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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1999
OR
[_] Transition Report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number 000-24435
MICROSTRATEGY INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation)
51-0323571
(I.R.S. Employer Identification Number)
8000 Towers Crescent Drive, Vienna, VA
(Address of Principal Executive Offices)
22182
(Zip Code)
Registrant's telephone number, including area code: (703) 848-8600
Securities registered pursuant to Section 12(b) of the Act: Not applicable
Securities registered pursuant to Section 12(g) of the Act:
Class A common stock, par value $0.001 per share
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant (based on the last reported sale price of the Registrant's Class A
common stock on March 1, 2000 on the Nasdaq National Market) was approximately
$4.6 billion.
The number of shares of the registrant's Class A common stock and Class B
common stock outstanding on March 1, 2000 was 23,563,492 and 55,466,929,
respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 2000 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.
ii
MICROSTRATEGY INCORPORATED
TABLE OF CONTENTS
PART I Page
----
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 19
Item 3. Legal Proceedings........................................... 20
Item 4. Submission of Matters to a Vote of Security Holders......... 20
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters......................................... 21
Item 6. Selected Financial Data..................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 23
Item 7a. Quantitative and Qualitative Disclosures about Market Risk.. 43
Item 8. Financial Statements and Supplementary Data................. 43
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 44
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 44
Item 11. Executive Compensation...................................... 44
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 44
Item 13. Certain Relationships and Related Transactions.............. 44
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................... 44
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CERTAIN DEFINITIONS
All references in this Annual Report on Form 10-K to "MicroStrategy", "we",
"us", and "our" refer to MicroStrategy Incorporated and its consolidated
subsidiaries (unless the context otherwise requires).
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended. For
this purpose, any statements contained herein that are not statements of
historical fact, including without limitation, certain statements under "Item
1. Business" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and located elsewhere herein regarding
industry prospects and our results of operations or financial position, may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects," and similar
expressions are intended to identify forward-looking statements. The important
factors discussed below under the caption "Business--Risk Factors," among
others, could cause actual results to differ materially from those indicated by
forward-looking statements made herein and presented elsewhere by management
from time to time. Such forward-looking statements represent management's
current expectations and are inherently uncertain. Investors are warned that
actual results may differ from management's expectations.
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PART I
ITEM 1. BUSINESS
Overview
We are a leading worldwide provider of intelligent e-business software and
related services that enable the transaction of one-to-one electronic business
through web, wireless and voice communication channels. Our product line enables
both proactive and interactive delivery of information from large-scale
databases. Our objective is to provide the largest 2000 enterprises in the
world, leading Internet businesses and high-volume data providers with a
software platform to develop solutions that deliver insight and intelligence to
their enterprises, customers and supply-chain partners.
Our software platform enables users to query and analyze the most detailed,
transaction-level databases, turning data into business intelligence. In
addition to supporting internal enterprise users, the platform delivers critical
business information beyond corporate boundaries to customers, partners and
supply-chain constituencies through a broad range of communication channels such
as the Internet, e-mail, telephones and wireless communication devices. Our
platform is designed for developing e-business solutions that are personalized
and proactive and that reach millions of users. We offer a comprehensive set of
consulting, education and technical support services for our customers and
partners.
In July 1999, we launched a new business unit called Strategy.com.
Strategy.com is our personal intelligence network, a new form of media that
brings speed to transactions by actively delivering highly personalized,
relevant and timely information to individuals through a wide variety of
delivery methods, including e-mail, telephone and wireless devices. The
Strategy.com network leverages the MicroStrategy software platform and is
organized around a suite of information channels. The network currently operates
a Finance Channel and plans to launch additional channels on subjects such as
weather, news, politics, arts, traffic, travel and entertainment. Strategy.com
syndicates its channels through other companies that serve as network affiliates
and network associates, which we refer to collectively as affiliates. Affiliates
offer the Strategy.com channels and services on a co-branded basis directly to
their customers and in turn share with Strategy.com a percentage of the revenues
they generate. Strategy.com also provides application maintenance, development,
customer billing, hosting and support services for those channels, enabling
affiliates to focus on their core businesses. Strategy.com has established more
than 100 network affiliate agreements with leading Internet companies,
communications carriers, media companies and financial institutions and now has
approximately 300,000 subscribers for its Strategy.com Finance Channel.
Strategy.com had recognized no revenue as of December 31, 1999.
Recent Developments
Our operations and prospects have been and are significantly affected by the
recent developments described below.
Restatement of Financial Results. We are revising our 1999, 1998 and 1997
financial statements. The principal reason for these revisions to revenues and
operating results was to conform with the accounting principles articulated in
Statement of Position 97-2 "Software Revenue Recognition." These revisions
primarily addressed the recognition of revenue for certain software arrangements
which should be accounted for under the subscription method or the percentage of
completion method, which spread the recognition of revenue over the entire
contract period. For example, when fees are received in a transaction in which
we are licensing software and also performing significant development,
customization or consulting services, the fees should be recognized using the
percentage of completion method and, therefore, product license and product
support and other services revenue are recognized as work progresses. Revenue
from arrangements where we
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provide hosting services is generally recognized over the hosting term, which is
generally two to three years. The effect of these revisions is to defer the time
in which revenue is recognized for large, complex contracts that combine both
products and services. These revisions also resulted in a substantial increase
in the amount of deferred revenue reflected on our balance sheet at the end of
1999 and 1998. Additionally, these revisions include the effects of changes in
the reporting periods when revenue from certain contracts are recognized. In the
course of reviewing our revenue recognition on various transactions, we became
aware that, in certain instances, we had recorded revenue on certain contracts
in one reporting period where customer signature and delivery had been
completed, but where the contract may not have been fully executed by us in that
reporting period. We subsequently reviewed license agreements executed near the
end of the years 1999, 1998 and 1997 and determined that revisions were
necessary to ensure that all agreements for which we were recognizing revenue in
a reporting period were executed by both parties no later than the end of the
reporting period in which the revenue is recognized.
With the concurrence of our auditors, we reduced our 1999 reported revenue
from $205.3 million to $151.3 million and our results of operations from diluted
net income per share of $0.15 to a diluted net loss per share of $(0.44).
Correspondingly, deferred revenue at December 31, 1999 increased from $16.8
million to $71.3 million. We also reduced our reported revenue for 1998 from
$106.4 million to $95.5 million and our results of operations from diluted net
income per share of $0.08 to diluted net loss per share of $(0.03). In addition,
we reduced our reported revenue for 1997 from $53.6 million to $52.6 million and
our results of operations from diluted net income per share of $0.00 to diluted
net loss per share of $(0.02).
We also made certain revisions to our balance sheet as of December 31, 1999.
These revisions include a reclassification of approximately $21.5 million from
accounts receivable to short-term investments relating to the value of proceeds
from a software transaction that was received in the form of a right to receive
shares of the customer's common stock. We also recorded an increase to goodwill
of approximately $31.4 million, net of the increase in amortization, relating to
the purchase of the intellectual property and other tangible and intangible
assets, including the assembled workforce relating to NCR's Teracube project in
exchange for 566,372 shares of our Class A common stock. We made this revision
as a result of a re-measurement of the purchase price of the Teracube assets to
reflect the value of our Class A common stock on the transaction's closing date.
In addition, we reduced fixed assets by approximately $8.8 million, net of the
decrease in depreciation, in order to record software received for resale and
software acquired for internal use in barter transactions at the book value of
our assets surrendered in the exchange. Approximately $5.0 million of the
reduction in fixed assets is a reduction in revenue, as restated. Of this
amount, no revenue will be recorded unless this software is resold. See Note 3
to the Consolidated Financial Statements.
As a result of the foregoing revisions to our 1999, 1998 and 1997 financial
statements, we will also be amending other Securities and Exchange Commission
("SEC") filings to reflect the revisions to our quarterly results in those
periods. Our financial statements and announced earnings for those quarterly
periods should not be relied upon.
Legal Proceedings.
Actions Arising under Federal Securities Laws. In March 2000, numerous
separate complaints purporting to be class actions were filed in federal courts
in various jurisdictions alleging that we and certain of our officers and
directors violated section 10(b) of the Securities Exchange Act of 1934, as
amended, Rule 10b-5 promulgated by the SEC thereunder, and section 20(a) of the
Securities Exchange Act of 1934, as amended.
The complaints contain varying allegations, including that we made materially
false and misleading statements with respect to our 1999 and 1998 financial
results in our filings with the SEC, analysts' reports, press releases and media
reports. The complaints do not specify the amount of damages sought.
We have not filed any answers, motions to dismiss or other responsive
pleadings in this litigation. We intend to defend this matter vigorously.
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SEC Investigation. In March 2000, we were notified that the SEC had issued a
formal order of private investigation in connection with matters relating to our
restatement of our financial results. The SEC has requested that we provide them
with certain documents concerning the revision of our financial results and
financial reporting documents. The SEC indicated that its inquiry should not be
construed as an indication by the SEC or its staff that any violation of law has
occurred, nor as an adverse reflection upon any person, entity or security. We
are cooperating with the SEC in connection with this investigation and its
outcome cannot yet be determined.
Industry Background
The emergence and widespread acceptance of the Internet as a medium of
communication and commerce has dramatically changed the way businesses interact
with each other and with their customers. According to International Data
Corporation ("IDC"), worldwide spending on Internet business infrastructure will
increase from $211 billion in 1998 to $1.5 trillion in 2003, a compound annual
growth rate of approximately 48%. The Internet provides opportunities for
businesses to establish new revenue streams, create new distribution channels
and reduce costs. For example, companies are using Internet-based systems to
facilitate business operations, including sales automation, supply-chain
management, marketing, customer service and human resource management. Consumers
are also becoming increasingly sophisticated in their use of the Internet,
relying on the Internet not only to make online purchases, but to perform price
comparisons, analyze recommendations from like-minded individuals and educate
themselves about relevant products and offerings. The integration of the
Internet into business processes and increased consumer sophistication create
opportunities for companies to use intelligent e-business systems as part of a
more dynamic business model. Factors increasing demand for these systems
include:
Increased Electronic Capture of Transaction and Customer Information. The
rapid growth in the electronic capture of business transactions and the
increased availability of related profile data on the parties or products
involved in each transaction are providing businesses with a rich data
foundation for one-to-one customer interactions. Powerful data analysis tools
are required to sift through massive amounts of data to uncover information
regarding customer interactions, in turn enabling organizations to provide
superior service and products to customers.
Need to Create a Personalized, One-to-One Customer Experience While
Maintaining Privacy. Many companies are initiating one-to-one marketing
strategies that establish personalized relationships with each customer based on
their individual needs and preferences and earn customer loyalty by providing
superior service, security and convenience. In order to successfully acquire,
retain and upgrade customers, organizations need to understand their profiles,
their transaction history, their past responses to marketing campaigns, and
their interactions with customer service. Retrieving information from widely
dispersed and complex data sources and providing a holistic view of the customer
can be challenging. At the same time, while businesses have the opportunity to
collect a variety of information that could improve targeting, customers are
increasingly concerned about the potential for loss or abuse of their privacy.
Need to Integrate Online and Traditional Operations. While there are
substantial benefits to conducting business electronically, companies need to
ensure that their online operations work in concert with their traditional
bricks and mortar operations. Companies are seeking to ensure that an order
placed online can be reliably fulfilled according to the expectations of the
customer and to develop and maintain consistent interactions with customers
across different channels. Maintaining the integrity of, and enhancing, the
customer experience is crucial to fostering customer loyalty.
Emergence of Wireless Internet and Voice Technologies. Information can be more
valuable if there is untethered, ubiquitous access to the information. The
recent development of the wireless application protocol and improvements in
text-to-speech and voice-recognition technologies have created a uniform
technology
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platform for delivering Internet-based information and services to digital
mobile phones and other wireless devices. According to IDC, the total value of
wireless Internet transactions will increase from $4.3 billion in 1998 to more
than $38.0 billion by 2003, a compound annual growth rate of approximately 55%.
This development is expected to generate new business opportunities for
companies by providing an additional channel for existing services and creating
opportunities to provide new services that can be delivered any place and at any
time to anyone that has access to a wireless device. For instance, customers of
an online brokerage company will have the capability not only to get stock
portfolio updates and alerts over their phones, but will also be able to
immediately act on that information and buy or sell securities through a
wireless device.
The MicroStrategy Solution
MicroStrategy offers a comprehensive suite of software products and services
that enable businesses to develop and deploy intelligent e-business systems.
MicroStrategy's solution enables organizations seeking a strong, personalized
relationship with their customers to better understand customer interactions and
actively deliver personalized information to customers through the Internet, e-
mail, telephones or wireless devices.
Optimized Support for Large Data Volumes and All Major Relational
Database/Hardware Combinations. The MicroStrategy platform supports systems with
very large data volumes and is specifically designed to support all major
relational database platforms commonly used for intelligent e-business systems.
Important features of our solution in this area include:
. structured query language optimization drivers that improve performance of
each major database;
. ability to support very large user populations;
. designed to maximize up-time, even in high volume applications; and
. ability to work with many languages for international applications.
Extremely Powerful Analytics to Customer- and Transaction-Levels of Detail. We
believe that the MicroStrategy platform incorporates the most sophisticated
analysis engine available today, capable of answering highly detailed business
questions. The MicroStrategy platform offers support for information beyond the
summary level to include information at the customer transaction and interaction
level. This capability is critical to a wide range of applications, including
highly targeted direct marketing, e-commerce site personalization, customer and
product affinity analysis, call detail analysis, fraud detection, credit
analysis forecasting and trend metrics and campaign management. The
MicroStrategy platform allows the creation of highly sophisticated systems that
take e maximum advantage of the detail available in a company's databases.
Powerful Personalization Engine. The MicroStrategy platform includes a
customer transaction-level personalization engine. The underlying architecture
is designed to generate personalization parameters based on data gathered by an
organization from a variety of sources, including past customers' transactions,
customer clickstream information, stated user preferences and demographic
information. In addition, the MicroStrategy personalization engine is able to
determine when and under what circumstances a person is automatically provided
with a set of information.
Interactive Broadcast Engine for Delivery and Response Using Internet, E-mail,
Wireless or Voice Media. Our technology offers a high performance personalized
broadcast engine for delivering periodic- and alert-based information to people
via Internet, e-mail, wireless devices and traditional telephone via text-to-
speech conversion. The broadcast engine includes drivers for all major device
types used in both domestic and international markets enabling the delivery of
information to users when and where it is needed. In addition, users can respond
to a message delivered by the MicroStrategy broadcast engine. For example, a
store manager
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can be alerted via a personal digital assistant that an item is out of stock and
order additional inventory using this device.
Strategy
Our objective is to become the leading provider of intelligent e-business
software and related services to the largest 2000 enterprises in the world and
leading Internet businesses. The key elements of our strategy to achieve this
objective are as follows:
Marketing Strategy--Increase Brand Awareness. Our marketing strategy focuses
on communicating the possibilities for value creation through the use of our
intelligent e-business platform. We focus primarily upon the largest 2000
enterprises in the world, leading Internet businesses and high-volume data
providers. In January 2000, we launched an aggressive branding campaign through
traditional television and print media to expand awareness of the MicroStrategy
brand. We believe that by creating greater awareness of the company and the
value of our intelligent e-business solutions, we will generate not only greater
brand awareness for MicroStrategy, but also a larger group of potential
customers by helping them understand the advantages of intelligent e-business.
Technology Strategy--Provide a Scalable, Sophisticated and Maintainable
Intelligent E-Business Platform. We have designed our platform to be highly
scalable, sophisticated, reliable and easy to maintain. Our technology strategy
is focused on expanding our support for large customer oriented information
stores, enhancing our analysis and segmentation capabilities, strengthening our
personalization technology, enhancing our broadcasting functionality to the
broadest set of consumer devices and providing a platform that can be easily
integrated with e-commerce transaction engines. As part of this strategy, we are
developing technology that further differentiates our product offerings by
increasing functionality along the following key dimensions:
. personalization--the quality and sophistication of a one-to-one user
experience;
. content flexibility--the range of content, both structured and
unstructured, that can be efficiently utilized;
. media channel and interface flexibility--the range of media channels,
interface options, and display features supported;
. capacity--the volume of information that can be efficiently analyzed and
utilized;
. concurrency--the number of users which can be supported simultaneously;
. sophistication--the range of analytical methods available to the
application designer;
. performance--the response time of the system;
. database flexibility--the range of data sources, data warehouses and online
transaction processing databases which the software is capable of
efficiently querying without modification;
. robustness--the reliability and availability of the software in mission
critical environments; and
. deployability--the ease with which applications can be deployed, modified,
upgraded and tuned.
Sales Strategy--Increase Market Share Among World's 2000 Largest Companies,
Leading Internet Businesses and High-Volume Data Providers. Our sales strategy
focuses on building direct sales capabilities
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and relationships with indirect channel partners in order to increase market
share among the world's 2000 largest companies, leading Internet businesses, and
high-volume data providers, both domestically and abroad. We also seek to
increase sales to our installed base of customers by offering a range of
software and services utilizing our core intelligent e-business platform. In
order to improve customer satisfaction and to generate additional sales to
current and prospective customers, we are also expanding our active consulting
practice to enable existing customers to fully utilize the capabilities of their
existing product implementations and to ensure that current customers have
access to our field engineering and telephone support. Finally, we are expanding
our education program to enhance our potential customers' and channel partners'
understanding of the power of intelligent e-business applications.
Products
We offer a comprehensive suite of intelligent e-business software, known as
MicroStrategy 6, that is designed to enable businesses to turn information into
strategic insight, transform customer interactions into relationships and make
more effective business decisions. The following are the components of the
MicroStrategy 6 platform:
MicroStrategy Intelligence Server. MicroStrategy Intelligence Server is the
foundation for all of our intelligent e-business products. It performs
sophisticated analysis on information captured from multiple data sources. With
the ability to support millions of users, MicroStrategy Intelligence Server has
the capacity to power the most complex intelligent e-business solutions.
We believe that MicroStrategy Intelligence Server is the most sophisticated
analysis engine available today, capable of answering highly detailed business
questions. Its robust relational analysis technology enables organizations to
conduct large-scale product affinity and product profitability analyses,
research customer preferences through sales, contribution, and pricing analysis,
and compare present and historical customer retention data with forecasting and
trend metrics. MicroStrategy Intelligence Server generates highly optimized
queries through its very large database drivers, enabling high throughput and
fast response times.
MicroStrategy Intelligence Server is designed to be fault tolerant to ensure
system availability and guarantee high performance. Through an enterprise
management console, MicroStrategy Intelligence Server provides a sophisticated
array of enterprise management tools, such as caching and query prioritization
to streamline performance and batch job scheduling, which helps to maintain
disparate and diverse user communities. Administrators can automate the dynamic
adjustments of system and user governing settings, such as user thresholds and
database thread priorities, in order to smooth the database workload and ensure
the high performance that large user communities require.
MicroStrategy Web. MicroStrategy Web provides easy-to-use, interactive,
sophisticated analysis which extends the information access and analysis
capabilities of MicroStrategy Intelligence Server to any user with a web
browser. Using the MicroStrategy Web infrastructure, corporations can rapidly
implement systems that allow local and remote users to develop and access
sophisticated reports containing information from their relational databases.
MicroStrategy Web provides a graphical user interface designed to boost end-
user efficiency. Users gain access to an array of options for data exploration
and analysis, such as spreadsheet grids and a wide variety of graphs. A flexible
architecture enables businesses to implement a standardized structure for
analysis and ensure consistent work practices. Through MicroStrategy Web's
reporting capabilities, users receive key elements of a report in easily
understood, plain English messages. MicroStrategy Web also allows users to
dynamically analyze data with higher levels of detail to view the underlying
information or to create and save new analyses. In addition, MicroStrategy Web's
security plug-ins enable businesses to limit access to sensitive information.
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MicroStrategy Web includes an application protocol interface that allows
businesses to customize, integrate and embed MicroStrategy Web functionality
into other applications. For example, a data syndicate for healthcare
information could utilize MicroStrategy Web with a customized interface to sell
access to this information to HMOs, hospitals and pharmacies.
MicroStrategy Broadcaster. MicroStrategy Broadcaster is a powerful content
generation and information broadcast server designed to actively deliver
personalized information to millions of recipients via the Internet, e-mail,
telephone and wireless devices. MicroStrategy Broadcaster delivers targeted
information to individuals on an event-triggered or scheduled basis through the
consumer communication device that is most convenient. It provides both an
engine to implement targeted information messaging to acquire and retain
customers and a platform for distributing information throughout the corporate
enterprise and to customers, suppliers, and other constituencies.
MicroStrategy Agent. MicroStrategy Agent provides an advanced environment for
rapid application development and sophisticated analysis. It provides an object-
oriented view of business data--converting a company's business data into a
virtual library of valuable information, enabling users to develop sophisticated
business metrics, filtering criteria and pre-defined report templates.
Applications developed within MicroStrategy Agent are easily deployed throughout
the MicroStrategy architecture bringing integrated query and reporting
capabilities, powerful analytics and decision support workflow to analysts,
quantitative users and end users throughout the enterprise and beyond.
These applications provide better understanding of a business or customer base
through analyses such as customer profiling, clickstream analysis and sales and
inventory analyses.
MicroStrategy InfoCenter. MicroStrategy InfoCenter is a web-based interface
that can be used with existing web applications to provide targeted product
offerings over many devices. Through MicroStrategy InfoCenter, users subscribe
to information services by providing personal information and preferences,
ensuring that users receive personalized, appropriate product offerings and
information. Its integration with MicroStrategy Broadcaster and MicroStrategy
Telecaster is designed to allow the delivery of the appropriate offering via the
appropriate medium at the appropriate time.
MicroStrategy InfoCenter can be used by companies to create one-to-one
marketing campaigns, learn more about their customers and increase customer
click-through and sales. MicroStrategy InfoCenter also can be used within an
enterprise by customer relationship managers to view reports on their customer
base, analyze their campaigns and take action upon them.
MicroStrategy Telecaster. MicroStrategy Telecaster is an intelligent voice
broadcast server that enables organizations to deliver fully personalized
information services to employees, partners, suppliers or customers over any
telephone or voice mail system.
MicroStrategy Telecaster notifies end-users of relevant news based on
schedules or exception criteria such as a close of market portfolio update or an
inventory reorder point. When a user picks up the call, information is presented
in natural language and structured in a fully interactive and individually
tailored format. MicroStrategy Telecaster not only creates a personal message,
but also generates the appropriate menu of response options on a one-to-one
basis. Users can then select the appropriate option by simply pressing a button
on the phone keypad.
MicroStrategy Telecaster is designed to enable voice-based interaction via
two-way electronic devices. MicroStrategy Telecaster can process user input,
such as the selection of an alternate flight, or the number of shares that
should be traded, to communicate in real-time with any external database,
transaction or e-commerce system and call centers and telephone applications.
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MicroStrategy Telecaster's combination of analysis, broadcast, personalization
and interaction capabilities facilitates its use in a variety of intelligent e-
business applications, including:
. reminder services, such as drug refills;
. event based notification services, such as flight delays and bank account
notifications;
. personal intelligence, such as financial, news, weather, traffic and sports
information; and
. sales force automation and internal reporting services, such as sales
reports.
MicroStrategy Administrator. MicroStrategy Administrator enables
administrators to efficiently maintain large-scale data warehouse applications
supporting millions of users. Project migration utilities help administrators
develop, test and deploy systems. Performance analysis enables administrators to
monitor and tune systems for maximum performance and availability.
MicroStrategy Architect. MicroStrategy Architect is a development environment
for intelligent e-business applications. Software developers can use this
product to design powerful enterprise and e-business intelligence systems
rapidly. MicroStrategy Architect is highly automated and is based on an open,
flexible architecture, which greatly reduces the cost and time required to
implement and maintain systems.
Consulting, Education and Customer Support
Our services and customer support capabilities are as follows:
MicroStrategy Consulting--Intelligent E-Business Management and Technical
Consulting. MicroStrategy Consulting facilitates the development of high-end
applications for our customers. Our consultants design and implement scalable,
high performance applications that run against multi-terabyte databases for
companies throughout the world. MicroStrategy Consulting's mission is to provide
services that ensure customer success and return on investment through full use
of our advanced technology.
MicroStrategy Education--Intelligent E-Business Education Programs.
MicroStrategy Education provides our customers with a thorough understanding of
our products and the implementation of intelligent e-business systems through
quality instruction and hands-on experience. With nearly ten years of experience
training a diverse customer base, we have developed a comprehensive set of
education programs designed to help customers get up to speed quickly on
intelligent e-business technologies. Representative courses from our training
curriculum include:
. Introduction to Intelligent E-Business;
. MicroStrategy Fast Track for Developers;
. MicroStrategy Server Platforms: Administration;
. MicroStrategy Broadcaster: Intelligence Everywhere;
. E-Business: Methodology and Architecture;
. MicroStrategy InfoCenter: Personal Information Gateway; and
. MicroStrategy Telecaster: Personalized Voice Broadcast Server.
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MicroStrategy Support--Hotline, Knowledge Base and Field Engineering Services.
MicroStrategy technical support provides support services designed to help
customers extract the highest return on investment from our products.
MicroStrategy technical support offers a variety of support options geared to
resolve technical issues quickly and efficiently whenever they arise.
Customer Case Studies
The following case studies illustrate the application and implementation of
our products and related services by several of our customers.
GE Capital Fleet Services. GE Capital Fleet Services, one of the world's
leading vehicle fleet management companies, uses our intelligent e-business
platform to deliver innovative customer services as part of an overall e-
business strategy. The company deployed MicroStrategy Web to give its customers
desktop access to specific fleet information. MicroStrategy Web allows GE
Capital Fleet Services and its customers to extract valuable information from
its data warehouse. Customers use the tool to compare service histories of
different car models, identify drivers who are most accident-prone or review the
fleet's monthly mileage.
Additionally, with MicroStrategy Broadcaster, customers receive proactive
vehicle maintenance reminders. MicroStrategy Broadcaster automatically sends
personalized maintenance reminders directly to vehicle drivers via e-mail,
telephone or wireless device. According to GE Capital Fleet Services, the
innovative vehicle fleet management services made possible by the MicroStrategy
intelligent business platform are saving the company millions of dollars in
printing and postage costs and are creating stronger customer relationships.
First Union. First Union is the nation's sixth largest financial institution,
with more than $230 billion in assets under management. The company uses our
intelligent e-business platform to manage relationships with more than 16
million customers. First Union runs MicroStrategy Web against a 27-terabyte data
warehouse, one of the largest in the banking industry, to retrieve valuable
insights. MicroStrategy Web enables authorized First Union users to quickly and
easily obtain a comprehensive view of customer relationships, analyze their
current and potential profitability and improve business relationships with
them. The tool allows authorized users to analyze critical customer information
and create detailed product and marketing reports quickly. For example,
authorized users can quickly identify how many customers have a high balance
checking account and who would likely be interested in asset management
services. These sales leads are then automatically sent to First Union's sales
and services organizations for direct, personalized marketing efforts.
NBCi. NBC Interactive, known as NBCi, is a leading Internet integrated media
company. NBCi uses our intelligent e-business platform to conduct advanced
clickstream analysis of daily traffic to its Snap and XOOM.com web sites. The
resulting insight helps site managers improve their services and deliver a more
personal online experience for users. In addition, MicroStrategy Web enables
Snap and XOOM.com product, channel and marketing managers to identify user
preference and demographic information with the click of a mouse. NBCi also uses
MicroStrategy Broadcaster to send managers regular information updates via e-
mail.
With these tools, NBCi is able to identify the most popular content on its
sites, as well as areas that may need additional support. Detailed customer
information also supports Snap and XOOM.com efforts to attract advertisers who
want to reach specific demographic markets.
Strategy.com
In July 1999, we launched a new business unit called Strategy.com.
Strategy.com is our personal intelligence network, a new form of media that
brings speed to transactions by actively delivering highly
9
personalized, relevant and timely information to individuals through a wide
variety of delivery methods, including e-mail, telephone and wireless devices.
The Strategy.com network leverages the MicroStrategy software platform and is
organized around a suite of information channels. The network currently operates
a Finance Channel and plans to launch additional channels on subjects such as
weather, news, politics, arts, traffic, travel and entertainment. Strategy.com
syndicates its channels through other companies that serve as network affiliates
and network associates, which we refer to collectively as affiliates. Affiliates
offer the Strategy.com channels and services on a co-branded basis directly to
their customers and in turn share with Strategy.com a percentage of the revenues
they generate. Strategy.com also provides application maintenance, development,
customer billing, hosting and support services for those channels, enabling
network affiliates and associates to focus on their core businesses.
Strategy.com has established more than 100 network affiliate agreements with
leading Internet companies, communications carriers, media companies and
financial institutions and now has approximately 300,000 subscribers for its
Strategy.com Finance Channel. Strategy.com has recognized no revenue as of
December 31, 1999. The key attributes of the Strategy.com network are as
follows:
Personal Intelligence Agent. Strategy.com functions as a personal intelligence
agent that operates on the user's behalf and is based on a set of permissions
and requirements specified by the user. Strategy.com goes beyond sending
scheduled information updates by allowing users to choose to be notified
immediately upon the occurrence of a predefined event. These capabilities enable
consumers to receive tailored, pertinent and timely information. As the
Strategy.com network expands, we intend to develop Strategy.com's software
agents to act, with permission, proactively on the user's behalf. For example,
in the future the user may be able to specify conditions under which
Strategy.com could transfer assets from one financial institution to another,
based on relative interest rates. We believe that this capability will provide
significant value to consumers.
Diverse Delivery Methods. We deliver Strategy.com services to devices in three
general categories -- web, wireless and voice. A major component of
Strategy.com's technology strategy is to take advantage of the capabilities of
the wireless application protocol and the improvements in text-to-speech and
voice-recognition technologies to create a robust and content-rich wireless
Internet portal. Strategy.com believes it can exploit its position as one of the
first to market in this area to facilitate e-commerce transactions and expand
its network and base of subscribers. In the future, Strategy.com intends to
provide users the ability to buy or sell stock, purchase merchandise and make
reservations after receiving information on their wireless and other devices,
eliminating the need to use a computer or speak with someone on the telephone.
Our goal is to allow users to move beyond the desktop and allow us to
significantly broaden our reach by interacting with consumers throughout the day
via the most convenient means available.
Unique Personalization. Unlike traditional television, radio and cable
networks which send the same content to all audience members and which require
users to initiate the use of a dedicated device, Strategy.com allows individuals
to subscribe to the selected programs and services that interest them and to
receive richer, more detailed information via the delivery mechanism of their
choice. Subscribers will be able to access personalized updates on a range of
subjects using their wireless devices.
Content. Strategy.com's network is organized around content-specific channels.
Its initial channels are:
. Strategy.com Finance: As the first channel of the Strategy.com network,
Strategy.com Finance provides consumers with personalized portfolio and
market reports via the device of their choice. Strategy.com Finance
provides users with a variety of information, from intra-day stock movement
alerts to a personalized portfolio analysis sent via Excel spreadsheets. In
the future, Strategy.com intends to also allow users to conduct trades and
other financial transactions through the Internet or using their wireless
devices after receiving Strategy.com Finance alerts.
. Strategy.com Weather: Strategy.com Weather is currently operating on a test
basis and is expected to be commercially available in the second quarter of
2000. Strategy.com delivers personalized weather
10
reports, forecasts and alerts for over 55,000 locations across the globe.
Strategy.com will offer subscribers features such as severe weather alerts,
beach and boating reports and weekly forecasts, along with the convenience
of receiving personalized weather information.
. Strategy.com News: Strategy.com News is currently operating on a test basis
and is expected to be commercially available in the second quarter of 2000.
Strategy.com will deliver breaking news, news alerts and local and global
updates. Strategy.com News utilizes data from numerous content providers
and covers over 20,000 stories a day. Subscribers will have the ability to
easily personalize Strategy.com News so they only receive stories about the
issues and locations that are of importance to them.
Strategy.com has entered into agreements with leading content and data
providers, including the following:
Media General Financial Services Weather Labs
Standard & Poor's Briefing.com
Zacks AFP
National Weather Service Comtex
SportsTicker Metro Networks
We also have agreements with smaller local and specialized providers to supply
content for our channels. We expect to focus our efforts on content providers
that can provide comprehensive coverage and that feature content that has the
potential for targeting e-commerce opportunities.
We have established more than 100 network affiliate agreements with Internet
companies, communication carriers, media companies and financial institutions
such as Ameritrade, Belo, Metrocall, Nasdaq, Phillips International, Primark,
The Wall Street Journal, Earthlink, WashingtonPost.com and USA Today.com to
market our services directly to consumers. By offering Strategy.com services to
their customers, network affiliates seek to differentiate their core product
offerings, increase customer loyalty and create new revenue streams. The
affiliates provide the marketing and sales support for the service and
Strategy.com focuses on providing the technical infrastructure, including the
management of the software, hardware, billing and customer support processes and
the development and deployment of channels and content to users. Larger
Strategy.com affiliates have the ability to create co-branded web pages and
commission customized features, services and content using Strategy.com data.
Strategy.com also offers an associates program in which smaller businesses and
individuals can create co-branded web pages offering Strategy.com services to
their users.
Our vision for Strategy.com is to be the leading provider of personalized
intelligence to consumers. We believe that strengthening affiliate relationships
and strategic alliances with leading content providers is critical to attracting
and expanding our subscriber base. We also intend to engage in aggressive brand-
building in order to attain a leadership position.
We believe that Strategy.com capitalizes on both our powerful software
technology and the emerging development of wireless Internet information
delivery. We plan to aggressively invest significant resources to build the
Strategy.com personal intelligence network and increase brand awareness,
including investing in computer equipment and software, marketing, personnel and
other infrastructure.
11
Customers
MicroStrategy has over 900 customers across such diverse industries as retail,
telecommunications, banking and finance, pharmaceuticals and healthcare,
technology and consumer packaged goods. A representative list of the firms that
purchased over $250,000 of our products and services since January 1, 1997 is as
follows:
Banking & Finance
American Express*
Ameritrade*
Banco Santander
Bank of America
CIBC
Fannie Mae
First Data Corporation
First Union Corporation*
First USA Bank
Freddie Mac*
GE Capital*
Nationwide Insurance*
Royal Bank of Canada
USAA
Visa International
Retail
Asda Stores
B & Q
Best Buy*
Comet
Elder Beerman
Fox Entertainment Group
Kmart*
Kohl's Department Stores
Littlewoods
Liz Claiborne*
Marks & Spencer*
ShopKo*
The Limited
Victoria's Secret
Woolworth's
Travel & Entertainment
Blockbuster Entertainment*
Continental Airlines
The SABRE Group
Starwood Hotels & Resorts
Universal Studios*
Telecommunications
Ameritech
AT&T Wireless Services
Bell Atlantic*
Bell South*
Cable & Wireless
Concert Management
Services*
MCI WorldCom
Pacific Bell*
Sprint*
Pharmaceutical & Healthcare
Cardinal Health
Glaxo Wellcome*
Ingenix*
MedPartners
Merck/Medco*
Premier
Smithkline Beecham
Warner Lambert*
Grocery & Pharmacy
American Stores*
Associated Food Stores
CVS Pharmacy
Eckerd Corporation*
Food Lion
Harris Teeter
Marsh Supermarkets
Government/Public Services
Housing and Urban
Development*
Ohio Department of
Education
US Air Force
US Postal Service*
Consumer Packaged Goods
Beverage Data Network
Brown & Williamson
Hallmark
Ralston Purina
S.C. Johnson Wax
Technology
Belo Interactive*
Earthlink*
Exchange Applications*
Gateway
IBM Corporation*
Lexis Nexis
Network Solutions
Nielsen Media Research
NCR*
Perot Systems
Snap.com
Tandem Computers
Western Digital*
Manufacturing & Industrial
Allied Signal
DuPont
General Motors
Lexmark*
Michelin*
Monsanto
Samsung*
Shaw Industries
Unisys
* Indicates customers that purchased more than $1.0 million of our products and
services since January 1, 1997.
12
Sales and Marketing
Direct Sales Organization. We market our software and services primarily
through our direct sales force. As of December 31, 1999, we had domestic sales
offices in a number of cities, including Atlanta, Boston, Chicago, Cincinnati,
Dallas, Denver, Detroit, Kansas City, Los Angeles, Minneapolis, New York, San
Francisco, Seattle, Tampa and Washington, D.C., and international sales offices
located in Amsterdam, Barcelona, Madrid, Cologne, London, Paris, Sao Paolo,
Vienna, Milan, Toronto and Zurich. We are represented by distributors in
countries in which we do not have sales offices, including Australia, Chile,
Colombia, the Czech Republic, Finland, Greece, Ireland, New Zealand, Singapore,
South Africa, South Korea and Sweden.
Indirect Sales Channels. We have entered into relationships with more than 225
system integration, application development and platform partners whose products
and services are used in conjunction with our own. Agreements with these
partners generally provide them with non-exclusive rights to market our products
and services and allow access to our marketing materials, product training and
direct sales force for field level assistance. In addition, we offer our
partners product discounts. Favorable product recommendations from the leading
system integration, application development and platform partners to potential
customers facilitates the sale of our products. We believe that such indirect
sales channels allow us to leverage sales and service resources as well as
marketing and industry specific expertise to expand our user base and increase
our market coverage.
Value-Added Resellers. Value-added resellers who resell MicroStrategy software
bundled with their own software applications and/or syndicated data products
include:
Accrue Software
Acxiom
Beverage Data Network
Exchange Applications
Fair Isaac and Company
HNC Software
IDX Systems
M&I Data Services
Net Perceptions
Net.Genesis
Plum Tree
Prime Response
Radiant Systems
Radius Retail
Retek Information Systems
Systems Consulting Company
System Integrators. We have also entered into agreements to provide training,
support, marketing and sales assistance to a number of system integrators,
including:
American Management Systems
AnswerThink Consulting Group
Arthur Andersen
AutoMate Incorporated
BeggsHeidt Enterprise Consulting
BizIntel Technology
Braun Technology Group
CACI
Computer Sciences Corporation
Deloitte & Touche
Ernst & Young
Etensity
Greenbrier & Russel
KPMG Peat Marwick
Modis Solutions
NCR
Nex Genix
Perot Systems Corporation
Questra Corporation
Sapient Corporation
Silicon Graphics
Tessera Enterprise Systems
Whitman-Hart
Xpedior
Platform Partners. Our platform partners consist of firms which co-sell and
co-market complementary technology to the same target customer base. These
platform partners include IBM, Compaq, NCR, Sequent, ICL, Data General,
Informatica, Oracle, Informix, EDS and Deloitte & Touche.
Research and Product Development
We have made substantial investments in research and product development. We
believe that our future performance will depend in large part on our ability to
maintain and enhance our current product line, develop new products that achieve
market acceptance, maintain technological competitiveness and meet an expanding
13
range of customer requirements. As of December 31, 1999, our research and
product development staff consisted of 338 employees. Our total expenses for
research and development for the years 1999, 1998 and 1997 were $28.0 million,
$12.1 million and $5.0 million (excluding $1.9 million of capitalized software
costs), respectively.
Competition
The markets for e-business, e-commerce, customer relationship management,
portals, business intelligence and Internet-based and wireless-based information
networks are intensely competitive and subject to rapidly changing technology.
In addition, many of our competitors in these markets are offering, or may soon
offer, products and services that may compete with our products and our
Strategy.com network.
Our most direct competitors provide:
. e-business infrastructure software;
. customer relationship management products;
. e-commerce transaction systems;
. business intelligence products;
. web portals and information networks;
. vertical Internet portals and information networks; and
. wireless communications and wireless access protocol enabled products.
Each of these market segments are discussed more fully below.
E-business Infrastructure Software. In the e-business infrastructure market,
BroadVision, E.piphany, Vignette, Net Perceptions, Broadbase, Art Technology
Group, Engage Technologies, Doubleclick and Personify all provide products that
compete directly or indirectly with our software platform. Many of these
companies provide alternatives to our technology for adding intelligence and
personalization to e-commerce applications. For example, customer information,
such as past purchases, clickstream data and stated preferences, can be used to
create a personalized e-commerce experience that targets customers with offers
and interactions to which they are more likely to respond.
Customer Relationship Management Products. Companies that deliver customer
relationship management products alone or in conjunction with e-commerce
applications, such as BroadVision, E.piphany, Vignette, and Siebel, compete with
our intelligent e-business products.
E-Commerce Transaction Systems. Products that support e-commerce transactions,
such as those provided by Microsoft, IBM, America Online's Netscape division,
BroadVision, Open Market, InterWorld, and Oracle could provide competition for
us. These products have the potential to extend their capabilities to use
customer information as the basis for generating targeted, personalized product
offers, which would compete with our e-business products.
Business Intelligence Products. In the business intelligence market, we
compete with providers of software used to enable businesses to analyze and
optimize their operations. In the enterprise category, which is generally
focused on large deployments, Information Advantage, which was recently acquired
by Sterling
14
Software, competes with us. In the desktop analysis and reporting category, we
face competition from companies such as Business Objects, Cognos, and Brio
Technology. A third category includes products from companies such as Oracle,
Microsoft, and IBM that are generally bundled with or designed to work with
their own relational databases.
Web Portals and Information Networks. Web portals and information networks,
such as Microsoft Network, Yahoo, Lycos, Excite, America Online and
InfoSpace.com, offer an array of information that is similar to information
provided by Strategy.com. Strategy.com seeks to differentiate itself by:
. providing a greater level of personalization;
. allowing users to receive the precise information they want across the
broadest range of information delivery devices including through email,
wireless phone, pager, wireless access protocol enabled products, fax,
personal digital assistants and the telephone; and
. partnering with financial institutions, device manufacturers, Internet
companies, communication carriers, media companies and wireless companies,
to embed Strategy.com information services as an ingredient in their own
offerings.
One or more of these companies, however, could expand their offerings and
reduce our differentiation in these three areas.
Vertical Internet Portals and Information Networks. Expedia, Weather.com,
CNBC.com, ABC.com, ESPN.com, Microsoft Investor, StockBoss, Microsoft CarPoint,
InfoBeat, Internet Travel Network and others have developed custom applications
and products to commercialize, analyze and deliver specific information over the
Internet. These systems are usually tailored to one application, such as
providing news, sports or weather, but in the aggregate, they offer applications
similar to those provided by Strategy.com. Any one of these companies could
expand their offerings to more closely compete with Strategy.com.
Wireless Communications and Wireless Access Protocol Enabled Products.
Wireless communications providers, such as AT&T, Sprint, MCI WorldCom, Nextel
Communications, British Telecom, Deutsche Telekom, PageNet, Nokia, Ericsson,
Aether Systems, 3COM and Palm offer a variety of mobile phones and wireless
devices over which Strategy.com delivers information. These companies may
develop in-house information services or partner with other companies to deliver
information that is competitive to that offered by Strategy.com.
Many of our competitors have longer operating histories, significantly greater
financial, technical, marketing or other resources, and greater name recognition
than we do. In addition, many of our competitors have strong relationships with
current and potential customers and extensive knowledge of the e-business
industry. As a result, they may be able to respond more quickly to new or
emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sale of their products than we can.
Increased competition may lead to price cuts, reduced gross margins and loss of
market share. We cannot be sure that we will be able to compete successfully
against current and future competitors or that the competitive pressures we face
will not have a material adverse affect on our business, operating results and
financial condition.
Current and future competitors may also make strategic acquisitions or
establish cooperative relationships among themselves or with others. By doing
so, they may increase their ability to meet the needs of our potential
customers. Our current or prospective indirect channel partners may establish
cooperative relationships with our current or future competitors. These
relationships may limit our ability to sell our products through specific
distribution channels. Accordingly, it is possible that new competitors or
alliances among current and future
15
competitors may emerge and rapidly gain significant market share. These
developments could harm our ability to obtain maintenance revenues for new and
existing product licenses on favorable terms.
Intellectual Property and Licenses
We rely primarily on a combination of copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary technology. For example, we require software licensees to enter into
license agreements that impose certain restrictions on their use of the
software. In addition, we have made efforts to avoid disclosure of our trade
secrets, including but not limited to, requiring those persons with access to
our proprietary technology and information to enter into confidentiality
agreements with us and restricting access to our source code. We have no
patents. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. Policing unauthorized use of our
products is difficult, and while we are unable to determine the extent to which
piracy of our software products exists, software piracy can be expected to be a
persistent problem. In addition, the laws of some foreign countries do not
protect our proprietary rights to as great an extent as do the laws of the
United States. There can be no assurance that our means of protecting our
proprietary rights will be adequate or that our competitors will not
independently develop similar technology.
Generally, our products are licensed through named-user licenses, under which
only one identified user may access the product for each named-user license fee
paid. A user is an individual to whom a licensee has assigned an identification
number for purposes of tracking use of a product and who is under an obligation
to the licensee to protect any of our confidential information. Under our
standard software license agreement, we have the ability to request certified
statements of records regarding identification numbers in particular, and use of
the products in general, once per year, and have the right to audit use of the
products at least once per year. Copying of products and documentation is
limited to the number of users for whom license fees have been paid.
There can be no assurance that third parties will not claim infringement by us
with respect to current or future products. We expect that software product
developers will increasingly be subject to infringement claims as the number of
products and competitors in our industry segment grows and the functionality of
products in different industry segments overlaps. Any such claims, with or
without merit, could be time-consuming, result in costly litigation, cause
product shipment delays or require us to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to us or at all, which could have a material
adverse effect upon our business, operating results and financial condition.
Employees
As of December 31, 1999, we had a total of 1,662 employees, of whom 1,397 were
based in the United States and 265 were based internationally. Of the total, 579
were engaged in sales and marketing, 338 in product development, 486 in
professional services and 259 in finance, administration and corporate
operations. None of our employees is represented by a labor union. We have not
experienced any work stoppages and consider our relations with our employees to
be good.
We believe that effective recruiting, education, and nurturing of human
resources is critical to our success and have traditionally made substantial
investments in these areas in order to differentiate ourselves from our
competition, increase employee loyalty and create a culture conducive to
creativity, cooperation and continuous improvement. These measures include:
16
Professional Education. All newly hired professionals complete a professional
orientation course that ranges from 1 to 6 weeks long, presented by
"MicroStrategy University," our in-house education function. The curriculum
consists of lectures, problem sets and independent and group projects, covering
data, our products, competitors and customers. Certain lectures also deal with
general business practices, ethics and teamwork. At the end of this training,
students must pass a number of oral and written examinations in order to begin
their assignments. Following this introductory course, veteran employees
normally complete at least one week of continuing professional development each
year. Course content for MicroStrategy University is created by the most
experienced members of our professional staff, who generally have an annual
obligation to create expert content based upon the best practices they have most
recently observed in the field. This expert content is then used to upgrade and
revitalize our education, consulting, support, technology and marketing
operations.
Company Days. Each quarter, we invite most of the employee base together for
knowledge transfer within functions, across functions and across geographic
boundaries. These events are generally built around a set of company-wide
meetings and breakout sessions, but they also have particular cultural themes.
These events include:
. the "Company Retreat," which allows employees to network with colleagues in
an informal setting and which traditionally has consisted of a company-
sponsored cruise;
. "University Week," which focuses on continuing professional development
along with the creation and codification of industry-best practices;
. "Friends and Family Weekend," during which we sponsor a weekend-long open
house and host immediate and extended family, as well as friends of
employees; and
. "MicroStrategy World," where our business partners and customers are
encouraged to mix with the employee base in order to exchange information
and strengthen the firm's ties to the marketplace.
We believe that our "Company Day" events are long-term investments which will,
over time, result in superior productivity, morale and loyalty among the
employee base, and we expect to continue engaging in these activities in the
future.
Executive Officers and Directors
Our executive officers and directors and their ages and positions as of March
1, 2000 are as follows:
Name Age Title
- ---- --- -----
Michael J. Saylor.............. 35 President, Chief Executive Officer
and Chairman of the Board of
Directors
Sanju K. Bansal................ 34 Executive Vice President, Chief
Operating Officer and Director
Jonathan F. Klein.............. 33 Vice President, Law and General
Counsel
Mark S. Lynch.................. 36 Vice President, Finance and Chief
Financial Officer
Joseph P. Payne................ 35 Vice President, Marketing and Chief
Marketing Officer
17
Stephen S. Trundle............. 31 Vice President, Technology and
Chief Technology Officer
Frank A. Ingari(1)(2).......... 50 Director
Jonathan J. Ledecky............ 42 Director
Ralph S. Terkowitz(1)(2)....... 49 Director
John W. Sidgmore............... 48 Director
_________________
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Set forth below is certain information regarding the professional experience
of each of the above-named persons.
Michael J. Saylor has served as president, chief executive officer and
chairman of the board of directors since founding MicroStrategy in November
1989. Prior to that, Mr. Saylor was employed by E.I. du Pont de Nemours &
Company as a Venture Manager from 1988 to 1989 and by Federal Group, Inc. as a
consultant from 1987 to 1988. Mr. Saylor received an S.B. in Aeronautics and
Astronautics and an S.B. in Science, Technology and Society from the
Massachusetts Institute of Technology.
Sanju K. Bansal has served as executive vice president and chief operating
officer since 1993 and was previously vice president, consulting since joining
MicroStrategy in 1990. He has been a member of the board of directors of
MicroStrategy since September 1997. Prior to joining MicroStrategy, Mr. Bansal
was a consultant at Booz Allen & Hamilton, a worldwide technical and management
consulting firm, from 1987 to 1990. Mr. Bansal received an S.B. in Electrical
Engineering from the Massachusetts Institute of Technology and an M.S. in
Computer Science from The Johns Hopkins University.
Jonathan F. Klein has served as vice president, law and general counsel since
November 1998 and as corporate counsel from June 1997 to November 1998. Prior to
that, Mr. Klein was an appellate litigator with the United States Department of
Justice. Mr. Klein received a B.A. in Economics from Amherst College and a J.D.
from Harvard Law School.
Mark S. Lynch has served as vice president, finance and chief financial
officer since September 1997. Prior to that, Mr. Lynch was chief financial
officer for WorldCorp and World Airways from 1996 to 1997, and before that was
vice president, finance for InteliData Technologies, an electronic commerce
firm, from 1991 to 1996. Mr. Lynch has also held several senior accounting
positions with KPMG Peat Marwick and Clark Construction Group. Mr. Lynch is a
certified public accountant and received a B.S. in Accounting from Penn State
and an M.B.A. from George Washington University.
Joseph P. Payne has served as vice president of marketing, and chief marketing
officer since April 1999. From 1996 to 1999, Mr. Payne held several executive-
level positions at InteliData Technologies, including president and chief
executive officer of its Telecommunications Division. Prior to that, Mr. Payne
served as vice president, marketing of Royal Crown Company from 1994 to 1996.
Before that, Mr. Payne was a brand manager at the Coca-Cola Company from 1991 to
1994. Mr. Payne received an A.B. in Public Policy from Duke University and an
M.B.A from the Fuqua School of Business at Duke University.
18
Stephen S. Trundle has served as vice president, technology and chief
technology officer since July 1997 and as director, technology from 1994 to
1997. From 1992 to 1994, Mr. Trundle served as a consultant and then a senior
consultant with MicroStrategy. Prior to that, Mr. Trundle worked for Bath Iron
Works on the Aegis Destroyer program from 1991 to 1992. Mr. Trundle received an
A.B. in Engineering and an A.B. in Government from Dartmouth College.
Frank A. Ingari has been a member of the board of directors of MicroStrategy
since October 1997. Mr. Ingari is founder and chief executive officer of
Wheelhouse Corporation, an eMarketing services firm formed in April of 1999.
Between 1997 and April 1999, Mr. Ingari founded Growth Ally, L.L.C., a
consulting firm specializing in assisting private technology companies in
accelerating their growth and served as its chief executive officer. Mr. Ingari
was chairman and chief executive officer of Shiva Corporation from 1993 to 1997.
Prior to joining Shiva Corporation, Mr. Ingari was vice president, marketing at
Lotus Development Corporation. Mr. Ingari received a B.A. in Creative Writing
and U.S. Foreign Relations from Cornell University.
Jonathan J. Ledecky has been a member of the board of directors of
MicroStrategy since June 1998. Mr. Ledecky is currently vice chairman of Lincoln
Holdings LLC, which owns the Washington Capitals, the Washington Wizards and the
Washington Mystics sports teams. Mr. Ledecky founded U.S. Office Products
Company in October 1994 and served as its chairman of the board and chief
executive officer from inception through November 1997 and thereafter as a
director until May 1998. In February 1997, Mr. Ledecky founded Building One
Services Corp., now Encompass Services Corporation, and served as its chairman
until February 2000 and chief executive officer until June 1999. Mr. Ledecky is
also a director of publicly traded Aztec Technology Partners, UniCapital
Corporation and School Specialty.
Ralph S. Terkowitz has been a member of the board of directors of
MicroStrategy since September 1997. Mr. Terkowitz is vice president, technology
for the Washington Post Company, a position he has held since 1992. Until
February 1996, Mr. Terkowitz was chief executive officer, president and
publisher of Digital Ink, an Internet publishing venture that launched, among
other ventures, WashingtonPost.com and PoliticsNow. In 1998 he was co-chief
executive officer of HireSystems and instrumental in the formation of
BrassRing.com. Mr. Terkowitz is a director of ICSA, BigStep and OutTask. Mr.
Terkowitz received an A.B. in Chemistry from Cornell University an M.S. in
Chemical Physics from the University of California, Berkeley.
John W. Sidgmore has been a member of the board of directors of MicroStrategy
since February 2000. Mr. Sidgmore was the president and chief executive officer
of UUNET Technologies, Inc., a provider of worldwide Internet services, from
June 1994 until November 1998 and has served as chairman since November 1998.
Since December 1996, Mr. Sidgmore has served as the chief operating officer and
vice chairman of WorldCom Inc., now MCI WorldCom, a provider of long distance,
Internet and telecommunication services. Prior to joining UUNET, Mr. Sidgmore
was president and chief executive officer of Intelicom Solutions, now CSC
Intelicom, a telecommunications software company. Mr. Sidgmore is also a member
of the board of directors of MCI WorldCom and ADC Telecommunications, Inc.
ITEM 2. PROPERTIES
Our principal offices currently occupy over 300,000 square feet in Northern
Virginia pursuant to multiple leases, the majority of which expire between June
2003 and January 2007. We recently signed a lease agreement for an additional
146,000 square feet of office space, also in the Northern Virginia area, which
expires in February 2010. In addition, we also lease sales offices domestically
and internationally in a variety of locations, including Atlanta, Bedminster,
Boston, Chicago, Cincinnati, Dallas, Detroit, Los Angeles, Minneapolis, New
York, San Francisco, Seattle, Washington, D.C., Amsterdam, Barcelona, Cologne,
London, Madrid, Milan, Paris, Vienna and Zurich. We believe that suitable
additional or alternative space will be available in the future on commercially
reasonable terms as needed.
19
ITEM 3. LEGAL PROCEEDINGS
Actions Arising under Federal Securities Laws
In March 2000, numerous separate complaints purporting to be class actions
were filed in federal courts in various jurisdictions alleging that we and
certain of our officers and directors violated section 10(b) of the Securities
Exchange Act of 1934, as amended, Rule 10b-5 promulgated by the SEC thereunder,
and section 20(a) of the Securities Exchange Act of 1934, as amended.
The complaints contain varying allegations, including that we made materially
false and misleading statements with respect to our 1999 and 1998 financial
results in our filings with the SEC, analysts' reports, press releases and media
reports. The complaints do not specify the amount of damages sought.
We have not filed any answers, motions to dismiss or other responsive
pleadings in this litigation. We intend to defend this matter vigorously.
SEC Investigation
In March 2000, we were notified that the SEC had issued a formal order of
private investigation in connection with matters relating to our restatement of
our financial results. The SEC has requested that we provide them with certain
documents concerning the revision of our financial results and financial
reporting documents. The SEC indicated that its inquiry should not be construed
as an indication by the SEC or its staff that any violation of law has occurred,
nor as an adverse reflection upon any person, entity or security. We are
cooperating with the SEC in connection with this investigation and its outcome
cannot yet be determined.
Other Proceedings
We are also involved in other legal proceedings through the normal course of
business. Management believes that any unfavorable outcome related to these
other proceedings will not have a material effect on our financial position,
results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our Class A common stock, $.001 par value, is traded on the Nasdaq National
Market under the symbol, MSTR. Following our initial public offering on June 16,
1998, the following high and low closing prices, adjusted to reflect the
two-for-one stock split which occurred in January 2000, were reported by Nasdaq
in each quarter:
For the quarter ended High Low
--------------------- ----- ---
June 30, 1998.................... $ 14.25 $ 10.38
September 30, 1998............... 22.25 12.06
December 31, 1998................ 16.94 10.38
March 31, 1999................... 16.44 9.31
June 30, 1999.................... 18.94 7.75
September 30, 1999............... 28.03 13.22
December 31, 1999................ 115.66 28.81
As of March 1, 2000, there were approximately 315 stockholders of record of
our Class A common stock and 13 stockholders of record of our Class B common
stock, $0.001 par value.
We have never paid any cash dividends on our Class A common stock and do not
expect to pay any such dividends in the foreseeable future. Our stock price has
fluctuated substantially since our initial public offering in June 1998. The
trading price of our Class A common stock is subject to significant fluctuations
in response to variations in quarterly operating results, the gain or loss of
significant orders, changes in earnings estimates by analysts, announcements of
technological innovations or new products by us or our competitors, general
conditions in the software and computer industries and other events or factors.
In addition, the equity markets in general have experienced extreme price and
volume fluctuations which have affected the market price for many companies in
industries similar or related to that of ours and which have been unrelated to
the operating performance of these companies. These market fluctuations have
affected and may continue to affect the market price of our Class A common
stock.
We sold 8,880,000 shares of our Class A common stock on June 16, 1998 in our
initial public offering pursuant to a registration statement on Form S-1
(Registration No. 333-49899), which was declared effective by the SEC on June
10, 1998. Certain stockholders of ours sold an aggregate of 320,000 shares of
Class A common stock pursuant to such registration statement. The managing
underwriters of this offering were Merrill Lynch & Co., Hambrecht & Quist, and
Friedman, Billings, Ramsey & Co., Inc. The aggregate gross proceeds raised in
the initial public offering by us and the selling stockholders were $53.3
million and $1.9 million, respectively. Our total expenses in connection with
the initial public offering were approximately $5.1 million, of which $3.7
million was for underwriting discounts and commissions and approximately $1.4
million was for other expenses. Our net proceeds from this offering were
approximately $48.2 million. From the effective date through December 31, 1999,
we used $13.6 million of the net proceeds of the initial public offering to
repay net borrowings under our business loan facility. In addition, we used
$10.0 million of such net proceeds to repay all of the borrowings under our
$10.0 million dividend notes which were issued to certain stockholders of ours
prior to the consummation of the initial public offering. Approximately $9.5
million of the $10.0 million dividend payment was paid to certain officers,
directors and 10% stockholders. As of December 31, 1999, we had used all
proceeds from the initial public offering for general corporate purposes to
support our growth.
We sold 3,170,000 shares of our Class A common stock, on February 10, 1999
pursuant to a registration statement on Form S-1 (Registration No. 333-70919),
which was declared effective by the SEC on February 10, 1999. Certain
stockholders of ours sold an aggregate of 830,000 shares of Class A common stock
under the same registration statement.
21
ITEM 6. SELECTED FINANCIAL DATA
Years ended December 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Restated)/2/ (Restated)/2/ (Restated)/2/
(in thousands, except per share data)
Statements of Operations Data
Revenues:
Product licenses............................... $ 85,797 $61,635 $35,478 $15,873 $ 4,077
Product support and other services............. 65,461 33,854 17,073 6,730 5,700
-------- ------- ------- ------- -------
Total revenues................................ 151,258 95,489 52,551 22,603 9,777
-------- ------- ------- ------- -------
Cost of revenues:
Product licenses............................ 2,597 2,246 1,641 1,020 257
Product support and other services.......... 34,436 17,535 9,475 4,237 2,201
-------- ------- ------- ------- -------
Total cost of revenues................ 37,033 19,781 11,116 5,257 2,458
-------- ------- ------- ------- -------
Gross profit.................................... 114,225 75,708 41,435 17,346 7,319
Operating expenses:
Sales and marketing............................ 93,512 53,408 30,468 13,054 2,992
Research and development....................... 27,998 12,106 5,049 2,840 1,855
General and administrative..................... 24,448 12,743 6,552 3,742 2,395
In-process research and development............ 2,800 -- -- -- --
-------- ------- ------- ------- -------
Total operating expenses...................... 148,758 78,257 42,069 19,636 7,242
-------- ------- ------- ------- -------
(Loss) income from operations................... (34,533) (2,549) (634) (2,290) 77
Interest income................................. 2,174 1,028 94 22 16
Interest expense................................ (144) (720) (333) (127) (56)
Other income (expense), net..................... 6 (14) (12) 20 11
-------- ------- ------- ------- -------
(Loss) income before taxes...................... (32,497) (2,255) (885) (2,375) 48
Provision for income taxes...................... 1,246 -- -- -- --
-------- ------- ------- ------- -------
Net (loss) income............................... $(33,743) $(2,255) $ (885) $(2,375) $ 48
======== ======= ======= ======= =======
Basic and diluted net (loss) income per share/(1)/ $ (0.44) $ (0.03) $ (0.02) $ (0.04) $ 0.00
======== ======= ======= ======= =======
Weighted average shares used in computing
basic and diluted net (loss) income per share/(1)/ 77,028 66,986 58,988 58,988 57,793
======== ======= ======= ======= =======
As of December 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Restated)/2/ (Restated)/2/ (Restated)/2/
(in thousands)
Balance Sheet Data
Cash and cash equivalents....................... $ 25,941 $27,491 $ 3,506 $ 1,686 $ 643
Working capital (deficit)....................... 53,109 23,919 (6,997) (2,237) 1,343
Total assets.................................... 203,368 76,571 29,101 13,004 5,838
Notes payable, long-term portion................ -- -- 2,428 460 600
Total stockholders' equity (deficit)............ 101,816 37,775 (1,433) (793) 1,546
_________________
(1) Share and per share amounts for all periods presented have been restated to
reflect the two-for-one stock split which occurred in January 2000.
(2) See Note 3 of the Notes to Consolidated Financial Statements regarding
restatement of 1999, 1998 and 1997 financial statements.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We are a leading worldwide provider of intelligent e-business software and
related services that enable the transaction of one-to-one electronic business
through web, wireless and communication channels. Our product line enables both
proactive and interactive delivery of information from large-scale databases.
Our objective is to provide the largest 2000 enterprises in the world, leading
Internet businesses and high-volume data providers with a software platform to
develop solutions that deliver insight and intelligence to their enterprises,
customers and supply-chain partners.
Our software platform enables users to query and analyze the most detailed,
transaction-level databases, turning data into business intelligence. In
addition to supporting internal enterprise users, the platform delivers critical
business information beyond corporate boundaries to customers, partners and
supply chain constituencies through a broad range of communication channels such
as the Internet, e-mail, telephones and wireless communications devices. Our
platform is ideal for developing e-business solutions that are personalized and
proactive and that reach millions of users. We also offer a comprehensive set of
consulting, education and technical support services for our customers and
partners.
In July 1999, we launched a new business unit called Strategy.com.
Strategy.com is our personal intelligence network, a new form of media that
brings speed to transactions by actively delivering highly personalized,
relevant and timely information to individuals through a wide variety of
delivery methods, including e-mail, telephone and wireless devices. The
Strategy.com network leverages the MicroStrategy software platform and is
organized around a suite of information channels. The network currently operates
a Finance Channel and plans to launch additional channels on subjects such as
weather, news, politics, arts, traffic, travel and entertainment. Strategy.com
syndicates its channels through other companies that serve as network affiliates
and network associates, which we refer to collectively as affiliates. Affiliates
offer the Strategy.com channels and services on a co-branded basis directly to
their customers and in turn share with Strategy.com a percentage of revenues
they generate. Strategy.com also provides application maintenance, development,
customer billing, hosting and support services for these channels, enabling
affiliates to focus on their core businesses. Strategy.com has established more
than 100 network affiliate agreements with leading Internet companies,
communications carriers, media companies and financial institutions and now has
approximately 300,000 subscribers for its Strategy.com Finance Channel.
Strategy.com has recognized no revenue as of December 31, 1999.
Since 1995, we have significantly increased our sales and marketing, service
and support, research and development and general and administrative staff.
Although our revenues have significantly increased over the last three years, we
experienced fluctuating operating margins during 1997, 1998 and 1999 primarily
as a result of increases in staff levels. We expect to continue to increase
staffing levels and incur additional associated costs in future periods. In
addition, we intend to substantially increase our investment in Strategy.com. We
therefore expect operating losses to significantly increase in 2000.
Our revenues historically have been derived from two principal sources, fees
for product licenses and fees for maintenance, technical support, education and
consulting services, which we refer to collectively as product support and other
services. We recognize revenue in accordance with Statement of Position ("SOP")
97-2, "Software Revenue Recognition," as amended by SOP 98-4, "Deferral of
the Effective Date of a Provision of SOP 97-2" and SOP 98-9, "Modification of
SOP 97-2, Software Revenue Recognition," and SOP 81-1, "Accounting for
Performance of Construction-Type and Certain Production-Type Contracts," as
applicable.
Product license revenues are generally recognized upon the execution of a
contract and shipment of the related software product if no significant
obligations remain outstanding on our part and the resulting receivable is
deemed collectible by management.
23
Technical support revenues are derived from customer support agreements
generally entered into in connection with initial product license sales and
subsequent renewals. Fees for our technical support services are displayed as
deferred revenue when paid by the customer and recognized ratably over the term
of the maintenance and support agreement, which is typically one year. We also
record as deferred revenue the fair value of implicit maintenance arrangements
when resellers or other customers that sell our software to end users offer
these end users the right to receive the then current version of our software at
the time of resale. Certain of these agreements extend over several years. Fees
for our education and consulting services are typically recognized at the time
the services are performed.
Revenues recognized from multiple-element software arrangements are allocated
to each element of the arrangement based on the relative fair values of the
elements, such as software products, upgrades, enhancements, technical support,
installation or education. The determination of fair value of each element is
based on objective evidence based on historical sales of the individual element
by us to other customers. If such evidence of fair value for each element of the
arrangement does not exist, all revenue from the arrangement is deferred until
such time that evidence of fair value does exist or until all elements of the
arrangement are delivered.
Customers at times require consulting and implementation services which
include evaluating their business needs, identifying resources necessary to meet
their needs and installing the solution to fulfill their needs. When the
software license arrangement requires the Company to provide significant
consulting services to produce, customize or modify software or when the
customer considers these services essential to the functionality of the software
product, both the product license revenue and product support and other services
revenue are recognized in accordance with the provisions of SOP 81-1. The
Company recognizes revenue from these arrangements using the percentage of
completion method and, therefore, both product license and product support and
other services revenue are recognized as work progresses. If the software
license arrangement obligates the Company to the delivery of unspecified future
products, then revenue is recognized on the subscription basis, ratably over the
term of the contract.
Beginning initially in the fourth quarter of 1998 and continuing throughout
1999, we began to sell our products and services to customers for large scale e-
commerce applications. In contrast to earlier periods in which our typical
customer transaction involved a stand-alone software license and maintenance,
these transactions typically involve multiple software products and services for
use by very large numbers of end users across web, wireless and voice
communications channels, and often incorporate elements from our Strategy.com
network. These multiple element transactions also often include significant
implementation and other consulting work and may also include our providing the
customer with hosting services, in which we manage the operation of hosting the
customer's specific e-commerce application. Customers often use our products and
services in a variety of ways, including internal use, integration with their
own products for resale to end users and creation of e-commerce applications.
These arrangements typically lead to our recording revenue from multiple
sources, including product license fees, product support fees and royalties
based on advertising, e-commerce transactions or the resale of solutions that
incorporate our software platform.
These large, multiple element transactions typically involve more complex
licensing and product support arrangements than the software licensing and
product support arrangements that comprised the bulk of our revenues in earlier
periods. Based on the revenue recognition criteria established in SOP 97-2 and
SOP 81-1, revenue from many of these large, multiple element contracts is not
recognizable upon full execution and delivery of the software product as in the
past, but instead is initially recorded as deferred revenue upon receipt of
cash, with product revenue recognized using the percentage of completion method
based on cost inputs or ratably over the entire term of the contract. As a
result of the size and complexity of these transactions, our results for any
quarter may depend significantly on the types of customer transactions that we
enter into during the quarter and on the mix of product licenses, support
agreements, implementation work and other specific
24
terms of each transaction, each of which may have a significant effect on the
manner in which we recognize revenue from the transaction.
The sales cycle for our products may span nine months or more. Historically,
we have recognized a substantial portion of our revenues in the last month of a
quarter, with these revenues frequently concentrated in the last two weeks of a
quarter. Even minor delays in booking orders may have a significant adverse
impact on revenues for a particular quarter. To the extent that delays are
incurred in connection with orders of significant size, the impact will be
correspondingly greater. Product license revenues in any quarter can be
dependent on orders booked and shipped in that quarter. As a result of these and
other factors, our quarterly results have varied significantly in the past and
are likely to fluctuate significantly in the future. Accordingly, we believe
that quarter-to-quarter comparisons of our results of operations are not
necessarily indicative of the results to be expected for any future period.
We license our software through our direct sales force and increasingly
through, or in conjunction with, value-added resellers, system integrators and
original equipment manufacturers. Channel partners accounted for, directly or
indirectly, approximately 39.2%, 33.6% and 27.0% of our revenues for the years
ended December 31, 1999, 1998 and 1997, respectively. Although we believe that
direct sales will continue to account for a majority of product license
revenues, we intend to increase the level of indirect sales activities. However,
there can be no assurance that our efforts to continue to expand indirect sales
will be successful. We also intend to continue to expand our international
operations and have committed, and continue to commit, significant management
time and financial resources to developing direct and indirect international
sales and support channels.
Results of Operations
The following table sets forth for the periods indicated the percentage of
total revenues represented by certain items reflected in our consolidated
statements of operations:
Years ended December 31,
----------------------------------------------------------------
1999 1998 1997
---- ---- ----
(Restated)/1/ (Restated)/1/ (Restated)/1/
Statements of Operations Data
Revenues:
Product licenses....................................... 56.7% 64.5% 67.5%
Product support and other services..................... 43.3 35.5 32.5
------ ----- -----
Total revenues........................................ 100.0 100.0 100.0
Cost of revenues:
Product licenses....................................... 1.7 2.4 3.1
Product support and other services..................... 22.8 18.4 18.0
------ ----- -----
Total cost of revenues................................ 24.5 20.8 21.1
------ ----- -----
Gross profit............................................ 75.5 79.2 78.9
Operating expenses:
Sales and marketing.................................... 61.8 55.9 58.0
Research and development............................... 18.5 12.7 9.6
General and administrative............................. 16.1 13.3 12.5
In-process research and development.................... 1.9 -- --
------ ----- -----
Total operating expenses.............................. 98.3 81.9 80.1
------ ----- -----
Loss from operations.................................... (22.8) (2.7) (1.2)
Interest income......................................... 1.4 1.1 0.2
Interest expense........................................ (0.1) (0.8) (0.6)
Provision for income taxes.............................. 0.8 -- --
------ ----- -----
Net loss................................................ (22.3)% (2.4)% (1.6)%
====== ===== =====
_________________
(1) See Note 3 of Notes to the Consolidated Financial Statements regarding
restatement of 1999, 1998 and 1997 financial statements.
25
Comparison of 1999, 1998 and 1997
Revenues. Total revenues consist of revenues derived from sales of product
licenses and product support and other services, including technical support,
education and consulting services. Total revenues increased from $52.6 million
in 1997 to $95.5 million in 1998 and to $151.3 million in 1999, resulting in a
revenue growth rate of 132.7% in 1997, 81.6% in 1998 and 58.4% in 1999. There
can be no assurance that total revenues will continue to increase at the rates
experienced in prior periods. The slower growth rates in 1999 and 1998 were
attributed to our new evolving business model. We entered into several new
multiple element transactions for large scale e-commerce applications and
complex Strategy.com deployments during 1999 and 1998. Based on the revenue
recognition criteria established in SOP 97-2 and SOP 81-1, revenue from many of
these large, multiple element arrangements is recorded as deferred revenue upon
receipt of cash, with both product license revenues and product support and
other services revenues recognized using the percentage of completion method
based on cost inputs or ratably over the entire term of the contract or over the
hosting period, as applicable.
In 1999, we launched the Strategy.com Finance Channel and plan to launch
additional information channels in the future. We expect to begin earning
subscription, advertising, transaction and other fees from our Strategy.com
service by the end of 2000.
Product License Revenues. Product license revenues increased from $35.5
million in 1997 to $61.6 million in 1998 and to $85.8 million in 1999, resulting
in a growth rate of 123.5% in 1997, 73.7% in 1998 and 39.3% in 1999. The
increase in product license revenues was due to continued demand for our core
products, new product offerings supporting intelligent e-business solutions and
increasing market demand for intelligent e-business solutions. We are attracting
new customers and our existing customer base is purchasing additional licenses
and new products to support their e-business solutions. As we continue to pursue
our new business model of larger-scale, multiple element transactions, we expect
product license revenues as a percentage of total revenues to fluctuate on a
period-to-period basis, and may vary significantly from the percentage of total
revenues achieved in prior years. In addition, there can be no assurance that we
will be able to maintain or continue to increase market acceptance for our
family of products.
Product Support and Other Services Revenues. Product support and other
services revenues increased from $17.1 million in 1997 to $33.9 million in 1998
and to $65.5 million in 1999, resulting in a growth rate of 153.7% in 1997,
98.2% in 1998 and 93.4% in 1999. The increase in product support and other
services revenues was primarily due to the increase in product licenses sold as
well as an increase in large scale e-commerce applications which require
significant implementation and other consulting work. An element of our sales
and marketing strategy is to use third-party implementation services to enable
us to more rapidly penetrate our target market. In addition, we plan to use our
consultants more aggressively to help sell our products and services, assist
with development of Strategy.com channels and other research and development
projects. To the extent that such efforts are successful, our product support
and other services revenues could decline as a percentage of total revenues. As
a result of the above mentioned trends, we expect product support and other
services revenues as a percentage of total revenues to fluctuate on a period-to-
period basis, and may vary significantly from the percentage of total revenues
achieved in prior years.
International Revenues. International revenues increased from $14.2 million in
1997 to $24.9 million in 1998 and to $36.4 million in 1999, resulting in a
growth rate of 466.7% in 1997, 74.9% in 1998 and 45.9% in 1999. The increase in
these revenues is due to the expansion of our international operations, new
product offerings and growing international market acceptance of our software
products. We opened sales offices in Brazil in 1999, in Canada and Italy in 1998
and in Austria, France, the Netherlands, Germany, United Kingdom and Spain prior
to 1998. We anticipate that international revenues will continue to account for
a significant amount of total revenues and management expects to continue to
commit significant time and financial
26
resources to the maintenance and ongoing development of direct and indirect
international sales and support channels. We may not be able to maintain or
continue to increase international market acceptance for our family of products.
Costs and Expenses
Cost of Product License Revenues. Cost of product license revenues consists
primarily of the costs of product manuals, media, amortization of capitalized
software expenses and royalties paid to third party software vendors. Cost of
product license revenues increased from $1.6 million in 1997 to $2.2 million in
1998 and to $2.6 million in 1999. As a percentage of product license revenues,
however, cost of product license revenues decreased from 4.5% in 1997 to 3.6% in
1998 and to 3.0% in 1999. The decrease in cost of product license revenues as a
percentage of product license revenues was due to economies of scale realized by
producing larger volumes of product materials and decreased materials costs due
to an increase in the percentage of customers reproducing product documentation
at their sites. We anticipate that the cost of product license revenues will
continue to increase as product license revenues increase, but decrease as a
percentage of product license revenues. However, in the event that we enter into
any royalty arrangements with strategic partners in the future, cost of product
license revenues as a percentage of total product license revenues may increase.
Cost of Product Support and Other Services Revenues. Cost of product support
and other services revenues consists of the costs of providing technical
support, education and consulting services to customers and partners. Cost of
product support and other services revenues increased from $9.5 million in 1997
to $17.5 million in 1998 and to $34.4 million in 1999. As a percentage of
product support and other services revenues, cost of product support and other
services revenues was 55.6% in 1997, 51.8% in 1998 and 52.5% in 1999. The
increase in cost of product support and other services revenues was primarily
due to the increase in the number of personnel providing consulting, education
and technical support to customers as a result of the increase in product
licenses sold, new large scale e-commerce applications and complex Strategy.com
deployments. Despite the increase in personnel and other costs for 1998, the
total cost of product support revenues decreased as a percentage of revenues
during 1998 compared to 1997 primarily due to the increase in technical support
revenues which typically do not require proportionate increases in the costs
required to perform associated technical support services. This trend continued
in 1999; however, the improvements in margin due to increasing technical support
revenues were offset by the increased use of third parties to perform consulting
services.
We expect to continue to increase the number of customer education and
implementation consultants and technical support personnel in the future. To the
extent that our product support and other services revenues do not increase at
anticipated rates, the hiring of additional consultants and technical support
personnel could increase the cost of product support and other services revenues
as a percentage of product support and other services revenues. In addition, to
the extent that we cannot hire adequate numbers of support personnel to meet
demand, we may need to rely more heavily on third parties to perform consulting
services, further increasing cost of product support and other services revenues
as a percentage of product support and other services revenues.
Sales and Marketing Expenses. Sales and marketing expenses include personnel
costs, commissions, office facilities, travel, advertising, public relations
programs and promotional events, such as trade shows, seminars and technical
conferences. Sales and marketing expenses increased from $30.5 million in 1997
to $53.4 million in 1998 and to $93.5 million in 1999. As a percentage of total
revenues, sales and marketing expenses decreased from 58.0% in 1997 to 55.9% in
1998 and increased to 61.8% in 1999. The increase in sales and marketing
expenses was primarily the result of increased staffing levels in the sales
force, increased commissions earned, increased promotional activities and
advertising, increased marketing efforts for Strategy.com and general marketing
efforts. In addition, we began a national advertising campaign during the fourth
quarter of 1999, which we plan to continue in 2000. We have invested and will
continue to substantially increase our investment in sales and marketing over
the next twelve months in order to create better market
27
awareness of the value-added potential of our product suite and to seek to
acquire market share. In addition, we intend to invest heavily over the next
twelve months to market Strategy.com.
Research and Development Expenses. Research and development expenses consist
primarily of salaries and benefits of software engineering personnel,
depreciation of equipment and other costs. Research and development expenses
increased from $5.0 million in 1997 to $12.1 million in 1998 and to $28.0
million in 1999. As a percentage of total revenues, research and development
expenses increased from 9.6% in 1997 to 12.7% in 1998 and to 18.5% in 1999. The
increase in research and development expenses was primarily due to hiring
additional research and development personnel to continue development of
Strategy.com channels, new products, product releases and e-commerce technology.
We intend to substantially increase our investment over the next twelve months
to develop sports, traffic and other channels as part of our suite of
information channels of our Strategy.com network. In addition, we expect that
research and development expenses will continue to increase as we continue to
invest in developing new products, applications and product enhancements for our
existing platform business.
In 1997, in accordance with Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Equipment to Be Sold,
Leased, or Otherwise Marketed," we capitalized research and development costs
associated with the version 5.0 release of our software product line. As a
result, we capitalized approximately $1.9 million of research and development
costs during 1997. During 1998 and 1999, no costs were capitalized as the
establishment of technological feasibility and general release of such software
had substantially coincided.
General and Administrative Expenses. General and administrative expenses
include personnel and other costs of our finance, human resources, information
systems, administrative and executive departments as well as outside
professional fees. General and administrative expenses increased from $6.6
million in 1997 to $12.7 million in 1998 and to $24.4 million in 1999. As a
percentage of total revenues, general and administrative expense were 12.5% in
1997, 13.3% in 1998 and 16.1% in 1999. The increase in general and
administrative expenses was primarily the result of increased staff levels and
related costs associated with the growth of our business during these periods.
Although we expect that general and administrative expenses will continue to
increase in the foreseeable future, such expenses are not expected to
significantly vary as a percentage of total revenues in the future.
In-process Research and Development. In December 1999, we purchased the
intellectual property and other tangible and intangible assets, including the
assembled workforce, relating to NCR's Teracube project in exchange for 566,372
shares of Class A common stock, valued at $49.6 million, based on the price of
our stock at the closing. We will develop the Teracube assets in concert with
its existing proprietary technology to create a business intelligence platform
for datawarehouses using NCR's Teradata database. Our preliminary allocation of
the $49.6 million purchase price was $2.8 million for in-process research and
development and $46.8 million to tangible and intangible assets including core
technology, computer equipment, assembled work force and agreements not to
compete. We believe the weighted average estimated useful life of such assets,
based upon the final allocation, will be less than 5 years and anticipate the
final allocation will be completed during the first half of 2000. As a result,
we will incur substantially incresased amortization expense in future periods
relating to the amortization of these intangible assets. We recorded $341,000
in related amortization expense related to the Teracube project in 1999.
In estimating the fair value of the in-process research and development
projects acquired, we considered, among other factors, the stage of development
of the Teracube research and development projects at the time of the acquisition
and projected estimated cash flows from those projects when completed and the
percentage of the final products cash flows that is attributed to our core
technology and that was already developed by NCR. Associated risks include the
inherent difficulties and uncertainties in completing Teracube and, thereby,
achieving technological feasibility and risk related to the impact of potential
changes in future technology.
28
We intend to incur expenses of approximately $900,000 over the next year in
order to complete the project. The project was approximately 85% complete at the
time of the acquisition and approximately 30% of the final product's estimated
cash in-flows are attributable to the acquired Teracube technology. We used a
discount rate of 35% when estimating the net present value of the projected
incremental cash flows. Remaining development efforts are focused on completing
development of certain sub-products of Teracube that will maximize efficiencies
in operation of our business intelligence and e-business products and make it
compliant with industry standards. Completion of these projects will be
necessary before revenues are produced. We expect to begin to benefit from the
purchased in-process research and development by the end of 2000. If these
projects are not successfully developed, we may not realize the value assigned
to the in-process research and development projects.
Deferred Compensation Expense. During 1998, we granted options to purchase
3,753,380 shares of Class A common stock, of which options to purchase 1,071,670
shares of Class A common stock were granted at exercise prices below fair market
value. We will amortize $1.4 million of compensation expense related to these
options ratably over the five-year vesting period. In 1999 and 1998,
compensation expense was $269,000 and $186,000, respectively. We will record
additional compensation expense of $270,000 in each year beginning 2000 through
2002, and $85,000 in 2003, if all of the related options vest.
Provision for Income Taxes. In 1999 and 1998, we recorded income tax expense
of $1.2 million and $0, respectively. Prior to our initial public offering, we
had elected to be treated as a Subchapter S corporation for federal and state
income tax purposes. Under Subchapter S, our income was allocated to our
individual stockholders rather than to us. Accordingly, no federal or state
income taxes have been provided for in the financial statements, prior to June
1998, when we converted to a C corporation.
Deferred Revenue
Deferred revenue represents product support and other services fees that are
collected in advance, product license and product support and other services
fees relating to multiple element software arrangements for which the fair value
of each element cannot be established or product license and product support and
other services fees relating to arrangements which required implementation
related services that are significant to the functionality of features of the
software product, including arrangements with subsequent hosting services.
Deferred revenue was $71.3 million as of December 31, 1999 compared to $13.0
million as of December 31, 1998. The increase in deferred revenue is primarily
attributable to a few large contracts with customers that involved multiple
elements, including software products, product support and other services,
hosting services and/or Strategy.com services and for which our revenue
recognition policy requires that the revenues be recognized on a percentage of
completion basis or recognized over the entire term of the contract or the
hosting period, as applicable. We expect to recognize approximately $38.0
million of this deferred revenue in 2000, however, the timing and ultimate
recognition of our deferred revenue depends on our performance of various
service obligations. Because of the possibility of customer changes in
development schedules, delays in implementation and development efforts and the
need to satisfactorily perform product support and other services, deferred
revenue as of any particular date may not be representative of actual revenue
for any succeeding period.
Liquidity and Capital Resources
From inception until our initial public offering, we primarily financed our
operations and met our capital expenditure requirements through cash flows from
operations and short- and long-term borrowings. On June 16, 1998, we raised
$48.2 million, net of offering costs, from our initial public offering, and we
raised an additional $40.1 million, net of offering costs, on February 10, 1999
from a public offering of 3,170,000 shares of Class A common stock. On December
31, 1999 and December 31, 1998, we had $68.4 million and $27.5 million of cash,
cash equivalents, and short-term investments, respectively.
29
Cash provided by operations was $89,000 for 1999 and cash used in operations
was $2.5 million for 1998. The decrease in cash used in operations from 1998 to
1999 was primarily attributable to an increase in deferred income and prepaid
expenses offset by an increase in net loss. As discussed in the overview, we
intend to aggressively pursue financing to allow us to invest significant
resources to market, develop and operate Strategy.com. Because of this
anticipated ongoing investment, we expect to use significant cash in operations.
Cash used in investing activities was $43.2 million and $9.3 million for 1999
and 1998, respectively. The increase in cash used in investing activities from
1998 to 1999 reflected purchases of short-term investments and capital
expenditures related to the acquisition of computer and office equipment
required to support expansion of our operations and building of infrastructure
to support Strategy.com. As of December 31, 1999 we had $12.2 million in
commitments for computer software and equipment. Additionally, in November 1999,
we signed a three-year master lease agreement to lease up to $40.0 million of
computer equipment, of which we leased approximately $17.8 million as of March
30, 2000. The lease bears interest at a rate equal to interest on three-year
U.S. treasury notes plus 1.5% to 2.0%. Future draw downs and interest rates
under the lease agreement are subject to our credit worthiness. If the lessor
deems our credit unworthy, we may not be able to lease additional equipment
under the agreement.
Our financing activities provided cash of $42.2 million and $35.7 million for
1999 and 1998, respectively. The principal source of cash from financing
activities during 1999 was from the sale of 3,170,000 shares of Class A common
stock in which we raised $40.1 million, net of offering costs. In March 1999, we
entered into a line of credit agreement with a commercial bank which provides
for a $25.0 million unsecured revolving line of credit for general working
capital purposes. Borrowings under the line of credit will bear interest at a
variable rate equal to LIBOR plus 1.0% to 1.75%, depending upon the ratio of
funded debt to earnings before interest, taxes, depreciation and amortization.
The line of credit agreement includes a 0.2% unused line of credit fee and
expires on May 31, 2001. As of December 31, 1999, no amounts were outstanding
under the line of credit. The line of credit requires us to comply with certain
financial covenants. We currently do not comply with all of the covenants
contained in the line of credit agreement, but have received a waiver through
April 30, 2000 at which time we expect to restructure the credit facility. If
we are not in compliance with all covenants contained in the line of credit
agreement, we will not have the right to borrow amounts under the agreement.
We declared a $10.0 million dividend to our stockholders prior to our initial
public offering. The dividend was paid in the form of notes, prior to the
termination of our S corporation election, which occurred immediately prior to
the consummation of our initial public offering. As of December 31, 1999, the
entire $10.0 million of the dividend notes had been repaid.
We will require additional external financing through credit facilities, sale
of additional equity or other financing facilities to support our planned
investment of significant resources to build the Strategy.com personal
intelligence network, to continue to grow the MicroStrategy software platform
business, and to increase both MicroStrategy and Strategy.com brand awareness.
There are no assurances that such financing facilities would be available on
acceptable terms; however, we believe that our existing cash and cash generated
internally by operations will meet our working capital requirements for at least
the next 12 months with more modest growth in Strategy.com and MicroStrategy and
minimal brand awareness expenditures.
In December 1999, we received approximately 824,000 shares (adjusted for a
two-for-one stock split) of Exchange Applications, valued at $21.5 million in
consideration for the sale of MicroStrategy software, technical support and
consulting services. Subsequent to year end, we sold approximately 412,000 of
these shares at an average price of approximately $41.71 per share.
30
Recent Accounting Pronouncements
In December 1999, the SEC released Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements," which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. Subsequently, the SEC released SAB 101A, which delayed the
implementation date of SAB 101 for registrants with fiscal years that begin
between December 16, 1999 and March 15, 2000. We are required to be in
conformity with the provisions of SAB 101, as amended by SAB 101A, no later than
April 1, 2000 and do not expect a material effect on our financial position,
results of operations or cash flows as a result of SAB 101.
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
which delays the effective date of SFAS No. 133, ''Accounting for Derivative
Instruments and Hedging Activities,'' which will be effective for our fiscal
year 2001. This statement establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments embedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement also
requires that changes in the derivative's fair value be recognized in earnings
unless specific hedge accounting criteria are met. We believe the adoption of
SFAS Nos. 133 and 137 will not have a material effect on our financial
statements.
Risk Factors
The following important factors, among others, could cause actual results to
differ materially from those contained in forward-looking statements made in
this Annual Report on Form 10-K or presented elsewhere by management from time
to time. The risks and uncertainties described below are not the only ones
facing our company. Additional risks and uncertainties not presently known to us
or that we currently deem immaterial may also impair our business operations.
If any of the events described in the following risks actually occur, our
business, financial condition or results of operations could be materially
adversely affected. In such case, the trading price of our Class A common stock
could decline and you may lose all or part of your investment.
Our quarterly operating results, revenues and expenses may fluctuate
significantly, which could have an adverse effect on the market price of our
stock
For a number of reasons, including those described below, our operating
results, revenues and expenses may vary significantly from quarter to quarter.
These fluctuations could have an adverse effect on the market price of our Class
A common stock.
Fluctuations in Quarterly Operating Results. Our quarterly operating results
may fluctuate as a result of:
. the size, timing and execution of significant orders and shipments;
. the mix of products and services of customer orders, which can affect
whether we recognize revenue upon the signing and delivery of our software
products or whether revenue must be recognized as work progresses or over
the entire contract period;
. the timing of new product announcements;
. changes in our pricing policies or those of our competitors;
. market acceptance of business intelligence software generally and of new
and enhanced versions of our products in particular;
31
. the length of our sales cycles;
. changes in our operating expenses;
. personnel changes;
. our success in expanding our direct sales force and adding to our indirect
distribution channels;
. the pace and success of our international expansion;
. delays or deferrals of customer implementation;
. changes in foreign currency exchange rates; and
. seasonal factors such as a lower pace of new sales in the summer.
Limited Ability to Adjust Expenses. Because we plan to expand our business, we
expect our operating expenses to increase substantially. In particular, during
2000 we expect to increase significantly the costs associated with marketing,
developing and operating our Strategy.com network and with expanding our
technical support, research and development and sales and marketing
organizations. We also expect to devote substantial resources to expanding our
indirect sales channels and international operations. We base our operating
expense budgets on expected revenue trends. In the short term we may not be able
to reduce the actual operating expenses associated with our expansion.
Based on the above factors, we believe that quarter-to-quarter comparisons of
our operating results are not a good indication of our future performance. It is
possible that in one or more future quarters, our operating results may be below
the expectations of public market analysts and investors. In that event, the
trading price of our Class A common stock may fall.
We have recently introduced Strategy.com and it is uncertain whether it will
achieve widespread acceptance
We have implemented the Finance Channel of our Strategy.com network, and our
weather and news channels have been introduced on a test basis. We plan on
introducing sports and traffic channels as part of our suite of information
channels, but they are still in development. While we expect to implement these
channels on a commercial basis by the end of 2000, we may encounter delays or
difficulties in this commercial introduction. We expect that a portion of our
future revenue will depend on fees from subscribers for the use of the
Strategy.com network service, from products and services offered through this
network, and from royalties from affiliates who bundle our Strategy.com network
with their own product and service offerings. We have not, to date, generated
any revenue from our Strategy.com network and may not be able to do so in the
future. If this service, or the products and services offered through it, fail
to achieve widespread customer acceptance, our business, operating results and
financial condition may be materially adversely affected. In addition, revenue
from Strategy.com would be adversely affected if our affiliates do not perceive
that the integration of our Strategy.com network with their product and service
offerings will increase demand for their products and services or will otherwise
be able to generate a sufficient return on their investment in the use of our
network.
We intend to make significant expenditures in developing our Strategy.com
network, which will result in us incurring operating losses
We plan to substantially increase the amounts we will expend on our
Strategy.com network compared to the expenses we have incurred to date. We
intend to substantially increase our investment in Strategy.com over the next
twelve months to market, develop and operate Strategy.com. We therefore expect
operating losses to
32
increase in 2000. We also intend to continue making significant investments in
Strategy.com after 2000 and therefore believe we will continue to be
unprofitable for the foreseeable future.
We may lose sales, or sales may be delayed, due to the long sales and
implementation cycles for our products, which would reduce our revenues
To date, our customers have typically invested substantial time, money and
other resources and involved many people in the decision to license our software
products. As a result, we may wait nine months or more after the first contact
with a customer for that customer to place an order while they seek internal
approval for the purchase of our products. During this long sales cycle, events
may occur that affect the size or timing of the order or even cause it to be
canceled. For example, our competitors may introduce new products, or the
customer's own budget and purchasing priorities may change.
Even after an order is placed, the time it takes to deploy our products varies
widely from one customer to the next. Implementing our product can sometimes
last several months, depending on the customer's needs and may begin only with a
pilot program. It may be difficult to deploy our products if the customer has
complicated deployment requirements, which typically involve integrating
databases, hardware and software from different vendors. If a customer hires a
third party to deploy our products, we cannot be sure that our products will be
deployed successfully.
Our employees, investors, customers, vendors and lenders may react adversely to
the revision of our 1999, 1998 and 1997 revenues and operating results
Our future success depends in large part on the support of our key employees,
investors, customers, vendors and lenders, who may react adversely to the
revision of our 1999, 1998 and 1997 revenues and operating results. The
revision of our 1999, 1998 and 1997 revenues and operating results has resulted
in substantial amounts of negative publicity about us. We may not be able to
retain key employees and customers if they lose confidence in us, and our
vendors and lenders may reexamine their willingness to do business with us. In
addition, investors may lose confidence which may cause the trading price of our
Class A common stock to decrease. If we lose the services of our key employees
or are unable to retain and attract our existing and new customers, vendors and
lenders, our business, operating results and financial condition could be
materially and adversely affected.
Our recognition of deferred revenue is subject to future performance obligations
and may not be representative of actual revenues for succeeding periods
Our deferred revenue was $71.3 million as of December 31, 1999. The timing and
ultimate recognition of our deferred revenue depends on our performance of
various service obligations. Because of the possibility of customer changes in
development schedules, delays in implementation and development efforts and the
need to satisfactorily perform product support services, deferred revenue at any
particular date may not be representative of actual revenue for any succeeding
period.
We may need additional financing which could be difficult to obtain
We intend to grow our business rapidly, including investing substantial
amounts in our Strategy.com business and expect to incur operating losses for
the foreseeable future. Therefore, we may require significant external financing
in the future. Obtaining additional financing will be subject to a number of
factors, including:
. market conditions;
. our operating performance; and
33
. investor sentiment.
These factors may make the timing, amount, terms and conditions of additional
financing unattractive to us. If we are unable to raise capital to fund our
growth, our business, financial condition and results of operations would be
materially and adversely affected.
We face litigation that could have a material adverse effect on our business,
financial condition and results of operations
We and some of our directors and executive officers are named as defendants in
a number of private securities litigation matters. Although we intend to defend
these actions vigorously, no assurance can be given as to the outcomes. It is
possible that we may be required to pay substantial damages or settlement costs
which could have a material adverse effect on our financial condition or results
of operation. In addition, the SEC has issued a formal order of private
investigation in connection with matters relating to our restatement of our
financial results. The SEC has requested that we provide the them with certain
documents concerning the revision of our financial results and financial
reporting documents. We are cooperating with the SEC in connection with this
investigation. Regardless of the outcome of any of these actions, it is likely
that we will incur substantial defense costs and that such actions will cause a
diversion of management time and attention.
We expect that our ability to borrow money under our existing credit facilities
will require waivers by our lenders or amendments to those facilities
Our credit facilities require that we comply with a number of financial
covenants. Although we have not borrowed any amounts under our $25.0 million
unsecured line of credit, we do not currently comply with all of the covenants
contained in the line of credit agreement; however, we have received a waiver
from the lender through April 30, 2000 at which time we expect to restructure
the credit facility. If we are in violation of any financial covenants, we will
not have the ability to borrow amounts under this facility.
In addition, we signed a three-year master lease agreement to lease up to
$40.0 million of computer equipment, of which we have leased approximately $17.8
million as of March 30, 2000. Future draw downs and interest rates under the
lease agreement are subject to our credit worthiness. If the lessor deems our
credit unworthy, we may not be able to lease additional equipment under the
agreement.
We face intense competition, which may lead to lower prices for our products,
reduced gross margins, loss of market share and reduced revenue
The markets for e-business, e-commerce, customer relationship management,
portals, business intelligence and Internet-based and wireless-based information
networks are intensely competitive and subject to rapidly changing technology.
In addition, many of our competitors in these markets are offering, or may soon
offer, products and services that may compete with our products and our
Strategy.com network.
Our most direct competitors provide:
. e-business products;
. customer relationship management products;
. e-commerce transaction systems;
. business intelligence products;
34
. Internet and wireless information networks and portals;
. vertical Internet portals and information networks; and
. wireless communications and wireless access protocol enabled products.
Each of these market segments are discussed more fully below.
E-business Infrastructure Software. In the e-business infrastructure market,
BroadVision, E.piphany, Vignette, Net Perceptions, Broadbase, Art Technology
Group, Engage Technologies, Doubleclick and Personify all provide products that
compete directly or indirectly with our software platform. Many of these
companies provide alternatives to our technology for adding intelligence and
personalization to e-commerce applications. For example, customer information,
such as past purchases, clickstream data and stated preferences, can be used to
create a personalized e-commerce experience that targets customers with offers
and interactions to which they are more likely to respond.
Customer Relationship Management Products. Companies that deliver customer
relationship management products alone or in conjunction with e-commerce
applications, such as BroadVision, E.piphany, Vignette, and Siebel, compete with
our intelligent e-business products.
E-Commerce Transaction Systems. Products that support e-commerce transactions,
such as those provided by Microsoft, IBM, America Online's Netscape division,
BroadVision, Open Market, InterWorld, and Oracle could provide competition for
us. These products have the potential to extend their capabilities to use
customer information as the basis for generating targeted, personalized product
offers, which would compete with our e-business products.
Business Intelligence Products. In the business intelligence market, we
compete with providers of software used to enable businesses to analyze and
optimize their operations. In the enterprise category, which is generally
focused on large deployments, Information Advantage, which was recently acquired
by Sterling Software, competes with us. In the desktop analysis and reporting
category, we face competition from companies such as Business Objects, Cognos,
and Brio Technology. A third category includes products from companies such as
Oracle, Microsoft, and IBM that are generally bundled with or designed to work
with their own relational databases.
Web Portals and Information Networks. Web portals and information networks,
such as Microsoft Network, Yahoo, Lycos, Excite, America Online and
InfoSpace.com, offer an array of information that is similar to information
provided by Strategy.com. Strategy.com seeks to differentiate itself by:
. providing a greater level of personalization;
. allowing users to receive the precise information they want across the
broadest range of information delivery devices including through email,
wireless phone, pager, wireless access protocol enabled products, fax,
personal digital assistants and the telephone; and
. partnering with financial institutions, device manufacturers, Internet
companies, communication carriers, media companies and wireless companies,
to embed Strategy.com information services as an ingredient in their own
offerings.
One or more of these companies, however, could expand their offerings and
reduce our differentiation in these three areas.
35
Vertical Internet Portals and Information Networks. Expedia, Weather.com,
CNBC.com, ABC.com, ESPN.com, Microsoft Investor, StockBoss, Microsoft CarPoint,
InfoBeat, Internet Travel Network and others have developed custom applications
and products to commercialize, analyze and deliver specific information over the
Internet. These systems are usually tailored to one application, such as
providing news, sports or weather, but in the aggregate, they offer applications
similar to those provided by Strategy.com. Any one of these companies could
expand their offerings to more closely compete with Strategy.com.
Wireless Communications and Wireless Access Protocol Enabled Products.
Wireless communications providers, such as AT&T, Sprint, MCI WorldCom, Nextel
Communications, British Telecom, Deutsche Telekom, PageNet, Nokia, Ericsson,
Aether Systems, 3COM and Palm offer a variety of mobile phones and wireless
devices over which Strategy.com delivers information. These companies may
develop in-house information services or partner with other companies to deliver
information that is competitive to that offered by Strategy.com.
Many of our competitors have longer operating histories, significantly greater
financial, technical, marketing or other resources, and greater name recognition
than we do. In addition, many of our competitors have strong relationships with
current and potential customers and extensive knowledge of the e-business
industry. As a result, they may be able to respond more quickly to new or
emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sale of their products than we can.
Increased competition may lead to price cuts, reduced gross margins and loss of
market share. We cannot be sure that we will be able to compete successfully
against current and future competitors or that the competitive pressures we face
will not have a material adverse affect on our business, operating results and
financial condition.
Current and future competitors may also make strategic acquisitions or
establish cooperative relationships among themselves or with others. By doing
so, they may increase their ability to meet the needs of our potential
customers. Our current or prospective indirect channel partners may establish
cooperative relationships with our current or future competitors. These
relationships may limit our ability to sell our products through specific
distribution channels. Accordingly, it is possible that new competitors or
alliances among current and future competitors may emerge and rapidly gain
significant market share. These developments could harm our ability to obtain
maintenance revenues for new and existing product licenses on favorable terms.
Our business is expanding, and our failure to manage this expansion effectively,
as well as the strain on our resources, could have a material adverse effect on
our business, operating results and financial condition
We have been expanding rapidly and we expect to continue expanding our
operations. Our total number of employees has grown from 59 on December 31, 1994
to 1,662 on December 31, 1999 and we expect the number of employees to continue
to increase. We have placed significant demands on our administrative,
operational, financial and personnel resources and expect to continue doing so.
In particular, we expect the current and planned growth of our international
operations to lead to increased financial and administrative demands. For
example, expanded facilities will complicate operations, managing relationships
with new foreign partners will mean additional administrative burdens, and
managing foreign currency risks will require expanded treasury functions. We may
also need to expand our support organization to develop our indirect
distribution channels in new and expanded markets and to accommodate growth in
our installed customer base. Failure to manage our expansion effectively could
have a material adverse effect on our business, operating results and financial
condition.
In addition, the development of our Strategy.com network could divert the time
and attention of our senior management from our other business. Michael J.
Saylor, our chairman, president and chief executive officer, currently is
responsible for the strategic planning and direction of both our MicroStrategy
software platform
36
and Strategy.com network businesses. If Mr. Saylor does not effectively manage
his time and attention between our businesses, it could materially adversely
affect our business, operating results and financial condition.
If we are unable to recruit or retain skilled personnel, or if we lose the
services of any of our key management personnel, our business, operating results
and financial condition would be materially adversely affected
Our future success depends on our continuing ability to attract, train,
assimilate and retain highly skilled personnel. Competition for these employees
is intense. We may not be able to retain our current key employees or attract,
train, assimilate or retain other highly skilled personnel in the future. Our
future success also depends in large part on the continued service of key
management personnel, particularly Michael J. Saylor, our chairman, president
and chief executive officer, and Sanju K. Bansal, our executive vice president
and chief operating officer. If we lose the services of one or both of these
individuals or other key personnel, or if we are unable to attract, train,
assimilate and retain the highly skilled personnel we need, our business,
operating results and financial condition could be materially adversely
affected.
Our inability to develop and release product enhancements and new products to
respond to rapid technological change in a timely and cost-effective manner
would have a material adverse effect on our business, operating results and
financial condition
The market for our products is characterized by rapid technological change,
frequent new product introductions and enhancements, changing customer demands
and evolving industry standards. The introduction of products embodying new
technologies can quickly make existing products obsolete and unmarketable. We
believe that our future success depends largely on three factors:
. our ability to continue to support a number of popular operating systems
and databases;
. our ability to maintain and improve our current product line; and
. our ability to rapidly develop new products that achieve market acceptance,
maintain technological competitiveness and meet an expanding range of
customer requirements.
Business intelligence applications are inherently complex, and it can take a
long time to develop and test major new products and product enhancements. In
addition, customers may delay their purchasing decisions because they anticipate
that new or enhanced versions of our products will soon become available. We
cannot be sure that we will succeed in developing and marketing, on a timely and
cost-effective basis, product enhancements or new products that respond to
technological change, introductions of new competitive products or customer
requirements, nor can we be sure that our new products and product enhancements
will achieve market acceptance.
The emergence of new industry standards may adversely affect our ability to
market our existing products
The emergence of new industry standards in related fields may adversely affect
the demand for our existing products. This could happen, for example, if new web
standards and technologies emerged that were incompatible with customer
deployments of our MicroStrategy applications. Although the core database
component of our business intelligence solutions is compatible with nearly all
enterprise server hardware and operating system combinations, such as OS/390,
AS/400, Unix and Windows, our application server component runs only on the
Windows operating system. Therefore, our ability to increase sales currently
depends on the continued acceptance of the Windows operating system. We cannot
market our current business intelligence applications to potential customers who
use Unix operating systems as their application server. We
37
would have to invest substantial resources to develop a Unix product and we
cannot be sure that we could introduce such a product on a timely or cost
effective basis, if at all.
The legal environment regarding collection and use of personal information is
uncertain and new laws or government regulations could have a material adverse
effect on our business, operating results and financial condition
Although some existing laws govern the collection and use of personal
information obtained through the Internet or other public data networks, it is
unclear whether they apply to us and our products. Most of these laws were
adopted before the widespread use and commercialization of the Internet and
other public data networks. As a result, the laws do not address the unique
issues presented by these media.
Due to increasing use of the Internet and the dramatically increased access to
personal information made possible by technologies like ours, the U.S. federal
and various state and foreign governments have recently proposed limitations on
the collection and use of personal information of users of the Internet and
other public data networks.
Although we attempt to obtain permission from users prior to collecting or
processing their personal data, new laws or regulations governing personal
privacy may change the ways in which we and our customers and affiliates may
gather this personal information. There may be significant costs and delays
involved with adapting our products to any change in regulations.
Our business, and in particular our Strategy.com network, depends upon our
receiving detailed personal information about subscribers in order to provide
them with the services they select. Privacy concerns may cause some potential
subscribers to forego subscribing to our service. If new laws or regulations
prohibit us from using information in the ways that we currently do, or if users
opt out of making their personal preferences and information available to us and
our affiliates, the utility of our products will decrease, which could have a
material adverse effect on our business, operating results and financial
condition. If personal information is misused by us, our customers or our
network affiliates, our legal liability may be increased and our growth may be
limited.
The Federal Trade Commission has recently launched investigations of the data
collection practices of various Internet companies. In addition, numerous
individuals and privacy groups have filed lawsuits or administrative complaints
against other companies asserting that they were harmed by the misuse of their
personal information. If comparable legal proceedings were commenced against us,
regardless of the merits of the claim, we could be required to spend significant
amounts on legal defense and our senior management's time and attention could be
diverted from our business. In addition, demand for our products could be
reduced if companies are not permitted to use clickstream data derived from
their web sites. This could materially and adversely affect our business,
financial condition and results of operations.
In addition, in Europe, the European Union Directive on Data Protection, a
comprehensive administrative and regulatory program, currently limits the
ability of companies to collect, store and exchange personal data with other
entities. Because the U.S. may not currently provide a level of data protection
sufficient to meet the guidelines under the European Union Directive, U.S.
companies could be prohibited from obtaining personal data from or exchanging
such data with companies in Europe.
Our business may suffer if either the Internet infrastructure or the wireless
communication infrastructure is unable to effectively support the growth in
demand placed upon it
Our Strategy.com network and our other products depend increasingly upon the
Internet infrastructure and wireless communications infrastructures to collect
information and deliver information to customers. We cannot assure you that
either of these infrastructures will continue to effectively support the
capacity, speed and
38
security demands placed upon them as they continue to experience increased
numbers of users, frequency of use and increased requirements for data
transmission by users. Even if the necessary infrastructure or technologies are
developed, we may incur considerable costs to adapt our solutions accordingly.
Furthermore, the Internet has experienced a variety of outages and other delays
due to damage to portions of its infrastructure or attacks by hackers. These
outages and delays could impact the web sites using our products or hosting our
Strategy.com network and could materially affect our business, operating results
and financial condition.
If the market for business intelligence software fails to grow as we expect, or
if businesses fail to adopt our products, our business, operating results and
financial condition would be materially adversely affected
Nearly all of our revenues to date have come from sales of business
intelligence software and related technical support, consulting and education
services. We expect these sales to account for a large portion of our revenues
for the foreseeable future. Although demand for business intelligence software
has grown in recent years, the market for business intelligence software
applications is still emerging. Resistance from consumer and privacy groups to
increased commercial collection and use of data on spending patterns and other
personal behavior may impair the further growth of this market, as may other
developments. We cannot be sure that this market will continue to grow or, even
if it does grow, that businesses will adopt our solutions. We have spent, and
intend to keep spending, considerable resources to educate potential customers
about business intelligence software in general and our solutions in particular.
However, we cannot be sure that these expenditures will help our products
achieve any additional market acceptance. If the market fails to grow or grows
more slowly than we currently expect, our business, operating results and
financial condition would be materially adversely affected.
Because of the rights of our two classes of common stock, and because we are
controlled by our existing stockholders, these stockholders could transfer
control of MicroStrategy to a third party without anyone else's approval or
prevent a third party from acquiring MicroStrategy
We have two classes of common stock: Class A common stock and Class B common
stock. Holders of our Class A common stock generally have the same rights as
holders of our Class B common stock, except that holders of Class A common stock
have one vote per share while holders of Class B common stock have ten votes per
share. As of March 1, 2000, holders of our Class B common stock owned or
controlled 55,466,929 shares of Class B common stock, or 95.9% of the total
voting power. Michael J. Saylor, our chairman, president and chief executive
officer, controlled 43,549,324 shares of Class B common stock, or 75.3% of the
total voting power, as of March 1, 2000. Accordingly, Mr. Saylor is able to
control MicroStrategy through his ability to determine the outcome of elections
of our directors, amend our certificate of incorporation and bylaws and take
other actions requiring the vote or consent of stockholders, including mergers,
going private transactions and other extraordinary transactions and their terms.
Our certificate of incorporation allows holders of Class B common stock,
almost all of whom are employees of our company or related parties, to transfer
shares of Class B common stock, subject to the approval of a majority of the
holders of outstanding Class B common stock. Mr. Saylor or a group of
stockholders possessing a majority of the outstanding Class B common stock
could, without seeking anyone else's approval, transfer voting control of
MicroStrategy to a third party. Such a transfer of control could have a material
adverse effect on our business, operating results and financial condition. Mr.
Saylor will also be able to prevent a change of control of MicroStrategy,
regardless of whether holders of Class A common stock might otherwise receive a
premium for their shares over the then-current market price.
We rely on our strategic channel partners and if we are unable to develop or
maintain successful relationships with them, our business, operating results and
financial condition will suffer
39
In addition to our direct sales force, we rely on strategic channel partners,
such as original equipment manufacturers, system integrators and value-added
resellers, to license and support our products in the United States and
internationally. In particular, for the years ended December 31, 1999, 1998,
1997 and 1996, channel partners accounted for, directly or indirectly,
approximately 39.2%, 33.6%, 27.0% and 9.0% of our total revenues, respectively.
Our channel partners generally offer customers the products of several different
companies, including some products that compete with ours. Although we believe
that direct sales will continue to account for a majority of product license
revenues, we intend to increase the level of indirect sales activities through
our strategic channel partners. However, there can be no assurance that our
efforts to continue to expand indirect sales in this manner will be successful.
We cannot be sure that we will attract strategic partners who will market our
products effectively and who will be qualified to provide timely and cost-
effective customer support and service. Our ability to achieve revenue growth in
the future will depend in part on our success in developing and maintaining
successful relationships with those strategic partners. If we are unable to
develop or maintain our relationships with these strategic partners, our
business, operating results and financial condition will suffer.
We rely on our network affiliates to market our Strategy.com network to their
customers and if we are unable to enter into arrangements with a sufficient
number of affiliates, or if our affiliates are unable to interest their
customers in our services, our business will suffer
We rely on our network affiliates to market our Strategy.com network to their
customers. We cannot be sure that we will attract affiliates who will market our
services effectively. Our ability to achieve revenue growth in the future will
depend in part on our success in recruiting and maintaining successful
relationships with affiliates. If we are unable to recruit affiliates or
maintain our relationships with them, our business, operating results and
financial condition will suffer.
Third party providers of information and services for our Strategy.com network
may fail to provide us such information and services or may also provide such
information and services to our competitors
We rely on third parties to provide information and services for our
Strategy.com network. For example, we rely on Ameritrade to provide users of our
Strategy.com network with stock quote information and expect to rely upon a
third party to execute trades in securities when this capability is added to our
network. If one or more of these providers were to stop working with us, we
would have to rely on other parties to provide the information and services we
need. We cannot predict whether other parties would be willing to do so on
reasonable terms. Furthermore, we do not have long-term agreements with our
providers of information and services and we cannot restrict them from providing
similar information and services to our competitors. As a result, our
competitors may be able to duplicate some of the information and services that
we provide and may, therefore, find it easier to enter the market for personal
intelligence and compete with us.
We rely upon our network affiliates to deliver services we offer through our
Strategy.com network and if they have difficulty in doing so, we could be
exposed to liability and our reputation could suffer
We depend upon our affiliates to deliver services to subscribers of our
Strategy.com network. If our affiliates fail to deliver reliable services, we
could face liability claims from our subscribers and our reputation could be
damaged. In addition, we will be dependent on the performance of the systems
deployed and maintained by these parties, whom we will not control. We expect to
include contractual provisions limiting our liability to the subscriber for
failures and delays, but we cannot be sure that these limits will be enforceable
or will be sufficient to shield us from liability. We will seek to obtain
liability insurance to cover problems of this sort, but we cannot guarantee that
insurance will be available or that the amounts of our coverage will be
sufficient to cover all potential claims.
Our network affiliates will rely on us to maintain the infrastructure of the
Strategy.com network and any problems with that infrastructure could expose us
to liability from our affiliates and their customers
40
Our network affiliates depend on us to maintain the software and hardware
infrastructure of our Strategy.com network. If this infrastructure fails or our
affiliates or their customers otherwise experience difficulties or delays in
accessing the network, we could face liability claims from them. We expect to
include contractual provisions limiting our liability to our affiliates for
system failures and delays, but we cannot be sure that these limits will be
enforceable or will be sufficient to shield us from liability. We will seek to
obtain liability insurance to cover problems of this sort, but we cannot
guarantee that insurance will be available or that the amounts of our coverage
will be sufficient to cover all potential claims.
We are vulnerable to system failures which could cause interruptions or
disruptions in our service
The hardware infrastructure on which the Strategy.com system operates is
located at the Exodus Communications data center in Northern Virginia. We cannot
assure you that we will be able to manage this relationship successfully to
mitigate any risks associated with having our hardware infrastructure maintained
by Exodus. Unexpected events such as natural disasters, power losses and
vandalism could damage our systems. Telecommunications failures, computer
viruses, electronic break-ins or other similar disruptive problems could
adversely affect the operation of our systems. Our insurance policies may not
adequately compensate us for any losses that may occur due to any damages or
interruptions in our systems. Accordingly, we could be required to make capital
expenditures in the event of damage. We do not currently have a formal disaster
recovery plan. Periodically, we experience unscheduled system downtime that
results in our web site being inaccessible to subscribers. Although we have not
suffered material losses during these downtimes to date, if these problems
persist in the future, users, network affiliates and advertisers could lose
confidence in our services.
System capacity constraints may diminish our ability to generate revenues from
Strategy.com
A substantial increase in the use of the products and services offered by
Strategy.com could strain the capacity of our systems, which could lead to
slower response time or system failures. System failures or slowdowns could
adversely affect the speed and responsiveness of our Strategy.com network. These
would diminish the experience for our subscribers and affect our reputation. The
ability of our systems to manage a significantly increased volume of
transactions in a production environment is unknown. As a result, we face risks
related to our ability to scale up to our expected transaction levels while
maintaining satisfactory performance. If our transaction volume increases
significantly, we may need to purchase additional servers and networking
equipment to maintain adequate data transmission speeds. The availability of
these products and related services may be limited or their cost may be
significant.
We have only limited protection for our proprietary rights in our software,
which makes it difficult to prevent third parties from infringing upon our
rights
We regard our software products as proprietary and we rely on a combination of
federal and international copyright, state and federal trademark and service
mark and state and common law trade secret laws, customer licensing agreements,
employee and third-party nondisclosure agreements and other methods to protect
our proprietary rights. However, these laws and contractual provisions provide
only limited protection. We have no patents, no registered trademarks, other
than MicroStrategy(R), DSS Agent(R) and QuickStrike(R). Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use our products or technology. Policing such unauthorized
use is difficult, and we cannot be certain that we can prevent it, particularly
in countries where the laws may not protect our proprietary rights as fully as
in the United States.
Our products may be susceptible to claims by other companies that our products
infringe upon their proprietary rights, which could adversely affect our
business, operating results and financial condition
41
As the number of software products in our target markets increases and the
functionality of these products further overlaps, we may become increasingly
subject to claims by a third party that our technology infringes such party's
proprietary rights. Regardless of their merit, any such claims could be time
consuming and expensive to defend, may divert management's attention and
resources, could cause product shipment delays and could require us to enter
into costly royalty or licensing agreements. If successful, a claim of
infringement against us and our inability to license the infringed or similar
technology could have a material adverse affect on our business, operating
results and financial condition.
Expanding our international operations will be difficult and our failure to do
so successfully or in a cost-effective manner would have a material adverse
effect on our business, operating results and financial condition
International sales accounted for 24.0%, 26.1%, 27.1% and 11.1% of our total
revenues for the years ended December 31, 1999, 1998, 1997 and 1996,
respectively. We plan to continue expanding our international operations and to
enter new international markets. This will require significant management
attention and financial resources and could adversely affect our business,
operating results and financial condition. In order to expand international
sales successfully, we must set up additional foreign operations, hire
additional personnel and recruit additional international resellers and
distributors. We cannot be sure that we will be able to do so in a timely
manner, and our failure to do so may limit our international sales growth.
There are certain risks inherent in our international business activities
including:
. changes in foreign currency exchange rates;
. unexpected changes in regulatory requirements;
. tariffs and other trade barriers;
. costs of localizing products for foreign countries;
. lack of acceptance of localized products in foreign countries;
. longer accounts receivable payment cycles;
. difficulties in managing international operations;
. tax issues, including restrictions on repatriating earnings;
. weaker intellectual property protection in other countries; and
. the burden of complying with a wide variety of foreign laws.
These factors may have a material adverse effect on our future international
sales and, consequently, our business, operating results and financial
condition.
The nature of our products makes them particularly vulnerable to undetected
errors, or bugs, which could cause problems with how the products perform and
which could in turn reduce demand for our products, reduce our revenue and lead
to product liability claims against us
Software products as complex as ours may contain errors or defects, especially
when first or subsequent versions are released. Although we test our products
extensively, we have in the past discovered software errors in new products
after their introduction. We cannot be certain that, despite testing by us and
by our current and
42
potential customers, errors will not be found in new products or releases after
commercial shipments begin. This could result in lost revenue or delays in
market acceptance, which could have a material adverse effect upon our business,
operating results and financial condition.
Our license agreements with customers typically contain provisions designed to
limit our exposure to product liability claims. It is possible, however, that
these provisions may not be effective under the laws of certain domestic or
international jurisdictions. Although there have been no product liability
claims against us to date, our license and support of products may involve the
risk of these claims. A successful product liability claim against us could have
a material adverse effect on our business, operating results and financial
condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about our market risk disclosures involves forward-
looking statements. Actual results could differ materially from those projected
in the forward-looking statements. We are exposed to the impact of interest rate
changes and foreign currency fluctuations.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily
to our cash equivalents and short-term investments. We do not use derivative
financial instruments. We invest our excess cash in short-term, fixed income
financial instruments. These fixed rate investments are subject to interest rate
risk and may fall in value if market interest rates increase. If market interest
rates were to increase immediately and uniformly by 10% from the levels at
December 31, 1999, the fair market value of the portfolio would decline by an
immaterial amount. We have the ability to hold our fixed income investments
until maturity and, therefore, we do not expect our operating results or cash
flows to be materially affected by a sudden change in market interest rates on
our investment portfolio.
Foreign Currency Risk
We face exposure to adverse movements in foreign currency exchange rates. Our
international revenues and expenses are denominated in foreign currencies,
principally the British Pound Sterling and the German Deutsche Mark. The
functional currency of each of our foreign subsidiaries is the local currency.
Our international business is subject to risks typical of an international
business, including, but not limited to differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility. Based on our
overall currency rate exposure at December 31, 1999, a 10% change in foreign
exchange rates would have had an immaterial effect on our financial position,
results of operations and cash flows. To date, we have not hedged the risks
associated with foreign exchange exposure. Although we may do so in the future,
we cannot be sure that any hedging techniques we may implement will be
successful or that our business, results of operations, financial condition and
cash flows will not be materially adversely affected by exchange rate
fluctuations. To date, our foreign currency gains and losses have been
immaterial.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements, together with the related notes and the
report of independent accountants, are set forth on the pages indicated in Item
14.
43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to directors and executive officers required by
this Item 10 is incorporated herein by reference to our Proxy Statement for the
2000 Annual Meeting of Stockholders expected to be held in May, which is
anticipated to be filed with the SEC within 120 days after the close of our
fiscal year. Information relating to certain filings on Forms 3, 4, and 5 is
contained in the 2000 Proxy Statement under the caption "Section 16(a)
Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by reference
to the information set forth under the caption "Executive Compensation" in the
2000 Proxy Statement. The sections entitled "Compensation Committee Report on
Executive Compensation" and "Stock Performance Graph" in the 2000 Proxy
Statement are not incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated herein by reference
to our 2000 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated herein by reference
to our 2000 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements
Page
----
Report of Independent Accountants........................................................ 47
Consolidated Financial Statements:
Balance Sheets........................................................................ 48
Statements of Operations.............................................................. 49
Statements of Stockholders' Equity (deficit).......................................... 50
Statements of Cash Flows.............................................................. 52
Notes to Consolidated Financial Statements............................................... 53
44
2. Consolidated Financial Statement Schedule
Page
----
Schedule II - Valuation and Qualifying Accounts.......................................... 72
3. Exhibits
Exhibit
Number Description
3.1 Certificate of Incorporation of the registrant, as amended. (Filed
as Exhibit 3.1 to the registrant's Registration Statement on Form
S-1 (Registration No. 333-49899) and incorporated by reference
herein.)
3.2 Bylaws of the registrant. (Filed as Exhibit 3.2 to the
registrant's Registration Statement on Form S-1 (Registration No.
333-49899) and incorporated by reference herein.)
4.1 Form of Certificate of Class A Common Stock of the registrant.
(Filed as Exhibit 4.1 to the registrant's Registration Statement
on Form S-1 (Registration No. 333-49899) and incorporated by
reference herein.)
10.1 1996 Stock Plan (as amended) of the registrant. (Filed as Exhibit
10.1 to the registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 (File No. 000-24435) and
incorporated by reference herein.)
10.2 1997 Stock Option Plan for French Employees of the registrant.
(Filed as Exhibit 10.6 to the registrant's Registration Statement
on Form S-1 (Registration No. 333-49899) and incorporated by
reference herein.)
10.3 1997 Director Option Plan (as amended) of the registrant.
10.4 1998 Employee Stock Purchase Plan of the registrant. (Filed as
Exhibit 10.4 to the registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998 (File No. 000-24435) and
incorporated by reference herein.)
10.5 Credit Agreement, dated March 26, 1999, between NationsBank, N.A.
and the registrant. (Filed as Exhibit 10.1 to the registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999
(File No. 000-24435) and incorporated by reference herein.)
10.6 Modification to Credit Agreement, dated July 12, 1999, between
NationsBank, N.A. and the registrant. (Filed as Exhibit 10.2 to
the registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999 (File No. 000-24435) and incorporated by
reference herein.)
10.7 1999 Stock Option Plan of the registrant. (Filed as Exhibit 10.3
to the registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999 (File No. 000-24435) and incorporated by
reference herein.)
10.8 Master Lease Agreement No. VAC180, dated November 1, 1999, between
MLC Group, Inc. and the registrant.
45
10.9 Letter Agreement, dated December 1, 1999, between ePlus, Inc.
(f/k/a MLC Group, Inc.) and the registrant.
10.10* Software Development and OEM Agreement, dated December 28, 1999,
between the registrant and Exchange Applications, Inc.
10.11 Software License Agreement, dated December 28, 1999, between the
registrant and Exchange Applications, Inc.
10.12 Value-Added Reseller Agreement, dated December 28, 1999, between
the registrant and Exchange Applications, Inc.
10.13 Payment and Registration Rights Agreement, dated December 28,
1999, between the registrant and Exchange Applications, Inc.
10.14* DSS Partner MicroStrategy Incorporated OEM Agreement, between the
registrant and NCR Corporation.
10.15 Memorandum of Understanding Purchase between, the registrant and
NCR Corporation.
10.16 Memorandum of Understanding Joint Marketing, between the
registrant and NCR Corporation.
10.17 Asset Purchase Agreement, dated December 23, 1999, between the
registrant and NCR Corporation.
10.18 Deed of Lease, dated January 7, 2000, between Tysons Corner
Property LLC and the registrant.
21.1 Subsidiaries of the registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule.
_________________
* Certain portions of this Exhibit were omitted by means of redacting a portion
of the text. This Exhibit has been filed separately with the Secretary of the
Commission with such text pursuant to our Application Requesting Confidential
Treatment under Rule 24b-2 under the Securities Exchange Act of 1934, as
amended.
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the last quarter of the period covered
by this Annual Report on Form 10-K.
(c) Exhibits
We hereby file as part of this Form 10-K the exhibits listed in the Index to
Exhibits.
(d) Financial Statement Schedule
The following financial statement schedule is filed herewith:
Schedule II - Valuation and Qualifying Accounts
46
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
MicroStrategy Incorporated
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and Item 14(a)(2) on page 44 and 45 present
fairly, in all material respects, the financial position of MicroStrategy
Incorporated and its subsidiaries at December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 3 to the accompanying consolidated financial statements,
the Company has restated its financial statements for the years ended December
31, 1999, 1998 and 1997.
PricewaterhouseCoopers LLP /s/ PricewaterhouseCoopers LLP
McLean, Virginia
April 12, 2000
47
MICROSTRATEGY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 31,
------------
1999 1998
---- ----
(Restated) (Restated)
See Note 3 See Note 3
Assets
Current assets:
Cash and cash equivalents...................................................... $ 25,941 $27,491
Short-term investments......................................................... 42,418 --
Accounts receivable, net....................................................... 37,586 25,377
Prepaid expenses and other current assets...................................... 15,461 5,245
Deferred tax assets, net....................................................... -- 1,928
-------- -------
Total current assets.......................................................... 121,406 60,041
-------- -------
Property and equipment, net..................................................... 30,594 13,773
Goodwill and other intangible assets, net of accumulated amortization
of $503 and $81, respectively.................................................. 47,154 987
Deposits and other assets....................................................... 2,439 1,770
Deferred tax assets, net........................................................ 1,775 --
-------- -------
Total assets.................................................................. $203,368 $76,571
======== =======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses.......................................... $ 13,582 $11,464
Accrued compensation and employee benefits..................................... 14,912 7,356
Deferred revenue and advance payments.......................................... 38,028 12,302
Deferred tax liabilities, net.................................................. 1,775 --
Dividend notes payable......................................................... -- 5,000
-------- -------
Total current liabilities..................................................... 68,297 36,122
Deferred revenue and advance payments........................................... 33,255 746
Deferred tax liabilities, net................................................... -- 1,928
-------- -------
Total liabilities............................................................. 101,552 38,796
-------- -------
Commitments and contingencies (Notes 12 and 13)
Stockholders' equity:
Preferred stock, par value $0.001 per share, 5,000 shares authorized;
no shares issued or outstanding............................................... -- --
Class A common stock, par value $0.001 per share, 100,000 shares
authorized; 22,384 and 10,104 shares issued and outstanding, respectively..... 22 11
Class B common stock, par value $0.001 per share, 100,000 shares
authorized; 55,867 and 61,266 shares issued and outstanding, respectively..... 56 61
Additional paid-in capital..................................................... 138,943 42,183
Deferred compensation.......................................................... (895) (1,164)
Accumulated other comprehensive income......................................... 1,643 894
Accumulated deficit............................................................ (37,953) (4,210)
-------- -------
Total stockholders' equity.................................................... 101,816 37,775
-------- -------
Total liabilities and stockholders' equity.................................... $203,368 $76,571
======== =======
The accompanying notes are an integral part of these Consolidated Financial
Statements.
48
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years ended December 31,
------------------------
1999 1998 1997
---- ---- ----
(Restated) (Restated) (Restated)
See Note 3 See Note 3 See Note 3
Revenues:
Product licenses............................................... $ 85,797 $61,635 $35,478
Product support and other services............................. 65,461 33,854 17,073
-------- ------- -------
Total revenues................................................ 151,258 95,489 52,551
-------- ------- -------
Cost of revenues:
Product licenses............................................... 2,597 2,246 1,641
Product support and other services............................. 34,436 17,535 9,475
-------- ------- -------
Total cost of revenues........................................ 37,033 19,781 11,116
-------- ------- -------
Gross profit.................................................... 114,225 75,708 41,435
Operating expenses:
Sales and marketing............................................ 93,512 53,408 30,468
Research and development....................................... 27,998 12,106 5,049
General and administrative..................................... 24,448 12,743 6,552
In-process research and development............................ 2,800 -- --
-------- ------- -------
Total operating expenses...................................... 148,758 78,257 42,069
-------- ------- -------
Loss from operations............................................ (34,533) (2,549) (634)
Interest income................................................. 2,174 1,028 94
Interest expense................................................ (144) (720) (333)
Other income (expense), net..................................... 6 (14) (12)
-------- ------- -------
Loss before income taxes........................................ (32,497) (2,255) (885)
Provision for income taxes...................................... 1,246 -- --
-------- ------- -------
Net loss........................................................ $(33,743) $(2,255) $ (885)
======== ======= =======
Basic and diluted net loss per share............................ $(0.44) $(0.03) $(0.02)
======== ======= =======
Weighted average shares used in computing basic and diluted
net loss per share........................................... 77,028 66,986 58,988
======== ======= =======
The accompanying notes are an integral part of these Consolidated Financial
Statements.
49
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
Common Stock Class A Common Stock Class B Common Stock
------------ -------------------- --------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
Balance at December 31, 1996.................. 62,886 $ 63 -- -- -- --
------- ------- ------ ------- ------- ------
Net loss...................................... -- -- -- -- -- --
Foreign currency translation
adjustment................................... -- -- -- -- -- --
Comprehensive loss............................ -- -- -- -- -- --
Proceeds from payments on notes
receivable................................... -- -- -- -- -- --
Retirement of treasury stock.................. (3,898) (4) -- -- -- --
------- ------- ------ ------- ------- ------
Balance at December 31, 1997.................. 58,988 $ 59 -- -- -- --
------- ------- ------ ------- ------- ------
Net loss...................................... -- -- -- -- -- --
Foreign currency translation
adjustment................................... -- -- -- -- -- --
Comprehensive loss............................ -- -- -- -- -- --
Issuance of common stock in exchange
for minority interest of Company's
foreign subsidiaries......................... 2,803 3 -- -- -- --
Issuance of stock options below fair
value........................................ -- -- -- -- -- --
Declaration of dividend....................... -- -- -- -- -- --
Conversion of common stock to
Class B common stock......................... (61,791) (62) -- -- 61,791 62
S-Corporation to C-Corporation
conversion................................... -- -- -- -- -- --
Issuance of Class A common stock in
connection with initial public
offering, net of offering costs.............. -- -- 8,880 9 -- --
Issuance of Class A common
stock under stock option plan................ -- -- 699 1 -- --
Conversion of Class B to Class
A common stock............................... -- -- 525 1 (525) (1)
Issuance of Class A common stock warrants..... -- -- -- -- -- --
Amortization of deferred stock
compensation................................. -- -- -- -- -- --
------- ------- ------ ------- ------- ------
Balance at December 31, 1998.................. -- -- 10,104 $ 11 61,266 $ 61
------- ------- ------ ------- ------- ------
Net loss...................................... -- -- -- -- -- --
Unrealized gain on short-term
investments, net of applicable taxes......... -- -- -- -- -- --
Foreign currency translation
adjustment................................... -- -- -- -- -- --
Comprehensive loss............................ -- -- -- -- -- --
Issuance of Class A common stock
in connection with offering, net of
offering costs............................... -- -- 3,170 3 -- --
Conversion of Class B to Class A
common stock................................. -- -- 5,399 5 (5,399) (5)
Issuance of Class A common stock
under stock option and purchase
plans........................................ -- -- 3,145 3 -- --
Issuance of Class A common stock
related to purchase of NCR's
Teracube assets.............................. -- -- 566 -- -- --
Issuance of Class A common stock warrants..... -- -- -- -- -- --
Amortization of deferred stock
compensation................................. -- -- -- -- -- --
------- ------- ------ ------- ------- ------
Balance at December 31, 1999.................. -- $ -- 22,384 $ 22 55,867 $ 56
======= ======= ====== ======= ======= ======
Additional
Paid-in Capital
---------------
Balance at December 31, 1996................... $ 181
--------
Net loss....................................... --
Foreign currency translation
adjustment.................................... --
Comprehensive loss............................. --
Proceeds from payments on notes
receivable.................................... --
Retirement of treasury stock................... (191)
--------
Balance at December 31, 1997................... $ (10)
--------
Net loss....................................... --
Foreign currency translation
adjustment.................................... --
Comprehensive loss............................. --
Issuance of common stock in exchange
for minority interest of Company's
foreign subsidiaries.......................... 1,065
Issuance of stock options below fair
value......................................... 1,350
Declaration of dividend........................ (10,000)
Conversion of common stock to
Class B common stock.......................... --
S-Corporation to C-Corporation
conversion.................................... 315
Issuance of Class A common stock in
connection with initial public
offering, net of offering costs............... 48,180
Issuance of Class A common
stock under stock option plan................. 349
Conversion of Class B to Class
A common stock................................ --
Issuance of Class A common stock warrants...... 934
Amortization of deferred stock
compensation.................................. --
--------
Balance at December 31, 1998................... $ 42,183
--------
Net loss....................................... --
Unrealized gain on short-term
investments, net of applicable taxes.......... --
Foreign currency translation
adjustment.................................... --
Comprehensive loss............................. --
Issuance of Class A common stock
in connection with offering, net of
offering costs................................ 40,046
Conversion of Class B to Class A
common stock.................................. --
Issuance of Class A common stock
under stock option and purchase
plans......................................... 7,018
Issuance of Class A common stock
related to purchase of NCR's
Teracube assets............................... 49,557
Issuance of Class A common stock warrants...... 139
Amortization of deferred stock
compensation.................................. --
--------
Balance at December 31, 1999................... $138,943
========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
50
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
Accumulated Other
-----------------
Comprehensive Income (Loss)
---------------------------
Unrealized Foreign Notes
---------- ------- -----
Gain on Currency Accumu- Deferred Receivable
------- -------- ------- -------- ----------
Short-term Translation lated Comp- from Stock-
---------- ----------- ----- ----- ------------
Investments Adjustment Deficit ensation holders
----------- ---------- ------- -------- -------
Balance at December 31, 1996................ -- -- $ (755) -- $ (87)
----------- ---------- -------- --------- ---------
Net loss.................................... -- -- (885) -- --
Foreign currency translation adjustment..... -- 158 -- -- --
Comprehensive loss.......................... -- -- -- -- --
Proceeds from payments on notes
receivable................................. -- -- -- -- 87
Retirement of treasury stock................ -- -- -- -- --
----------- ---------- -------- --------- ---------
Balance at December 31, 1997................ -- 158 (1,640) -- --
----------- ---------- -------- --------- ---------
Net loss.................................... -- -- (2,255) -- --
Foreign currency translation adjustment..... -- 736 -- -- --
Comprehensive loss.......................... -- -- -- -- --
Issuance of common stock in exchange
for minority interest of Company's
foreign subsidiaries....................... -- -- -- -- --
Issuance of stock options below fair
value...................................... -- -- -- (1,350) --
Declaration of dividend..................... -- -- -- -- --
Conversion of common stock to
Class B common stock....................... -- -- -- -- --
S-Corporation to C-Corporation
conversion................................. -- -- (315) -- --
Issuance of Class A common stock in
connection with initial public
offering, net of offering costs............ -- -- -- -- --
Issuance of Class A common
Stock under stock option plan.............. -- -- -- -- --
Conversion of Class B to Class
A common stock............................. -- -- -- -- --
Issuance of warrants........................ -- -- -- -- --
Amortization of deferred stock
compensation............................... -- -- -- 186 --
----------- ---------- -------- --------- ---------
Balance at December 31, 1998................ -- 894 (4,210) (1,164) --
----------- ---------- -------- --------- ---------
Net loss.................................... -- -- (33,743) -- --
Unrealized gain on short-term investments,
net of applicable taxes.................... 1,367 -- -- -- --
Foreign currency translation
adjustment................................. -- (618) -- -- --
Comprehensive loss.......................... -- -- -- -- --
Issuance of Class A common stock in
connection with offering, net of offering
costs...................................... -- -- -- -- --
Conversion of Class B to Class A
common stock............................... -- -- -- -- --
Issuance of Class A common stock under
stock option and purchase plans............ -- -- -- -- --
Issuance of Class A common stock related
to purchase of NCR's Teracube assets....... -- -- -- -- --
Issuance of warrants........................ -- -- -- -- --
Amortization of deferred stock
compensation............................... -- -- -- 269 --
----------- ---------- -------- --------- ---------
Balance at December 31, 1999................ $ 1,367 $ 276 $(37,953) $ (895) --
=========== ========== ======== ========= =========
Treasury Stock
--------------
Shares Amount Total
------ ------ -----
Balance at December 31, 1996................ 3,898 $ (195) $ (793)
-------- -------- --------
Net loss.................................... -- -- (885)
Foreign currency translation adjustment..... -- -- 158
--------
Comprehensive loss.......................... -- -- (727)
Proceeds from payments on notes
receivable................................. -- -- 87
Retirement of treasury stock................ (3,898) 195 --
-------- -------- --------
Balance at December 31, 1997................ -- -- (1,433)
-------- -------- --------
Net loss.................................... -- -- (2,255)
Foreign currency translation adjustment..... -- -- 736
--------
Comprehensive loss.......................... -- -- (1,519)
Issuance of common stock in exchange
for minority interest of Company's
foreign subsidiaries....................... -- -- 1,068
Issuance of stock options below fair
value...................................... -- -- --
Declaration of dividend..................... -- -- (10,000)
Conversion of common stock to
Class B common stock....................... -- -- --
S-Corporation to C-Corporation
conversion................................. -- -- --
Issuance of Class A common stock in
connection with initial public
offering, net of offering costs............ -- -- 48,189
Issuance of Class A common
Stock under stock option plan.............. -- -- 350
Conversion of Class B to Class
A common stock............................. -- -- --
Issuance of warrants........................ -- -- 934
Amortization of deferred stock
compensation............................... -- -- 186
-------- -------- --------
Balance at December 31, 1998................ -- -- 37,775
-------- -------- --------
Net loss.................................... -- -- (33,743)
Unrealized gain on short-term investments,
net of applicable taxes.................... -- -- 1,367
Foreign currency translation
adjustment................................. -- -- (618)
--------
Comprehensive loss.......................... -- -- (32,994)
Issuance of Class A common stock in
connection with offering, net of offering
costs...................................... -- -- 40,049
Conversion of Class B to Class A
common stock............................... -- -- --
Issuance of Class A common stock under
stock option and purchase plans............ -- -- 7,021
Issuance of Class A common stock related
to purchase of NCR's Teracube assets....... -- -- 49,557
Issuance of warrants........................ -- -- 139
Amortization of deferred stock
compensation............................... -- -- 269
-------- -------- --------
Balance at December 31, 1999................ -- -- $101,816
======== ======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
51
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31,
------------------------
1999 1998 1997
---- ---- ----
(Restated) (Restated) (Restated)
See Note 3 See Note 3 See Note 3
Operating activities:
Net loss.......................................................................... $(33,743) $ (2,255) $ (885)
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation and amortization..................................................... 7,839 3,250 1,243
Provision for doubtful accounts................................................... 1,877 815 312
Acquired in-process research and development...................................... 2,800 -- --
Deferred income taxes............................................................. -- -- --
Amortization of deferred compensation............................................. 269 186 --
Issuance of warrants to a customer................................................ -- 934 --
Changes in operating assets and liabilities:
Accounts receivable............................................................... (14,598) (10,835) (7,271)
Prepaid expenses and other current assets......................................... (10,318) (3,758) (1,051)
Deposits and other assets......................................................... (1,054) (188) 102
Accounts payable and accrued expenses, compensation and benefits.................. 10,297 5,508 8,951
Deferred revenue.................................................................. 36,720 3,795 3,554
-------- -------- -------
Net cash provided by (used in) operating activities............................. 89 (2,548) 4,955
-------- -------- -------
Investing activities:
Purchases of property and equipment............................................... (23,733) (9,295) (5,954)
Purchases of short-term investments............................................... (24,491) -- --
Maturities of short-term investments.............................................. 5,000 -- --
Increase in capitalized software.................................................. -- -- (1,928)
-------- -------- -------
Net cash used in investing activities........................................... (43,224) (9,295) (7,882)
-------- -------- -------
Financing activities:
Proceeds from sale of Class A common stock and exercise of stock options,
net of offering costs............................................................ 47,197 48,539 --
Borrowings on short-term line of credit, net...................................... -- -- 1,750
Repayments on short-term line of credit, net...................................... -- (4,508) --
Payments of dividend notes payable................................................ (5,000) (5,000) --
Proceeds from issuance of notes payable........................................... -- 862 3,264
Principal payments on notes payable............................................... -- (4,190) (521)
Proceeds from payments on stockholders' notes receivable.......................... -- -- 87
-------- -------- -------
Net cash provided by financing activities....................................... 42,197 35,703 4,580
-------- -------- -------
Effect of foreign exchange rate changes on cash................................. (612) 125 167
-------- -------- -------
Net (decrease) increase in cash and cash equivalents............................... (1,550) 23,985 1,820
Cash and cash equivalents, beginning of year....................................... 27,491 3,506 1,686
-------- -------- -------
Cash and cash equivalents, end of year............................................. $ 25,941 $ 27,491 $ 3,506
======== ======== =======
Supplemental disclosure of noncash investing and financing activities:
Retirement of treasury stock...................................................... $ -- $ -- $ 195
======== ======== =======
Issuance of common stock in exchange for minority interest of Company's
foreign subsidiaries............................................................. $ -- $ 1,065 $ --
======== ======== =======
Issuance of Class A common stock related to purchase of Teracube assets........... $ 49,557 $ -- $ --
======== ======== =======
Stock received in exchange for product and services............................... $ 21,546 $ -- $ --
======== ======== =======
Issuance of Class A common stock warrants......................................... $ 139 $ 934 $ --
======== ======== =======
Unrealized gain on short-term investment, net of tax.............................. $ 1,367 $ -- $ --
======== ======== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest............................................ $ 87 $ 714 $ 290
======== ======== =======
Cash paid during the year for income taxes........................................ $ 2,113 $ 2,996 $ --
======== ======== =======
The accompanying notes are an integral part of these Consolidated Financial
Statements.
52
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization
MicroStrategy provides intelligent e-business software and related services
that enable the transaction of one-to-one electronic business through web,
wireless and voice communication channels. MicroStrategy's product line enables
both proactive and interactive delivery of information from large-scale
databases and provides Internet businesses with a software platform to develop
solutions that deliver insight and intelligence to their enterprises, customers
and supply-chain partners. In July 1999, MicroStrategy launched a personal
intelligence network called Strategy.com, which leverages MicroStrategy's
software platform to deliver personalized, requested information to consumers.
Strategy.com has recognized no revenues through December 31, 1999.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(b) Use of Estimates
The preparation of the consolidated financial statements, in conformity
with generally accepted accounting principles, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(c) Reclassification
Certain amounts in prior years' consolidated financial statements have been
reclassified to conform to the current year presentation.
(d) Cash and Cash Equivalents
Cash equivalents include money market instruments and commercial paper. The
Company considers all highly liquid investments with an original maturity of
three months or less when purchased to be cash equivalents.
(e) Short-term Investments
Short-term investments are comprised of readily marketable equity
securities and debt securities with original maturities of more than three
months when purchased. Where the original maturity of marketable debt securities
is more than one year, the marketable debt securities are classified as short-
term investments if the Company's intention is to convert them to cash within
one year. Marketable debt securities are classified in one of three categories:
trading, available-for-sale, or held-to-maturity. Marketable equity securities
are classified as either trading or available-for-sale. Trading securities are
bought and held principally for the purpose of selling them in the near term.
Held-to-maturity securities are those debt securities which the Company has the
ability and intent to hold until maturity. All other marketable securities not
included in trading and held-to-maturity are classified as available-for-sale.
Management determines the appropriate classification of marketable securities at
the time of purchase and re-evaluates such designation as of each balance sheet
date. All of the Company's marketable securities are available-for-sale as of
December 31, 1999.
53
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Available-for-sale marketable securities are reported at fair value,
adjusted for other-than-temporary declines in value, of which there have been
none. Unrealized holding gains and losses, net of applicable taxes, on
available-for-sale marketable securities are reported in accumulated other
comprehensive income in stockholders' equity until realized. Interest income is
recognized when earned. Realized gains and losses for marketable securities are
determined using the specific identification method for determining the cost of
the securities sold.
(f) Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, as follows: three years for computer equipment and
software and five to ten years for furniture and equipment. Leasehold
improvements are amortized using the straight-line method over the shorter of
the estimated useful lives of the assets or the term of the lease.
Expenditures for maintenance and repairs are charged to expense as
incurred. Expenditures for major renewals and betterments that extend the useful
lives of property and equipment are capitalized and depreciated over the
remaining useful lives of the asset. When assets are retired or sold, the cost
and related accumulated depreciation are removed from the accounts and any
resulting gain or loss is recognized in the results of operations.
(g) Goodwill and Other Intangible Assets
Goodwill and other intangible assets were acquired in connection with the
purchase of NCR's Teracube assets and related intangible assets and the purchase
of the minority interest in the Company's foreign subsidiaries. Other
intangible assets consist of trade name, customer list, and assembled work
force. Goodwill and other intangible assets are amortized on the straight-line
basis over their weighted average useful lives of approximately 3 years.
(h) Impairment of Long-Lived Assets
The Company reviews long-lived assets, including goodwill, for impairment
whenever events or changes in business circumstances indicate that the carrying
amount of the assets may not be fully recoverable or that the useful lives of
these assets are no longer appropriate. Each impairment test is based on a
comparison of the undiscounted cash flows to the recorded value of the asset.
If impairment is indicated, the asset is written down to its estimated fair
value of the discounted cash flow basis. There have been no impairment
provisions.
(i) Software Development Costs
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed," software development costs are expensed as incurred until
technological feasibility has been established, at which time such costs are
capitalized until the product is available for general release to customers.
Software development costs capitalized include direct labor costs and fringe
labor overhead costs attributed to programmers, software engineers, quality
control and field certifiers working on products after they reach technological
feasibility but before they are generally available to customers for sale.
Capitalized costs are amortized over the estimated product life of two to three
years using the greater of the straight-line method or the ratio of current
product revenues to total projected future revenues. Software development costs,
net of accumulated amortization, are $647,000 and $1.2 million at December 31,
1999 and 1998, respectively, and are included in deposits and other
54
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assets on the balance sheet. Amortization expense related to software
development costs was $600,000, $584,000 and $98,000 for the years ended
December 31, 1999, 1998 and 1997, respectively, and is included in cost of
revenues. During 1999 and 1998, no costs were capitalized as the establishment
of technological feasibility and general release of such software had
substantially coincided.
(j) Deferred Revenue and Advance Payments
Deferred revenue and advance payments related to product licenses result
primarily from multiple element arrangements that include development and other
customized services, which may also include subsequent hosting services, or
other arrangements with future deliverables. Certain of these services
significantly alter features or functionality of the software. Deferred revenue
and advance payments related to product support and other services result from
payments received prior to the performance of services for software development,
consulting, education and maintenance. Deferred revenue has been classified as
either deferred product revenue or deferred product support and other services
revenue based on the estimated fair value of the multiple elements of the
arrangement. Non-current deferred revenue and advance payments are expected to
be recognized into revenue in one to three years. The Company discloses
billable and unpaid amounts in deferred revenue as an offset to accounts
receivable.
(k) Revenue Recognition
Product license revenue is derived from sales of software licenses. Product
support and other services revenue consists of revenue derived from software
production and/or modification, maintenance services, customer and partner
education and consulting and other services. The Company's revenue recognition
policies are in accordance with Statement of Position ("SOP") 97-2, "Software
Revenue Recognition" which is the authoritative guidance for recognizing revenue
on software transactions and, in the case of software arrangements which require
significant production, modification, or customization of software, the Company
follows the guidance in SOP 81-1, "Accounting for Performance of Construction-
Type and Certain Production-Type Contracts."
SOP 97-2 requires that revenue recognized from software arrangements be
allocated to each element of the arrangement based on the relative fair values
of the elements, such as software products, maintenance services, installation,
training or other elements. Under SOP 97-2, the determination of fair value is
based on objective evidence that is specific to the vendor. If such evidence of
fair value for each element of the arrangement does not exist, all revenue from
the arrangement is deferred until such time that evidence of fair value does
exist or until all elements of the arrangement are delivered. SOP 97-2 was
amended in February 1998 by SOP 98-4 "Deferral of the Effective Date of a
Provision of SOP 97-2" and was amended again in December 1998 by SOP 98-9
"Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain
Transactions." Those amendments deferred and then clarified, respectively, the
specification of what was considered vendor specific objective evidence of fair
value for the various elements in a multiple element arrangement. The Company
adopted the provisions of SOP 97-2 and SOP 98-4 as of January 1, 1998.
SOP 98-9 is effective for all transactions entered into by the Company in
fiscal year 2000. The adoption of this statement is not expected to have a
material impact on the Company's operating results, financial position or cash
flows.
The Company's revenue recognition policy is as follows:
Product license revenue: The Company recognizes revenue from sales of
software licenses to end users or resellers upon persuasive evidence of an
arrangement (as provided by agreements or contracts executed by both parties),
delivery of the software and determination that collection of a fixed or
determinable license fee is
55
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
considered probable. When the fees for software upgrades and enhancements,
maintenance, consulting and education are bundled with the license fee, they are
unbundled using the Company's objective evidence of the fair value of the
multiple elements represented by the Company's customary pricing for each
element in separate transactions. If such evidence of fair value for each
element of the arrangement does not exist, all revenue from the arrangement is
deferred until such time that evidence of fair value exists for undelivered
elements or until all elements of the arrangement are delivered, subject to
certain exceptions set forth in SOP 97-2. When the software license arrangement
requires the Company to provide consulting services for significant production,
customization or modification of the software or when the customer considers
these services essential to the functionality of the software product, both the
product license revenue and consulting services revenue are recognized in
accordance with the provisions of SOP 81-1. The Company recognizes revenue from
these arrangements using the percentage of completion method based on cost
inputs and, therefore, both product license and consulting services revenue are
recognized as work progresses. If the software license arrangement obligates the
Company to the delivery of unspecified future products, then revenue is
recognized on the subscription basis, ratably over the term of the contract.
Product support and other services: Maintenance includes technical support
and software updates and upgrades to customers. Maintenance service revenue is
recognized ratably over the term, which in most cases is one year. Revenue from
consulting and education services is recognized as the services are performed.
Revenue from arrangements where the Company provides hosting services is
recognized over the hosting period. Any fees paid or costs incurred prior to the
hosting period, such as license fees, consulting, customization or development
services, is deferred and also recognized ratably over the subsequent hosting
period, which is generally two years.
Amounts collected prior to satisfying the above revenue recognition
criteria are reflected in deferred revenue and advance payments. The Company
discloses billable and unpaid amounts in deferred revenue as an offset to
accounts receivable.
Cost of product license revenue consists of the costs to distribute the
product, including the costs of the media on which it is delivered and royalty
payments to third party vendors, as well as amortization of software development
costs. Cost of product support and other services revenue consists primarily of
consulting and support personnel salaries and related costs. Research and
development costs are excluded from the cost of revenue.
The Company occasionally enters into barter arrangements involving the
exchange of both products and services. Such transactions are recorded at the
estimated fair value of the products or services received or given where
significant objective evidence of this value exists. In the absence of
sufficient objective evidence of fair value, the acquired assets are recorded at
the book value of the surrendered assets.
For additional information regarding the Company's revenue recognition
policies in the years ended December 31, 1999, 1998 and 1997, see the discussion
in Note 3, below.
(l) Advertising Costs
Advertising production costs are expensed the first time the advertisement
takes place. Media placement costs are expensed in the month the advertising
appears. Advertising costs were $1.6 million, $134,000 and $93,000 for the years
ended December 31, 1999, 1998 and 1997, respectively. Additionally, as of
December 31, 1999, prepaid advertising costs were $3.5 million, of which a
substantial portion will be expensed in the first quarter of 2000.
(m) Year 2000 Costs
56
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's year 2000 activities are substantially complete. The Company
expenses costs for Year 2000 issues as incurred.
(n) Income Taxes
Prior to the initial public offering, the Company had elected to be treated
as a Subchapter S corporation for federal and state income tax purposes. Under
Subchapter S, the taxable income or loss was reported by the stockholders and,
accordingly, no federal or state income taxes have been provided for in the
financial statements prior to the Initial Public Offering.
In connection with the initial public offering, the Company converted to a
Subchapter C corporation and, accordingly, is no longer treated as a Subchapter
S corporation for tax purposes. The Company is now subject to federal and state
income taxes and recognizes deferred taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." This statement provides for a liability approach
under which deferred income taxes are provided based upon enacted tax laws and
rates applicable to the periods in which the taxes become payable.
(o) Basic and Diluted Net Loss Per Share
The Company previously adopted SFAS No. 128, "Earning per Share." SFAS 128
specifies the calculation and presentation of basic and diluted net loss per
share. Basic net loss per share is determined by dividing the net loss
applicable to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted net loss per share is determined
by dividing the net loss applicable to common stockholders by the weighted
average number of common shares and common share equivalents outstanding during
the period. Common share equivalents are included in the diluted net loss per
share calculation when dilutive. Common share equivalents consisting of common
stock issuable upon exercise of outstanding common stock options and warrants
are computed using the treasury stock method. The Company's net loss per share
calculation for basic and diluted is based on the weighted average common shares
outstanding. There are no reconciling items in the numerator and denominator of
the Company's net loss per share calculation. Employee stock options and
warrants have been excluded from the net loss per share calculation because
their effect would be anti-dilutive. Refer to Note 14 below for stock options
and warrants excluded in each year.
(p) Foreign Currency Translation
The functional currency of the Company's international operations, which
are predominately in Europe, is the local currency. Accordingly, all assets and
liabilities of these subsidiaries are translated using exchange rates in effect
at the end of the period and revenue and costs are translated using weighted
average exchange rates for the period. The related translation adjustments are
reported in accumulated other comprehensive income in stockholders' equity.
Gains and losses resulting from foreign currency transactions are immaterial for
all periods presented.
(q) Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents,
short-term investments and accounts receivable. The Company places its cash
equivalents and short-term investments with high credit-quality financial
institutions and invests its excess cash primarily in money market instruments.
The Company has established guidelines relative to credit ratings and maturities
that seek to maintain safety and liquidity. The Company sells products and
services to various companies across several industries throughout the world in
the ordinary course of business. The Company
57
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
routinely assesses the financial strength of its customers and maintains
allowances for anticipated losses. For the years ended December 31, 1999 and
1998, no one customer accounted for 10% or more of net accounts receivable.
(r) Fair Value of Financial Instruments
The Company's financial instruments, which consist of cash, cash
equivalents, short-term investments, accounts receivable and accounts payable,
approximate fair value.
(s) Stock-based Compensation
The Company accounts for stock-based compensation under SFAS No. 123,
"Accounting for Stock-Based Compensation." As permitted by SFAS No. 123, the
Company has elected to continue following the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and to adopt only the disclosure provisions of SFAS No. 123.
(t) Comprehensive Income (Loss)
The Company adopted SFAS No. 130, "Reporting Comprehensive Income,"
effective January 1, 1998. This standard requires the Company to report the
total changes in stockholders' equity that do not result directly from
transactions with stockholders, including those which do not affect retained
earnings. Other comprehensive income (loss) recorded by the Company is solely
comprised of accumulated currency translation adjustments and unrealized gains
and losses on available-for-sale marketable securities, net of related tax
effects.
(u) Recent Accounting Standards
In December 1999, the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. Subsequently,
the SEC released SAB 101A, which delayed the implementation date of SAB 101 for
registrants with fiscal years that begin between December 16, 1999 and March 15,
2000. The Company is required to be in conformity with the provisions of SAB
101, as amended by SAB 101A, no later than April 1, 2000 and does not expect a
material effect on the Company's financial position, results of operations or
cash flows as a result of SAB 101.
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
which delays the effective date of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which will be effective for the Company's
fiscal year 2001. This statement establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments embedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement also
requires that changes in the derivative's fair value be recognized in earnings
unless specific hedge accounting criteria are met. The Company has not entered
into derivative contracts and does not have near term plans to enter into
contracts, accordingly the adoption of SFAS No. 133 and SFAS No. 137 is not
expected to have a material effect on the financial statements.
(3) Restatement of Financial Statements
Subsequent to the filing of a registration statement on Form S-3 with the
SEC which included the Company's audited financial statements for the years
ended December 31, 1999, 1998 and 1997 the Company
58
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
became aware that the timing and amount of reported earned revenues from license
transactions in 1999, 1998 and 1997 required revision.
These revisions primarily addressed the recognition of revenue for certain
software arrangements which should be accounted for under the subscription
method or the percentage of completion method, which spread the recognition of
revenue over the entire contract period. For example, when fees are received in
a transaction in which the Company is licensing software and also performing
significant development, customization or consulting services, the fees should
be recognized using the percentage of completion method and, therefore, product
license and product support and other services revenue are recognized as work
progresses. Revenue from arrangements where the Company provides hosting
services is generally recognized over the hosting term, which is generally two
to three years. The effect of these revisions is to defer the time in which
revenue is recognized for large, complex contracts that combine both products
and services. These revisions also resulted in a substantial increase in the
amount of deferred revenue reflected on the Company's balance sheet at the end
of 1999 and 1998. Additionally, these revisions include the effects of changes
in the reporting periods when revenue from certain contracts are recognized. In
the course of reviewing its revenue recognition on various transactions, the
Company became aware that, in certain instances, the Company had recorded
revenue on certain contracts in one reporting period where customer signature
and delivery had been completed, but where the contract may not have been fully
executed by the Company in that reporting period. The Company subsequently
reviewed license agreements executed near the end of the years 1999, 1998 and
1997 and determined that revisions were necessary to ensure that all agreements
for which the Company was recognizing revenue in a reporting period were
executed by both parties no later than the end of the reporting period in which
the revenue is recognized. The total effect of all revisions to revenue was to
reduce revenues by $54.0 million, $10.9 million and $1.0 million for the years
ended December 31, 1999, 1998 and 1997, respectively.
The Company also made certain revisions to our balance sheet as of December
31, 1999. These revisions include a reclassification of approximately $21.5
million from accounts receivable to short-term investments relating to the value
of proceeds from a software transaction that was received in the form of a right
to receive shares of the customer's common stock. We also recorded an increase
to goodwill of approximately $31.4 million, net of the increase in amortization,
relating to the purchase of the intellectual property and other tangible and
intangible assets, including the assembled workforce relating to NCR's Teracube
project in exchange for 566,372 shares of our Class A common stock. We made
this revision as a result of a re-measurement of the purchase price of the
Teracube assets to reflect the value of our Class A common stock on the
transaction's closing date. In addition, we reduced fixed assets by
approximately $8.8 million, net of the decrease in depreciation, in order to
record software received for resale and software acquired for internal use in
barter transactions at the book value of our assets surrendered in the exchange.
Approximately $5.0 million of the reduction in fixed assets is a reduction in
revenue, as restated. Of this amount, no revenue will be recorded unless this
software is resold.
Accordingly, such financial statements have been restated as follows:
1999 1998 1997
---------------------- ---------------------- -----------------------
As As As
-- -- --
Reported Restated Reported Restated Reported Restated
-------- -------- -------- -------- -------- --------
Statements of Operations Data
Revenues:
Product licenses....................... $143,193 $ 85,797 $72,721 $61,635 $36,601 $35,478
Product support and other services..... 62,136 65,461 33,709 33,854 16,956 17,073
Income (loss) from operations........... 18,319 (34,533) 9,326 (2,549) 372 (634)
Provision for income taxes.............. 7,735 1,246 3,442 -- -- --
Net income (loss)....................... 12,620 (33,743) 6,178 (2,255) 121 (885)
Net income (loss) per share:
59
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basic.................................. 0.16 (0.44) 0.09 (0.03) 0.00 (0.02)
Diluted................................ 0.15 (0.44) 0.08 (0.03) 0.00 (0.02)
Balance Sheet Data
Short-term investments.................. 19,627 42,418 -- -- -- --
Accounts receivable, net................ 61,149 37,586 33,054 25,377 16,085 15,121
Prepaid expenses and other current
assets................................. 15,782 15,461 2,198 5,245 1,435 1,435
Property and equipment, net............. 39,400 30,594 13,773 13,773 6,891 6,891
Goodwill and other intangible assets,
net.................................... 15,760 47,154 987 987 -- --
Deposits and other assets............... 1,559 2,439 1,770 1,770 2,148 2,148
Deferred tax assets, net (current and
non-current)........................... 3,337 1,775 716 1,928 -- --
Accounts payable and accrued expenses 14,388 13,582 11,904 11,464 9,636 9,636
Deferred revenue and advance 16,782
payments (current and non-current)..... 71,283 11,478 13,048 9,387 9,429
Deferred tax liabilities, net (current
and non-current)....................... -- 1,775 671 1,928 -- --
Additional paid-in capital.............. 117,556 138,943 42,183 42,183 20 20
Deferred compensation................... (1,641) (895) (2,098) (1,164) -- --
Accumulated other comprehensive
income................................. 197 1,643 894 894 158 158
Retained earnings (deficit)............. 17,849 (37,953) 5,229 (4,210) (634) (1,640)
(4) Public Offerings
On February 10, 1999, the Company sold to the public 3,170,000 shares of
Class A common stock for approximately $40.1 million, net of offering costs. In
addition, certain holders of Class B common stock converted 830,000 shares of
Class B common stock to Class A common stock in connection with their sale of
such shares in the public offering. Class B common stock shares are convertible
to Class A common stock shares on a one-to-one basis at the election of
the stockholder.
On June 16, 1998, the Company issued 8,880,000 shares of Class A common
stock in an initial public offering, raising $48.2 million, net of offering
costs. In addition, certain stockholders of Class B common stock converted
320,000 shares of Class B common stock to Class A common stock in connection
with their sale of such shares in the initial public offering.
The holders of Class A common stock generally have rights identical to
those of holders of Class B common stock, except that holders of Class A common
stock are entitled to one vote per share while holders of Class B common stock
are entitled to ten votes per share on all matters submitted to a vote of
stockholders.
(5) Acquisitions
(a) Purchase of NCR's Teracube Assets
In December 1999, the Company purchased the intellectual property and other
tangible and intangible assets, including the assembled workforce relating to
NCR's Teracube project in exchange for 566,372 shares of Class A common stock,
valued at $49.6 million, based on the price of the Company's stock at the
closing. The Company will develop the Teracube assets in concert with its
existing proprietary technology to create a business intelligence platform for
data warehouses using NCR's Teradata database. The Company's preliminary
allocation of the $49.6 million purchase price was $2.8 million for in-process
research and development and
60
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$46.8 million for tangible and intangible assets including core technology,
computer equipment, assembled work force and agreements not to compete. The
Company believes the weighted average estimated useful life of such assets,
based upon the final allocation, will be less than 5 years and anticipates its
final allocation of the purchase price will be completed during the first half
of 2000.
In estimating the fair value of the in-process research and development
projects acquired, the Company considered, among other factors, the stage of
development of the Teracube research and development projects at the time of the
acquisition and projected estimated cash flows from those projects when
completed and the percentage of the final products cash flows that is attributed
to core technology of the Company and that was already developed by NCR.
Associated risks include the inherent difficulties and uncertainties in
completing Teracube and, thereby, achieving technological feasibility and risk
related to the impact of potential changes in future technology.
The Company intends to incur expenses of approximately $900,000 over the
next year in order to complete the project. The project was approximately 85%
complete at the time of the acquisition and approximately 30% of the final
product's estimated cash in-flows are attributable to the acquired Teracube
technology. The Company used a discount rate of 35% when estimating the net
present value of the projected incremental cash flows. Remaining development
efforts are focused on completing development of certain sub-products of
Teracube that will maximize efficiencies in operation of the Company's business
intelligence and e-business products and make it compliant with industry
standards. Completion of these projects will be necessary before revenues are
produced. The Company expects to begin to benefit from the purchased in-process
research and development by the end of 2000. If these projects are not
successfully developed, the Company may not realize the value assigned to the
in-process research and development projects.
During the year ended December 31, 1999, the Company recorded amortization
expense of $341,000 relating to these intangible assets.
(b) Purchase of Minority Interest in Foreign Subsidiaries and Related
Intangibles
Effective January 1, 1998, the Company issued a total of 2,803,282 shares
of Class B common stock to certain existing stockholders in exchange for their
approximate 21% minority interest in certain of the Company's foreign
subsidiaries. The transaction and the valuation of the percentage interests held
by each of the minority interest stockholders for purposes of determining the
number of shares of common stock to be issued to each of them were reviewed and
approved by the disinterested members of the Board of Directors. The Company
accounted for the transaction under the purchase method of accounting. The
2,269,324 shares issued to the majority stockholder of the Company in exchange
for his shares in the foreign subsidiaries' minority interest (representing 17%
interest of the foreign subsidiaries) was an exchange between entities under
common control and was therefore accounted for at historical cost. The
historical cost for the majority stockholder's investment in the minority
interest was approximately $58,000. The shares issued to the other minority
interest stockholder (representing 4% interest of the foreign subsidiaries) were
recorded at fair value. Accordingly, the Company recorded $1.1 million for
acquired intangible assets representing the excess of the fair market value of
533,958 of the shares issued in exchange for the non-controlling interests'
shares in the foreign subsidiaries. The Company has allocated the purchase price
amounts to the identifiable intangible assets, consisting primarily of
distribution channels, trade name and customer lists and is amortizing those
assets on a straight-line basis over weighted average useful lives of
approximately 14 years.
During the years ended December 31, 1999 and 1998, the Company recorded
amortization expense of $81,000, in each year, relating to these intangible
assets.
(6) Short-term Investments
61
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following available-for-sale securities are included in short-term
investments as of December 31, 1999 (in thousands):
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
-------------- -------------- --------------- --------------
Corporate notes................................... $ 5,505 $ -- $ (50) $ 5,455
U.S. agency notes................................. 14,000 -- (78) 13,922
Common shares interests in U.S. domiciled
corporation...................................... 21,546 1,495 -- 23,041
------- ------- ------- -------
$41,051 $1,495 $ (128) $42,418
======= ======= ======= =======
The following is a summary of contractual maturities of the Company's
investments in debt securities as of December 31, 1999 (in thousands):
Amortized Cost Fair Value
------------------- -------------------
Within one year.................................................. $11,000 $10,960
After one year, within five years................................ 8,505 8,417
------- -------
$19,505 $19,377
======= =======
There were no short-term investments as of December 31, 1998.
(7) Accounts Receivable
Accounts receivable, net of allowances, consist of the following, as of
December 31, (in thousands):
1999 1998
------------ -----------
Billed and billable.............................................. $ 66,181 $35,057
Less deferred revenue............................................ (25,266) (8,095)
-------- -------
40,915 26,962
Less allowance for doubtful accounts............................. (3,329) (1,585)
-------- -------
$ 37,586 $25,377
======== =======
(8) Property and Equipment
Property and equipment consist of the following, as of December 31, (in
thousands):
1999 1998
--------- ---------
Computer equipment and software................................ $ 28,451 $14,967
Furniture and equipment........................................ 9,595 2,850
Leasehold improvements......................................... 3,647 697
-------- -------
41,693 18,514
Less: accumulated depreciation and amortization............... (11,099) (4,741)
-------- -------
$ 30,594 $13,773
======== =======
Depreciation and amortization expense related to property and equipment was
$6.6 million, $2.6 million and $1.1 million for the years ended December 31,
1999, 1998 and 1997, respectively.
(9) Bank Borrowings
62
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In March 1999, the Company entered into a line of credit agreement with a
commercial bank which provides for an unsecured revolving line of credit for
general working capital purposes, up to $25.0 million, not to exceed 3.5 times
earnings before interest, taxes, depreciation and amortization for the prior
four quarters. The borrowings under the line of credit bear interest at a
variable rate equal to LIBOR plus 1.0% to 1.75%, depending upon the ratio of
funded debt to earnings before interest, taxes, depreciation and amortization.
The line of credit agreement includes a 0.2% unused line of credit fee and
expires on May 31, 2001. This line of credit agreement replaced the previous
loan agreement, which provided for a $5.0 million revolving line of credit. In
July 1998, the Company repaid all net borrowings under the previous loan
agreement. As of December 31, 1999 and 1998, there were no outstanding amounts
under the line of credit.
The line of credit agreement requires that the Company comply with certain
financial covenants. The Company is not in compliance with all of the covenants
contained in the line of credit agreement. However, the Company has received
a waiver through April 30, 2000 at which time the Company expects to restructure
the credit facility.
(10) Deferred Revenue and Advance Payments
Deferred revenue and advance payments from customers consist of the
following, as of December 31, (in thousands):
1999 1998
----------- ----------
Current:
Deferred product revenue......................................... $ 38,164 $ 1,366
Deferred product support and other services revenue.............. 24,267 15,885
-------- -------
62,431 17,251
Less amount in accounts receivable............................... (24,403) (4,949)
-------- -------
$ 38,028 $12,302
======== =======
Non-current:
Deferred product revenue......................................... $ 9,461 $ 471
Deferred product support and other services revenue.............. 24,657 3,421
-------- -------
34,118 3,892
Less amount in accounts receivable............................... (863) (3,146)
-------- -------
$ 33,255 $ 746
======== =======
(11) Income Taxes
Prior to the initial public offering, the Company was an S Corporation, and
accordingly, the Company was not liable for corporate income taxes. Effective
June 12, 1998, the Company elected to become a tax-paying entity. In connection
with such conversion, the Company recorded a net deferred tax liability of
$576,000 reflecting the effect of its conversion from the cash to the accrual
basis for tax reporting.
U.S. and international components of income before income taxes were, for
the years ended December 31, (in thousands):
1999 1998
----------- ------------
U.S............................................................... $(28,245) $ 206
Foreign........................................................... (4,252) (2,461)
-------- -------
Total............................................................. $(32,497) $(2,255)
======== =======
63
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax provision consists of the following, for the years ended December 31,
(in thousands):
1999 1998
------------ -----------
Current:
Federal......................................................... $ -- $ --
State........................................................... -- --
Foreign......................................................... 1,246 --
-------- -------
1,246 --
Deferred:
Federal......................................................... (7,488) (136)
State........................................................... (1,872) (545)
Foreign......................................................... (2,313) (1,654)
-------- -------
(11,673) (2,335)
-------- -------
Increase in valuation allowance................................... 11,673 2,335
-------- -------
Total provision................................................. $ 1,246 $ --
======== =======
The provision for income taxes differs from the amount computed by applying
the federal statutory income tax rate to the Company's income before taxes as
follows, for the years ended December 31, (in thousands):
1999 1998
---------- ----------
Income tax (benefit) expense at federal statutory rate............ $(11,374) $ (766)
Goodwill amortization and other non-deductibles................... 351 (72)
Impact of international operations................................ (200) (787)
Adjustment for tax method change.................................. 1,016 --
S Corporation income.............................................. (180) (637)
Research and development tax credit............................... (40) (73)
Change in valuation allowance..................................... 11,673 2,335
-------- --------
$ 1,246 $ --
======== ========
Significant components of the Company's deferred tax assets and liabilities
are as follows, as of December 31, (in thousands):
1999 1998
----------- -----------
Deferred tax assets, net:
Allowances and reserves........................................... $ 1,826 $ 1,561
Accrued compensation.............................................. 1,214 848
Net operating loss carryforwards.................................. 17,434 3,162
Deferred revenue adjustment....................................... 10,768 582
Cash to accrual conversion........................................ 1,892 --
Amortization...................................................... 329 --
Acquired in-process research and development...................... 1,064 --
Federal and state tax credit carry forwards....................... 1,649 541
-------- -------
36,176 6,694
Valuation allowance............................................... (25,169) (3,228)
-------- -------
Deferred tax assets, net of valuation allowance................... 11,007 3,466
-------- -------
Deferred tax liabilities:
Prepaid assets.................................................... 3,257 489
64
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation...................................................... 2,311 424
Capitalized software.............................................. 208 476
Capitalized internal software..................................... 1,651 --
Amortization...................................................... 7 595
Unbilled receivables.............................................. 1,558 --
Cash to accrual conversion........................................ 1,496 1,482
Net unrealized gain on marketable securities...................... 519 --
-------- -------
Total deferred tax liabilities.................................... 11,007 3,466
-------- -------
Total net deferred tax liability.................................. $ -- $ --
======== =======
The Company recorded a net $21.9 million increase in the valuation allowance
for the year ended December 31, 1999 related to deferred tax assets which, in
the Company's opinion, are not likely to be realized in future periods. The
Company has foreign net operating loss carryforwards of $13.3 million of which
$185,000, $1.7 million and $213,000 will expire in 2002, 2003 and 2004,
respectively. The remaining foreign net operating losses of $11.3 million can be
carried forward indefinitely. The Company has domestic net operating loss
carryforwards of $31.5 million, primarily related to the deductions associated
with the disqualified disposition of incentive stock options, which expire in
2019. The Company has research and development tax credit carryforwards of $1.4
million expiring in 2018 and 2019.
For the years ended December 31, 1999 and 1998 the Company recorded a total
tax provision of $1.2 million and $0, respectively. Upon the revocation of the
Company's federal S corporation election in June 1998, the Company accounts for
income taxes in accordance with SFAS No. 109, ''Accounting for Income Taxes.''
As of December 31, 1999 management has concluded that a full valuation allowance
is required on the domestic deferred tax assets and its foreign deferred tax
assets based on its assessment that current and expected future levels of
taxable income are not sufficient enough to realize these deferred tax assets.
(12) Commitments and Contingencies
The Company leases office space and computer and other equipment under
operating lease agreements expiring at various dates through 2010. In addition
to base rent, the Company is responsible for certain taxes, utilities, and
maintenance costs. Some of these leases contain renewal options and some contain
purchase options. Future minimum lease payments under noncancellable operating
leases with initial terms of one year or more consist of the following (in
thousands):
2000.................................................................................. $ 20,279
2001.................................................................................. 19,350
2002.................................................................................. 16,113
2003.................................................................................. 11,922
2004.................................................................................. 10,150
Thereafter............................................................................ 36,278
--------
$114,092
========
Total rental expense for the years ended December 31, 1999, 1998 and 1997 was
approximately $12.8 million, $4.0 million and $1.6 million, respectively.
As of December 31, 1999, the Company had $12.2 million in commitments for
computer software and equipment and $5.0 million in marketing agreements.
65
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In January 2000, the Company entered into an agreement to lease approximately
146,000 square feet of office space in McLean, Virginia. Total commitments under
the lease, which expires in 2010, are approximately $51.6 million and are
included in the schedule above.
(13) Litigation
The Company is a defendant in numerous purported class action suits in which
the Company and several of its officers are alleged to have violated Section
10(b) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), Rule
10(b) (5) promulgated thereunder and Section 20(a) of the 1934 Act. The
complaints do not specify the amount of the damages sought. Accordingly, the
Company is unable to determine or estimate the outcome at this time. It is
possible that the Company may be required to pay substantial damages or
settlement costs which could have a material adverse effect on the Company's
financial condition or results of operations. The Company has not yet filed any
responsive pleadings, but intends to defend the matter vigorously.
In March 2000, the Company was notified that the SEC has issued a formal order
of private investigation in connection with matters relating to the Company's
previously announced restatement of its 1999 and 1998 financial results. The SEC
has requested that the Company provide the SEC with certain documents concerning
the Company's revision of its financial results for 1999 and 1998 and financial
reporting documents. The SEC indicated that its inquiry should not be construed
as an indication by the SEC or its staff that any violation of law has occurred,
nor as an adverse reflection upon any person, entity or security. The Company is
cooperating with the SEC in connection with this investigation and its outcome
cannot yet be determined.
The Company is also involved in other legal proceedings through the normal
course of business. Management believes that any unfavorable outcome related to
these other proceedings will not have a material effect on the Company's
financial position, results of operations or cash flows.
(14) Stockholders' Equity
(a) Stock Split
In January 2000, the Company's Board of Directors approved a two-for-one split
of the Company's common stock effective in the form of a stock dividend. The
stock dividend was distributed on January 26, 2000 to stockholders of record as
of January 20, 2000. Stockholders' equity has been restated to give retroactive
recognition to the split for all periods presented by reclassifying the par
value of the additional shares arising from the split from paid-in capital to
common stock. All references to share and per share amounts for all periods
presented have been restated to reflect this stock split.
(b) Stock Plans
In February 1996, the Company adopted the 1996 Stock Plan in order to provide
an incentive to eligible employees and officers of the Company. A total of
12,282,664 shares of Class A common stock are reserved under the 1996 Stock
Plan, as amended. As of December 31, 1999, options to purchase 15,341,838 shares
have been granted, of which 3,059,174 have been cancelled.
In March 1997, the Company adopted the 1997 Stock Option Plan for French
Employees, which provides for the granting of options on the Company's Class A
common stock to employees of MicroStrategy France SARL, the Company's French
subsidiary. A total of 600,000 shares of Class A common stock are reserved under
the French Stock Plan. As of December 31, 1999, options to purchase 251,500
shares have been granted.
66
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In September 1997, the Company adopted the 1997 Director Option Plan, which
provides for grants of nonqualified stock options to non-employee directors of
the Company. A total of 600,000 shares of Class A common stock are reserved
under the Director Option Plan, as amended. As of December 31, 1999, options to
purchase 320,000 shares have been granted.
In April 1999, the Company adopted the 1999 Stock Option Plan, which provides
for grants of stock options to eligible employees and officers of the Company. A
total of 5,000,000 shares of Class A common stock are reserved under the 1999
Stock Option Plan. As of December 31, 1999, options to purchase 3,262,964 shares
have been granted.
Shares of Class A common stock will be issued upon exercise of any of the
stock options granted under the stock plans. Stock options granted to date
generally vest ratably over five years from the date of grant and expire ten
years after grant. The stock option exercise price of incentive options under
the Company's stock option plans may not be less than the determined fair market
value at the date of grant.
A summary of the status of the Company's stock option plans are presented (in
thousands, except per share data):
Price per Share Options Exercisable
--------------------------------- --------------------------------
Weighted
Weighted Number of Average
Shares Range Average Shares Exercise Price
------ ----- ---------- ------------- ---------------
Balance, December 31, 1996 4,919 $0.25 - 0.63 $ 0.42
Granted.................... 5,321 0.75 - 2.00 1.22
Exercised.................. -- -- --
Cancelled.................. (416) 0.25 - 1.25 0.55
------ --------------- ------
Balance, December 31, 1997 9,824 0.25 - 2.00 0.85 913 $0.41
Granted.................... 3,753 2.00 - 21.25 7.14
Exercised.................. (700) 0.25 - 2.00 0.53
Cancelled.................. (726) 0.25 - 19.13 1.98
------ --------------- ------
Balance, December 31, 1998 12,151 0.25 - 21.25 2.73 2,292 $1.04
Granted.................... 5,245 7.75 - 115.66 28.42
Exercised.................. (2,513) 0.25 - 20.00 1.26
Cancelled.................. (2,065) 0.25 - 48.31 4.38
------ --------------- ------
Balance, December 31, 1999 12,818 $0.25 - 115.66 $13.07 2,128 $4.11
======
Options Exercisable at
Options Outstanding at December 31, 1999 December 31, 1999
- ------------------------------------------------------------------------ ----------------------------------
Weighted Average
Remaining Weighted
Range of Number of Contractual Life Weighted Average Number of Average
Exercise Prices Shares (Years) Exercise Price Shares Exercise Price
- ---------------- ------ ------- --------------- ------- --------------
$ 0.25 - 0.75 2,468 6.2 $ 0.47 987 $ 0.45
1.00 - 1.25 2,376 7.4 1.22 545 1.22
1.50 - 10.00 2,928 8.1 5.03 352 4.60
10.21 - 14.00 1,764 9.0 12.14 131 11.66
14.03 - 38.50 1,860 9.1 20.18 73 18.04
41.31 - 115.66 1,422 9.5 63.12 40 79.67
------ --- ------ ----- ------
12,818 8.0 $13.07 2,128 $ 4.11
====== ===== ------
67
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1998, the Company adopted the 1998 Employee Stock Purchase Plan and
reserved 800,000 shares, subject to annual increases. As of December 31, 1999, a
total of 1,000,000 shares of common stock were reserved. The Purchase Plan
became effective upon the completion of the Company's initial public offering.
The Purchase Plan permits eligible employees to purchase common stock, through
payroll deductions of up to 10%, not to exceed $15,000 per year, of the
employee's compensation, at a price equal to 85% of the fair market value of the
common stock at either the beginning or the end of each offering period,
whichever is lower. As of December 31, 1999, 531,640 shares have been issued
under the plan.
If compensation expense had been recorded based on the minimum or fair value
at the grant dates for awards under the stock option and purchase plans as set
forth in SFAS 123, "Accounting for Stock-based Compensation," the Company's net
loss would have been adjusted to the pro forma amounts presented below, for the
years ended December 31, (thousands, except per share data):
1999 1998 1997
------------- ------------- -------------
Net loss:
As reported................................................... $(33,743) $(2,255) $ (885)
Pro forma..................................................... $(42,358) $(5,229) $(1,264)
Basic and diluted net loss per share, as reported............... $ (0.44) $ (0.03) $ (0.02)
Pro forma basic and diluted net loss per share.................. $ (0.55) $ (0.08) $ (0.02)
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
option grants under the Company's stock option plans issued during 1999, 1998
and 1997, respectively: volatility factors of 95%, 80% and 60%, weighted-average
expected life of 5 years, 5 years, and 2.5 years, risk-free interest rates of
6%, 5% and 6%, and no dividend yields.
The following assumptions were used for shares issued during 1999 and 1998,
respectively, under the Employee Stock Purchase Plan: volatility factors of 96%
and 80%, weighted-average expected life of 6 months, risk-free interest rate of
5% and no dividend yield. The pro forma amounts for options granted prior to
the Company's initial public offering are based on the minimum value method
proscribed by SFAS 123.
The weighted average minimum and fair value of grants made during 1999, 1998
and 1997 are $21.44, $9.52 and $1.04, respectively.
During the year ended December 31, 1998, the Company granted options to
purchase 3,753,380 shares of Class A common stock, of which options to purchase
1,071,670 shares of Class A common stock were granted at exercise prices below
fair market value. The Company will amortize $1.4 million of compensation
expense related to these options ratably over the five-year vesting period. For
the years ended December 31, 1999 and 1998, the Company recorded compensation
expense of $269,000 and $186,000, respectively. The Company will record
compensation expense of $270,000 in each of the years ending December 31, 2000,
2001 and 2002 and $85,000 in 2003, if all of the related options vest.
(c) Distribution to S Corporation Stockholders
The Company declared a $10.0 million dividend to the existing stockholders of
the S corporation in the form of short-term one-year notes prior to the
termination of the Company's S corporation election, which occurred immediately
prior to the initial public offering. The notes issued to the existing
stockholders of the Company bear interest at the applicable federal rate for
short-term obligations. As of December 31, 1999, the entire $10.0 million of
the dividend notes had been repaid.
68
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(d) Stock Warrants
In June 1999, the Company issued warrants to a customer to purchase 14,000
shares of Class A common stock at $12.47 per share which immediately vested and
were exercisable upon issuance. The fair value of the warrants of $139,000 was
recorded as a reduction of revenue at the date of grant. Fair value was
determined using the Black-Scholes option-pricing model with the following
assumptions: volatility factor of 80%, weighted average expected life of 8
years, risk-free interest rate of 6%, and no dividend yield.
In December 1998, the Company issued warrants to a customer to purchase
100,000 shares of Class A common stock at $11.75 per share which become
exercisable ratably over the five-year vesting period. The fair value of the
warrants of $934,000 was recorded as general and administrative expense at the
date of grant. Fair value was determined using the Black-Scholes option-pricing
model with the following assumptions: volatility factor of 80%, weighted average
expected life of 5 years, risk-free interest rate of 5%, and no dividend yield.
(15) Employee Benefit Plan
The Company sponsors a plan to provide retirement and incidental benefits for
its employees, known as the MicroStrategy 401(k) plan (the "Plan").
Participants may make voluntary contributions to the Plan of up to 20% of their
compensation not to exceed the Federally determined maximum allowable
contribution. The Plan permits for discretionary company contributions; however,
no contributions were made for the years ended December 31, 1999, 1998 and 1997.
(16) Segment Information
The Company adopted the provisions of SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information," during 1998. SFAS No. 131
requires certain disclosures about operating segments, products and services,
geographic areas, and major customers. The method for determining what
information to report is based on the way that management organizes the
operating segments within the Company for making operational decisions and
assessments of financial performance. The Company's chief operating decision
maker is considered to be the Company's Chief Executive Officer ("CEO"). The
CEO reviews financial information presented on a consolidated basis accompanied
by disaggregated information about revenues by operating segments for purposes
of making operating decisions and assessing financial performance.
The Company has two operating segments, MicroStrategy Platform and
Strategy.com. MicroStrategy Platform provides scalable, sophisticated and
maintainable solutions that enable businesses to develop and deploy intelligent
e-business systems. Revenues are derived from sales of product licenses and
product support and other services, including technical support, education and
consulting and hosting services. Strategy.com delivers personalized information
to consumers through its personal intelligence network via the web, wireless
applications protocol-enabled devices, e-mail, mobile phone, fax, pager and
regular telephone. Strategy.com syndicates its channels through network
affiliates and offers them to consumers directly through its website. Revenues
are expected to be derived from subscription, advertising fees and transaction
fees. The Company began operating its business as two segments in the latter
part of 1999. Prior years' segment information has been restated to reflect the
operations of Strategy.com.
The accounting policies of both segments are the same as those described in
the summary of significant accounting policies. Certain corporate support costs
are allocated to Strategy.com based on factors such as headcount, gross asset
value and the specific level of activity directly related to such costs.
69
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summary discloses certain financial information regarding the
Company's operating segments (in thousands):
MicroStrategy
Platform Strategy.com Consolidated
-------- ------------ ------------
Year ended December 31, 1999
Total license and service revenues........ $151,258 $ -- $151,258
Gross profit.............................. 114,225 -- 114,225
Depreciation and amortization............. 6,839 1,000 7,839
Operating expenses........................ 139,522 9,236 148,758
Loss from operations...................... (25,297) (9,236) (34,533)
Total assets.............................. 195,150 8,218 203,368
Year ended December 31, 1998
Total license and service revenues......... $ 95,489 $ -- $ 95,489
Gross profit............................... 75,708 -- 75,708
Depreciation and amortization.............. 3,242 8 3,250
Operating expenses......................... 77,916 341 78,257
Loss from operations....................... (2,208) (341) (2,549)
Total assets............................... 76,476 95 76,571
Year ended December 31, 1997
Total license and service revenues......... $ 52,551 $ -- $ 52,551
Gross profit............................... 41,435 -- 41,435
Depreciation and amortization.............. 1,243 -- 1,243
Operating expenses......................... 42,069 -- 42,069
Loss from operations....................... (634) -- (634)
Total assets............................... 29,101 -- 29,101
The following summary discloses total revenues and long-lived assets,
excluding long-term deferred tax assets, relating to the Company's geographic
regions (in thousands):
Domestic International Consolidated
-------------------- ------------------ ---------------------
Year ended December 31, 1999
Total license and service revenues......... $114,907 $36,351 $151,258
Long-lived assets.......................... 78,159 2,028 80,187
Year ended December 31, 1998
Total license and service revenues......... $ 70,573 $24,916 $ 95,489
Long-lived assets.......................... 13,776 2,754 16,530
Year ended December 31, 1997
Total license and service revenues......... $ 38,304 $14,247 $ 52,551
Long-lived assets.......................... 7,097 1,942 9,039
Transfers of $8.3 million, $6.6 million, and $ 4.4 million for the year ended
December 31, 1999, 1998 and 1997, respectively, from international to domestic
operations have been excluded from the above table and eliminated in the
consolidated financial statements.
For the year ended December 31, 1999, 1998 and 1997, no one customer
accounted for 10% or more of consolidated total revenue.
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Vienna,
Commonwealth of Virginia, on this 12th day of April 2000.
MICROSTRATEGY INCORPORATED
(Registrant)
By: /s/ Michael J. Saylor
---------------------------------------
Name: Michael J. Saylor
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Position Date
- ----------------------------------- ------------------------------------------- ---------------------------
/s/ Michael J. Saylor President, Chief Executive Officer and April 12, 2000
- ------------------------------- Chairman of the Board of Directors (Principal
Michael J. Saylor Executive Officer)
/s/ Mark S. Lynch Vice President and Chief Financial Officer April 12, 2000
- ------------------------------- (Principal Financial and Accounting Officer)
Mark S. Lynch
/s/ Sanju K. Bansal Director April 12, 2000
- -------------------------------
Sanju K. Bansal
/s/ Frank A. Ingari Director April 12, 2000
- --------------------------------
Frank A. Ingari
/s/ Jonathan J. Ledecky Director April 12, 2000
- --------------------------------
Jonathan J. Ledecky
/s/ John W. Sidgmore Director April 13, 2000
- --------------------------------
John W. Sidgmore
/s/ Ralph S. Terkowitz Director April 12, 2000
- ---------------------------------
Ralph S. Terkowitz
71
Schedule II
Valuation and Qualifying Account
For the years ended December 31, 1997, 1998 and 1999
(In thousands)
Allowance for doubtful accounts
Balance at
beginning Additions Balance at
of the charged to the end of
period expenses Deductions the period
31-Dec-97 458 312 -- 770
31-Dec-98 770 1,468 (653) 1,585
31-Dec-99 1,585 4,625 (2,881) 3,329
72
INDEX TO EXHIBITS
Exhibit
Number Description
- ----------- -------------------------------------------------------------
3.1 Certificate of Incorporation of the registrant, as
amended. (Filed as Exhibit 3.1 to the registrant 's
Registration Statement on Form S-1 (Registration No.
333-49899) and incorporated by reference herein.)
3.2 Bylaws of the registrant. (Filed as Exhibit 3.2 to the
registrant's Registration Statement on Form S-1 (Registration
No. 333-49899) and incorporated by reference herein.)
4.1 Form of Certificate of Class A Common Stock of the registrant.
(Filed as Exhibit 4.1 to the registrant's Registration
Statement on Form S-1 (Registration No. 333-49899) and
incorporated by reference herein.)
10.1 1996 Stock Plan (as amended) of the registrant. (Filed as
Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998 (File No. 000-24435)
and incorporated by reference herein.)
10.2 1997 Stock Option Plan for French Employees of the registrant.
(Filed as Exhibit 10.6 to the registrant's Registration
Statement on Form S-1 (Registration No. 333-49899) and
incorporated by reference herein.)
10.3 1997 Director Option Plan (as amended) of the registrant.
10.4 1998 Employee Stock Purchase Plan of the registrant. (Filed as
Exhibit 10.4 to the registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998 (File No.
000-24435) and incorporated by reference herein.)
10.5 Credit Agreement, dated March 26, 1999, between NationsBank,
N.A. and the registrant. (Filed as Exhibit 10.1 to the
registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999 (File No. 000-24435) and incorporated by
reference herein.)
10.6 Modification to Credit Agreement, dated July 12, 1999, between
NationsBank, N.A. and the registrant. (Filed as Exhibit 10.2
to the registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999 (File No. 000-24435) and
incorporated by reference herein.)
10.7 1999 Stock Option Plan of the registrant. (Filed as Exhibit
10.3 to the registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999 (File No. 000-24435) and
incorporated by reference herein.)
10.8 Master Lease Agreement No. VAC180, dated November 1, 1999,
between MLC Group, Inc. and the registrant.
10.9 Letter Agreement, dated December 1, 1999, between ePlus, Inc.
(f/k/a MLC Group, Inc.) and the registrant.
10.10* Software Development and OEM Agreement, dated December 28,
1999, between the registrant and Exchange Applications, Inc.
10.11 Software License Agreement, dated December 28, 1999, between
the registrant and Exchange Applications, Inc.
10.12 Value-Added Reseller Agreement, dated December 28, 1999,
between the registrant and Exchange Applications, Inc.
10.13 Payment and Registration Rights Agreement, dated December 28,
1999, between the registrant and Exchange Applications, Inc.
10.14* DSS Partner MicroStrategy Incorporated OEM Agreement, between
the registrant and NCR Corporation.
10.15 Memorandum of Understanding Purchase, between the registrant
and NCR Corporation.
10.16 Memorandum of Understanding Joint Marketing, between the
registrant and NCR Corporation.
10.17 Asset Purchase Agreement, dated December 23, 1999, between the
registrant and NCR Corporation.
10.18 Deed of Lease, dated January 7, 2000, between Tysons Corner
Property LLC and the registrant.
21.1 Subsidiaries of the registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule.
* Certain portions of this Exhibit were omitted by means of redacting a portion
of the text. This Exhibit has been filed separately with the Secretary of the
Commission with such text pursuant to our Application Requesting Confidential
Treatment under Rule 24b-2 under the Securities Exchange Act of 1934, as
amended.