the three months ended March 31, 2002. The slight increase in research and development expenses was primarily due to an increase in office and travel expense for our product engineering team. As of March 31, 2003, we had 26 personnel assigned to the product engineering team, as compared with 24 as of December 31, 2002. Research and development expenses are anticipated to remain near current levels for the near future.

     Stock Compensation. The decrease in stock compensation expense for the three months ended March 31, 2003 as compared to the three months ended March 31, 2002 was primarily due to the recognition of, on an accelerated basis, $2.0 million of expense related to the cancellation of certain officer and employee-held stock options during the three months ended March 31, 2002. The decline also

- 12 -

reflects a lower level of continuing stock compensation expense for stock options granted in 1999 and 2000. Stock compensation expense in the second quarter of 2003 is expected to be similar to the amount recognized in the first quarter of 2003.

     Restructuring. We recognized a benefit to restructuring due to a reduction in future net rent expense for lease obligations as a result of office space that was sublet during the first quarter of 2003. We expect to record in the second quarter of 2003, additional restructuring expense of approximately $1.0 million relating to the termination of our New York City office lease as discussed in Note 9 of the financial statements.

Investment income, net (in thousands):

     The decrease in net investment income for the three months ended March 31, 2003 as compared to the three months ended March 31, 2002 was due to a combination of a lower average invested capital and lower interest rates between periods. We expect that our average invested capital will continue to trend downward during 2003, as we continue to use cash and investment proceeds to finance our operations.

Liquidity and Capital Resources

     Cash was $2.5 million at March 31, 2003 and $8.5 million at December 31, 2002. Interest-bearing investments were $126.4 million at March 31, 2003 and $123.4 million at December 31, 2002. Net cash used in operating activities was $2.8 million and $5.3 million for the three months ended March 31, 2003 and 2002, respectively. Capital expenditures of $23,000 and $16,000 for the three months ended March 31, 2003 and 2002, respectively, were used primarily for computer equipment, office equipment and leasehold improvements.

     We anticipate that our existing sources of liquidity should be adequate to fund our currently anticipated cash needs through at least the next 18 months. To the extent we may need to obtain financing from external sources in the form of either additional equity or indebtedness, there can be no assurance that additional financing will be available at all, or that, if available, the financing will be obtainable on favorable terms.

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.

We expect to continue to incur significant losses at least through the end of the first quarter of 2004.

     Since the third quarter of fiscal 2000, we have incurred losses. We incurred cumulative net losses of $67.4 million from the fiscal quarter ended September 30, 2000 through the fiscal quarter ended March 31, 2003. We expect losses to continue through at least the first quarter of 2004. However, there can be no assurance that we will be profitable thereafter. If we do achieve profitability, we cannot assure you that we will be able to sustain or improve upon it on a quarterly or annual basis for future periods.

We are implementing a new business model that is evolving and unproven since we have migrated from offering a software engineering services model to a software products model.

     We decided at the beginning of 2001 to change our business strategy from a software engineering services model to a software products model. Accordingly, our business model is new and unproven and

- 13 -

we will need to continue to develop it as we implement our new business strategy. Our ability to generate significant revenues with our new business model will depend, in large part, on our ability to successfully develop our software products and to effectively market them to existing and potential clients. We have offered our software product since October 2001, and to date have executed five license agreements. We intend to continue to develop our business model as the demand for our software products evolves. We expect that our financial model and results of operations will change as a result of our transition from a software engineering services model to a software products model. We do not have sufficient experience with the sale and support of our products to determine all of the effects this transition will have on our financial model and results of operations. Our new business strategy may not be successful and we may need to restructure or revise our business model.

Demand for our product is uncertain and we may not be able to develop a sustainable market for our product.

     Cysive Cymbio is a new product for which demand is uncertain. Our marketing and sales activities may not be successful in developing customer interest and in generating sales of our product and related services. We also have not yet sold enough of our product to determine whether we can effectively develop a market for our product. We may not be able to sell sufficient products and related services to offset our costs, which may result in continuing losses.

     If the market for multi-channel interaction server software does not continue to grow or grows more slowly than expected, the need for our product could decline, negatively impacting future revenues. Consumers and businesses may reject our software for a number of reasons, including:

•		lack of a perceived need to embrace interaction server technology or our solution;
•		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 support and services;
•		increases in access costs to the Internet;
•		evolving government regulation;
•		uncertainty regarding intellectual property ownership;
•		costs associated with licensing and implementing multi-channel interaction server technology;
•		costs associated with the obsolescence of the multi-channel interaction server and existing infrastructure; and
•		our economic viability and the economic viability of our competitors.

The lengthy sales cycle for our products makes our revenues susceptible to substantial fluctuations.

     Our customers typically use our product and services to implement large, sophisticated applications that are critical to their business, and their purchases are often part of their implementation of a distributed or Web-based computing environment. Customers evaluating our software products face complex decisions regarding alternative approaches to the integration of enterprise applications, competitive product offerings, rapidly changing software technologies and standards and limited internal

- 14 -

resources due to other information systems requirements. For these and other reasons, the sales cycle for our products is lengthy and is subject to delays or cancellation over which we have little or no control. The recent economic downturn has also contributed to increasing the length of our sales cycle, and there is a risk this will continue or worsen. This delay or failure to complete large orders and sales in a particular quarter could significantly reduce revenue that quarter, as well as subsequent quarters over which revenue for the sale would likely be recognized.

Because we rely on highly trained and experienced personnel to design and build complex products and systems for our customers, our inability to attract and retain qualified employees would impair our ability to provide our products 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 other technical personnel and sales and marketing professionals of various levels with experience in software products and related solutions. If we fail to attract and retain these personnel, we may be unable to timely develop new products and enhancements to our existing products, and 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 more than ten years, may also 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.

During the three months ended March 31, 2003, we derived 100.0% 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 a customer 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 net loss of customers could reduce our revenues. During the three months ended March 31, 2003, our five largest customers represented 100.0% of our revenues: McDATA Corporation, 38.7%; CAPS Logistics, Inc., 23.1%; Philips Medical Systems, N.A., 22.3%; Charles Machine Works, Inc., 13.0%; and Manheim Auctions, 2.9%. Many of these customers have completed the related software engineering services projects or Cysive Cymbio installations, and therefore, there is not a significant expected future revenue stream from these customers. In addition, a failure to collect a large account receivable could significantly reduce our assets and profitability.

Our revenues are derived primarily from a single software product and related services, and a decline in demand or prices for this product and services could adversely affect our business, operating results and financial condition.

     We currently derive the majority of our revenue from Cysive Cymbio and from related products and services. We expect this product and services to continue to account for the majority of our revenues in the immediate future. As a result, factors adversely affecting the pricing of or demand for Cysive Cymbio or related services, such as a continued or worsened general economic slowdown, future terrorist activities or military actions, competition, product performance or technological change, could have an adverse effect on our business, operating results and financial condition. In addition, as we introduce new versions of Cysive Cymbio, any delay or failure of these new versions to gain market acceptance among new and existing customers would have an adverse affect on our business, operating results and financial condition.

- 15 -

Our quarterly revenues and operating results are likely to fluctuate significantly, causing our stock price to decline.

     Our quarterly revenues and operating results have varied in the past and are likely to vary significantly from quarter to quarter. This fluctuation may cause our operating results to be below the expectations of securities analysts and investors, and the price of our stock may fall. Factors that could cause quarterly fluctuations include:

•		the lengthy sales cycle for our products and our level of product sales;
•		the loss of a significant customer;
•		financial difficulty encountered by a significant customer;
•		the introduction of new products or changes in pricing policies by us or our competitors;
•		any increased price sensitivity by our customers, particularly in the face of current adverse economic conditions and increased competition;
•		our ability to manage costs, including employee costs and support services costs; and
•		costs related to restructurings and the under-utilization or closing of our offices.

     In any given quarter, most of our revenues have been attributable to a limited number of customers and we expect this to continue. As a result, the cancellation or deferral of any product orders 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 a failure to book an expected order in a given quarter would not be offset by a corresponding reduction in costs. As a result of these factors, we believe that period-to-period comparisons of our revenues and operating results are not necessarily meaningful.

We may not be able to enhance our existing product or develop or acquire new products, which could adversely affect our business.

     We believe that our success will depend, in part, on our ability to enhance existing products and develop new products that meet the needs of a rapidly evolving marketplace and increasingly sophisticated and demanding customers. However, enhancement and development of products is a complex process involving several risks. Hiring and retaining highly qualified technical employees is critical to the success of our development efforts, and we face intense competition for these employees. Launches of products can be delayed for a variety of reasons, including the typically long development and testing periods. Further, new or improved products may also have “bugs” that hinder performance, or third party products we incorporate in, or use to build and support, our products, may contain defects that impair performance. These problems can be expensive to fix and can also result in higher technical support costs and lost customers. In addition, new products or features are sometimes built on top of older architectures or infrastructures, which can take longer to get to market, make quality assurance and support more difficult, and lead to complexity in supporting future functionality. Significant delays in new product enhancements or significant problems in creating new products may give competitors opportunities to improve their competitive position at our expense and result in declines in our revenues and earnings.

- 16 -

We may not be able to provide adequate customer service, which could adversely affect our customer relationships and financial performance.

     If we are unable to meet customer expectations, we could lose customers and/or receive negative publicity, which could have a significant negative impact on the financial and market success of our products. In addition, despite our efforts to maintain continuous and reliable product support and customer service, we may occasionally experience unplanned outages or technical difficulties. Lengthy and/or frequent service disruptions, particularly for services that customers consider time-sensitive, can result in negative publicity, damage to our reputation and loss of customers. This could adversely affect customer relationships and our financial performance.

Competition from larger, more established competitors with greater financial resources and from new entrants could result in price reductions and loss of current or future customers.

     The software products market is intensely competitive and faces rapid technological change. We expect competition to continue and intensify, which could result in price reductions and the loss of current or future customers. Many of our competitors have longer operating histories and customer relationships, greater financial, technical, marketing and public relations resources, larger customer bases and greater brand or name recognition than we have. Our competitors may be able to respond more quickly to technological developments and changes in customer needs. This ability may place us at a disadvantage in responding to our competitors’ pricing strategies, technological advances, advertising campaigns, strategic partnerships and other initiatives. In addition, there are low barriers to entry into our business because the costs to develop new products and to provide information technology services are relatively low. We do not own any technologies that preclude or inhibit competitors from entering our industry. We have filed a patent application for our Follow-On universal session management technology, which is part of Cysive Cymbio. We cannot be certain that the patent will be granted, that the patent application will not be successfully challenged or that we will realize any competitive advantage from the patent if it is granted. Therefore, we expect to continue to face additional competition from new entrants into our industry.

Our business is technology driven, and if we have difficulty responding to changing technology, industry standards and customer preferences, we could lose current and potential customers, which would reduce our revenues.

     We expect to derive a substantial portion of our revenues from creating software products 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 products that stay at the forefront of continuing changes in technology, evolving industry standards and changing customer preferences. Our failure to create products 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 products.

If our products contain software defects, it could harm our revenues and expose us to litigation.

     The software product we offer is internally complex and, despite extensive testing and quality control, may contain errors or defects. We may need to issue corrective releases of our software product to fix any defects or errors. Any defects or errors could also cause damage to our reputation or suits for damages and result in loss of revenues, product returns or order cancellations, or lack of market acceptance of our product. Accordingly, any defects or errors could have an adverse affect on our business, results of operations and financial condition.

     Our license agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in our license agreements may not be effective as a result of existing or future federal, state or local laws or ordinances or unfavorable judicial decisions. Although we have not

- 17 -

experienced any product liability claims to date, sale and support of our products entails the risk of such claims, which could be substantial in light of customers’ use of such products in mission-critical applications. If a claimant brings a product liability claim against us, it could have a material adverse effect on our business, results of operations and financial condition. Our products interoperate with many parts of complicated computer systems, such as mainframes, servers, personal computers, application software, databases, operating systems and data transformation software. Failure of any one of these parts could cause all or large parts of computer systems to fail. In such circumstances, it may be difficult to determine which part failed, and it is likely that customers will bring a lawsuit against several suppliers. Even if our software is not at fault, we could suffer material expense and material diversion of management time in defending any such lawsuits.

     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.

A general decline in economic conditions could lead to reduced demand for our product.

     The continuing downturn in general economic conditions and specific declines in the technology sector has led to reduced demand for a variety of goods and services, including many technology products. If conditions continue to decline, or fail to improve, in geographic areas that are significant to us, we could see a decrease in the overall demand for our products that could negatively impact our operating results.

Because our business of software products 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 products, trade secrets, trademarks or other proprietary information, or if disputes arise with customers or suppliers 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.

We entered 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 custom software engineering services business involved the development of software applications for specific projects. Ownership of customer-specific software was generally retained by the customer, although we retained rights to some of the applications, processes and other intellectual property developed in connection with projects. We sometimes agreed, however, not to reuse this customer-specific software when building systems for a customer’s competitors. In addition, we occasionally agreed not to build any type of system for a customer’s competitors for limited periods of time, which have been as long as three years. These non-compete agreements reduce the number of our potential customers and our sources of revenues. We may enter into such non-compete agreements in the future.

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

- 18 -

operations and creating and maintaining a cohesive culture. He has also been involved in establishing and expanding customer relationships.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

     We are exposed to interest rate risk related to our cash and interest-bearing investments. Our interest-bearing investments are generally comprised of variable rate securities that provide for optional or early redemption within twelve months, and the contractual maturities are generally greater than twelve months. As of March 31, 2003, we had total cash and interest-bearing investments of $128.9 million, and this balance is expected to decline to between $121.0 — $125.0 million by June 30, 2003. We believe that a change in interest rates of 100 basis points or more could have a material impact on our investment income and cash flows.

     We are potentially exposed to interest rate risk related to borrowings under our credit facility with Merrill Lynch & Co., Inc. We had no borrowings outstanding under our credit facility at March 31, 2003.

Item 4. Controls and Procedures

     Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely reporting material information required to be included in our periodic reports filed with the Securities and Exchange Commission. In addition, we reviewed our internal controls, and there have been no significant changes in our internal controls or in other factors that could significantly affect those internal controls subsequent to the date we carried out our last evaluation.

- 19 -

PART II.

OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds

     During the three months ended March 31, 2003, we issued a total of 1,875 shares of our common stock upon stock option exercises and we also issued 15,618 shares of our common stock pursuant to stock purchases under our Employee Stock Purchase Plan. Proceeds from the exercise of stock options were nominal and were added to the Company’s general funds.

     During the three months ended March 31, 2003, we did not purchase any shares under our stock repurchase plan.

- 20 -

Item 6. Exhibits and Reports on Form 8-K

	a.		Exhibits:
			99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 — CEO.
			99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 — CFO.
	b.		Reports on Form 8-K:

- 21 -

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.

- 22 -

CERTIFICATION

     Each of the undersigned, in his capacity as the Chief Executive Officer and Chief Financial Officer of Cysive, Inc., as the case may be, provides the following certifications required by 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Certification of Chief Executive Officer

     I, Nelson A. Carbonell, Jr., hereby certify that:

	1.		I have reviewed this quarterly report on Form 10-Q of Cysive, Inc., a Delaware corporation (the “Company”);
	2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and
	3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report.
	4.		The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended) for the Company and we have:
	(a)		designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	(b)		evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	(c)		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.
	5.		The Company’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent function):
	(a)		all significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data and have identified for the Company’s auditors any material weaknesses in internal controls; and
	(b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls.
	6.		The Company’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

/s/ Nelson A. Carbonell, Jr. Nelson A. Carbonell, Jr. Chief Executive Officer

May 15, 2003

- 23 -

Certification of Chief Financial Officer

     I, John R. Lund, hereby certify that:

	1.		I have reviewed this quarterly report on Form 10-Q of Cysive, Inc., a Delaware corporation (the “Company”);
	2.		Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and
	3.		Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this quarterly report.
	4.		The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended) for the Company and we have:
	(a)		designed such disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	(b)		evaluated the effectiveness of the Company’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	(c)		presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.
	5.		The Company’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent function):
	(a)		all significant deficiencies in the design or operation of internal controls which could adversely affect the Company’s ability to record, process, summarize and report financial data and have identified for the Company’s auditors any material weaknesses in internal controls; and
	(b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls
	6.		The Company’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

/s/ John R. Lund John R. Lund Chief Financial Officer

May 15, 2003

- 24 -