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, 2000
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)
8000 Towers Crescent Drive, Vienna, VA 22182
(Address of Principal Executive Offices) (Zip Code)
51-0323571
(I.R.S. Employer
Identification Number)
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, 2001 on the Nasdaq National Market) was approximately
$267.2 million.
The number of shares of the registrant's Class A common stock and Class B
common stock outstanding on March 1, 2001 was 30,325,030 and 51,165,624,
respectively.
MICROSTRATEGY INCORPORATED
TABLE OF CONTENTS
Page
PART I ----
Item 1. Business.................................................................................... 1
Item 2. Properties.................................................................................. 17
Item 3. Legal Proceedings........................................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders......................................... 18
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters........................ 18
Item 6. Selected Financial Data..................................................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 20
Item 7a. Quantitative and Qualitative Disclosures about Market Risk.................................. 49
Item 8. Financial Statements and Supplementary Data................................................. 49
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........ 49
PART III
Item 10. Directors and Executive Officers of the Registrant.......................................... 49
Item 11. Executive Compensation...................................................................... 52
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 56
Item 13. Certain Relationships and Related Transactions.............................................. 59
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................. 59
i
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 business intelligence 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 businesses 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, telephone and wireless communication devices. Our
platform is designed for developing business intelligence 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.
Our principal corporate offices are located in Vienna, Virginia. We also
maintain domestic sales offices throughout the United States and international
sales offices throughout Europe, South America, and the Asia-Pacific region.
International sales accounted for 24.9%, 24.0% and 26.1% of our total revenues
in 2000, 1999 and 1998, respectively.
In July 1999, we launched a new business unit called Strategy.com. Third
party content providers use Strategy.com's hosted One-to-One Messaging platform
to offer their customers highly personalized, timely information services. These
services are delivered on a scheduled or event-driven basis through a wide
variety of delivery methods, including e-mail, telephone and wireless devices.
With an infrastructure built upon a scalable and flexible database architecture,
MicroStrategy platform technology and an XML interface, Strategy.com delivers
over 500,000 messages per day on average. Each message is individually tailored
by matching end user profiles and preferences with proprietary content or third-
party syndicated content in the areas of finance, weather, traffic, sports and
news. Strategy.com's hosted messaging applications can be used by companies to
facilitate transactions, increase mind share and augment customer profile data
warehouses with information that the user has provided and given permission to
use. Strategy.com also provides application maintenance, development, customer
billing, hosting and support services, enabling customers to focus on their core
businesses. As of March 1, 2001, syndicated programming hosted by Strategy.com
includes Finance, News, Weather, Sports and Traffic "channels." Strategy.com
syndicates its channels through companies it refers to as Strategy.com
affiliates, such as Earthlink and Ameritrade. Strategy.com has established
dozens of affiliate agreements with leading Internet companies, communications
carriers, media companies and financial institutions. Strategy.com also powers
messaging services utilizing proprietary content for content brands such as
Thomson Financial, Wall Street Journal Interactive, and Belo Interactive.
Strategy.com currently provides over 500,000 subscribers with information
services. In October 2000, MicroStrategy completed the reorganization of
Strategy.com into a separate subsidiary. In connection with this reorganization,
Strategy.com commenced a round of financing through the sale of Series A
redeemable convertible preferred stock which was completed in January 2001.
Aggregate proceeds from this round of financing totaled approximately $49.8
million, net of offering costs of approximately $3.0 million. Microstrategy owns
approximately 84% of the economic interest in the outstanding equity of
Strategy.com on an as converted, diluted basis.
Industry Background
The emergence and widespread acceptance of the Internet (or "web") as a
medium of communication and commerce has dramatically changed the way businesses
interact with each other and with their customers. 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
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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 business intelligence applications 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 combination 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 platform for delivering Internet-based information and services to
digital mobile phones and other wireless devices. 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.
Web Browsers are Becoming the Standard Interface for Business Intelligence
Applications. Until recently, business intelligence tools were primarily
deployed in a company's headquarter offices. With web-based business
intelligence applications, store clerks, customer service representatives and
technicians can have the tools to make data-driven decisions in the field. The
web facilitates an unprecedented degree of collaboration between geographically
distributed people. Headquarters-based users and distributed users now have
access to the same data through the same tool. Hopes for the web have revolved
around its ability to serve as a point-of-transaction for customers and trading
partners. With a web-based business intelligence system, the web can also become
the "point-of-decision" that provides users, customers and partners with the
information they need to make insightful decisions.
Increased Openness of Business Intelligence Applications to Customers,
Suppliers and Partners. Business intelligence systems are no longer confined to
the corporation. Today, companies are extending their business intelligence
insight to suppliers, channel partners and customers. Business partners can have
up-to-the-minute access to sales histories, inventory status and billing
information through their web browsers. Three key drivers for opening up the
business intelligence system to vendors, partners and customers are:
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o Supplier transactions become more efficient with direct access to
inventory and other related data. For true vendor-managed inventory
and collaborative commerce systems, vendors need to have access to
key information about how their products are performing against
business metrics. For example, vendors should be able to see how
their products are selling in each geography so as not to over-ship
products that are slow-moving or under-ship products that are
selling quickly. By opening vendor performance information to the
vendors themselves, they become partners in the quest to optimize
sales, margin and inventory.
o Business partners collaborate more effectively with access to shared
data. By giving access to information such as the manufacturing
pipeline and build schedule, partners can be more effective at
satisfying end customers and setting expectations. Opening invoice
and purchase order information to partners will enable them to
reduce the overhead associated with channel management, resulting in
cost savings and time efficiencies. For example, notifying channel
sales partners of changes in the manufacturing schedule allows them
to reset end customer expectations or to increase selling activity.
o Customers derive increasing value from the information content of
products and services. In a market crowded with mass-market
advertising, customers increasingly value meaningful interactions
with companies. Customers want companies to know their interests and
preferences. Customers also want to be able to login to their
providers' systems to check their billing and order status. These
are the features that a business intelligence system can deliver to
help differentiate each company in a crowded marketplace.
The MicroStrategy Solution
MicroStrategy offers a comprehensive suite of software products and
services that enable businesses to develop and deploy business intelligence
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 business intelligence systems.
Important features of our solution in this area include:
o structured query language optimization drivers that improve
performance of each major database;
o the ability to support very large user populations;
o maximized up-time, even in high volume applications; and
o the 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 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
3
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 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 provide businesses with a software platform to develop
solutions that deliver insight and intelligence to their enterprises, customers
and supply-chain partners. The key elements of our strategy include.
Marketing Strategy. Our marketing strategy focuses on expanding our market
share and brand awareness by focusing in three key areas:
Business Intelligence Platform. Our business intelligence
platform marketing strategy is designed to extend our footprint in
the business intelligence market, by increasing awareness of the
MicroStrategy 7 platform. In the business intelligence market, our
marketing programs will target three principal audiences:
o Our historical base of corporate technology buyers and
departmental technology buyers in Global 2000
enterprises;
o Corporate and departmental technology buyers in
mid-sized enterprises, with revenue between $500
million and $2.5 billion; and
o Independent software vendors who want to embed
analytical tools in their solutions.
Analytical Customer Relationship Management Applications. In
January 2001, MicroStrategy announced the general availability of
our analytical Customer Relationship Management (CRM) applications.
We believe that corporate marketing departments are the target
market for these applications. Because the applications are built on
the MicroStrategy 7 platform, we will seek to create maximum synergy
between our MicroStrategy 7 platform and analytical CRM applications
by continuing to upgrade the CRM applications to run on newer
versions of the MicroStrategy 7 platform and by incorporating
functionality developed by the CRM applications as base
functionality for the Microstrategy 7 platform. Our advertising and
other promotions will be designed to mutually support both product
lines.
Hosted Messaging Platform. The target market for Strategy.com
includes marketing executives and general managers at companies that
have strong electronic relationships with their customers. During
2001, our marketing objectives are to engage financial institutions
and media companies and communicate the benefits of Strategy.com's
One-to-One Messaging service. The companies most interested in
Strategy.com services seek to enhance their customer relationships,
drive transactions and/or monetize their content.
Strategy.com will focus on creating awareness among our target
customer base with a combination of vertically-targeted public
relations campaigns, direct marketing programs, vertically-targeted
print advertising and trade show participation. Strategy.com will
also selectively promote new product releases and initiatives to
build its subscriber base.
Technology Strategy--Provide a Scalable, Sophisticated and Maintainable
Business Intelligence 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 information delivery
functionality to the broadest set of consumer devices and providing a platform
that can be easily integrated with e-
4
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:
o Deployability--the ease with which applications can be deployed,
modified, upgraded and tuned;
o Capacity--the volume of information that can be efficiently analyzed
and utilized;
o Database flexibility--the range of data sources, data warehouses and
online transaction processing databases which the software is
capable of efficiently querying without modification;
o Performance--the response time of the system;
o Openness--the ease with which applications can be developed on our
standard-based platform and comprehensive application programming
interfaces;
o Interactivity--the ability for users to take action upon information
and update the data warehouse or transactional systems;
o Personalization--the quality and sophistication of a one-to-one user
experience;
o Concurrency--the number of users, which can be supported
simultaneously;
o Sophistication--the range of analytical methods available to the
application designer; and
o Robustness--the reliability and availability of the software in
mission critical environments.
Sales Strategy--Our sales strategy is executed through a field-based
direct sales force, a newly launched web store and inside sales force, and
relationships with indirect channel partners. Our goal is to increase market
share both domestically and abroad, by targeting corporate and departmental
technology buyers in Global 2000 enterprises, in mid-sized companies and
independent software vendors. We also seek to increase sales to our installed
base of customers by offering a wide range of software and services utilizing
our MicroStrategy 7 platform.
Products
We offer a comprehensive business intelligence platform, known as
MicroStrategy 7, which is designed to enable businesses to turn information into
strategic insight, transform customer interactions into relationships and make
more effective business decisions. Revenues from sales of product licenses
accounted for approximately 46% of total revenues during 2000. The following are
the components of the MicroStrategy 7 platform:
MicroStrategy Intelligence Server. MicroStrategy Intelligence Server is
the foundation for our business intelligence platform. We believe that
MicroStrategy Intelligence Server is the most sophisticated analysis engine
available. MicroStrategy Intelligence Server is 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.
The MicroStrategy Intelligence Server has been built with the scalability
and fault tolerance required for sophisticated analysis of multi-terabyte
databases and can be deployed to thousands of users through complete user,
object and data security and management. It contains thousands of specific
optimizations for all major relational databases and includes the load
distribution, prioritization and system tuning capabilities demanded by
large-scale implementations.
MicroStrategy Intelligence Server contains an analytical engine with over
150 different sophisticated mathematical and statistical functions with the
flexibility for further function extensions. MicroStrategy Intelligence
5
Server combines the power of its analytical engine with the scalability of a
relational database to perform complex data analysis with maximum efficiency.
All the other products in the MicroStrategy 7 platform integrate with the
MicroStrategy Intelligence Server and benefit from its broad functionality.
MicroStrategy Intelligence Server is designed to be fault-tolerant to
ensure system availability and 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. MicroStrategy Web can be accessed through a web browser on any
operating system, eliminating deployment issues associated with customer-side
Java and Active X controls. Using the MicroStrategy Web infrastructure,
customers 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 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. In
order to accommodate the various business requirements of end users,
MicroStrategy Web is available in a full-featured version, a simplified version
and an enterprise reporting version.
MicroStrategy Narrowcast Server. MicroStrategy Narrowcast Server is a
powerful content generation and information broadcast server designed to
proactively deliver personalized information to millions of recipients via the
Internet, e-mail, telephone and wireless devices. MicroStrategy Narrowcast
Server delivers targeted information to individuals on an event-triggered or
scheduled basis through the consumer communication device that is most
convenient. It provides an engine to implement targeted messaging to acquire and
retain customers, and a platform for distributing information to the corporate
enterprise, customers, suppliers and other constituencies.
MicroStrategy Narrowcast Server has a web-based interface that can be used
with existing web applications. Users subscribe to information services by
providing personal information and preferences, ensuring they receive
personalized product offerings and information.
In addition to proactively delivering information from the MicroStrategy 7
platform, MicroStrategy Narrowcast Server's open information source modules
enable it to deliver information from a multitude of information sources to the
business user. The multiple information sources can be combined to provide users
with requested information in one personalized e-mail, message or document.
MicroStrategy OLAP Provider. With MicroStrategy OLAP Provider, other
vendors' front-end business intelligence products can now access the analytical
power and scalability of the MicroStrategy 7 platform. Cognos PowerPlay and
Microsoft Excel 2000 communicate with MicroStrategy OLAP Provider using the
standard OLE database for OLAP application programming interface. MicroStrategy
OLAP Provider accepts multi-dimensional expressions, or MDX, queries from Cognos
PowerPlay, Microsoft Excel 2000 or custom applications, and works with
MicroStrategy Intelligence Server to translate these queries into
database-optimized structured query language. MicroStrategy OLAP Provider allows
organizations to standardize on a reporting and analysis platform, while still
enabling users to access the platform from a variety of user interfaces. This
leverages investments in databases, software and training and removes some of
the traditional burdens of cube-based architectures.
By doing this, MicroStrategy OLAP Provider allows other vendors'
interfaces to access transaction-level detail
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in a relational database, with the analytical power and flexibility of the
MicroStrategy 7 platform. This helps organizations realize value by reducing
maintenance and development costs, increasing user access to the data,
minimizing re-training costs and promoting a standard, enterprise-wide view of
the data.
MicroStrategy Transactor. To integrate business intelligence and online
transaction processing systems, MicroStrategy Transactor employs intelligent
transaction agents that interpret and integrate web information with various
enterprise information systems, such as database, commerce, business
intelligence, and enterprise resource planning systems through an open driver
application programming interface, allowing customers to transact with
businesses via XML-compliant devices such as web-enabled phones, personal
digital assistants and web browsers. Through its transaction and extraction
capabilities, MicroStrategy Transactor enables e-commerce applications through a
variety of devices and communications media.
MicroStrategy Architect. MicroStrategy Architect is the MicroStrategy 7
component in which applications are modeled through an intuitive graphical user
interface. MicroStrategy Architect provides a unified environment for creating
and maintaining all aspects of web reporting and business intelligence
applications. 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.
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
Administrator has been designed to ensure easy management of application objects
and users across multiple development, testing, and production environments.
MicroStrategy Administrator eases the burden of maintaining users and security
by using textual commands that can be saved as scripts. These commands and
scripts can be executed from either a graphical interface or from the command
line giving system administrators the flexibility and ease-of-use necessary for
efficient systems management.
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. Once applications have been created through
MicroStrategy Architect, they can be deployed through a number of different
interfaces. For power analysts and application developers desiring to use a
client-server Microsoft Windows interface, MicroStrategy Agent is an advanced
environment providing a full range of analytical functionality, a rich
mathematical function library, built-in workflow and data mining integration.
MicroStrategy SDK. MicroStrategy SDK completes the MicroStrategy 7
platform by enabling developers to integrate, extend and fully harness the power
of MicroStrategy 7. Through a set of rich XML, Java and COM-based application
programming interfaces that fully expose all platform functionality, businesses
can leverage this powerful development environment to quickly deploy custom
applications and embed intelligence into any website.
MicroStrategy CRM Applications. MicroStrategy CRM Applications enable
customers to develop and grow personal and profitable customer relationships.
MicroStrategy CRM Applications is an easy-to-use, web-based customer
relationship management application built on the MicroStrategy 7 platform that
delivers customer analysis and segmentation across all customer touch points.
MicroStrategy CRM Applications customers can use best-of-breed marketing
automation to continually build, execute and manage permission-based,
personalized and event-driven marketing campaigns.
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Consulting, Education and Technical Support
Our services and customer support capabilities are as follows:
MicroStrategy 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. Revenues from
consulting services accounted for approximately 31% of total revenues during
2000.
MicroStrategy Education. MicroStrategy Education provides our customers
with a thorough understanding of our products and the implementation of business
intelligence 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
quickly become familiar with business intelligence technologies. Revenues from
education services accounted for approximately 5% of total revenues during 2000.
MicroStrategy Technical Support. 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. All support options are supplemented with access to online
support services, including the comprehensive, web-based MicroStrategy Knowledge
Base, as well as the ability to check, modify or log new cases via the web.
Revenues from technical support services accounted for approximately 18% of
total revenues during 2000.
Customer Case Studies
The following case studies illustrate the application and implementation
of our products and related services by several of our customers.
Best Buy. Best Buy, one of the nation's leading electronics retailers,
continues to drive business growth with MicroStrategy's business intelligence
platform. For more than four years, Best Buy has used MicroStrategy technology
to provide merchandise buyers, financial analysts, store managers and executive
officers detailed reports on store performance, product sales, marketing results
and consumer trends. MicroStrategy Web anchors the business performance
management application that gives end users an array of options for powerful
information analysis and exploration. For example, merchandise buyers and other
user groups can run predefined reports, create their own queries and download
information into Excel spreadsheets for easy off-line analysis right from their
desktops. Identified trends indicate potential problems or opportunities. Users
can drill down into the data to get more detailed information, including sales
by region, city or even individual store. In addition, a MicroStrategy-based
customer relationship management application helps Best Buy employees foster
stronger relationships with their valued customers.
GE Capital Fleet Services. GE Capital Fleet Services, one of the world's
largest vehicle fleet management companies, chose MicroStrategy as its corporate
standard for business intelligence. To support, track and analyze transactions
associated with thousands of corporate fleet vehicles leased to customers, GE
Capital required a platform that could be deployed via the Internet and scale to
support a rapidly growing user community. Approximately 1,600 GE Capital Fleet
Services' end users access a simple-to-use web-based system via MicroStrategy
Web and perform critical analyses, such as invoice management, trend analysis
and forecasting, improving bottom line results. GE Capital Fleet Services also
uses MicroStrategy to send personalized proactive maintenance alerts directly to
vehicle drivers through multiple communications channels, including web,
wireless and voice.
Customers
The Company has over 1,100 customers across such diverse industries as
retail, telecommunications, banking and finance, pharmaceuticals and healthcare,
technology and consumer packaged goods. A list of some of the firms that
purchased over $250,000 of our products and services since January 1, 1997 is as
follows:
8
Banking & Finance The SABRE Group La Poste
American Express* Starwood Hotels & Resorts Ohio Department of
Ameritrade* Universal Studios* Education*
Bank of America US Air Force
CIBC Telecommunications US Postal Service*
Deutsche Borse Ameritech
Fannie Mae AT&T Wireless Services Consumer Packaged Goods
First Data Corporation Bell Atlantic* Beverage Data Network
First Union Corporation* Bell South* Brown & Williamson
First USA Bank Cable & Wireless Hallmark
FleetBoston Financial France Telecom* Ralston Purina
Corporation* Pacific Bell* S.C. Johnson & Son*
Freddie Mac* Sprint*
GE Capital* Technology
Nationwide Insurance* Pharmaceutical & Earthlink*
Royal Bank of Canada Healthcare Gateway
USAA * Cardinal Health IBM Corporation*
Visa International * Glaxo Wellcome* J.D. Edwards & Company*
Ingenix* Lexis Nexis
Retail MedPartners Network Solutions
Asda Stores Merck/Medco* Nielsen Media Research
B & Q Premier NCR*
Best Buy* Smithkline Beecham* Perot Systems
Comet Warner Lambert* Snap.com
Elder Beerman Western Digital*
Fox Entertainment Group Grocery & Pharmacy Xchange, Inc.*
Kmart* American Stores*
Kohl's Department Stores Associated Food Stores Manufacturing &
Liz Claiborne* CVS Pharmacy Industrial
Marks & Spencer* Eckerd Corporation* Allied Signal
ShopKo* Food Lion DuPont*
The Limited Harris Teeter General Motors*
Victoria's Secret Marsh Supermarkets Lexmark*
Woolworth's Michelin*
Government/Public Monsanto
Travel & Entertainment Services Samsung*
Blockbuster Entertainment* Housing and Urban Shaw Industries
Continental Airlines Development* Unisys
9
* Indicates customers that purchased more than $1.0 million of our products and
services since January 1, 1997.
Sales and Marketing
Direct Sales Organization. We market our software and services primarily
through our direct sales force. As of December 31, 2000, we had domestic sales
offices in a number of cities, including Atlanta, Bedminster, Boston, Charlotte,
Chicago, Cincinnati, Dallas, Denver, Detroit, Houston, Kansas City, Los Angeles,
Minneapolis, New York, Phoenix, Pittsburgh, San Francisco, Seattle, Tampa and
Washington, D.C., and international sales offices located in Barcelona, Buenos
Aires, Calgary, Cologne, London, Madrid, Mexico City, Milan, Montreal, Paris,
Sao Paolo, Seoul, Sydney, Toronto, Utrecht, Vancouver, Vienna and Zurich. We are
represented by distributors in several countries where we do not have sales
offices, including Chile, Colombia, the Czech Republic, Denmark, Finland,
Greece, Hungary, Ireland, Japan, Malaysia, the Middle East, New Zealand, Norway,
Peru, Poland, Singapore, South Africa and Sweden.
Indirect Sales Channels. We have entered into relationships with more than
225 system integration, application development, platform and OEM 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 facilitate 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. In addition, we have entered into agreements with
resellers who resell our software on a stand-alone basis.
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
Braun Technology Group
Computer Sciences Corporation
Cap Gemini Ernst & Young
Deloitte & Touche
Etensity
Greenbrier & Russel
KPMG Peat Marwick
Nexgenix
Perot Systems Corporation
Questra Corporation
Tessera Enterprise Systems
Xpedior
Value-Added Resellers. Value-added resellers who resell MicroStrategy
software bundled with their own software applications and/or syndicated data
products include:
Accrue Software
Beverage Data Network
Fair Isaac and Company
HNC Software
IDX Systems Corporation
M&I Data Services
Net Perceptions
PlumTree Software
Prime Response
Radiant Systems
Retek Information Systems
Xchange, Inc.
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 Compaq, NCR, Informatica and Informix.
OEM Partners. Our OEM partners integrate our business intelligence
platform, narrowcast server or customer relationship management modules into
their applications. These OEM Partners include J.D. Edwards and Company,
Interworld and SageTree.
Resellers. Companies that resell MicroStrategy software on a stand-alone
basis include Broadcast 1
10
on 1.com Incorporated, Olympus Group, Fugen, Inc., Application Consulting Group,
eJiva and Veridian Information Solutions, Inc.
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 range of customer requirements. As of December 31, 2000, our research
and product development staff consisted of 474 employees. Our total expenses for
research and development for the years 2000, 1999 and 1998 were $61.4 million,
$28.0 million and $12.1 million, respectively.
Strategy.com
In July 1999, we launched a new business unit called Strategy.com.
Companies such as Thomson Financial, EarthLink, The Wall Street Journal, and
Ameritrade use Strategy.com's hosted one-to-one messaging platform to offer
their customers highly personalized, timely information services. These services
are delivered on a scheduled or event-driven basis through a wide variety of
delivery methods, including e-mail, telephone and wireless devices. With an
infrastructure built upon a scalable and flexible database architecture,
MicroStrategy platform technology and an XML interface, Strategy.com delivers
over 500,000 messages per day on average. Each message is individually tailored
by matching end user profiles and preferences with proprietary content or
third-party syndicated content in the areas of finance, weather, traffic, sports
and news. Strategy.com's hosted messaging applications can be used by companies
to facilitate transactions, increase mind share and augment customer profile
data warehouses with information that the user has provided and given permission
to use. Strategy.com also provides application maintenance, development,
customer billing, hosting and support services, enabling customers to focus on
their core businesses.
As of March 1, 2001, syndicated programming hosted by Strategy.com
includes Finance, News, Weather, Sports and Traffic "channels." Strategy.com
syndicates its channels through companies it refers to as Strategy.com
affiliates, such as Earthlink and Ameritrade. Strategy.com has established
dozens of affiliate agreements with leading Internet companies, communications
carriers, media companies and financial institutions. Strategy.com also powers
messaging services utilizing proprietary content for premier content brands such
as Thomson Financial, Wall Street Journal Interactive, and Belo Interactive.
Strategy.com currently provides over 500,000 subscribers with information
services.
In October 2000, MicroStrategy completed the reorganization of
Strategy.com into a separate subsidiary. In connection with this reorganization,
Strategy.com commenced a round of financing through the sale of Series A
redeemable convertible preferred stock which was completed in January 2001.
Aggregate proceeds from this round of financing totaled $49.8 million, net of
offering costs. MicroStrategy owns approximately 84% of the economic interest in
the outstanding equity of Strategy.com on an as converted, diluted basis.
Strategy.com seeks to differentiate its offerings from competitors through
its greater level of personalization, its support of virtually any information
delivery device and its scalable and extensible messaging platform.
Strategy.com's XML application programming interface enables the Strategy.com
platform to be embedded into the offerings of financial institutions, device
manufacturers, Internet companies, communication carriers, media companies and
wireless companies. Our vision for Strategy.com is for it to be the leading
platform for one-to-one messaging. Strategy.com revenues accounted for
approximately 4% of our license and service revenues during 2000.
Strategy.com derives its revenue from three principal sources:
o set-up and hosting fees;
o usage fees; and
11
o subscription fees.
Set-up and hosting fees. Strategy.com affiliates and customers pay set-up
fees for integration and customization, such as linking Strategy.com financial
monitoring services to a customer's backend portfolio system. In addition,
customers also pay hosting fees for continual monitoring and support.
Usage fees. Strategy.com's affiliates and customers pay usage fees which
are typically measured on either a per message basis or on a monthly month basis
per subscriber.
Subscription fees. Strategy.com affiliates and customers pay subscription
fees for expanded or premium service. For those services in which the
Strategy.com affiliate or customer does not fully subsidize the cost of
providing the service, the end subscriber is charged a subscription fee.
Strategy.com's business is centered around its technology platform. The
key attributes of the Strategy.com platform are as follows:
o One-to-One Messaging Engine. Strategy.com's one-to-one message
engine, based on MicroStrategy platform technology, constantly
monitors incoming data, matches that data to subscriber profile
data, and creates and delivers individually personalized messages to
the subscribers delivery device of choice. This enables an end user
to configure a personal intelligence agent to act on behalf of the
user to deliver tailored, pertinent, and timely information.
o Strategy.com XML Application Programming Interface. Strategy.com's
XML application programming interface allows customers to seamlessly
integrate Strategy.com platform functionality and services into
their existing website or offering on a private-labeled basis. This
application programming interface also facilitates rapid development
of new applications upon the Strategy.com platform.
o Resource Center. Strategy.com provides its customers a web-based
Resource Center, where they can access information and sample code
on the XML application programming interface, configure settings,
view activity reports on their services and set up custom messages
to be sent to their subscribers.
o Hosting and Operations. Customers can obtain the benefits of
Strategy.com's one-to-one messaging platform without incurring the
infrastructure set-up and on-going costs of in-house
implementations.
Strategy.com's flexible platform is packaged into a set of product
offerings, tailored for different customer bases. These products are described
below.
Syndicated Information Services. Strategy.com's syndicated information
services is organized around different categories of content:
o 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 delivery 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.
o Strategy.com Weather. Strategy.com Weather delivers personalized
weather reports, forecasts and alerts for over 55,000 locations
worldwide. Strategy.com Weather offers subscribers features such as
severe weather alerts, beach and boating reports and weekly
forecasts, along with the convenience of receiving personalized
weather information.
o Strategy.com News. Strategy.com News delivers breaking news, news
alerts and local and global
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updates. Strategy.com News utilizes data from numerous content
providers and covers over 20,000 stories a day. Subscribers 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.
o Strategy.com Sports. Strategy.com Sports gives fans across the
country and around the world the ability to track results and news
in a wide variety of leagues and sports. Strategy.com Sports
provides subscribers with daily sports highlights, score alerts and
sports news alerts.
o Strategy.com Traffic. Strategy.com Traffic offers personalized
traffic conditions, reports and alerts to people in 65 cities across
the country. Subscribers can define regularly traveled routes so
they know when an incident occurs that would specifically impact
their commute. Subscribers can also check live traffic information
and receive personalized traffic alerts.
Custom Content Services. Strategy.com can take proprietary content or data
from a customer, monitor and filter the data and create individually
personalized messages that are delivered to the end user, based on the
preferences and permissions established by the end user. In addition,
Strategy.com's customers can leverage other Strategy.com syndicated content
solutions to mix-and-match content into a custom offering. This solution is
designed for companies, such as media companies, online commerce companies,
retailers, direct marketers and financial institutions, with content or
information that would be more useful to an end user if delivered on a
personalized and timely basis.
Competition
The markets for business intelligence software, customer relationship
management applications and narrowcast messaging technologies 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 MicroStrategy products and those of Strategy.com.
MicroStrategy's most direct competitors provide:
o business intelligence software;
o OLAP tools;
o query and reporting tools;
o web-based static reporting tools;
o information delivery and proactive reporting;
o analytical customer relationship management products;
o web traffic analysis applications; and
o marketing automation.
Each of these markets are discussed more fully below.
Business Intelligence Software. Makers of business intelligence software
provide business intelligence capabilities designed for integration,
customization and application development. Leading analyst firms classify
companies such as Microsoft, Oracle, Hyperion, SAP and SAS to be leading
providers of business intelligence software.
OLAP Tools. Companies that build software to perform online analytical
processing (OLAP) provide offerings competitive with the core MicroStrategy 7
platform. Whether web-based or client-server, these
13
tools give end users the ability to query underlying data sources without having
to hand code structured query language queries. Most OLAP tools allow users to
build their own calculations and specify report layouts and other options.
Additionally, OLAP tools provide users the ability to navigate throughout the
underlying data in an easy, graphical mode, often referred to as drilling.
Providers of OLAP tools include Cognos, Hyperion, Brio, IBM, Seagate and
Microsoft.
Query and Reporting Tools. Query and reporting tools allow large numbers
of end users to gain access to pre-defined reports for simple analysis. Often
the end users are able to specify some sort of run-time criteria that customizes
the result set for that particular person. Some limited drilling is also
provided. Companies who produce query and reporting tools include Business
Objects, Cognos, Oracle, Seagate and Brio.
Web-based Static Reporting Tools. Companies that offer software to deliver
pre-built reports for end user viewing and consumption can also compete with
MicroStrategy. These applications often lack the sophistication, robustness and
scalability of MicroStrategy, but can be attractive for small, departmental
applications. Vendors in this category include Actuate, Business Objects,
Seagate, Microsoft, Computer Associates and SAS.
Information Delivery and Proactive Reporting. Companies that focus on the
proactive delivery of information, via e-mail, website, or other medium can
compete with MicroStrategy's offerings. Typically these tools serve to push out
compiled reports on a scheduled basis to sets of users based on job type.
MicroStrategy software has this technology integrated into its core platforms.
Vendors of such technology include Actuate, nQuire, Information Builders and
Business Objects.
Analytical Customer Relationship Management Products. Companies that
deliver customer relationship management products alone or in conjunction with
e-commerce applications, such as Broadbase, BroadVision, E.piphany and Vignette,
compete with our analytical customer relationship management applications. In
contrast with providers of operational customer relationship management vendors,
such as Vantive and Oracle, analytical customer relationship management deals
more with customer segmentation, analysis and interaction as opposed to
infrastructure and call centers.
Web Traffic Analysis Applications. Reporting and analysis tools can be
specialized to deal specifically with the analysis of visitors to a company's
website. Typically this involves extracting data from a web-log file and
importing it into a usable format, often in a relational database. A set of
analyses, sometimes customer-centric in nature, is performed, and limited ad-hoc
reporting is permitted. Advanced applications in this space merge data from the
web-logs with other customer centric attributes to help provide a complete view
of the customer base. Vendors in this space include Accrue, Net.Genesis and
WebTrends.
Marketing Automation. Applications focused on the automation and execution
of marketing tasks, such as campaign management and delivery, compete with our
customer relationship management applications and our Narrowcast Server
platform. Leading vendors in this space include E.piphany, Xchange, Chordiant
and Broadbase.
Strategy.com's most direct competitors are:
o Web portal and information networks;
o E-mail marketers and publishers;
o Wireless content vendors;
o Alert vendors;
o Financial solution vendors; and
o Vertical internet portals and information networks.
14
Each of these markets are discussed more fully below.
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.
E-mail marketers and publishers. E-mail marketers and publishers,
such as DoubleClick, Responsys, and ClickAction, offer companies the
ability to deliver non-personalized content via e-mail to end users. These
companies could expand their offering to more closely compete with
Strategy.com.
Wireless content vendors. Wireless content vendors, such as
Infospace and i3Mobile, have similar offerings as Strategy.com's
syndicated information services for wireless devices. These companies
could expand their offerings to support e-mail and voice, as well as to
deliver proprietary content.
Alert vendors. Alert vendors, such as Alerts Inc., Pumatech, and
Xigo, have similar offerings as Strategy.com's proactive alert services.
These companies could expand their offering to more closely compete with
Strategy.com.
Financial solution vendors. Financial solution vendors, such as 724
Solutions and W-Technologies, offer a broad array of consumer finance
technology solutions, but generally do not have a proactive messaging
system like Strategy.com. Any of these companies could augment their
existing offering with proactive messaging comparable to Strategy.com.
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.
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 business intelligence 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 effect 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.
Intellectual Property and Licenses
We rely primarily on a combination of copyright, patent, trademark
and trade secret laws,
15
non-disclosure agreements 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 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. 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 software licenses that restrict its use to a specific number of
named users or a specific hardware configuration. 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 and for archival purposes.
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, 2000, we had a total of 1,899 employees, of whom 1,498
were based in the United States and 401 were based internationally. Of the
total, 661 were engaged in sales and marketing, 474 in product development, 516
in professional services and 248 in finance, administration and corporate
operations. None of our employees are 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 are critical to our success and have traditionally made 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.
All newly hired professionals complete a professional orientation course
that ranges from 2 days 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 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.
16
ITEM 2. PROPERTIES
Our principal offices currently occupy over 350,000 square feet in
Northern Virginia pursuant to multiple leases, the majority of which expire
between June 2003 and June 2010. In addition, we also lease sales offices
domestically and internationally in a variety of locations, including Atlanta,
Bedminster, Boston, Charlotte, Chicago, Cincinnati, Dallas, Denver, Detroit,
Houston, Los Angeles, Minneapolis, New York, Phoenix, Pittsburgh, San Francisco,
Seattle, Tampa, Washington, D.C., Barcelona, Buenos Aires, Calgary, Cologne,
London, Madrid, Mexico City, Milan, Montreal, Paris, Sao Paolo, Seoul, Sydney,
Toronto, Utrecht, Vancouver, Vienna and Zurich. We do not expect to add
additional office space in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
Actions Arising under Federal Securities Laws
From March through May 2000, twenty-five class action complaints 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 and Exchange
Act of 1934, as amended (the "Exchange Act"), Rule 10b-5 promulgated thereunder,
and section 20(a) and section 20A of the Exchange Act. Our outside auditor,
PricewaterhouseCoopers LLP, was also named in two of the suits. The complaints
contained varying allegations, including that we made materially false and
misleading statements with respect to our 1999, 1998 and 1997 financial results
in our filings with the SEC, analysts' reports, press releases and media
reports. In June 2000, these putative class action lawsuits were consolidated in
the United States District Court for the Eastern District of Virginia. On July
7, 2000, the lead plaintiffs filed an amended class action complaint naming us,
certain of our officers and directors, and PricewaterhouseCoopers LLP as
defendants. The amended class action complaint alleges claims under section
10(b), section 20(a) and section 20A of the Exchange Act. The amended class
action complaint does not specify the amount of damages sought.
On October 23, 2000, the Company, its officers and directors named as
defendants, and plaintiffs' counsel entered into a settlement agreement in the
consolidated class action. Under the settlement agreement, class members will
receive: (1) five-year unsecured promissory notes issued by MicroStrategy having
an aggregate principal amount of $80.5 million and bearing interest at 7.5% per
year; (2) 550,000 shares of our Class A common stock, with the number of shares
to be increased if the market value of the shares, based on the dollar weighted
average trading price during a specified trading period prior to the district
court settlement hearing, is less than $30 per share, so that the minimum value
of the shares is $16.5 million; and (3) warrants to purchase 1.9 million shares
of Class A common stock at an exercise price of between $40 and $50 per share,
based on the dollar weighted average trading price during a specified trading
period prior to the district court settlement hearing, with the warrants
expiring five years from the date they are issued. The settlement was made
subject to confirmatory discovery, final documentation, district court approval,
and other conditions.
On January 19, 2001, the district court authorized notice of the proposed
settlement to be sent to all putative class members. The notice informs class
members of their rights including their rights to object to the proposed
settlement and to opt out of the proposed settlement and pursue their claims
separately. A hearing has been scheduled for April 2, 2001 for the district
court to consider and, if appropriate, approve the settlement.
Delaware Derivative Investigation
On June 30, 2000, a shareholder derivative action was filed in the
Delaware Court of Chancery seeking recovery for various alleged breaches of
fiduciary duties by certain of our directors and officers relating to our
restatement of financial results. On September 11, 2000, we filed a motion to
dismiss the derivative complaint for failure to make a demand. That motion
remains pending. On October 23, 2000, the Company, the directors and officers
named as defendants and the derivative plaintiff reached an agreement in
principle settling the derivative action. Under the derivative settlement
agreement, we will add a new, independent director with finance experience to
the audit committee of our
17
Board of Directors and will ensure continued adherence with applicable legal and
regulatory requirements regarding the independence of audit committee members
and trading by insiders. In addition, certain of our officers will contribute a
portion of the Class A common stock held by them that is to be issued to class
members in settlement of the class action lawsuit. Specifically, Michael J.
Saylor, Sanju K. Bansal and Mark S. Lynch will contribute to the class action
settlement shares of Class A common stock with a total value of $10 million. The
settlement was made subject to confirmatory discovery, final documentation,
Chancery Court approval, and other conditions. No hearing has been scheduled for
the Chancery Court to review and, if appropriate, approve the settlement.
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 the restatement of
our financial results. On December 14, 2000, we consented, without admitting or
denying the SEC's findings, to the entry of an administrative cease and desist
order finding that we had violated certain provisions of the federal securities
laws. As part of the cease and desist order, we made a number of undertakings
pursuant to which we will implement various corporate governance enhancements,
hire additional staff and adopt policies and controls relating to our contract
administration and financial reporting functions. The cease and desist order
imposed no monetary fines or penalties on us.
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 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our Class A common stock, $0.001 par value, is traded on the Nasdaq
National Market under the symbol, MSTR. The following table sets forth for the
periods indicated the high and low closing prices, adjusted to reflect the
two-for-one stock split which occurred in January 2000, for our Class A common
stock as reported by Nasdaq in each quarter:
For the quarter ended High Low
----------------------------- ------ ------
March 31, 1999.......... 17.25 9.00
June 30, 1999........... 18.94 7.75
September 30, 1999...... 28.03 13.22
December 31, 1999....... 115.66 28.81
March 31, 2000.......... 313.00 74.78
June 30, 2000........... 77.12 17.31
September 30, 2000...... 35.75 20.25
December 31, 2000....... 28.00 9.25
As of March 1, 2001, there were approximately 510 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
18
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.
ITEM 6. SELECTED FINANCIAL DATA
Years ended December 31,
--------------------------------------------
2000 1999 1998 1997 1996
--------- -------- ------- ------- -------
(in thousands, except per share data)
Statements of Operations Data
Revenues:
Product licenses.................................. $ 102,050 $ 85,797 $61,635 $35,478 $15,873
Product support and other services................ 121,880 65,461 33,854 17,073 6,730
--------- -------- ------- ------- -------
Total revenues.................................. 223,930 151,258 95,489 52,551 22,603
--------- -------- ------- ------- -------
Cost of revenues:
Product licenses.................................. 2,722 2,597 2,246 1,641 1,020
Product support and other services................ 85,249 34,436 17,535 9,475 4,237
--------- -------- ------- ------- -------
Total cost of revenues.......................... 87,971 37,033 19,781 11,116 5,257
--------- -------- ------- ------- -------
Gross profit......................................... 135,959 114,225 75,708 41,435 17,346
Operating expenses:
Sales and marketing............................... 151,095 93,090 53,327 30,468 13,054
Research and development.......................... 61,433 27,998 12,106 5,049 2,840
General and administrative........................ 58,762 24,448 12,743 6,552 3,742
Amortization of intangible assets................. 17,667 422 81 -- --
In-process research and development............... -- 2,800 -- -- --
Restructuring and related charges................. 10,835 -- -- -- --
--------- -------- ------- ------- -------
Total operating expenses........................ 299,792 148,758 78,257 42,069 19,636
--------- -------- ------- ------- -------
Loss from operations................................. (163,833) (34,533) (2,549) (634) (2,290)
Financing and other income (expenses):
Interest income................................... 3,675 2,174 1,028 94 22
Interest expense.................................. (37) (144) (720) (333) (127)
Loss on investments............................... (9,365) -- -- -- --
Provision for litigation settlement............... (89,729) -- -- -- --
Minority interest................................. (713) -- -- -- --
Other income (expense), net....................... 96 6 (14) (12) 20
--------- -------- ------- ------- -------
Total financing and other income (expenses)..... (96,073) 2,036 294 (251) (85)
--------- -------- ------- ------- -------
Loss before income taxes............................. (259,906) (32,497) (2,255) (885) (2,375)
Provision for income taxes........................... 1,400 1,246 -- -- --
--------- -------- ------- ------- -------
Net loss............................................. (261,306) (33,743) (2,255) (885) (2,375)
--------- -------- ------- ------- -------
Preferred stock dividends............................ (4,687) -- -- -- --
Beneficial conversion feature........................ (19,375) -- -- -- --
--------- -------- ------- ------- -------
Net loss attributable to common stockholders......... $(285,368) $(33,743) $(2,255) $ (885) $(2,375)
========= ======== ======= ======= =======
Basic and diluted net loss per share (1)............. $ (3.58) $ (0.44) $ (0.03) $ (0.02) $ (0.04)
========= ======== ======= ======= =======
Weighted average shares used in computing basic
and diluted net loss per share (1)................ 79,779 77,028 66,986 58,988 58,988
========= ======== ======= ======= =======
19
As of December 31,
--------------------------------------------
2000 1999 1998 1997 1996
--------- -------- -------- ------- -------
(in thousands)
Balance Sheet Data
Cash and cash equivalents............................ $ 67,685 $ 25,941 $ 27,491 $ 3,506 $ 1,686
Restricted cash...................................... 25,884 -- -- -- --
Working capital (deficit)............................ 42,616 53,109 23,919 (7,048) (2,237)
Total assets......................................... 259,087 203,368 76,571 27,052 13,004
Long-term liabilities, excluding deferred revenue and
advance payments.................................. 100,993 -- 1,928 2,428 460
Series A redeemable convertible preferred stock...... 119,585 -- -- -- --
Mandatorily redeemable convertible preferred stock
of consolidated subsidiary........................ 40,530 -- -- -- --
Total stockholders' equity (deficit)................. (145,538) 101,816 37,775 (1,433) (793)
- ----------
(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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We are a leading worldwide provider of business intelligence 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 businesses 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, telephone and wireless communications devices. Our
platform is designed for developing business intelligence 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. Third
party content providers use Strategy.com's hosted one-to-one messaging platform
to offer their customers highly personalized, timely information services. These
services are delivered on a scheduled or event-driven basis through a wide
variety of delivery methods, including e-mail, telephone and wireless devices.
With an infrastructure built upon a scalable and flexible database architecture,
MicroStrategy platform technology and an XML interface, Strategy.com delivers
over 500,000 messages per day on average. Each message is individually tailored
by matching end user profiles and preferences with proprietary content or
third-party syndicated content in the areas of finance, weather, traffic, sports
and news. Strategy.com's hosted messaging applications can be used by companies
to facilitate transactions, increase mind share and augment customer profile
data warehouses with information that the user has provided and given permission
to use. Strategy.com also provides application maintenance, development,
customer billing, hosting and support services, enabling customers to focus on
their core businesses. As of March 1, 2001, syndicated programming hosted by
Strategy.com includes Finance, News, Weather, Sports and Traffic "channels."
Strategy.com syndicates its channels through companies it refers to as
Strategy.com affiliates, such as Earthlink and Ameritrade. Strategy.com has
established dozens of affiliate agreements with leading Internet companies,
communications carriers, media companies and financial institutions.
Strategy.com also powers messaging services utilizing proprietary content for
content brands such as Thomson Financial, Wall Street Journal Interactive, and
Belo Interactive. Strategy.com currently provides over 500,000 subscribers with
information services. In October 2000, MicroStrategy completed the
reorganization of Strategy.com into a separate subsidiary. In connection with
this reorganization, Strategy.com commenced a round of financing through the
sale of Series A redeemable convertible preferred stock which was completed in
January 2001. Aggregate proceeds from this round of financing totaled
approximately $49.8 million, net of offering costs of approximately $3.0
million. MicroStrategy owns approximately 84% of the economic interest in the
outstanding equity of Strategy.com on an as converted, diluted basis. Aether
Capital, the investment arm of Aether Systems, Inc., a provider of wireless data
products and services, participated as an investor in this round of financing.
Aether Capital's investment was
20
approximately $25.0 million of total gross proceeds. Concurrent with this
financing round, we also announced a strategic alliance with Aether Systems
which includes initiatives in the following areas:
o the companies will develop a new product, MicroStrategy 7M, that
will be designed to combine Aether Systems' wireless technology with
the functionality and performance of the MicroStrategy 7 platform to
deliver personalized, intelligent information services to a full
range of wireless devices;
o Aether Systems' chairman and chief executive officer, David Oros,
was named to the Board of Directors of Strategy.com; and
o Aether Systems will offer Strategy.com services to its customers.
Since 1997, 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 2000, 1999 and 1998
primarily as a result of increases in staff levels, expansion of operations
outside of the United States, and our increased investment in Strategy.com. Our
net losses increased substantially during 2000, as our growth in revenues, and
particularly higher margin product license revenues, decreased, while our
expenses have significantly increased due primarily to aggressive hiring of
additional personnel and advertising expenditures in the first half of 2000,
increased investment in our Strategy.com subsidiary, and increased legal and
professional fees relating to class action lawsuits and an SEC investigation in
connection with matters relating to the restatement of our 1999, 1998 and 1997
financial statements.
Our net loss increased significantly during 2000 to $261.3 million
primarily as a result of the following factors: (1) operating expenses
(excluding in-process research and development and restructuring related
charges) increased by $143.0 million while gross profit increased by only $21.7
million; (2) amortization of intangible assets increased by $17.2 million; (3)
we recorded an $89.7 million expense associated with an agreement to settle
outstanding class action and derivative shareholder lawsuit litigation (of which
approximately $4.0 million is a cash charge for legal fees and administration
costs and approximately $85.7 million is a non-cash charge); (4) we recorded a
$10.8 million charge related to restructuring activities; and (5) we recorded a
$9.4 million loss on investments, net of realized gain of $2.7 million.
Our revenues historically have been derived from two principal sources,
fees for product licenses and fees for product support and other services,
including maintenance, education and consulting services. We recognize revenue
in accordance with accounting principles generally accepted in the United States
and particularly 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, SOP 98-9, Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions, SOP 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts, and SEC
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements, as applicable.
Product license revenues are generally recognized 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 reasonably assured. When fees for software
upgrades and enhancements, maintenance, consulting or education are bundled with
the license fee, they are unbundled using objective evidence of the fair value
of the multiple elements represented by our customary pricing for each element
in separate transactions. If such evidence of fair value exists on undelivered
elements and there is no such evidence of fair value established for delivered
elements, revenue is first allocated to the elements where such evidence of fair
value has been established and the residual amount is allocated to the delivered
elements. If evidence of fair value for each undelivered element of the
arrangement does not exist, all revenue from the arrangement is deferred until
such time that evidence of fair value does exist for undelivered elements or
until all elements of the arrangement are delivered, subject to certain limited
exceptions set forth in SOP 97-2.
21
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 recorded as
deferred revenue 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.
These agreements may extend over several years. Fees for our education and
consulting services are typically recognized at the time the services are
performed. Revenue from arrangements where we provide 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, are deferred and recognized ratably over the subsequent hosting
period, which is typically two to three years.
Customers at times require consulting and implementation services, which
may 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 us 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. We recognize
revenue from these arrangements using contract accounting (typically, the
percentage of completion method based on cost inputs) and, therefore, both
product license and product support and other services revenue are recognized as
work progresses. Expected losses on contracts in progress are expensed in the
current period. As of December 31, 2000, we have not incurred any losses on
contracts in progress. If the arrangement includes acceptance criteria, revenue
is not recognized until we can demonstrate that the software or services can
meet the acceptance criteria. If the software license arrangement obligates us
to deliver unspecified future products, then revenue is recognized on the
subscription basis, ratably over the term of the contract.
Beginning in the fourth quarter of 1998, we began to sell our products and
services to customers for large-scale applications and have continued to enter
into similar transactions. In contrast to earlier periods in which our typical
customer transaction involved a stand-alone software license and simple
maintenance and support services, these transactions typically involve multiple
software products and services for use by very large numbers of end users across
network, intranet, web, wireless and voice communication channels, and sometimes
incorporate elements from our Strategy.com network. In addition, these multiple
element transactions often include significant implementation and other
consulting work and may also include the provision of 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 revenue recognition from multiple elements, 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
maintenance and 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
may not be recognized upon full execution and delivery of the software product
as in the past, but instead is initially recorded as deferred revenue, with
product revenue recognized using the percentage of completion method based on
cost inputs or ratably over the entire term of the contract. If the arrangement
includes acceptance criteria, revenue is not recognized until we can demonstrate
that the software or services can meet the acceptance criteria. 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 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
22
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 license transactions generated by our
direct sales force and increasingly through or in conjunction with "channel
partners," including value-added resellers, system integrators and original
equipment manufacturers. Channel partners accounted for, directly or indirectly,
approximately 44.4%, 39.2% and 33.6% of our revenues for the years ended
December 31, 2000, 1999 and 1998, 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, our efforts
to continue to expand indirect sales may not 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.
We recently implemented a new multi-channel distribution strategy and
product-pricing plan designed to expand our customer base, improve operating
efficiency and decrease the length of sales cycles. The strategy includes the
use of the web as a channel for distributing products where new and existing
customers can test our software on a demonstration basis and configure, upgrade
and order software directly online via a standard pricing model. In addition, we
will now provide complimentary evaluation software for all potential customers
and qualified partners.
Recognizing the need to bring operating expenses in line with our revenue
expectations, during the third quarter of 2000, we developed and implemented a
restructuring plan that called for the elimination of 231 employees or
approximately 10% of our workforce. We also rescinded approximately 230 offers
of employment, reduced various company-sponsored events for employees, limited
the use of external contractors and consultants and developed a plan to
consolidate facilities. To implement these actions we made severance payments to
employees, incurred costs for rescinded job offers, recognized expenses
associated with stock grants from a principal shareholder and the acceleration
of vesting provisions of stock options and recorded a liability for commitments
related to company-sponsored events. These costs totaled $10.8 million and are
reflected as restructuring and related charges in the accompanying consolidated
statements of operations for the year ended December 31, 2000. We expect that
annualized savings from these actions will approximate $25.0 million and will
contribute to slowing the growth of our sales and marketing expenses and our
general and administrative expenses. Substantially all restructuring costs and
related charges had been paid as of December 31, 2000. The unpaid amount of
$48,000 is included in accounts payable and accrued expenses in the accompanying
consolidated balance sheets.
Our operations and prospects have been and will be significantly affected
by the developments relating to the revision of our 1999, 1998 and 1997
financial statements. We and certain of our officers and directors are
defendants in a class action lawsuit alleging violations of various securities
laws and certain of our officers and directors are defendants in a shareholder
derivative lawsuit alleging that they breached their fiduciary duties related to
our restated financial statements. In October 2000, we entered into agreements
to settle the class action and shareholder derivative lawsuits. Both settlements
are subject to confirmatory discovery, final documentation, court approval and
certain other conditions.
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:
23
Years ended December 31,
------------------------
2000 1999 1998
----- ----- -----
Statements of Operations Data
Revenues:
Product licenses .............................. 45.6% 56.7% 64.5%
Product support and other services ............ 54.4 43.3 35.5
----- ----- -----
Total revenues .............................. 100.0 100.0 100.0
Cost of revenues:
Product licenses .............................. 1.2 1.7 2.4
Product support and other services ............ 38.1 22.8 18.4
----- ----- -----
Total cost of revenues ...................... 39.3 24.5 20.8
----- ----- -----
Gross profit ..................................... 60.7 75.5 79.2
Operating expenses:
Sales and marketing ........................... 67.5 61.5 55.8
Research and development ...................... 27.4 18.5 12.7
General and administrative .................... 26.2 16.1 13.3
Amortization of intangible assets ............. 7.9 0.3 0.1
In-process research and development ........... -- 1.9 --
Restructuring and related charges ............. 4.8 -- --
----- ----- -----
Total operating expenses .................... 133.8 98.3 81.9
----- ----- -----
Loss from operations ............................. (73.1) (22.8) (2.7)
Financing and other income (expenses):
Interest income ............................... 1.6 1.4 1.1
Interest expense .............................. -- (0.1) (0.8)
Loss on investments ........................... (4.2) -- --
Provision for litigation settlement ........... (40.1) -- --
Minority interest ............................. (0.3) -- --
Other income (expense), net ................... -- -- --
----- ----- -----
Total financing and other income
(expenses) .................................. (43.0) 1.3 0.3
----- ----- -----
Loss before income taxes ......................... (116.1) (21.5) (2.4)
Provision for income taxes ....................... 0.6 0.8 --
----- ----- -----
Net loss ......................................... (116.7)% (22.3)% (2.4)%
===== ===== =====
Preferred stock dividends ........................ (2.1) -- --
Beneficial conversion feature .................... (8.6) -- --
----- ----- -----
Net loss attributable to common stockholders ..... (127.4)% (22.3)% (2.4)%
====== ===== =====
Comparison of 2000, 1999 and 1998
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 $95.5 million
in 1998 to $151.3 million in 1999, and to $223.9 million in 2000, resulting in
annual revenue growth rates of 81.7% in 1998, 58.4% in 1999 and 48.0% in 2000.
Total revenues may not continue to increase at the rates experienced in prior
periods. Additionally, based on the revenue recognition criteria established in
SOP 97-2 and SOP 81-1, revenue from many large, multiple element arrangements is
recorded as deferred revenue, with both product license revenues and product
support and other services revenues recognized using the percentage of
completion method based on cost inputs as the work progresses. If the
arrangement includes acceptance criteria, revenue is not recognized until we can
demonstrate that the software or service can meet the acceptance criteria. If
the software license arrangement obligates us to the delivery of unspecified
future products, then revenue is recognized on the subscription basis, ratably
over the term of the contract.
In 1999, we launched the Strategy.com Finance channel. In 2000, we
launched the Strategy.com News and Weather channels, and in March 2001, we
launched the Strategy.com Sports and Traffic channels. We did not recognize
revenues related to Strategy.com until 2000, in which we recognized $8.7 million
in network affiliate and subscription fees and other services. During 2000,
approximately $5.0 million of Strategy.com revenues related to a customer
24
from whom we do not expect to generate significant recurring revenue in the
future. We expect to continue to generate revenues from OEM fees, network
affiliation fees, subscription fees, hosting, transaction and other fees from
Strategy.com services in the future.
During 2000, we agreed to restructure our relationship with a significant
customer, terminating the Strategy.com affiliation and joint research and
development agreement and replacing it with a standard enterprise software
license and maintenance agreement. While we had been providing services to the
customer throughout the year, no revenue had been recognized in accordance with
our revenue recognition accounting policies. In view of changes in the
customer's internal information technology plans, we entered into an agreement
with the customer in which we agreed to discontinue our development efforts and
deliver all existing work product. Since we have no future obligations to this
customer, all payments were made prior to the end of the year, and all other
revenue recognition criteria were met, we recorded revenues of $9.8 million,
with $4.4 million and $5.4 million recorded as product license and services
revenue, respectively, and deferred an additional $1.2 million related to
ongoing technical support obligations. Of the total $5.4 million recorded as
services revenue, $5.0 million related to Strategy.com. We do not expect to
generate significant recurring revenue from this customer in future periods.
Product License Revenues. Product license revenues increased from $61.6
million in 1998 to $85.8 million in 1999, and to $102.1 million in 2000,
resulting in annual growth rates of 73.7% in 1998, 39.2% in 1999 and 18.9% in
2000. The increase in product license revenues was due to increased customer
acceptance of our recently released products and the growth of the business
intelligence software market in general. Product license revenues were also
positively affected by the restructuring of the customer relationship described
above which resulted in $4.4 million of product license revenue. Although
product revenues have increased each year, the rate of increase has declined. We
believe this may be caused, in part, by concerns of potential new customers over
our restatement of financial results and the related litigation during 2000. We
believe the resolution of these matters may relieve these concerns. We expect
product license revenues as a percentage of total revenues to fluctuate on a
period-to-period basis and vary significantly from the percentage of total
revenues achieved in prior years. Additionally, historic growth rates my not be
sustainable or may decline due to the current economic climate in the first
quarter of 2001 with respect to decreased corporate spending in information
technology.
Product Support and Other Services Revenues. Product support and other
services revenues increased from $33.9 million in 1998 to $65.5 million in 1999,
and to $121.9 million in 2000, resulting in a growth rate of 98.3% in 1998,
93.4% in 1999 and 86.2% in 2000. The increase in product support and other
services revenues was primarily due to a continuing increase in large scale
business intelligence applications which require significant implementation and
other consulting work. As a result of expected fluctuations in product license
revenues discussed above, we expect product support and other services revenues
as a percentage of total revenues to fluctuate on a period-to-period basis and
vary significantly from the percentage of total revenues achieved in prior
years.
International Revenues. International revenues are included in the amounts
discussed above and are discussed separately in this paragraph. International
revenues increased from $24.9 million in 1998 to $36.4 million in 1999, and to
$55.8 million in 2000, resulting in a growth rate of 74.9% in 1998, 45.9% in
1999 and 53.5% in 2000. Growth in international product license revenues
accounted for 45% of the total product license growth during 2000. 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. International revenues also increased as a result of the recognition
of $4.4 million of product license revenues from the non-recurring transaction
with the significant customer that restructured its relationship with us. In
addition, we opened new sales offices in Argentina, Switzerland, Mexico, Korea
and Australia in 2000, in Brazil in 1999, in Canada and Italy in 1998 and in
Austria, France, the Netherlands, Germany, United Kingdom and Spain prior to
1998. As a percentage of total revenues, international revenues were 26.1% in
1998, 24.0% in 1999 and 24.9% in 2000. 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
resources to the maintenance and ongoing development of direct and indirect
international sales and support channels.
25
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 $2.2 million in 1998 to
$2.6 million in 1999, and to $2.7 million in 2000. As a percentage of product
license revenues, however, cost of product license revenues decreased from 3.6%
in 1998, to 3.0% in 1999 and to 2.7% in 2000. 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 and shipping 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 may increase as product license revenues
increase. In the event that we enter into additional royalty arrangements 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. Cost of product support and
other services consists of the costs of providing consulting services to
customers and partners, technical support and education. Cost of product support
and other services revenues increased from $17.5 million in 1998 to $34.4
million in 1999, and to $85.2 million in 2000. As a percentage of product
support and other services revenues, cost of product support and other services
revenues was 51.8% in 1998, 52.6% in 1999 and 69.9% in 2000. 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 new product licenses sold
associated with a continuing increase in large-scale business intelligence
applications and complex Strategy.com deployments. The total cost of product
support and other services revenues as a percentage of product support and other
services revenues increased slightly in 1999 compared to 1998 due to the
increased use of third parties to perform consulting services. The significant
increase in total cost of product support and other services revenues as a
percentage of product support and other services revenues ("services margin") in
2000 compared to 1999 was primarily attributable to the following a substantial
increase in the use of third parties to perform consulting services, an increase
in consulting services revenues as a percentage of total product support and
other services revenues, which are at lower margins than other product support
revenues, the agreement to restructure a large customer relationship which
resulted in recognizing a significant amount of services revenue at no margin,
excess capacity in consulting personnel, and excess capacity in the Strategy.com
service infrastructure.
We have increased our consulting, education and technical support staffing
levels based on anticipated increases in revenues. To the extent our product
support and other services revenues do not increase at anticipated rates, our
services margin may not improve without lowering costs of product support and
other services. To the extent that Strategy.com can maximize economies of scale
and leverage off its relationship with MicroStrategy and existing
infrastructure, we expect Strategy.com's cost of product support and other
services as a percentage of its total product support and other services
revenues will decrease. The cost, however, of providing hosting services and
operating the Strategy.com network may become more significant as Strategy.com's
customer base expands, further increasing the cost of product support and other
services 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 $53.3 million
in 1998 to $93.1 million in 1999, and to $151.1 million in 2000. As a percentage
of total revenues, sales and marketing expenses were 55.8% in 1998, 61.5% in
1999 and 67.5% in 2000. The increase in sales and marketing expenses was
primarily the result of increased staffing levels in the sales force prior to
our restructuring in 2000, increased commissions earned, increased promotional
activities and advertising, increased marketing efforts for Strategy.com and
general marketing efforts. Prior to the restructuring, weighted average staffing
levels for sales and marketing personnel had increased by approximately 59% in
2000 over 1999. Additionally, during the first quarter of 2000, we invested
heavily in advertising, including a national television and print advertising
campaign and other marketing efforts in order to create better market awareness
of the value-added potential of our product suite and Strategy.com and to seek
to acquire
26
market share. We intend to continue to market our MicroStrategy 7 software and
other technology in our suite of products; however, we expect to reduce our
overall advertising and marketing efforts going forward in order to better align
our costs with anticipated revenues.
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 $12.1 million in 1998 to $28.0 million in 1999, and to $61.4
million in 2000. As a percentage of total revenues, research and development
expenses increased from 12.7% in 1998 to 18.5% in 1999, and to 27.4% in 2000.
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 business intelligence
technology. Weighted average staffing levels of research and development
personnel increased by approximately 59% in 2000 over 1999. During 2000,
Strategy.com research and development costs represented 29% of total research
and development costs. Research and development expenses may increase as we
continue to invest in developing new products, applications and product
enhancements for our existing platform business.
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 consulting,
legal and other professional fees. General and administrative expenses increased
from $12.7 million in 1998 to $24.4 million in 1999, and to $58.8 million in
2000. As a percentage of total revenues, general and administrative expenses
were 13.3% in 1998, 16.1% in 1999, and 26.2% in 2000. The increase in general
and administrative expenses was the result of increased staff levels, increased
office occupancy costs, costs associated with the growth of our business and an
increase in outside professional fees, specifically legal and other consultancy
fees related to the recent litigation associated with our restatement of our
financial statements and the related SEC investigation. We expect that general
and administrative expenses may level-off or decrease in future periods in view
of the settlement of the SEC inquiry, facilities consolidation, staff reductions
and reductions in the use of external consultants.
Amortization of Intangible Assets. We have recorded $81,000, $422,000 and
$17.7 million in amortization expense for the years ended December 31, 1998,
1999 and 2000, respectively. We expect our rate of amortization expense to be
substantially the same over the next two years, to the extent no additional
intangible assets are acquired. The primary components of amortization of
intangible assets are discussed below.
In June 2000, we entered into an agreement with the controlling
stockholder of a software integrator. The primary purpose of the agreement was
to grant us the right to hire certain employees of the software integrator. In
exchange, we issued 57,143 shares of Class A common stock to the controlling
stockholder. We will issue up to $3.4 million in additional shares of Class A
common stock over the next two years based on an agreed upon formula including
revenue and attrition objectives. We have recorded $1.6 million related to the
first installment as an intangible asset in the accompanying balance sheet. The
first installment is being amortized over the estimated period of benefit of two
years.
Beginning in December 1999 and throughout 2000, we acquired the right to
use certain Internet domain names for $3.2 million. We are amortizing these
assets over their expected useful life of 3 years.
In December 1999, in connection with the purchase of intellectual property
and other tangible and intangible assets relating to NCR's Teracube project, we
allocated $46.6 million of the $49.6 million purchase price to intangible
assets. The intangible assets are being amortized over their useful lives,
ranging from one to three years. As of December 31, 2000, $16.7 million of such
amount had been amortized and $15.1 million and $14.8 million are expected to be
amortized in 2001 and 2002, respectively.
In January 1998, we recorded $1.1 million for acquired intangible assets
representing the excess of the fair market value of the shares issued in
exchange for the non-controlling interests in certain foreign
27
subsidiaries. The intangible assets consist primarily of distribution channels,
trade names and customer lists and are being amortized on a straight-line basis
over their weighted average useful lives of approximately 14 years.
In-process Research and Development. In December 1999, in connection with
the purchase of intellectual property and other tangible and intangible assets
relating to NCR's Teracube project, we allocated $2.8 million of the $49.6
million purchase price to in-process research and development. 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, 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.
At the end of 1999, we estimated we would incur additional expenses of
approximately $900,000 to complete development; however, due to expansion of
project scope, we incurred expenses of $1.6 million during 2000 and intend to
incur additional expenses in 2001 of approximately $700,000 in order to complete
development. Remaining development efforts are focused on completing the
development of certain sub-products of Teracube that will maximize efficiencies
in the operation of our business intelligence and business intelligence
products. Completion of these projects will be necessary before revenues are
produced. Approximately 30% of the final products' 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.
We expect to begin deriving revenues in 2001 when certain MicroStrategy products
that include the Teracube sub-products are expected to be generally available.
Restructuring and related charges. In the third quarter of 2000, we
announced a restructuring plan designed to better align costs with expected
revenues and strengthen the financial performance of the business. The
restructuring plan included a reduction of our workforce by 231 or approximately
10% of the worldwide headcount and the cancellation of 230 new jobs for which
candidates had not yet started with us. All of these actions were completed
prior to September 30, 2000. As a result of the reduction in headcount, we plan
to consolidate facilities located in the vicinity of our Northern Virginia
headquarters. In addition, we are eliminating or reducing certain quarterly
corporate events, including cancellation of our annual cruise. Finally, we are
reducing expenditures on external consultants and contractors across all
functional areas. We anticipate realizing annual savings of approximately $25.0
million as a result of these actions.
In connection with this restructuring plan, we incurred severance costs
for terminated employees and costs for rescinded offers of employment,
accelerated the vesting provisions of certain stock option grants, wrote-off
certain assets that are no longer of service, and accrued related professional
fees. In addition, Michael J. Saylor, our chairman of the board and chief
executive officer, made grants of the Company's Class A common stock to
terminated employees from his personal stock holdings. Since he is a principal
shareholder of Microstrategy, his actions are deemed to be an action undertaken
on behalf of Microstrategy for accounting purposes. Accordingly, we recognized
an expense and a capital contribution by Mr. Saylor for approximately $3.0
million, which represents the fair value of the stock on the date of grant. We
also recognized a liability related to our commitments associated with the 2000
annual cruise for employees that was canceled.
The following table sets forth a summary of these restructuring costs and
related charges (in thousands):
28
Severance and rescinded employment offers.................. $2,854
Stock grant and applicable payroll taxes................... 3,192
Compensation expense on accelerated stock options.......... 1,483
Elimination of corporate events............................ 2,838
Write-off of impaired assets............................... 360
Accrual for professional fees.............................. 108
-------
Total restructuring costs and related charges.............. $10,835
=======
Included in the $10.8 million restructuring charge are approximately $6.2
million of cash costs and $4.6 million in non-cash related costs. No events or
circumstances occurred subsequent to the announcement of the restructuring plan
requiring significant changes to management's original estimates. Substantially
all restructuring costs and related charges had been paid as of December 31,
2000. If we are unable to reduce our costs more in line with revenues and
strengthen the financial performance of our business, we may need to further
adjust our cost structure through the execution of additional restructuring
plans.
Loss on investments. In December 1999, we received 824,742 shares of
Xchange, Inc., formerly Exchange Applications, Inc., stock valued at $21.5
million, in consideration for the sale of MicroStrategy software, technical
support and consulting services. We sold all of our economic interest in these
shares for a net realized gain of $1.5 million during the first two quarters of
2000.
During 2000, we received an additional 805,800 shares of Xchange's stock,
valued at $13.1 million, in consideration for the sale of MicroStrategy
software, technical support and consulting services. Due to a significant
decrease in the market value of their stock, the timing and amount of future
recovery, if any, in the value of this asset is uncertain and we do not consider
the decline in value to be temporary. Accordingly, we have written down the
investment to its fair value at December 31, 2000, and recognized a loss of
$12.1 million during 2000. This loss was partially offset by a hedging
transaction that resulted in a gain of $1.4 million in the third quarter of
2000.
Provision for litigation settlement. We and certain of our officers and
directors are defendants in a private securities class action lawsuit alleging
that we have violated Section 10(b) of the Exchange Act, Rule 10b-5 promulgated
thereunder, and Section 20(a) and Section 20A of the Exchange Act in connection
with various statements that we had made with respect to our 1999, 1998 and 1997
financial results. In June 2000, purported holders of our common stock filed a
shareholder derivative lawsuit in the Delaware Court of Chancery seeking
recovery for various alleged breaches of fiduciary duties by certain of our
directors and officers relating to our restatement of financial results for
1999, 1998 and 1997. In October 2000, we entered into agreements to settle these
lawsuits. Both settlements are subject to confirmatory discovery, final
documentation, court approval and certain other conditions.
Under the class action settlement agreement, class members will receive:
1) five-year unsecured promissory notes issued by the Company having an
aggregate principal amount of $80.5 million and bearing interest at 7.5% per
year; 2) 550,000 shares of our Class A common stock, with the number of shares
to be increased if the market value of the shares, based on the dollar weighted
average trading price during a specified trading period prior to the district
court settlement hearing, is less than $30 per share so that the minimum value
of the shares is $16.5 million; and 3) warrants issued by the Company to
purchase 1.9 million shares of our Class A common stock at an exercise price
between $40 and $50 per share, based on the dollar weighted average trading
price during a specified trading period prior to the district court settlement
hearing, with the warrants expiring five years from the date they are issued.
We will have the right, at any time, to prepay the promissory notes, or to
mandatorily convert the promissory notes into shares of our Class A common stock
at a conversion price equal to 80% of the dollar weighted average trading price
per share for all round lot transactions in the stock on the Nasdaq National
Market for the ten trading days ending two days prior to the date that written
notice of conversion has been given. The warrants may be exercised for cash or
by tendering promissory notes valued for the purpose of warrant exercise at 133%
of their principal amount plus accrued interest.
Based on the terms of the settlement agreements, we determined that a
liability related to these actions was probable and that the value was
reasonably estimable. Accordingly, we separately evaluated the individual
components of the settlement agreements in consideration of existing market
conditions and recorded an estimated charge of $89.7 million for the cost of the
litigation settlement, net of insurance proceeds of approximately $13.0 million.
29
The final value of the settlements may differ significantly from the
estimates currently recorded depending on a variety of factors including the
market value of the stock when issued and potential changes in market conditions
affecting the valuation of the other securities. Additionally, the settlements
are contingent on confirmatory discovery, final documentation, court approval
and certain other conditions. Accordingly, we will revalue the estimate of the
settlements on a quarterly basis and at the time the securities are issued.
Minority Interest. During the year ended December 31, 2000, we accreted
dividends of $713,000 on the preferred stock of Strategy.com.
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 are amortizing $1.4 million of compensation expense related to these
options ratably over the five-year vesting period. In 2000, 1999 and 1998,
compensation expense was $271,000, $269,000 and $186,000, respectively. We will
record additional compensation expense of $270,000 in each year beginning 2001
through 2002, and $84,000 in 2003, if all of the related options vest.
Provision for Income Taxes. In 2000, 1999 and 1998, we recorded income tax
expense of $1.4 million, $1.2 million and $0, respectively, primarily related to
foreign jurisdictions where we are profitable. 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. The provision for income taxes may
increase as we become more profitable in certain foreign jurisdictions.
Preferred Stock Dividends. During 2000, we recorded preferred stock
dividends of $4.7 million on our Series A redeemable convertible preferred
stock. For the year ended December 31, 2000, we paid dividends of $4.1 million
through the issuance of 359,125 shares of Class A common stock in lieu of cash
and had accrued dividends of $599,000 as of December 31, 2000 which are included
in accounts payable and accrued expenses in the accompanying consolidated
balance sheet. All accrued dividends were paid subsequent to December 31, 2000
through the issuance of 63,146 shares of Class A common stock in lieu of cash.
Beneficial Conversion Feature. During the second quarter of 2000, we
recorded a $19.4 million charge attributable to the beneficial conversion
feature of the Series A redeemable convertible preferred stock based on the
difference between the fair market value of the Class A common stock on the
closing date of the private placement and the conversion rate. The conversion
rate was computed based on the volume weighted average price of the stock for
the 17 trading days subsequent to the closing date in accordance with the
Certificate of Designations, Preferences and Rights of the Series A Redeemable
Convertible Preferred Stock. If the conversion price is adjusted based upon
certain contingent events as specified in the Certificate of Designations,
Preferences and Rights of the Series A Redeemable Convertible Preferred Stock,
an additional charge per share of outstanding preferred stock may be recorded in
the future.
Deferred Revenue
Deferred revenue represents product support and other services fees that
are collected in advance for 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. Deferred revenue also includes
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. Aggregate deferred revenue was $81.6 million
as of December 31, 2000 compared to $71.3 million as of December 31, 1999. 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
30
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 $50.3 million of this deferred revenue in
2001; 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
On December 31, 2000 and 1999, we had $94.7 million and $68.4 million, of
cash, cash equivalents, and short-term investments, respectively, of which $25.9
million is restricted cash as of December 31, 2000. The restrictions on this
cash were removed in February 2001.
Cash used in operations was $87.8 million for 2000 and cash provided by
operations was $89,000 for 1999. The increase in cash used in operations from
1999 to 2000 was primarily attributable to a substantial increase in sales and
marketing, and other operating expenses, which increased at a significantly
greater rate than revenues. However, during the latter part of the year, we took
several actions to curtail our operating expenses including a reduction in
headcount and discontinuation of various company sponsored events. We have also
implemented actions to reduce the use of outside consultants and contractors and
other sales and marketing expenses. These actions were taken to achieve our goal
of making our business other than Strategy.com breakeven on an operating basis
by the end of 2001, excluding amortization, preferred dividends and other
non-operating expenses.
Cash used in investing activities was $37.7 million and $43.2 million for
2000 and 1999, respectively. In December 1999, we received 824,742 shares of
Xchange stock, valued at $21.5 million, in consideration for the sale of
MicroStrategy software, technical support and application development. We sold
all of our economic interest in the shares we received in December 1999 for a
total net realized gain of $1.5 million. The decrease in cash used in investing
activities from 1999 to 2000 reflected the sale of these shares and other
short-term investments primarily offset by the increase in restricted cash,
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. During the third quarter of 2000, we invested $5.0
million in exchange for an approximate 5% interest in a voice portal technology
company.
Our financing activities provided cash of $167.8 million and $42.2 million
for 2000 and 1999, respectively. In June 2000, we issued 12,500 shares of our
Series A redeemable convertible preferred stock in a private placement to
institutional investors for cash proceeds of $119.6 million, net of offering
costs. Dividends are payable quarterly at a rate of 7% per annum, in cash or in
shares of Class A common stock. The preferred stock is currently convertible
into 3,744,152 shares of Class A common stock based on the current conversion
price of $33.39 per share. The conversion price may be adjusted at certain
future dates, including the first and each subsequent anniversary of the initial
issuance date, depending upon the trading price of the Class A common stock and
an agreed upon formula. The preferred stock is also redeemable upon certain
triggering events such as suspension from trading or failure of our Class A
common stock to be listed on the Nasdaq National Market for a period of five
consecutive trading days and other events as defined in the Certificate of
Designations, Preferences and Rights of the Series A Redeemable Convertible
Preferred Stock. As of December 31, 2000, none of these triggering events have
occurred.
We also recorded a $19.4 million charge attributable to the beneficial
conversion feature of the Series A redeemable convertible preferred stock equal
to the difference between the fair market value of the Class A common stock on
the closing date of the private placement and the conversion rate. The
conversion rate was computed based on the volume weighted average price of the
stock for the 17 trading days subsequent to the closing date in accordance with
the Certificate of Designations, Preferences and Rights of the Series A
Redeemable Convertible Preferred Stock. If the conversion price is adjusted
based upon certain contingent events as specified in the Certificate of
Designations, Preferences and Rights of the Series A Redeemable Convertible
Preferred Stock, such as the failure to maintain the effectiveness of the
related
31
registration statement and issuance of certain equity securities, an additional
charge per share of outstanding preferred stock may be recorded in the future.
Additionally, in accordance with the terms of the agreements relating to
the issuance of Series A redeemable convertible preferred stock, under certain
circumstances, we may be required to pay substantial penalties to a holder of
the preferred stock. Such penalties are generally paid in the form of interest
payments, subject to any restrictions imposed by applicable law. In the third
quarter of 2000, we incurred $578,000 in penalties as a result of a 14-day delay
in the filing of a registration statement registering the shares of Class A
common stock issuable upon conversion of and in lieu of dividends on the Series
A redeemable convertible preferred stock.
During the year ended December 31, 2000, we paid dividends of $4.1 million
through the issuance of 359,125 shares of Class A common stock in lieu of cash.
As of December 31, 2000, we had recorded unpaid accrued dividends of $599,000.
All accrued dividends were paid subsequent to December 31, 2000 through the
issuance of 63,146 shares of Class A common stock in lieu of cash.
In October 2000, we issued 13,401,253 shares of convertible preferred
stock of Strategy.com to a group of institutional and accredited investors for
cash proceeds of $39.8 million, net of offering costs, in an initial closing. In
January 2001, we issued an additional 3,134,796 million shares for $10.0
million, in a second and final closing. The preferred stock is convertible into
Class A common stock of Strategy.com on a one-for-one basis based upon the
occurrence of certain specified events. The total proceeds of $49.8 million, net
of offering costs, will be used to fund ongoing operations of our Strategy.com
subsidiary. Microstrategy owns approximately 84% of the economic interest in the
outstanding equity of Strategy.com on an as converted, diluted basis.
As part of the class action litigation settlement agreement, in addition
to issuing Class A common stock, we expect to issue five-year unsecured
promissory notes having an aggregate principal amount of $80.5 million and
bearing interest at 7.5% per year and warrants to purchase 1.9 million shares of
Class A common stock at an exercise price between $40 and $50 per share, with
the warrants expiring five years from the date they are issued. In connection
with this arrangement, we expect to pay approximately $6.0 million per year in
interest charges commencing upon the settlement hearing date which has been
scheduled for April 2, 2000.
As of December 31, 2000, we had $12.1 million in future minimum lease
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
December 31, 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 drawdowns and interest
rates under the lease agreement are subject to our credit worthiness. Currently,
we are unable to draw down additional amounts under the lease agreement.
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 provided for a $25.0 million unsecured revolving line of
credit for general working capital purposes. In May 2000, we entered into a
modification of the line of credit agreement, which, among other things,
increased the aggregate credit available to include an additional letter of
credit, removed any financial covenants and cured any financial covenant
defaults. The modified line of credit accrued interest at LIBOR plus 1.75%,
included a 0.2% unused line of credit fee, and required monthly payments of
interest. As of December 31, 2000, after consideration of outstanding letters of
credit, we had $18.7 million of borrowing capacity under this credit line. As of
December 31, 2000, the line of credit was secured by $25.9 million of cash and
cash equivalents, which is classified as restricted cash in the accompanying
consolidated balance sheets. The cash was restricted through February 2001, at
which time the agreement was terminated upon the closing of the credit facility
agreement described below.
On February 9, 2001, we entered into a loan and security agreement which
provides for aggregate borrowing capacity of up to $30.0 million to be used for
general working capital purposes (the "Credit
32
Facility"). The Credit Facility consists of a $10.0 million term loan and a
revolving line of credit for up to $20.0 million, subject to certain borrowing
base limitations, as defined in the agreement. The Credit Facility, which
matures in February 2004, is collateralized by substantially all of our assets
and replaces the previous line of credit agreement. On February 9, 2001, we
borrowed $10.0 million under the term loan. Currently, we have $1 million of
borrowing capacity under the $20 million revolving line of credit. The remaining
$19 million under the revolving line of credit is expected to be available for
future drawdowns upon completion of specified reporting requirements and other
events defined in the agreement and subject to borrowing base limitations.
At our option, borrowings under the revolving line of credit will bear
interest at a variable rate equal to LIBOR plus 3.25% or 3.75% or at a variable
rate equal to the prime rate plus 1.50% or 2.00%, depending on the outstanding
balance. The Credit Facility also includes a 1.50% unused letter of credit fee
and requires monthly payments of interest and other fees beginning on the first
day of the month following the execution of the agreement. Borrowings under the
term loan are based upon certain levels of maintenance revenue and bear interest
at a variable rate equal to the prime rate plus 3.00%. In addition to the
interest and other fees on borrowings under the Credit Facility, the lender has
been granted warrants to purchase 50,000 shares of our Class A common stock at
an exercise price of $14.825 per share, subject to adjustment as set forth
therein. Under the terms of the Credit Facility, we are required to maintain
certain financial covenants, the most restrictive of which are achieving certain
minimum earnings amounts, as defined in the agreement, limitations on capital
expenditures ($11.2 million in 2001, $14.4 million in 2002 and $21.0 million in
2003), minimizing the ability to invest further in subsidiaries, and limitations
on incurring additional indebtedness.
We have grown significantly in 2000 and prior years in anticipation of
high revenue growth. We have recently taken actions to realign our cost
structure to better match our expected revenue growth by reducing our workforce,
limiting discretionary operating expenses and reducing capital expenditures. If
revenues do not grow at anticipated rates, and we are not able to promptly
adjust our cost structure, we will need to take further measures to reduce costs
or will require additional external financing through credit facilities, sale of
additional equity in MicroStrategy or in our Strategy.com subsidiary, or by
obtaining other financing facilities to support our current cost structure.
Financing facilities may not be available on acceptable terms. We believe that
our existing cash, cash generated internally by operations and the new credit
facility agreement entered into in February 2001 will meet our working capital
requirements and anticipated capital expenditures for the next 12 months.
Recent Accounting Standards
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 have not entered into any material derivative
contracts and do not have near term plans to enter into such contracts.
Accordingly, the adoption of SFAS No. 133 and SFAS No. 137 is not expected to
have a material effect on our financial position or results of operations.
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
33
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:
o the size, timing and execution of significant orders and shipments;
o 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;
o the timing of new product announcements;
o changes in our pricing policies or those of our competitors;
o market acceptance of business intelligence software generally and of
new and enhanced versions of our products in particular;
o the length of our sales cycles;
o changes in our operating expenses;
o personnel changes;
o our success in adding to our indirect distribution channels;
o utilization of our consulting personnel, which can be affected by
delays or deferrals of customer implementation of our software
products and consulting, education and support services;
o changes in foreign currency exchange rates; and
o seasonal factors, such as our traditionally lower pace of new sales
in the summer.
Limited Ability to Adjust Expenses. We base our operating expense budgets
on expected revenue trends. Many of our expenses, particularly personnel costs
and rent, are relatively fixed. We may be unable to adjust spending quickly
enough to offset any unexpected revenue shortfall. Accordingly, any shortfall in
revenue may cause significant variation in operating results in any quarter.
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 may lose sales, or sales may be delayed, due to the long sales and
implementation cycles for our products, which would reduce our revenues
34
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 and purchase our consulting and other services. 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 and/or services. 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
and complete consulting engagements 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 and we believe that this
publicity has caused some of our potential customers to defer purchases of our
software or to do business with other vendors. 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 $81.6 million as of December 31, 2000. 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 may require additional external financing through credit facilities,
sale of additional equity in MicroStrategy or in our Strategy.com subsidiary or
by obtaining other financing facilities to support our operations, as we expect
to incur operating losses through at least the third quarter of 2001 and
possibly longer. Obtaining additional financing will be subject to a number of
factors, including:
o market conditions;
o our operating performance; and
o 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 operations, our business, operating results and financial condition may
be materially and adversely affected.
We face litigation that could have a material adverse effect on our business,
financial condition and
35
results of operations
We and certain of our directors and executive officers are named as
defendants in a private securities class action lawsuit and a shareholder
derivative lawsuit relating to the restatement of our 1999, 1998 and 1997
financial results. Although we have entered into agreements to settle such
lawsuits, the settlements are subject to court approval and certain other
conditions. If the agreed upon settlements are not consummated, 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. Regardless of the outcome of these matters, it is likely that we will
incur substantial defense costs and that such actions may cause a diversion of
management time and attention.
The issuance of Class A common stock as part of the proposed settlement of class
action litigation and the exercise of warrants or conversion of notes issued as
part of the litigation settlement could result in a substantial number of
additional shares of Class A common stock being issued
The agreements we entered into to settle the private securities class
action lawsuit and the derivative suit relating to the restatement of our 1999,
1998 and 1997 financial results require us to issue shares of common stock with
a market value of $16.5 million, but not less than 550,000 shares. Based on the
closing price of our Class A common stock on March 1, 2001, we and certain of
our executive officers would be obligated to issue approximately 1,872,340
shares of Class A common stock to the class members as part of the settlement.
In addition, the settlement agreements require the issuance of warrants to
purchase 1,900,000 shares of common stock and promissory notes having an
aggregate principal amount of $80.5 million. We would have the option at any
time to convert the notes into a number of shares of Class A common stock equal
to the principal amount of the notes being converted divided by 80% of the
weighted average trading price of the Class A common stock over a 10 day period
preceding our delivery of a notice of conversion, which could result in a
substantial number of shares of Class A common stock being issued. For example,
if the conversion of notes were based on the weighted average trading price of
the Class A common stock during the 10 days ending March 1, 2001, we would be
obligated to issue 10,363,690 shares of Class A common stock if we elected to
convert the notes. The issuance of a substantial number of shares of Class A
common stock as part of the litigation settlement and future exercises or
conversions of securities issued in the litigation settlement may result in
substantial dilution to the interests of holders of Class A common stock and may
result in downward pressure on the price of our Class A common stock.
Shares in our public offerings may have been offered and sold in violation of
the Securities Act and purchasers in one or more of these offerings may have
claims that could result in a substantial amount of damages
The Company and selling shareholders sold an aggregate 9,200,000 shares of
our Class A common stock in our initial public offering on June 16, 1998 at a
price (adjusted for a 2 for 1 stock split in January 2000) per share of $6.00
for an aggregate purchase price of $55.2 million and 4,000,000 shares of our
Class A common stock at a price (adjusted for a 2 for 1 stock split in January
2000) per share of $13.50 in an additional public offering on February 10, 1999
for an aggregate purchase price of $54.0 million. The shares were sold pursuant
to prospectuses that contained financial statements that we subsequently
revised. The inclusion of these financial statements that required revision in
the registration statements and prospectuses used in the offering and sale of
these shares may constitute a violation of the Securities Act.
If the inclusion of these financial statements that required revision in
the registration statements and prospectuses used in the offerings did
constitute a violation of the Securities Act, the purchasers in these offerings
would have the right for a period of one year from the date that they
discovered, or should have discovered with reasonable diligence, that such
financial statements required revision in the applicable registration statement
and prospectus, but in no event later than three years from the date of the sale
of shares to them, to obtain recovery of the consideration paid in connection
with their purchase of Class A common stock or, if they have already sold the
stock, to sue us for damages based upon the difference between the price they
paid for Class A common stock and the proceeds they obtained from the sale of
the stock. The amount of these damages could be substantial.
36
We are currently unable to borrow additional amounts under our master equipment
lease agreement
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
December 31, 2000. Future drawdowns and interest rates under the lease agreement
are subject to our credit worthiness. Currently, we are not able to draw down
additional amounts under the lease 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 business intelligence software, customer relationship
management applications, portals and narrowcast messaging technologies 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 MicroStrategy products and those of
Strategy.com.
MicroStrategy's most direct competitors provide:
o business intelligence software;
o OLAP tools;
o query and reporting tools;
o web-based static reporting tools;
o information delivery and proactive reporting;
o analytical customer relationship management products;
o web traffic analysis applications; and
o marketing automation.
Each of these markets are discussed more fully below.
Business Intelligence Software. Makers of business intelligence software
provides business intelligence capabilities designed for integration,
customization and application development. Leading analyst firms classify
companies such as Microsoft, Oracle, Hyperion, SAP and SAS to be leading
providers of business intelligence software.
OLAP Tools. Companies that build software to perform OLAP provide
offerings competitive with the core MicroStrategy 7 platform. Whether web-based
or client-server, these tools give end users the ability to query underlying
data sources without having to hand code structured query language queries. Most
OLAP tools allow users to build their own calculations and specify report
layouts and other options. Additionally, OLAP tools provide users the ability to
navigate throughout the underlying data in an easy, graphical mode, often
referred to as drilling. Providers of OLAP tools include Cognos, Microsoft,
Hyperion, Brio, IBM, Seagate and Microsoft.
Query and Reporting Tools. Query and reporting tools allow large numbers
of end users to gain access to pre-defined reports for simple analysis. Often
the end users are able to specify some sort of run-time criteria that customizes
the result set for that particular person. Some limited `drilling' is also
provided. Companies who produce query and reporting tools include Business
Objects, Cognos, Oracle, Seagate, and Brio.
Web-based Static Reporting Tools. Companies that offer software to deliver
pre-built reports for end-
37
user viewing and consumption can also compete with MicroStrategy. These
applications often lack the sophistication, robustness and scalability of
MicroStrategy, but can be attractive for small, departmental applications.
Vendors in this category include Actuate, Business Objects, Seagate, Microsoft,
Computer Associates and SAS.
Information Delivery and Proactive Reporting. Companies that focus on the
proactive delivery of information, via e-mail, website, or other medium can
compete with MicroStrategy's offerings. Typically these tools serve to push out
compiled reports on a scheduled basis to sets of users based on job type.
MicroStrategy software has this technology integrated into its core platforms.
Vendors of such technology include Actuate, nQuire, Information Builders and
Business Objects.
Analytical Customer Relationship Management Products. Companies that
deliver customer relationship management products alone or in conjunction with
e-commerce applications, such as Broadbase, BroadVision, E.piphany, Vignette,
compete with our analytical customer relationship management applications. In
contrast with providers of operational customer relationship management vendors,
such as Vantive and Oracle, analytical customer relationship management deals
more with customer segmentation, analysis and interaction as opposed to
infrastructure and call centers.
Web Traffic Analysis Applications. Reporting and analysis tools can be
specialized to deal specifically with the analysis of visitors to a company's
website. Typically this involves extracting data from a web-log file and
importing it into a usable format, often in a relational database. A set of
analysis, sometimes customer-centric in nature, is performed, and limited ad-hoc
reporting is permitted. Advanced applications in this space merge data from the
web-logs with other customer centric attributes to help provide a complete view
of the customer base. Vendors in this space include Accrue, Net.Genesis and
WebTrends.
Marketing Automation. Applications focused on the automation and execution
of marketing tasks, such as campaign management and delivery, compete with our
customer relationship management applications and our Narrowcast Server
platform. Leading vendors in this space include E.piphany, Xchange, Chordiant
and Broadbase.
Strategy.com's most direct competitors provide:
o web portal and information networks;
o vertical internet portals and information networks; and,
o wireless communications and wireless access protocol enabled
products.
Each of these market segments are discussed more fully below.
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.
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,
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
38
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 business intelligence 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, 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.
We have expanded our business rapidly and our failure to manage this expansion
effectively, as well as the strain it places on our resources, could have a
material adverse effect on our business, operating results and financial
condition
We have expanded rapidly. Our total number of employees has grown from 907
on December 31, 1998 to 1,899 on December 31, 2000. This expansion has placed
significant demands on our administrative, operational, financial and personnel
resources and is expected to continue doing so. In particular, our expansion
into international markets has led to increased financial and administrative
demands. For example, managing relationships with new foreign partners require
additional administrative burdens and managing foreign currency risks requires
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.
In addition, the development of the Strategy.com network could divert the
time and attention of our senior management from our other business. Michael J.
Saylor, our chairman and chief executive officer, currently is responsible for
the strategic planning and direction of both our MicroStrategy software business
and the Strategy.com business. If Mr. Saylor does not effectively manage his
time and attention between these 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 and chief
executive officer, and Sanju K. Bansal, our vice chairman, 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
39
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:
o our ability to continue to support a number of popular operating
systems and databases;
o our ability to maintain and improve our current product line; and
o 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 NT operating system. Therefore, our ability to increase sales currently
depends on the continued acceptance of the Windows NT operating system. We
cannot market many of our current business intelligence applications to
potential customers who use Unix operating systems as their application server.
We 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 our products and us. 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.
40
Our business, and in particular the 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 plan to
do, or if users opt out of making their personal preferences and information
available to us and Strategy.com affiliates, the utility of our products will
decrease, which could have a material adverse effect on our business, operating
results and financial condition. If our customers, our network or Strategy.com
affiliates misuse personal information, 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 websites. This could materially and adversely affect our business,
operating results and financial condition.
In Europe, the European Union Directive on Data Protection requires member
countries to implement legislation that prohibits any European entity from
sharing personal data collected from EU persons with entities in any country
that is not deemed to have adequate data protection laws. Currently, the United
States' data protection laws are not deemed to be adequate, and some data
transfers from European entities to us may be prohibited unless explicit consent
is obtained from EU data subjects, we agree to specified contractual privacy
safeguards that are approved by EU authorities, or we comply with the
requirements of the so-called Safe Harbor program between the United States and
the EU. It may not be feasible for us to obtain the required consent or to make
the necessary contractual commitments. Currently, we have not sought to be
certified under the Safe Harbor program, and our data collection and handling
practices may not qualify under this program. Although enforcement of EU data
protection laws against U.S. companies is currently subject to a standstill,
this standstill will expire in June 2001, and some countries, including France,
are currently attempting to enforce data protection laws with respect to data
exports to the United States, notwithstanding the existence of the standstill.
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
The 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. These infrastructures
may not continue to effectively support the capacity, speed and 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 websites using our products or hosting the 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
41
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.
Our relationship with Strategy.com could create the potential for conflicts of
interest
We hold an approximately 84% economic interest in the equity of
Strategy.com. Conflicts may arise between us and other investors in
Strategy.com, including: the allocation of business opportunities, the sharing
of rights, technologies, facilities, personnel and other resources, and the
fiduciary duties owed by officers, directors and other personnel who provide
services to both us and Strategy.com.
Strategy.com has only recently introduced its network and it is uncertain
whether it will achieve widespread acceptance
Strategy.com has implemented the finance, news, weather, sports and
traffic channels of its network. Strategy.com may introduce additional channels
as part of our suite of information and we could be subject to 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 Strategy.com affiliates who bundle the
Strategy.com network with their own product and service offerings. If this
service, or the products and services offered through it, fails to achieve
widespread customer acceptance, our business, operating results and financial
condition would be materially adversely affected. In addition, revenue from
Strategy.com would be adversely affected if Strategy.com affiliates do not
perceive that the integration of the 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.
Strategy.com is expected to incur significant losses for the foreseeable future
and will require additional external financing
Strategy.com is expected to incur significant losses for the foreseeable
future and will require additional external financing to support its operations
and it may be difficult to obtain addition financing on acceptable terms. If
Strategy.com is unable to raise capital to fund its operations, our business and
spending results could be materially and adversely affected.
Strategy.com relies on Strategy.com affiliates to market and deliver
Strategy.com services to their customers and if Strategy.com is unable to enter
into arrangements with a sufficient number of Strategy.com affiliates, or if
Strategy.com affiliates are unable to interest their customers in Strategy.com
services or have difficulty in delivering those service to their customers, our
business and reputation will suffer
Strategy.com relies on Strategy.com affiliates to market and
deliverStrategy.com services to their customers. Strategy.com may not attract
Strategy.com affiliates who will market its services effectively and deliver
services reliably to customers. If Strategy.com affiliates fail to deliver
services reliably, Strategy.com could face liability claims from its subscribers
and our reputation could be damaged. Strategy.com includes contractual
provisions limiting its liability to the subscriber for failures and delays, but
these limits may not be enforceable and may not be sufficient to shield
Strategy.com from liability. Strategy.com will seek to obtain liability
insurance to cover problems of this sort, but insurance may not be available and
the amounts of its coverage may not be sufficient to cover all potential claims
Our ability to achieve revenue growth in the future will depend in part on
Strategy.com's success in recruiting and maintaining successful relationships
with Strategy.com affiliates and the performance of the systems deployed and
maintained by Strategy.com affiliates which Strategy.com does not control. If
42
Strategy.com is unable to recruit Strategy.com affiliates or maintain its
relationships with Strategy.com affiliates, or if Strategy.com affiliates
perform poorly in the delivery of Strategy.com services to customers, our
business, operating results and financial condition will suffer.
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, 2001, holders of our Class B common stock owned
or controlled 51,165,624 shares of Class B common stock, or 94.4% of the total
voting power. Michael J. Saylor, our chairman and chief executive officer,
controlled 3,550,155 shares of Class A common stock and 39,657,110 shares of
Class B common stock, or 73.8% of total voting power, as of March 1, 2001.
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 who 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.
The conversion of the Series A redeemable convertible preferred shares could
result in substantial numbers of additional shares of Class A common stock being
issued if our market price declines during periods in which the conversion price
of the Series A redeemable convertible preferred shares may adjust
As of December 31, 2000, the Series A redeemable convertible preferred
shares are convertible into Class A common stock at a conversion price equal to
$33.3854 per share. This conversion price may be adjusted based on the market
price of our Class A common stock if the preferred stock remains outstanding on
June 19, 2001 and on each subsequent anniversary of such date, if such
adjustment would result in a lower conversion price. The conversion price may
also be adjusted upon the occurrence of various events, including the failure to
maintain the effectiveness of the registration statement to which these shares
relate and the issuance of certain equity securities. As a result, the lower the
price of our Class A common stock at these intervals, the greater the number of
shares the holder will receive upon conversion after any such adjustment. For
example, the number of shares of Class A common stock that we would be required
to issue upon conversion of all 12,500 Series A redeemable convertible preferred
shares, excluding shares issued as accrued dividends, would increase from
approximately 3,744,152 shares, based on the applicable conversion price of
$33.3854 per share as of December 31, 2000, to approximately:
o 4,992,212 shares if the applicable conversion price decreased 25%;
o 7,488,303 shares if the applicable conversion price decreased 50%;
o 14,976,516 shares if the applicable conversion price decreased 75%;
or
o 37,441,516 shares if the applicable conversion price decreased by
90%.
For example, if the Series A redeemable convertible preferred stock conversion
price were adjusted to a
43
conversion price of $8.8125 per share (the closing price of our Class A common
stock on March 1, 2001) we would be required to issue 14,184,397 shares of Class
A common stock upon conversion of all 12,500 Series A preferred shares.
To the extent the Series A redeemable convertible preferred shares are
converted or dividends on the Series A preferred shares are paid in shares of
Class A common stock rather than cash, a significant number of shares of Class A
common stock may be sold into the market, which could decrease the price of our
Class A common stock and encourage short sales. Short sales could place further
downward pressure on the price of our Class A common stock. In that case, we
could be required to issue an increasingly greater number of shares of our Class
A common stock upon future conversions of the Series A redeemable convertible
preferred shares as a result of the annual and other adjustments described
above, sales of which could further depress the price of our Class A common
stock.
The conversion of and the payment of dividends in shares of Class A common
stock in lieu of cash on the Series A redeemable convertible preferred shares
may result in substantial dilution to the interests of other holders of our
Class A common stock. No selling stockholder may convert its Series A redeemable
convertible preferred shares if upon such conversion the selling stockholder
together with its affiliates would have acquired a number of shares of Class A
common stock during the 60-day period ending on the date of conversion which,
when added to the number of shares of Class A common stock held at the beginning
of such 60-day period, would exceed 9.99% of our then outstanding Class A common
stock, excluding for purposes of such determination shares of Class A common
stock issuable upon conversion of Series A preferred shares which have not been
converted. Nevertheless, a selling stockholder may still sell a substantial
number of shares in the market. By periodically selling shares into the market,
an individual selling stockholder could eventually sell more than 9.99% of our
outstanding Class A common stock while never holding more than 9.99% at any
specific time.
We may be required to pay substantial penalties to the holders of the Series A
redeemable convertible preferred shares if specific events occur
In accordance with the terms of the agreements relating to the issuance of
the Series A redeemable convertible preferred shares, we are required to pay
substantial penalties to a holder of the Series A preferred shares under
specified circumstances, including, among others:
o nonpayment of dividends on the Series A redeemable convertible
preferred shares in a timely manner;
o failure to deliver shares of our Class A common stock upon
conversion of the Series A redeemable convertible preferred shares
after a proper request;
o nonpayment of the redemption price at maturity of the Series A
redeemable convertible preferred shares;
o failure to hold a meeting of our stockholders on or before July 31,
2001 to approve the issuance of the shares of Class A common stock
issuable upon conversion of and in lieu of cash dividends on the
Series A redeemable convertible preferred shares; or
o the unavailability of the registration statement relating to the
shares of Class A common stock issuable upon conversion of and in
lieu of cash dividends on the Series A redeemable convertible
preferred shares to cover the resale of such shares for more than
brief intervals.
Such penalties are generally paid in the form of interest payments,
subject to any restrictions imposed by applicable law. In the third quarter of
2000, we incurred $578,000 in penalties as a result of a 14 day delay in the
filing of a registration statement registering the shares of Class A common
stock issuable upon conversion of and in lieu of dividends on the Series A
redeemable convertible preferred shares.
We rely on our strategic channel partners and if we are unable to develop or
maintain successful
44
relationships with them, our business, operating results and financial condition
will suffer
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, the years ended December 31, 2000, 1999 and
1998, channel partners accounted for, directly or indirectly, approximately
44.4%, 39.2% and 33.6% of our total product license 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, we may not be successful in our efforts
to continue to expand indirect sales in this manner. We may not be able to
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.
Third party providers of information and services for Strategy.com services may
fail to provide us such information and services or may also provide such
information and services to our competitors
Strategy.com relies on third parties to provide information and services
for the Strategy.com network. For example, Strategy.com relies on Thomson
Financial to provide users of Strategy.com financial information services with
stock quote information. If one or more of these providers were to stop working
with Strategy.com, Strategy.com would have to rely on other parties to provide
the information and services it needs. Other parties may not be willing to do so
on reasonable terms. Furthermore, Strategy.com does not have long-term
agreements with its providers of information and services and cannot restrict
them from providing similar information and services to its competitors. As a
result, Strategy.com's competitors may be able to duplicate some of the
information and services that it provides and may, therefore, find it easier to
enter the market for personal intelligence and compete with Strategy.com.
Strategy.com affiliates will rely on Strategy.com to maintain the infrastructure
of the network and any problems with that infrastructure could expose
Strategy.com to liability from its Strategy.com affiliates and their customers
Strategy.com affiliates depend on Strategy.com to maintain the software
and hardware infrastructure of the Strategy.com network. If this infrastructure
fails or Strategy.com affiliates or their customers otherwise experience
difficulties or delays in accessing the network, Strategy.com could face
liability claims from them. Strategy.com expects to include contractual
provisions limiting its liability to its Strategy.com affiliates for system
failures and delays, but these limits may not be enforceable and may not be
sufficient to shield Strategy.com from liability. Strategy.com will seek to
obtain liability insurance to cover problems of this sort, but insurance may not
be available and the amounts of its coverage may not be sufficient to cover all
potential claims.
Strategy.com is vulnerable to system failures, which could cause interruptions
or disruptions in its service
The hardware infrastructure on which the Strategy.com system operates is
located at the Exodus Communications data center in Northern Virginia.
Strategy.com may not be able to manage this relationship successfully to
mitigate any risks associated with having its hardware infrastructure maintained
by Exodus. Unexpected events such as natural disasters, power losses and
vandalism could damage its systems. Telecommunications failures, computer
viruses, electronic break-ins or other similar disruptive problems could
adversely affect the operation of its systems. Insurance policies may not
provide adequate compensation for any losses that may occur due to any damages
or interruptions in its systems. Accordingly, we may need to make capital
expenditures in the event of damage. Strategy.com does not currently have a
formal disaster recovery plan. Periodically, Strategy.com experiences
unscheduled system
45
downtime that results in its website being inaccessible to subscribers. Although
Strategy.com has not suffered material losses during these downtimes to date, if
these problems persist in the future, users, Strategy.com affiliates and
advertisers could lose confidence in Strategy.com 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 its systems, which could lead to
slower response time or system failures. System failures or slowdowns could
adversely affect the speed and responsiveness of the Strategy.com network. These
would diminish the experience for Stategy.com subscribers and affect our
reputation. The ability of Stategy.com systems to manage a significantly
increased volume of transactions in a production environment is unknown. As a
result, Stategy.com faces risks related to its ability to scale up to expected
transaction levels while maintaining satisfactory performance. If Strategy.com
transaction volume increases significantly, it 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 rely primarily on a combination of copyright, patent, trademark and
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.
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
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 effect on our business, operating
results and financial condition.
In late March 2001, NCR Corporation asked us to consider licensing
certain technology which NCR alleges is covered under patents that they hold.
NCR has implied that if we are unwilling to license this technology they
may seek to enforce their patents against us. We have not yet had an opportunity
to fully review these matters. In the event NCR seeks to enforce any of these
patents and if such patents are found to be valid and enforceable against
MicroStrategy, our business, operating results and financial condition may be
materially adversely affected. We are not currently able to estimate the
potential range of loss and the outcome of the uncertainty is unknown.
Accordingly, no provision for this matter has been made in the accompanying
consolidated financial statements.
Managing our international operations is complex 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 24.9%, 24.0% and 26.1% of our total
revenues for the years ended December 31, 2000, 1999 and 1998, respectively. Our
international operations require significant management attention and financial
resources.
There are certain risks inherent in our international business activities
including:
o changes in foreign currency exchange rates;
o unexpected changes in regulatory requirements;
46
o tariffs and other trade barriers;
o costs of localizing products for foreign countries;
o lack of acceptance of localized products in foreign countries;
o longer accounts receivable payment cycles;
o difficulties in managing international operations;
o tax issues, including restrictions on repatriating earnings;
o weaker intellectual property protection in other countries; and
o 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. Despite testing by us and by our current and
potential customers, errors may 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.
The price of our stock may be extremely volatile
The market price for our Class A common stock has historically been
volatile and could fluctuate
47
significantly for any of the following reasons:
o quarter-to-quarter variations in our operating results;
o developments or disputes concerning proprietary rights;
o technological innovations or new products;
o governmental regulatory action;
o general conditions in the software industry;
o increased price competition;
o changes in earnings estimates by analysts;
o any change in the actual or expected amount of dilution attributable
to issuances of additional shares of Class A common stock upon
conversion of the Series A redeemable convertible preferred stock or
as a result of the litigation settlement; or
o other events or factors.
Many of the above factors are beyond our control.
The stock market has recently experienced extreme price and volume
fluctuations. These fluctuations have particularly affected the market price of
many software companies, often without regard to their operating performance.
48
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 have
material 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, 2000, 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.
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, 2000, 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.
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.
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 REGISRTANT
Our executive officers and directors and their ages and positions as of
March 1, 2001 are as follows:
49
Name Age Title
------------------------- --- -------------------------------------------
Michael J. Saylor............ 36 Chairman and Chief Executive Officer
Sanju K. Bansal.............. 35 Vice Chairman, Executive Vice President &
Chief Operating Officer
Eric F. Brown................ 35 President and Chief Financial Officer
Jonathan F. Klein............ 34 Vice President, Law and General Counsel
Stephen S. Trundle........... 32 Vice President, Technology and Chief
Technology Officer
Frank A. Ingari (1)(2)....... 51 Director
Jonathan J. Ledecky.......... 43 Director
John W. Sidgmore............. 49 Director
Ralph S. Terkowitz (1)(2).... 50 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 chief executive officer and chairman of
the board of directors since founding MicroStrategy in November 1989, and as
president from November 1989 to November 2000. 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 and has served as vice chairman since
November 2000. 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.
Eric F. Brown has served as president and chief financial officer since
November 2000. Mr. Brown originally joined the Company as chief financial
officer of the Strategy.com subsidiary in February 2000. Prior to that, Mr.
Brown served as division chief financial officer and then chief operating
officer of Electronic Arts from October 1998 until February 2000. Prior to that,
Mr. Brown was co-founder and chief financial officer of DataSage, Inc. from 1995
until October 1998. Mr. Brown also held several senior financial positions with
Grand Metropolitan from 1990 until 1995. Mr. Brown received his M.B.A. from the
Sloan School of Management of Massachusetts Institute of Technology and a B.S.
in Chemistry from the Massachusetts Institute of Technology.
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.
From September 1993 to June 1997, 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.
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 founded Wheelhouse Corporation, a
marketing infrastructure services provider, in April 1999 and served as its
chief executive officer from April 1999 until May 2000 and as its chairman of
the board from April 1999 until the present. Prior to Wheelhouse, Mr. Ingari
founded Growth Ally, LLC, a start-up consultancy dedicated to helping pre-public
technology companies accelerate their development, and served as its president
from November 1997 until April 1999. 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 of worldwide marketing at Lotus
Development Corporation. Mr. Ingari received a B.A. in Creative Writing and U.S.
Foreign Relations from Cornell University.
50
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, and has served in this position since July
1999. 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
School Specialty, Inc.
John W. Sidgmore has been a member of the board of directors of
MicroStrategy since February 2000. Mr. Sidgmore is currently the chief operating
officer and vice chairman of WorldCom, Inc., a provider of long distance,
Internet and telecommunications services, where he has served in such positions
since December 1996. Mr. Sidgmore was the president and chief executive officer
of UUNET Technologies, Inc., a provider of worldwide Internet services, from
June 1994 until December 1996. 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 WorldCom.
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 BigStep.com and OutTask. Mr.
Terkowitz received an A.B. in Chemistry from Cornell University and an M.S. in
Chemical Physics from the University of California, Berkeley.
We have agreed as part of a settlement with the Securities and Exchange
Commission ("SEC") to add an additional independent director with finance
experience to the audit committee of the our board of directors who is not
objectionable to the SEC. We expect to appoint this additional director to the
audit committee in the second quarter of 2001.
Involvement in Certain Legal Proceedings
On December 14, 2000, Mr. Saylor and Mr. Bansal each entered into a
settlement with the SEC in connection with the Company's restatement of its
financial results for 1999, 1998 and 1997. In the settlement, each of Mr. Saylor
and Mr. Bansal consented, without admitting or denying the allegations in the
SEC's complaint, to the entry of a judgment enjoining him from violating the
antifraud and recordkeeping provisions of the federal securities laws and
ordering him to pay disgorgement and a civil penalty.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors, executive officers and holders of more than 10% of the
Company's Class A Common Stock to file with the SEC initial reports of ownership
of the Company's Class A Common Stock and other equity securities on a Form 3
and reports of changes in such ownership on a Form 4 or Form 5. Officers,
directors and holders of 10% of the Company's Class A Common Stock are required
by SEC regulations to furnish the Company with copies of all Section 16(a) forms
they file. To the Company's knowledge, based solely on a review of the Company's
records, all Section 16(a) filing requirements were satisfied with respect to
the fiscal year ended 2000 except that (i) one Form 4 that was timely filed by
Michael J. Saylor to report a series of gift transactions included four share
conversions by Michael J. Saylor that were reportable in two prior months in
connection with those gift transactions, and (ii) one Form 4 filed by Stephen S.
Trundle included a sale of shares by his spouse that was inadvertently omitted
from a prior reporting period.
51
ITEM 11. EXECUTIVE COMPENSATION
The compensation information set forth in this Item 11 relates to
compensation paid by the Company to its Chief Executive Officer, the Company's
four other most highly compensated executive officers who were serving as
executive officers of the Company as of December 31, 2000, and the two most
highly compensated executive officers who served as executive officers during
the fiscal year ended December 31, 2000 ("Fiscal Year 2000"), but who were not
serving as executive officers at the end of Fiscal Year 2000 (collectively, the
"Named Executive Officers").
Option awards relating to the Class A Common Stock of Strategy.com
Incorporated, a majority-owned subsidiary of the Company, are designated in the
tables set forth below in this Item 11 by the term "SDC." Unless so designated,
all option information set forth in this Item 11 refers to option awards
relating to the Class A Common Stock of the Company.
The following table sets forth certain information concerning the
compensation of the Named Executive Officers for each of the last three fiscal
years:
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation
Compensation Awards
-------------------------------------- ------------
Number of Shares
Name and Fiscal Underlying
Principal Position Year Salary Bonus Other Annual Options
- ------------------ ---- ------ ----- Compensation -------
Michael J. Saylor. 2000 150,000 -- -- --
Chairman of the Board and Chief 1999 150,000 50,000 -- --
Executive Officer 1998 127,500 -- -- --
Sanju K. Bansal 2000 115,000 -- -- --
Vice Chairman of the Board, 1999 115,000 40,000 -- --
Executive Vice President, Chief 1998 115,000 -- -- --
Operating Officer and Director
Eric F. Brown (1) 2000 131,250 10,000 96,962(2) 500,000
President and Chief Financial 100,000 (SDC)
Officer 1999 -- -- -- --
1998 -- -- -- --
Jonathan F. Klein 2000 135,417 60,000 -- 75,000
Vice President, Law and General 75,000 (SDC)
Counsel 1999 115,000 30,000 -- 30,000
1998 91,500 15,000 -- 80,500
Stephen S. Trundle 2000 125,000 -- -- 125,000
Vice President, Technology and Chief 150,000 (SDC)
Technology Officer 1999 125,000 -- -- 100,000
1998 115,000 20,000 -- --
Eric D. Driscoll (3) 2000 153,750 72,365 -- 125,661
Vice President, Corporate Development 50,000 (SDC)
1999 -- -- -- 10,000
1998 -- -- -- --
Joseph P. Payne (4) 2000 175,000 75,000 -- 75,000
Vice President, Marketing and 50,000 (SDC)
Chief Marketing Officer 1999 121,307 15,000 -- 250,000
1998 -- -- -- --
52
- ----------
(1) Mr. Brown joined the Company in February 2000 as Chief Financial Officer
of Strategy.com, a business unit of the Company at the time, and became
Chief Financial Officer and President of the Company on August 1, 2000 and
November 14, 2000, respectively. Accordingly, the 2000 information for Mr.
Brown is for the period from February 2000 to December 31, 2000, and there
is no information for 1999 and 1998.
(2) This amount represents relocation expenses paid by the Company.
(3) Mr. Driscoll became the Company's Vice President, Corporate Development in
June 2000. From March 1999 until June 2000, Mr. Driscoll was Vice
President, Americas Consulting and from October 1998 until March 1999 was
Director, North American Consulting. The information in the table for Mr.
Driscoll reflects the aggregate compensation received during 2000 as an
employee of MicroStrategy Services Corporation and as an employee of the
Company. Mr. Driscoll did not serve as an executive officer of the Company
during 1999 or 1998.
(4) Mr. Payne joined the Company in April 1999 as Vice President, Marketing
and Chief Marketing Officer. Accordingly, the 1999 information for Mr.
Payne is for the period from April 22, 1999 to December 31, 1999, and
there is no information for 1998. Mr. Payne resigned from the Company on
February 28, 2001.
Option Grants Table
The following table contains information concerning grants of stock
options made to each of the Named Executive Officers during Fiscal Year 2000:
53
Option Grants in Last Fiscal Year
Individual Grants
Potential Realizable
Number of Shares Value at Assumed
of Class A Annual rates of Stock
Common Stock % of Total Price Appreciation for
Underlying Options Granted Exercise Option Term(3)
Options to Employees in Price Per Expiration --------------
Name Granted(1) 2000 Share(2) Date 5% 10%
---- ---------- ---- -------- ---- -- ---
Michael J. Saylor -- -- -- -- $ -- $ --
Sanju K. Bansal -- -- -- -- -- --
Eric F. Brown 500,000 6.504 21.000 8/21/2010 6,603,394 16,734,296
100,000 (SDC) 2.124 2.7500 12/20/2010 172,946 438,279
Jonathan F. Klein 50,000 0.650 23.625 9/27/2010 742,882 1,882,608
25,000 0.325 21.500 10/17/2010 338,031 856,637
75,000 (SDC) 1.593 2.7500 12/20/2010 129,710 328,709
Stephen S. Trundle 50,000 0.650 44.125 6/09/2010 1,387,499 3,516,194
75,000 0.976 21.500 10/17/2010 1,014,093 2,569,910
150,000 (SDC) 3.186 2.7500 12/20/2010 259,419 657,419
Eric D. Driscoll 661 0.009 17.938 5/30/2010 7,457 18,897
75,000 0.976 39.313 6/16/2010 1,854,280 4,699,110
50,000 0.650 21.500 10/17/2010 676,062 1,713,273
50,000 (SDC) 1.062 2.7500 12/20/2010 86,473 219,140
50,000 0.650 23.625 9/27/2010 742,882 1,882,608
Joseph P. Payne 25,000 0.325 21.500 10/17/2010 338,031 856,637
50,000 (SDC) 1.062 2.7500 12/20/2010 86,473 219,140
- ----------
(1) These options generally vest over a five-year period and expire on the
tenth anniversary of the date of grant. SDC options, irrespective of
vesting, are not exercisable until the earlier of an underwritten initial
public offering of SDC or the closing of an acquisition transaction
resulting in a change of control of SDC.
(2) The exercise price of options of the Company or SDC may be paid in cash or
in shares of Class A Common Stock of the Company or SDC, as the case may
be, valued at fair market value on the exercise date. All stock options
were granted with an exercise price equal to the fair market value of such
stock as determined by the Board of Directors of the Company or SDC, as
applicable, on the grant date.
54
(3) The potential realizable value is calculated based on the term of the
option at its time of grant (ten years). It is calculated assuming that
the fair market value of the Class A Common Stock of the Company or of
SDC, as the case may be, on the date of grant appreciates at the indicated
annual rate compounded annually for the entire term of the option and that
the option is exercised and sold on the last day of its term for the
appreciated stock price.
Option Exercises and Holdings
The following table sets forth information concerning each exercise of a
stock option during Fiscal Year 2000 by each of the Named Executive Officers and
the number and value of unexercised options held by each of the Named Executive
Officers on December 31, 2000.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
Number of Shares of Class
Number of A Common Stock Value of Unexercised In-
Shares Underlying Unexercised the-Money Options at Fiscal
Acquired Options at Fiscal Year-End Year-End(2)
on Value
Name Exercise Realized(1) Exercisable/Unexercisable Exercisable/Unexercisable
---- -------- ----------- ------------------------- -------------------------
Michael J. Saylor -- $ -- -- / -- $ -- / $ --
Sanju K. Bansal -- -- -- / -- -- / --
Eric F. Brown -- -- 0 / 500,000 -- / --
0 / 100,000 (SDC) -- / --
Jonathan F. Klein 20,000 2,049,000 10,200 / 155,300 35,270 / 429,905
0 / 75,000 (SDC) -- / --
Stephen S. Trundle 100,000 16,025,000 81,600 / 245,400 569,800 / 373,700
0 / 150,000 (SDC) -- / --
Eric D. Driscoll 10,000 318,750 2,000 / 153,661 0 / 170,000
0 / 50,000 (SDC) -- / --
Joseph P. Payne 20,000 380,000 30,000 / 275,000 18,750 / 125,000
0 / 50,000 (SDC) -- / --
- ----------
(1) Represents the difference between the exercise price and the fair market
value of the Class A Common Stock of the Company on the date of exercise.
(2) Value of unexercised options is determined by subtracting the exercise
price per share from the fair market value per share for the underlying
shares as of December 31, 2000, multiplied by the number of shares
underlying the options. The fair market value of the Company's Class A
Common Stock is based upon the last reported sale price as reported on the
Nasdaq National Market on December 31, 2000 ($9.50 per share). No public
market for the shares underlying the SDC options existed as of December
31, 2000, and accordingly no value in excess of the exercise price has
been attributed to these options.
55
Directors' Compensation
Directors do not receive any fees or other cash compensation for serving
on the Company's Board of Directors or any committee thereof. Directors of the
Company who are not employees of the Company or any subsidiary ("Outside
Directors") are entitled to receive options to purchase shares of the Company's
Class A Common Stock.
In 2000, options for 30,000 shares of Class A Common Stock were granted to
Outside Directors under the 1997 Director Option Plan. Subsequent to 2000, the
Company grants options to Outside Directors under the 1999 Stock Option Plan.
Pursuant to this plan, Outside Directors are granted options on the following
terms: (i) each Outside Director of the Company is granted an option to purchase
100,000 shares of Class A Common Stock upon his or her initial election or
appointment to the Board of Directors ("First Options") and (ii) each Outside
Director is granted an option to purchase 30,000 shares of Class A Common Stock
of the Company on the day immediately following each annual meeting of
stockholders ("Subsequent Options"). Each option granted to an Outside Director
under the 1999 Stock Option Plan has an exercise price equal to the last
reported sale price of the Company's Class A Common Stock as reported on the
Nasdaq National Market for the most recent trading day prior to the date of
grant. First Options granted under the 1999 Stock Option Plan become exercisable
in equal annual installments over a five-year period and Subsequent Options are
exercisable in full upon grant. In the event of a merger of the Company with or
into another corporation or another qualifying acquisition event, each option
will be assumed or an equivalent option will be substituted by the successor
corporation. If the successor corporation does not assume outstanding options or
such options are not otherwise exchanged, the exercisability of all outstanding
options will accelerate.
Employment Agreements
Employees of the Company are generally required to enter into
confidentiality agreements prohibiting the employees from disclosing any
confidential or proprietary information of the Company. In addition, the
agreements generally provide that upon termination, an employee will not work
for a competitor and will not solicit Company customers and employees for a
period of one year. At the time of commencement of employment, the Company's
employees also generally sign offer letters specifying certain basic terms and
conditions of employment. Otherwise, employees of the Company are not subject to
written employment agreements.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Common
Stock of the Company, as of February 28, 2001 unless otherwise indicated, by (i)
each person who is known by the Company to beneficially own more than 5% of any
class of the Company's Common Stock, (ii) each director or nominee for director,
(iii) each of the Named Executive Officers, and (iv) all directors and executive
officers as a group as of February 28, 2001:
Number of Shares Percentage of
Beneficially Class
Beneficial Owner(1) Owned(2)(3) Outstanding(3)(4)
- ------------------- ----------- -----------------
Michael J. Saylor (5) 43,534,865 53.4
Sanju K. Bansal (6) 8,698,958 10.7
Eric F. Brown (7) 100,000 *
Jonathan F. Klein (8) 68,946 *
Stephen S. Trundle (9) 452,878 *
Eric D. Driscoll (10) 17,274 *
Joseph P. Payne (11) 30,396 *
Frank A. Ingari (12) 45,000 *
Jonathan J. Ledecky (13) 38,000 *
Ralph S. Terkowitz (14) 38,000 *
John W. Sidgmore (15) 18,000 *
Thomas P. Spahr (16) 1,582,242 2.0
Capital Group International, Inc. (17) 1,626,900 2.0
Citadel Investment Group, L.L.C. (18) 2,664,845 3.3
John Hancock Financial Services, Inc. (19) 1,549,000 1.9
Nevis Capital (20) 2,474,850 3.1
All executive officers and directors as a 52,994,647 64.8
group (9 persons) (2)
56
- ----------
* Less than 1%
(1) Each person named above (except as otherwise indicated in the footnotes
below) has an address in care of MicroStrategy Incorporated, 8000 Towers
Crescent Drive, Vienna, Virginia 22182.
(2) The shares of the Company listed in this table are shares of Class B
Common Stock, unless otherwise indicated or set forth in the footnotes to
this table. Shares held by the directors and executive officers as a group
include options to purchase 363,300 shares of Class A Common Stock of the
Company that are exercisable within 60 days after February 28, 2001.
(3) The inclusion of any shares of Common Stock deemed beneficially owned does
not constitute an admission of beneficial ownership of those shares. In
accordance with the rules of the SEC, each stockholder is deemed to
beneficially own any shares subject to stock options that are currently
exercisable or exercisable within 60 days after February 28, 2001, and any
reference below to shares subject to outstanding stock options held by the
person in question refers only to such stock options.
(4) Number of shares deemed outstanding as of February 28, 2001 includes (i)
30,313,030 shares of the Company's Class A Common Stock and (ii)
51,165,624.28 shares of the Company's Class B Common Stock, plus any
shares of the Company's Common Stock subject to outstanding stock options
exercisable by the person in question within 60 days after February 28,
2001.
(5) Mr. Saylor's holdings of the Company's Common Stock consist of 39,257,110
shares of the Class B Common Stock held beneficially by Mr. Saylor as a
result of his beneficial ownership in Alcantara LLC, 400,000 shares of
Class B Common Stock held in trust (approximately 77.5% of the Class B
Common Stock outstanding), 3,030,000 shares of the Company's Class A
Common Stock held beneficially by Mr. Saylor as a result of his beneficial
ownership in Alcantara LLC, 535,155 shares of the Company's Class A Common
Stock held in his own name and 312,600 shares of the Company's Class A
Common Stock held beneficially by Mr. Saylor in a foundation.
(6) Mr. Bansal's holdings of Common Stock consist of 8,059,681 shares of Class
B Common Stock held beneficially by Mr. Bansal as a result of his
beneficial ownership in Shangri-La LLC, 439,046 shares of Class B Common
Stock held in trust, 16,954 shares of Class B Common Stock held in his own
name (approximately 16.6% of the Class B Common Stock outstanding), 19,000
shares of the Company's Class A Common Stock held beneficially by Mr.
Bansal as a result of his beneficial ownership in Shangri-La LLC, 106,277
shares of the Company's Class A Common Stock held in his own name and
58,000 shares of Class A Common Stock held beneficially by Mr. Bansal in a
foundation.
(7) Mr. Brown's holdings of the Common Stock consist of options exercisable
within 60 days after February 28, 2001 for 100,000 shares of the Company's
Class A Common Stock.
(8) Mr. Klein's holdings of Common Stock consist of 42,646 shares of the
Company's Class A Common Stock and options exercisable within 60 days
after February 28, 2001 for 26,300 shares of the Company's Class A Common
Stock.
57
(9) Mr. Trundle's holdings of Common Stock consist of 230,878 shares of the
Company's Class A Common Stock, 100,000 Shares of Class B Common Stock
(approximately 0.002% of the Class B common stock outstanding), and
options exercisable within 60 days after February 28, 2001 for 122,000
shares of the Company's Class A Common Stock.
(10) Mr. Driscoll's holdings of Common Stock consist of 15,274 shares of the
Company's Class A Common Stock and options exercisable within 60 days
after February 28, 2001 for 2,000 shares of the Company's Class A Common
Stock.
(11) Mr. Payne's holdings of Common Stock consist of 936 shares of the
Company's Class A Common Stock and options exercisable within 60 days
after February 28, 2001 for 30,000 shares of the Company's Class A Common
Stock.
(12) Mr. Ingari's holdings of Common Stock consist of 20,000 shares of the
Company's Class A Common Stock and options exercisable within 60 days
after February 28, 2001 for 25,000 shares of the Company's Class A Common
Stock.
(13) Mr. Ledecky's holdings of Common Stock consist of 2,000 shares of the
Company's Class A Common Stock and options exercisable within 60 days
after February 28, 2001 for 36,000 shares of the Company's Class A Common
Stock.
(14) Mr. Terkowitz's holdings of Common Stock consist of 2,000 shares of the
Company's Class A Common Stock held beneficially by Mr. Terkowitz in trust
and options exercisable within 60 days after February 28, 2001 for 36,000
shares of the Company's Class A Common Stock.
(15) Mr. Sidgmore was elected as a director on February 16, 2000. Mr.
Sidgmore's holdings of Common Stock consist of options exercisable within
60 days after February 28, 2001 for 18,000 shares of the Company's Class A
Common Stock.
(16) Mr. Spahr's holdings of Common Stock consist of 1,364,000 shares of Class
B Common Stock (approximately 2.7% of the Class B Common Stock
outstanding), 139,000 shares of the Company's Class A Common Stock in his
own name, 50,000 shares of the Company's Class A Common Stock held
beneficially by Mr. Spahr in trust, 19,000 shares of the Company's Class A
Common Stock held beneficially by Mr. Spahr in a foundation and options
exercisable within 60 days after February 28, 2001 for 10,242 shares of
the Company's Class A Common Stock.
(17) Information regarding the number of shares of Common Stock beneficially
owned by Capital Group International, Inc. includes shares beneficially
owned by a wholly-owned subsidiary, Capital Guardian Trust Company, and is
based on the most recent Schedule 13-G of such entities received by the
Company, which reported such ownership as of December 29, 2000. All shares
beneficially held by Capital Group International consist of the Company's
Class A Common Stock (approximately 5.7% of the Class A Common Stock
outstanding as of December 29, 2000). The address of Capital Group
International, Inc. is 11100 Santa Monica Boulevard, Los Angeles,
California 90025.
(18) Information regarding the number of shares of Common Stock beneficially
owned by Citadel Investment Group, L.L.C. includes shares beneficially
owned by affiliates Citadel Limited Partnership, GLB Partners,
58
L.P., Wellington Partners Limited Partnership, Kensington Global
Strategies Fund, Ltd., Wingate Capital Ltd., Fisher Capital Ltd. and
Kenneth Griffin, and is based on the most recent Schedule 13-G of such
entities and individual received by the Company, which reported such
ownership as of December 31, 2000. All shares beneficially held by such
entities and individual consist of the Company's Class A Common Stock
(approximately 8.8% of the Class A Common Stock outstanding as of December
31, 2000). The address of Citadel Investment Group, L.L.C. is 225 W.
Washington, 9th Floor, Chicago, Illinois 60606.
(19) Information regarding the number of shares of Common Stock beneficially
owned by John Hancock Financial Services, Inc. includes shares
beneficially owned by affiliates John Hancock Life Insurance Company, John
Hancock Subsidiaries, Inc., The Berkeley Financial Group, Inc. and John
Hancock Advisers, Inc., and is based on the most recent Schedule 13-G of
such entities received by the Company, which reported such ownership as of
December 31, 2000. All shares beneficially held by such entities and
individual consist of the Company's Class A Common Stock (approximately
5.4% of the Class A Common Stock outstanding as of December 31, 2000). The
address of John Hancock Financial Services, Inc. is John Hancock Place,
P.O. Box 111, Boston, Massachusetts 02117.
(20) Information regarding the number of shares of Common Stock beneficially
owned by Nevis Capital includes shares beneficially owned by Jon C. Baker
and David R. Wilmerding, III, and is based on the most recent Schedule 13-
G of such entities received by the Company, which reported such ownership
as of December 31, 2000. All shares beneficially held by such entities
consist of the Company's Class A Common Stock (approximately 8.6% of the
Class A Common Stock outstanding as of December 31, 2000). The address of
Nevis Capital is 1119 St. Paul Street, Baltimore, Maryland 21202.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As discussed under Item 3 "Legal Proceedings" above, Michael J. Saylor
and Sanju K. Bansal were named as defendants in a class action lawsuit
and shareholder derivative action and were subjects of an SEC investigation
relating to the restatement of our financial results for 1999, 1998 and 1997.
Mr. Saylor and Mr. Bansal each retained separate legal counsel to defend their
individual interests in these legal proceedings. Using a portion of the proceeds
that we received from insurance in connection with those proceedings, we paid
the legal fees of such separate counsel in the amounts of $1,009,360 and
$334,553 on behalf of Mr. Saylor and Mr. Bansal, respectively, during 2000.
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................................... 64
Consolidated Financial Statements:
Balance Sheets................................................ 65
Statements of Operations...................................... 66
Statements of Stockholders' Equity (Deficit).................. 67
Statements of Cash Flows...................................... 70
Notes to Consolidated Financial Statements.......................... 71
2. Consolidated Financial Statement Schedule
Page
----
Schedule II--Valuation and Qualifying Accounts...................... 93
59
3. Exhibits
Exhibit
Number Description
------ -----------
3.1 Amended and Restated 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 Certificate of Designations, Preferences and Rights of the
Series A Convertible Preferred Stock (Filed as Exhibit 3.1 to
the registrant's Current Report on Form 8-K (File No.
000-24435) filed on June 19, 2000 and incorporated by
reference herein).
3.3 Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of the registrant (Filed as
Exhibit 3.2 to the registrant's Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2000 (File No.
000-24435) and incorporated by reference herein).
3.4 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
(Filed as Exhibit 10.3 to the registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999 (File
No. 000-24435) and incorporated by reference herein).
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 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).
10.6 Amendment No. 1 to the 1999 Stock Option Plan of the
registrant (Filed as Exhibit 10.3 to the registrant's
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2000 (File No. 000-24435) and incorporated by
reference herein).
10.7 Master Lease Agreement No. VAC180, dated November 1, 1999,
between MLC Group, Inc. and the registrant (Filed as Exhibit
10.8 to the registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999 (File No. 000-24435) and
incorporated by reference herein).
10.8 Letter Agreement, dated December 1, 1999, between ePlus, Inc.
(f/k/a MLC Group, Inc.) and the registrant (Filed as Exhibit
10.9 to the registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999 (File No. 000-24435) and
incorporated by reference herein).
10.9 Software Development and OEM Agreement, dated December 28,
1999, between the registrant and Exchange Applications, Inc.
(Filed as Exhibit 10.10 to the registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999 (File
No. 000-24435) and incorporated by reference herein).
60
Exhibit
Number Description
------ -----------
10.10 Software License Agreement, dated December 28, 1999, between
the registrant and Exchange Applications, Inc. (Filed as
Exhibit 10.11 to the registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1999 (File No.
000-24435) and incorporated by reference herein).
10.11 Value-Added Reseller Agreement, dated December 28, 1999,
between the registrant and Exchange Applications, Inc. (Filed
as Exhibit 10.12 to the registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1999 (File No.
000-24435) and incorporated by reference herein).
10.12 Payment and Registration Rights Agreement, dated December 28,
1999, between the registrant and Exchange Applications, Inc.
(Filed as Exhibit 10.13 to the registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999 (File
No. 000-24435) and incorporated by reference herein).
10.13 DSS Partner MicroStrategy Incorporated OEM Agreement, between
the registrant and NCR Corporation (Filed as Exhibit 10.14 to
the registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999 (File No. 000-24435) and
incorporated by reference herein).
10.14 Memorandum of Understanding (Purchase), dated as of September
30, 1999, between, the registrant and NCR Corporation (Filed
as Exhibit 10.15 to the registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1999 (File No.
000-24435) and incorporated by reference herein).
10.15 Memorandum of Understanding (Joint Marketing), dated as of
September 30, 1999, between the registrant and NCR Corporation
(Filed as Exhibit 10.16 to the registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999 (File
No. 000-24435) and incorporated by reference herein).
10.16 Asset Purchase Agreement, dated December 23, 1999, between the
registrant and NCR Corporation (Filed as Exhibit 10.17 to the
registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999 (File No. 000-24435) and incorporated
by reference herein).
10.17 Deed of Lease, dated January 7, 2000, between Tysons Corner
Property LLC and the registrant (Filed as Exhibit 10.18 to the
registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999 (File No. 000-24435) and incorporated
by reference herein).
10.18 Registration Rights Agreement, dated as of June 17, 2000, by
and among MicroStrategy Incorporated and each of the
signatories thereto (Filed as Exhibit 10.1 to the registrant's
Current Report on Form 8-K (File No. 000-24435) filed on June
19, 2000 and incorporated by reference herein).
10.19 Series A Preferred Stock Purchase Agreement by and among
Strategy.com Incorporated, Aether Capital LLC and the other
parties thereto, dated as of October 18, 2000 (Filed as
Exhibit 10.1 to the registrant's Current Report of Form 8-K
(File No. 000-24435) filed on November 6, 2000 and
incorporated by reference herein).
10.20 Amended and Restated Certificate of Incorporation of
Strategy.com Incorporated, dated as of October 17, 2000 (Filed
as Exhibit 10.2 to the registrant's Current Report of Form 8-K
(File No. 000-24435) filed on November 6, 2000 and
incorporated by reference herein).
10.21 Investor Rights Agreement by and among Strategy.com
Incorporated, the registrant, Aether Capital LLC and the other
parties thereto, dated as of October 18, 2000 (Filed as
Exhibit 10.3 to the registrant's Current Report of Form 8-K
(File No. 000-24435) filed on November 6, 2000 and
incorporated by reference herein).
10.22 Stockholders' Voting Agreement by and among Strategy.com
Incorporated, the registrant, Aether Capital LLC and the other
parties thereto, dated as of October 18, 2000 (Filed as
Exhibit 10.4 to the registrant's Current Report of Form 8-K
(File No. 000-24435) filed on November 6, 2000 and
incorporated by reference herein).
61
Exhibit
Number Description
------ -----------
10.23 Memorandum of Understanding by and among the registrant,
Strategy.com Incorporated and certain other affiliates of the
registrant, dated as of October 17, 2000 (Filed as Exhibit
10.5 to the registrant's Current Report of Form 8-K (File No.
000-24435) filed on November 6, 2000 and incorporated by
reference herein).
10.24 United States Intellectual Property Assignment and License
Back Agreement by and between the registrant and Strategy.com
Incorporated, dated as of October 17, 2000 (Filed as Exhibit
10.6 to the registrant's Current Report of Form 8-K (File No.
000-24435) filed on November 6, 2000 and incorporated by
reference herein).
10.25 U.S. Intellectual Property License Agreement by and between
the registrant and Strategy.com Incorporated, dated as of
October 17, 2000 (Filed as Exhibit 10.7 to the registrant's
Current Report of Form 8-K (File No. 000-24435) filed on
November 6, 2000 and incorporated by reference herein).
10.26 U.S. Software License Agreement by and between the registrant
and Strategy.com Incorporated, dated as of October 17, 2000
(Filed as Exhibit 10.8 to the registrant's Current Report of
Form 8-K (File No. 000-24435) filed on November 6, 2000 and
incorporated by reference herein).
10.27 International Software License Agreement by and between
MicroStrategy International II Limited and Strategy.com
International Limited, dated as of October 17, 2000 (Filed as
Exhibit 10.9 to the registrant's Current Report of Form 8-K
(File No. 000-24435) filed on November 6, 2000 and
incorporated by reference herein).
10.28 International Intellectual Property License Agreement by and
between MicroStrategy International II Limited and
Strategy.com International Limited, dated as of October 17,
2000 (Filed as Exhibit 10.10 to the registrant's Current
Report of Form 8-K (File No. 000-24435) filed on November 6,
2000 and incorporated by reference herein).
10.29 Stipulation of Settlement regarding the settlement of the
class action lawsuit, dated as of January 11, 2001.
10.30 Loan and Security Agreement by and among Foothill Capital
Corporation, the registrant and MicroStrategy Services
Corporation, dated as of February 9, 2001 (Filed as Exhibit
10.1 to the registrant's Current Report of Form 8-K (File No.
000-24435) filed on February 15, 2001 and incorporated by
reference herein).
10.31 General Continuing Guaranty by and among the registrant,
Aventine Incorporated, MicroStrategy Capital Corporation and
MicroStrategy Management Corporation, dated as of February 9,
2001 (Filed as Exhibit 10.2 to the registrant's Current Report
of Form 8-K (File No. 000-24435) filed on February 15, 2001
and incorporated by reference herein).
10.32 Security Agreement by and among the registrant, Aventine
Incorporated, MicroStrategy Capital Corporation, MicroStrategy
Management Corporation and Foothill Capital Corporation, dated
as of February 9, 2001 (Filed as Exhibit 10.3 to the
registrant's Current Report of Form 8-K (File No. 000-24435)
filed on February 15, 2001 and incorporated by reference
herein).
10.33 Warrant to Purchase Class A Common Stock of the registrant,
dated February 9, 2001, issued to Foothill 10.33 Wapital
Corporation (Filed as Exhibit 10.4 to the registrant's Current
Report of Form 8-K (File No. C00-24435) filed on February 15,
2001 and incorporated by reference herein).
10.34 Registration Rights Agreement by and between the registrant
and Foothill Capital Corporation, dated as of February 9, 2001
(Filed as Exhibit 10.5 to the registrant's Current Report of
Form 8-K (File No. 000-24435) filed on February 15, 2001 and
incorporated by reference herein).
62
Exhibit
Number Description
------ -----------
21.1 Subsidiaries of the registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
(b) Reports on Form 8-K
On November 6, 2000, we filed a Current Report on Form 8-K announcing the
initial closing of a private placement of Series A redeemable convertible
preferred stock by Strategy.com Incorporated.
(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
63
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 59 present fairly, in
all material respects, the financial position of MicroStrategy Incorporated and
its subsidiaries at December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. 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 of America, 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.
/S/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
McLean, Virginia
February 2, 2001, except as to Note 19
which is as of March 20, 2001
64
MICROSTRATEGY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 31,
------------------
2000 1999
---- ----
Assets
Current assets:
Cash and cash equivalents..................................................... $ 67,685 $ 25,941
Restricted cash............................................................... 25,884 --
Short-term investments........................................................ 1,085 42,418
Accounts receivable, net...................................................... 49,061 37,586
Prepaid expenses and other current assets..................................... 11,158 15,461
-------- --------
Total current assets..................................................... 154,873 121,406
-------- --------
Property and equipment, net..................................................... 61,409 30,594
Long-term investments........................................................... 5,271 --
Goodwill and other intangible assets, net of accumulated amortization
of $18,170 and $503, respectively.......................................... 34,300 47,154
Deposits and other assets....................................................... 3,234 2,439
Deferred tax assets, net........................................................ -- 1,775
-------- --------
Total assets............................................................. $259,087 $203,368
======== ========
Liabilities and Stockholders' (Deficit) Equity
Current liabilities:
Accounts payable and accrued expenses......................................... $ 35,025 $ 13,582
Accrued compensation and employee benefits.................................... 26,929 14,912
Deferred revenue and advance payments......................................... 50,303 38,028
Deferred tax liabilities, net................................................. -- 1,775
-------- --------
Total current liabilities................................................ 112,257 68,297
Deferred revenue and advance payments........................................... 31,260 33,255
Accrued litigation settlement................................................... 99,484 --
Other long-term liabilities..................................................... 1,509 --
-------- --------
Total liabilities. ...................................................... 244,510 101,552
-------- --------
Commitments and contingencies (Notes 8, 11 and 12)
Series A redeemable convertible preferred stock, par value $0.001 per share,
18 shares authorized, 13 shares issued and outstanding in 2000............. 119,585 --
Mandatorily redeemable convertible preferred stock of consolidated subsidiary,
par value $0.001 per share, 47,884 shares authorized, 13,401 shares issued
and outstanding in 2000.................................................... 40,530 --
Stockholders' equity (deficit):
Preferred stock undesignated, par value $0.001 per share, 4,982 shares
authorized, no shares issued or outstanding.............................. -- --
Class A common stock, par value $0.001 per share, 330,000 shares
authorized, 28,736 and 22,384 shares issued and outstanding, respectively. 29 22
Class B common stock, par value $0.001 per share, 165,000 shares
authorized, 52,033 and 55,867 shares issued and outstanding, respectively. 52 56
Additional paid-in capital.................................................... 152,821 138,943
Deferred compensation......................................................... (624) (895)
Accumulated other comprehensive income........................................ 1,443 1,643
Accumulated deficit........................................................... (299,259) (37,953)
-------- --------
Total stockholders' (deficit) equity..................................... (145,538) 101,816
-------- --------
Total liabilities and stockholders' (deficit) equity..................... $259,087 $203,368
======== ========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
65
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years ended December 31,
------------------------------
2000 1999 1998
---- ---- ----
Revenues:
Product licenses...................................................... $ 102,050 $ 85,797 $ 61,635
Product support and other services.................................... 121,880 65,461 33,854
--------- -------- --------
Total revenues...................................................... 223,930 151,258 95,489
--------- -------- --------
Cost of revenues:
Product licenses...................................................... 2,722 2,597 2,246
Product support and other services.................................... 85,249 34,436 17,535
--------- -------- --------
Total cost of revenues.............................................. 87,971 37,033 19,781
--------- -------- --------
Gross profit............................................................. 135,959 114,225 75,708
Operating expenses:
Sales and marketing................................................... 151,095 93,090 53,327
Research and development.............................................. 61,433 27,998 12,106
General and administrative............................................ 58,762 24,448 12,743
Amortization of intangibles assets.................................... 17,667 422 81
In-process research and development................................... -- 2,800 --
Restructuring and related charges..................................... 10,835 -- --
--------- -------- --------
Total operating expenses............................................ 299,792 148,758 78,257
--------- -------- --------
Loss from operations..................................................... (163,833) (34,533) (2,549)
Financing and other income (expenses):
Interest income....................................................... 3,675 2,174 1,028
Interest expense...................................................... (37) (144) (720)
Loss on investments................................................... (9,365) -- --
Provision for litigation settlement................................... (89,729) -- --
Minority interest..................................................... (713) -- --
Other income (expense), net........................................... 96 6 (14)
--------- -------- --------
Total financing and other income (expenses)......................... (96,073) 2,036 294
--------- -------- --------
Loss before income taxes................................................. (259,906) (32,497) (2,255)
Provision for income taxes............................................... 1,400 1,246 --
--------- -------- --------
Net loss................................................................. (261,306) (33,743) (2,255)
--------- -------- --------
Preferred stock dividends................................................ (4,687) -- --
Beneficial conversion feature............................................ (19,375) -- --
--------- -------- --------
Net loss attributable to common stockholders............................. $(285,368) $(33,743) $ (2,255)
========= ======== ========
Basic and diluted net loss per share..................................... $ (3.58) $ (0.44) $ (0.03)
========= ======== ========
Weighted average shares used in computing basic and diluted net loss
per share............................................................. 79,779 77,028 66,986
========= ======== ========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
66
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
Additional
Class A Class B Paid-in
Common Stock Common Stock Common Stock Capital
--------------- --------------- --------------- --------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
Balance at December 31, 1997 ............................... 58,988 $ 59 -- $-- -- $ -- $ (10)
------- ---- ------ --- ------ ---- --------
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 -- -- -- -- 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. (61,791) (62) -- -- 61,791 62 --
S-Corporation to C-Corporation conversion .................. -- -- -- -- -- -- 315
Issuance of Class A common stock in connection with
initial public offering, net of offering costs ........... -- -- 8,880 9 -- -- 48,180
Issuance of Class A common stock under stock option
plan ..................................................... -- -- 699 1 -- -- 349
Conversion of Class B to Class A common stock .............. -- -- 525 1 (525) (1) --
Issuance of Class A common stock warrants .................. -- -- -- -- -- -- 934
Amortization of deferred stock compensation ................ -- -- -- -- -- -- --
------- ---- ------ --- ------ ---- --------
Balance at December 31, 1998 ............................... -- $ -- 10,104 $11 61,266 $ 61 $ 42,183
------- ---- ------ --- ------ ---- --------
Net loss ................................................... -- -- -- -- -- -- --
Change in unrealized gain (loss) on 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 -- -- 40,046
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 -- -- 7,018
Issuance of Class A common stock related to purchase of
NCR's Teracube assets .................................... -- -- 566 -- -- -- 49,557
Issuance of Class A common stock warrants .................. -- -- -- -- -- -- 139
Amortization of deferred stock compensation ................ -- -- -- -- -- -- --
------- ---- ------ --- ------ ---- --------
Balance at December 31, 1999 ............................... -- $ -- 22,384 $22 55,867 $ 56 $138,943
------- ---- ------ --- ------ ---- --------
Net loss ................................................... -- -- -- -- -- -- --
Change in unrealized gain (loss) on investments, net of
applicable taxes ......................................... -- -- -- -- -- -- --
Foreign currency translation adjustment .................... -- -- -- -- -- -- --
Comprehensive loss ......................................... -- -- -- -- -- -- --
Conversion of Class B to Class A common stock .............. -- -- 3,834 4 (3,834) (4) --
Issuance of Class A common stock under stock option and
purchase plans ........................................... -- -- 2,102 2 -- -- 8,392
Issuance of Class A common stock in connection with
agreement with software integrator ....................... -- -- 57 -- -- -- 1,600
Capital contribution related to stockholder stock grant .... -- -- -- -- -- -- 3,003
Acceleration of vesting provisions on stock options ........ -- -- -- -- -- -- 1,483
Preferred stock dividends .................................. -- -- -- -- -- -- (4,687)
Payment of preferred stock dividends ....................... -- -- 359 1 -- -- 4,087
Amortization of deferred stock compensation ................ -- -- -- -- -- -- --
------- ---- ------ --- ------ ---- --------
Balance at December 31, 2000 ............................... -- $ -- 28,736 $29 52,033 $ 52 $152,821
------- ---- ------ --- ------ ---- --------
The accompanying notes are an integral part of these
Consolidated Financial Statements.
67
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
Accumulated Other Accumu- Deferred
Comprehensive lated Comp-
Income (Loss) Deficit ensation Total
------------------------ ------- -------- -----
Unrealized Foreign
Gain (Loss) on Currency
Short-term Translation
Investments Adjustment
----------- ----------
Balance at December 31, 1997.............. $ -- $ 158 $ (1,640) $ -- $ (1,433)
------- ------- --------- -------- ---------
Net loss.................................. -- -- (2,255) -- (2,255)
Foreign currency translation
adjustment............................. -- 736 -- -- 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.................................. -- -- -- (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........ -- -- -- -- 48,189
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........................... -- -- -- 186 186
------- ------- --------- -------- ---------
Balance at December 31, 1998.............. $ -- $ 894 $ (4,210) $ (1,164) $ 37,775
------- ------- --------- -------- ---------
Net loss.................................. -- -- (33,743) -- (33,743)
Change in unrealized gain (loss) on
investments, net of applicable
taxes.................................. 1,367 -- -- -- 1,367
Foreign currency translation
adjustment............................. -- (618) -- -- (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........................... -- -- -- 269 269
------- ------- --------- -------- ---------
Balance at December 31, 1999.............. $ 1,367 $ 276 $ (37,953) $ (895) $ 101,816
------- ------- --------- -------- ---------
Net loss.................................. -- -- (261,306) -- (261,306)
Change in unrealized gain (loss) on
investments, net of applicable
taxes.................................. (1,400) -- -- -- (1,400)
Foreign currency translation
adjustment............................. -- 1,200 -- -- 1,200
---------
Comprehensive loss........................ -- -- -- -- (261,506)
Conversion of Class B to Class A
common stock........................... -- -- -- -- --
Issuance of Class A common stock
under stock option and purchase plans... -- -- -- -- 8,394
Issuance of Class A common stock in
connection with agreement with
software integrator................... -- -- -- -- 1,600
Capital contribution related to
stockholder stock grant............... -- -- -- -- 3,003
Acceleration of vesting provisions on
stock options......................... -- -- -- -- 1,483
Preferred stock dividends................. -- -- -- -- (4,687)
Payment of preferred stock dividends...... -- -- -- -- 4,088
Amortization of deferred stock
compensation.......................... -- -- -- 271 271
------- ------- --------- -------- ---------
Balance at December 31, 2000.............. $ (33) $ 1,476 $(299,259) $ (624) $(145,538)
------- ------- --------- -------- ---------
The accompanying notes are an integral part of these
Consolidated Financial Statements.
69
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31,
-------------------------------
2000 1999 1998
---- ---- ----
Operating activities:
Net loss................................................................................ $(261,306) $(33,743) $ (2,255)
Adjustments to reconcile net loss to net cash from operating activities:
Depreciation and amortization........................................................... 34,890 7,839 3,250
Allowance for doubtful accounts......................................................... 10,129 1,877 815
Acquired in-process research and development............................................ -- 2,800 --
Amortization of deferred stock option compensation...................................... 271 269 186
Loss on other than temporary decline in investments..................................... 12,095 -- --
Gain on hedging transaction and short-term investments.................................. (2,730) -- --
Restructuring expense related to stockholder stock grant and accelerated options........ 4,486 -- --
Noncash accrual for litigation settlement............................................... 99,484 -- --
Minority interest....................................................................... 713 -- --
Issuance of warrants to a customer...................................................... -- -- 934
Changes in operating assets and liabilities:
Accounts receivable..................................................................... (20,395) (14,598) (12,884)
Prepaid expenses and other current assets............................................... 4,528 (10,318) (3,758)
Deposits and other assets............................................................... (1,908) (1,054) (188)
Accounts payable and accrued expenses, compensation and employee benefits............... 33,064 10,297 5,508
Deferred revenue and advance payments................................................... (2,636) 36,720 5,844
Other long-term liabilities............................................................. 1,509 -- --
--------- -------- --------
Net cash (used in) provided by operating activities................................... (87,806) 89 (2,548)
--------- -------- --------
Investing activities:
Purchases of property and equipment..................................................... (47,420) (23,733) (9,295)
Purchases of short-term investments..................................................... (1,496) (24,491) --
Purchases of long-term investments...................................................... (5,021) -- --
Maturities of short-term investments.................................................... 5,500 5,000 --
Proceeds from sale of short-term investments and realized gain on hedging transaction... 39,763 -- --
Increase in restricted cash............................................................. (25,884) -- --
Purchase of intangible assets........................................................... (3,168) -- --
--------- -------- --------
Net cash used in investing activities................................................. (37,726) (43,224) (9,295)
--------- -------- --------
Financing activities:
Proceeds from sale of Class A common stock and exercise of stock options, net
of offering costs..................................................................... 8,394 47,197 48,539
Proceeds from sale of Series A redeemable convertible preferred stock, net of offering
costs................................................................................. 119,585 -- --
Proceeds from sale of redeemable convertible preferred stock of consolidated subsidiary,
net of offering costs................................................................. 39,817 -- --
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
Principal payments on notes payable..................................................... -- -- (4,190)
--------- -------- --------
Net cash provided by financing activities............................................. 167,796 42,197 35,703
--------- -------- --------
Effect of foreign exchange rate changes on cash....................................... (520) (612) 125
--------- -------- --------
Net increase (decrease) in cash and cash equivalents....................................... 41,744 (1,550) 23,985
Cash and cash equivalents, beginning of year............................................... 25,941 27,491 3,506
--------- -------- --------
Cash and cash equivalents, end of year..................................................... $ 67,685 $ 25,941 $ 27,491
========= ======== =========
Supplemental disclosure of noncash investing and financing activities:
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..................................... $ 13,058 $ 21,546 $ --
========= ======== =========
Issuance of Class A common stock warrants............................................... $ -- $ 139 $ 934
========= ======== =========
Issuance of Class A common stock in connection with agreement with software integrator. $ 1,600 $ -- $ --
========= ======== =========
Payment of preferred stock dividends through the issuance of Class A common stock....... $ (4,088) $ -- $ --
========= ======== =========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................................................. $ 33 $ 87 $ 714
========= ======== =========
Cash paid during the year for income taxes.............................................. $ 515 $ 2,113 $ 2,996
========= ======== =========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
70
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization
MicroStrategy Incorporated (the "Company" or "MicroStrategy") provides
business intelligence 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 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 business unit called Strategy.com, which leverages
MicroStrategy's software platform to deliver personalized, requested information
to consumers.
In October 2000, the Company completed a reorganization of its business,
which resulted in the establishment of Strategy.com as a stand-alone subsidiary.
As part of this reorganization, the Company assigned rights to MicroStrategy
software, certain contracts, employees and intellectual property to Strategy.com
in exchange for approximately 84.0 million shares of Class B common stock, which
at the time represented all of the outstanding common stock of Strategy.com. The
Company also agreed to enter into various intercompany agreements covering
consulting services, sales and marketing activities and administrative services
to be provided by MicroStrategy on behalf of Strategy.com. The Company owns
approximately 84% of the economic interest in the outstanding equity of
Strategy.com on an as converted, diluted basis. All losses of Strategy.com are
included in the consolidated financial statements of the Company.
The Company has incurred substantial losses for each of the three years in
the period ended December 31, 2000. For the year ended December 31, 2000, the
Company incurred a loss from operations of $163.8 million and negative cash
flows from operations of $87.8 million. As of December 31, 2000, the Company had
an accumulated deficit of $299.3 million. If revenues do not grow at anticipated
rates, and the Company is not able to promptly adjust its cost structure, it
will need to take further measures to reduce costs or will require additional
external financing through credit facilities, sale of additional equity in
MicroStrategy or in Strategy.com, or by obtaining other financing facilities to
support the Company's current cost structure. Financing facilities may not be
available on acceptable terms. Management believes that existing cash, cash
generated internally by operations and the new credit facility agreement entered
into in February 2001 (see Note 19) will meet working capital requirements and
anticipated capital expenditures for the next 12 months.
(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 accounting principles generally accepted in the United States, 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.
71
(e) Investments
Investments are comprised of readily marketable equity securities,
non-publicly traded 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. A majority of the
Company's marketable securities are available-for-sale as of December 31, 2000.
Available-for-sale marketable securities are reported at fair value.
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. On a quarterly
basis, management evaluates individual securities to determine whether a decline
in fair value is other than temporary. If the decline in fair value is
considered to be other than temporary, the cost basis of the individual security
is written down to fair value as a new cost basis and the amount of the
write-down is included in operations. Interest income is recognized when earned.
Realized gains and losses for marketable securities are derived 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
estimated useful lives of the improvements or the term of the lease, whichever
is shorter.
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.
Included in property and equipment is the cost of internally developed
software. In accordance with Statement of Position ("SOP") 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use," eligible
internally developed software costs incurred are capitalized subsequent to the
completion of the preliminary project stage. Such costs include external direct
material and service costs, employee payroll and payroll-related costs. After
all substantial testing and deployment is completed and the software is ready
for its intended use, internally developed software costs are amortized using
the straight-line method over the estimated useful life of the software,
generally up to three years.
(g) Goodwill and Other Intangible Assets
Goodwill and other intangible assets were acquired principally in
connection with the purchase of NCR Corporation's ("NCR") 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 names,
customer lists, assembled work force, domain names and agreement with software
integrator. Goodwill and other intangible assets are amortized on the
straight-line basis over their weighted average useful lives of approximately
three years.
(h) Impairment of Long-Lived Assets
The Company reviews long-lived assets, including goodwill and other
intangible assets, for impairment
72
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 by the amount in which the
carrying value of the asset exceeds the related fair value of the asset. No
provisions for impairment have been recorded to date.
(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. Capitalized software
development costs, net of accumulated amortization, are $1,296,000 and $647,000
at December 31, 2000 and 1999, respectively, and are included in deposits and
other assets in the accompanying consolidated balance sheets. Amortization
expense related to software development costs was $771,000, $600,000 and
$584,000 for the years ended December 31, 2000, 1999 and 1998, respectively, and
is included in cost of product license revenues. During 2000, the Company
capitalized software development costs of $1.4 million. No costs were
capitalized during 1999 as the establishment of technological feasibility and
general release of such software had substantially coincided.
(j) Legal Costs
The Company accrues legal costs in the period in which expenses are
incurred, except in the event of a loss contingency that is believed to be
probable and can be reasonably estimated, whereby the Company accrues the legal
costs estimated to be incurred until the expected settlement of the contingent
matter. As events evolve during the administration and litigation process and
additional information becomes known, the Company reassesses its estimates
related to accrued legal costs.
(k) Deferred Costs
Deferred costs represent costs incurred that are directly associated with
customer contracts for which the Company has not yet started recognizing
revenue. These costs, which consist mainly of salary and commissions costs, are
deferred until revenues on the related project are recognized in order to
properly match revenues and associated expenses. Deferred costs are amortized
over the same period as the related revenue. As of December 31, 2000 and 1999,
the Company had deferred costs of $2.9 million and $630,000, respectively. The
current and non-current portions of deferred costs are included in prepaid
expenses and other current assets and deposits and other assets, respectively,
in the accompanying consolidated balance sheets.
(l) 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 offsets its
accounts receivable and deferred revenue for any unbilled and unpaid items
included in deferred revenue and advance payments.
73
(m) 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, consulting, hosting and other services. The Company's revenue
recognition policies are in accordance with SOP 97-2, "Software Revenue
Recognition," as amended, which is the authoritative guidance for recognizing
revenue on software transactions. 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 undelivered 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, subject
to certain limited exceptions set forth in SOP 97-2. 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. In December 1999, the Securities and
Exchange Commission ("SEC") released SAB No. 101, "Revenue Recognition in
Financial Statements," which provides guidance on the recognition, presentation,
and disclosure of revenue in the financial statements filed with the SEC.
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 did not have a material
impact on the Company's operating results, financial position or cash flows. SAB
No. 101 was effective in fiscal year 2000. The implementation of SAB No. 101 did
not have a material impact on the Company's financial position or results of
operations.
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 reasonably assured. 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 exists on undelivered elements and there is no such evidence of fair
value established for delivered elements, revenue is first allocated to the
elements where evidence of fair value has been established and the residual
amount is allocated to the delivered elements. If evidence of fair value for
each undelivered 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 limited 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. Expected losses
on contracts in progress are expensed in the current period. As of December 31,
2000, the Company has not incurred any losses on contracts in progress. If the
arrangement includes acceptance criteria, revenue is not recognized until the
Company can demonstrate that the software or service can meet the acceptance
criteria. If the software license arrangement obligates the Company to deliver
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
74
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, are deferred and recognized
ratably over the subsequent hosting period, which is typically two to three
years.
Amounts collected prior to satisfying the above revenue recognition
criteria are reflected in deferred revenue and advance payments. The Company
offsets its accounts receivable and deferred revenue for any unbilled and unpaid
items included in deferred revenue and advance payments.
Cost of product licenses consists of the costs to distribute the product,
including the costs of the media on which it is delivered, shipping and handling
costs and royalty payments to third party vendors, as well as amortization of
software development costs. Cost of product support and other services 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.
(n) 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 $9.0 million, $1.6 million and $134,000 for the
years ended December 31, 2000, 1999 and 1998, respectively. As of December 31,
2000, the Company had no prepaid advertising costs. As of December 31, 1999, the
Company had prepaid advertising costs of $3.5 million.
(o) Income Taxes
Prior to the initial public offering, the Company was a Subchapter S
corporation for federal and state income tax purposes. Under Subchapter S, the
stockholders reported the taxable income or loss and, accordingly, no federal or
state income taxes have been recorded 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. Since that conversion, the Company is 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. The Company provides a valuation allowance to reduce deferred tax
assets to their estimated realizable value.
(p) 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. Net loss used in the calculation is increased by
dividends and beneficial conversion features in each period related to preferred
stock outstanding. 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 potential common shares outstanding during the period. Potential
common shares are included in the diluted net loss per share calculation when
dilutive. Potential common shares consist of common stock issuable upon exercise
of outstanding common stock options, warrants and the conversion of preferred
stock. The Company's net loss per share calculation for basic and diluted is
based on the weighted average number of 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, warrants and the conversion of
preferred stock have been excluded from the net loss per share calculation
because their effect would be anti-dilutive. Refer to Notes 13 and 15 below for
stock options, warrants and the conversion of preferred stock excluded in each
year.
75
(q) Foreign Currency Translation
The functional currency of the Company's international operations 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 (loss) in stockholders' equity (deficit). Transaction gains
and losses arising from transactions denominated in a currency other than the
functional currency of the entity involved are included in the consolidated
statement of operations. For the year ended December 31, 2000, the Company
recorded foreign currency transaction losses of $505,000. Gains and losses
resulting from foreign currency transactions were immaterial for 1999 and 1998.
(r) 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 routinely assesses the financial
strength of its customers and maintains allowances for anticipated losses. For
the year ended December 31, 2000, one customer accounted for 10.8% of net
accounts receivable. For the year ended 1999, no individual customer accounted
for 10% or more of net accounts receivable.
(s) Fair Value of Financial Instruments
The carrying amounts for the Company's cash, cash equivalents, accounts
receivable, and accounts payable approximate fair value. The fair market value
for short-term and long-term marketable securities is based on quoted market
prices where available. The carrying value of Series A redeemable convertible
preferred stock approximates fair value. The carrying value of long-term debt
and warrants to be issued in connection with the settlement of the class action
litigation is based upon the fair value of the instruments to be issued. See
factors for determining the fair value of these instruments discussed in Note
12.
(t) 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 ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and to adopt only the disclosure provisions of SFAS No. 123.
(u) Comprehensive Income (Loss)
Other comprehensive income (loss) recorded by the Company is comprised of
accumulated currency translation adjustments and unrealized gains and losses on
available-for-sale marketable securities, net of related tax effects.
(v) Recent Accounting Standards
In June 1999, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 137, which delays the effective date of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," until 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 any material
derivative contracts and does not have near term plans to enter into such
contracts. Accordingly, the adoption of SFAS No. 133 and SFAS No. 137 is not
expected to have a material effect on the financial position or results of
operations of the Company.
76
(3) 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 of
$2.7 million. 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 of $5.1 million. 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.
(4) Acquisitions
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 is developing 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 allocation of the
$49.6 million purchase price was $2.8 million for in-process research and
development and $46.8 million for tangible and intangible assets including core
technology, computer equipment, and assembled workforce. The Company is
amortizing the intangible assets over their estimated useful lives, ranging from
one to three years.
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.
At the end of 1999, the Company estimated additional expenditures of
approximately $900,000 to complete development; however, due to expansion of
project scope, the Company incurred expenses of $1.6 million during 2000 and
intends to incur additional expenses in 2001 of approximately $700,000 in order
to complete development. Remaining development efforts are focused on completing
the development of certain sub-products of Teracube that will maximize
efficiencies in operation of the Company's business intelligence products.
Completion of these projects will be necessary before revenues are produced.
Approximately 30% of the final products' 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. The Company expects to begin deriving revenues in 2001 when certain
MicroStrategy products that include the Teracube sub-products are expected to be
generally available. If these projects are not successfully developed, the
Company may not realize the value assigned to the intangible assets.
During the years ended December 31, 2000 and 1999, the Company recorded
amortization expense of $16.4 million and $341,000, respectively, relating to
these intangible assets.
(5) Investments
The following summarizes by major security type the fair market value and
cost of the Company's investments as of December 31, (in thousands):
77
2000 1999
-------------- ---------------
Fair Fair
Value Cost Value Cost
----- ---- ----- ----
Corporate notes......................... $ - $ - $ 5,455 $ 5,505
U.S. agency notes....................... - - 13,922 14,000
Marketable equity securities............ 1,085 1,118 23,041 21,546
Non-publicly traded equity securities... 5,271 5,271 - -
------ ------ ------- -------
$6,356 $6,389 $42,418 $41,051
====== ====== ======= =======
In December 1999, the Company received 824,742 shares of Xchange, Inc.
("Xchange"), formerly Exchange Applications, Inc., stock valued at $21.5
million, in consideration for the sale of MicroStrategy software, technical
support and consulting services. The Company sold all of its economic interest
in these shares for a net realized gain of $1.5 million during the first two
quarters of 2000.
During 2000, the Company received an additional 805,800 shares of
Xchange's stock, valued at $13.1 million, in consideration for the sale of
MicroStrategy software, technical support and consulting services. Due to a
significant decrease in the market value of their stock, the timing and amount
of future recovery, if any, of this asset is uncertain and the Company does not
consider the decline in value to be temporary. Accordingly, the Company has
written down the investment to its fair value at December 31, 2000, and
recognized a loss of $12.1 million during 2000. This loss was partially offset
by a hedging transaction that resulted in a gain of $1.4 million in the third
quarter of 2000.
At December 31, 2000, the Company had net unrealized losses of $33,000 and
at December 31, 1999, the Company had net unrealized gains of $1.4 million
included in accumulated other comprehensive income (loss) in the accompanying
consolidated statements of stockholders' equity (deficit).
(6) Accounts Receivable
Accounts receivable, net of allowances, consist of the following, as of
December 31, (in thousands):
2000 1999
------- -------
Billed and billable........................... $84,833 $66,181
Less: billed and unpaid deferred revenue...... (26,128) (25,266)
------- -------
58,705 40,915
Less: allowance for doubtful accounts......... (9,644) (3,329)
------- -------
$49,061 $37,586
======= =======
The Company offsets its accounts receivable and deferred revenue for any
billed and unpaid items included in deferred revenue and advance payments.
(7) Property and Equipment
Property and equipment consist of the following, as of December 31, (in
thousands):
2000 1999
------- -------
Computer equipment and software..................... $43,677 $22,940
Furniture and equipment............................. 18,772 9,595
Leasehold improvements.............................. 13,508 3,647
Internally developed software....................... 12,409 5,511
------- -------
88,366 41,693
Less: accumulated depreciation and amortization..... (26,957) (11,099)
------- -------
$61,409 $30,594
======= =======
78
Depreciation and amortization expense related to property and equipment
was $16.4 million, $6.6 million, $2.6 million for the years ended December 31,
2000, 1999 and 1998, respectively.
(8) Bank Borrowings
In March 1999, the Company entered into a line of credit agreement with a
commercial bank which provided for a $25.0 million unsecured revolving line of
credit for general working capital purposes. In May 2000, the Company entered
into a modification of the line of credit agreement, which, among other things,
increased the aggregate credit available to include an additional letter of
credit, removed any financial covenants and cured any financial covenant
defaults. As of December 31, 2000, the line of credit was secured by $25.9
million of cash and cash equivalents, which is classified as restricted cash in
the accompanying consolidated balance sheet. The cash was restricted through
February 2001, at which time the agreement was terminated upon the closing of
the credit facility agreement discussed in Note 19 below. The modified line of
credit accrued interest at LIBOR plus 1.75%, includes a 0.2% unused line of
credit fee, and requires monthly payments of interest. As of December 31, 2000,
after consideration of outstanding letters of credit, the Company had $18.7
million of borrowing capacity under this credit line. As of December 31, 2000
and 1999, there were no outstanding amounts under the line of credit.
(9) Deferred Revenue and Advance Payments
Deferred revenue and advance payments from customers consist of the
following, as of December 31, (in thousands):
2000 1999
---- ----
Current:
Deferred product revenue................................ $21,399 $38,164
Deferred product support and other services revenue..... 48,278 24,267
------- -------
69,677 62,431
Less: billed and unpaid deferred revenue................ (19,374) (24,403)
------- -------
$50,303 $38,028
======= =======
Non-current:
Deferred product revenue................................ $13,267 $9,461
Deferred product support and other services revenue..... 24,747 24,657
------- -------
38,014 34,118
Less: billed and unpaid deferred revenue................ (6,754) (863)
------- -------
$31,260 $33,255
======= =======
The Company offsets it accounts receivable and deferred revenue for any
billed and unpaid items included in deferred revenue and advance payments.
(10) 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 (loss) before income taxes
were, for the years ended December 31, (in thousands):
2000 1999 1998
---- ---- ----
U.S..................... $(235,703) $(28,245) $ 206
Foreign................. (24,203) (4,252) (2,461)
--------- -------- -------
Total................... $(259,906) $(32,497) $(2,255)
========= ======== =======
79
The provision for income taxes consists of the following, for the years
ended December 31, (in thousands):
2000 1999 1998
---- ---- ----
Current:
Federal.............. $ 175 $ -- $ --
State................ -- -- --
Foreign.............. 1,225 1,246 --
------ ------ --------
$1,400 $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 (loss)
before income taxes as follows, for the years ended December 31, (in thousands):
2000 1999 1998
---- ---- ----
Income tax benefit at federal
statutory rate...................... $(88,369) $(11,374) $ (766)
Goodwill amortization and other
non-deductibles..................... 2,234 351 (72)
Restructuring and related charges..... 1,528 -- --
Impact of international operations.... (10,860) (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......... 96,867 11,673 2,335
-------- -------- ------
$ 1,400 $ 1,246 $ --
======== ======== ======
Significant components of the Company's deferred tax assets and liabilities
are as follows, as of December 31, (in thousands):
2000 1999
---- ----
Deferred tax assets, net:
Allowances and reserves........................... $ 3,723 $ 1,826
Reserve for litigation settlement................. 37,804 --
Accrued compensation and expenses................. 1,827 1,214
Net operating loss carryforwards.................. 59,044 17,434
Deferred revenue adjustment....................... 14,577 12,660
Investment valuation differences.................. 4,596 --
Rent abatement.................................... 545 --
Amortization...................................... 6,809 329
Acquired in-process research and development...... 1,055 1,064
Alternative minimum tax and contribution
Carryforwards..................................... 152 --
Federal and state tax credit carryforwards........ 4,335 1,649
Net unrealized gain/loss on marketable securities. 12 --
--------- --------
134,479 36,176
Valuation allowance............................... (124,159) (25,169)
--------- --------
Deferred tax assets, net of valuation allowance... 10,320 11,007
------ ------
Deferred tax liabilities:
Prepaid assets.................................... 187 3,257
Depreciation...................................... 2,464 2,311
Capitalized software.............................. 540 208
Capitalized internal software..................... 4,272 1,651
Deferred costs................................. 1,459 --
Amortization...................................... -- 7
Unbilled receivables.............................. 650 1,558
Cash to accrual conversion........................ 748 1,496
Net unrealized gain on marketable securities...... -- 519
--------- --------
Total deferred tax liabilities.................... 10,320 11,007
--------- --------
Total net deferred taxes.......................... $ -- $ --
========= ========
80
The Company recorded a net $99.0 million increase in the valuation
allowance for the year ended December 31, 2000 related to deferred tax assets.
As of December 31, 2000 management has concluded that a full valuation allowance
is required on the deferred tax assets based on its assessment that the
realization of deferred tax assets does not meet the "more likely than not"
criteria under SFAS No. 109. The Company has foreign net operating loss
carryforwards of $20.9 million of which $185,000, $744,000, $2.0 million and
$959,000 will expire in 2002, 2003, 2005 and 2007, respectively. The remaining
foreign net operating losses of $17.0 million can be carried forward
indefinitely. The Company has domestic net operating loss carryforwards of
$137.9 million, of which $10.3 million and $127.6 million will expire in 2019
and 2020, respectively. The Company has research and development tax credit
carryforwards of $3.7 million expiring in 2018, 2019 and 2020.
For the years ended December 31, 2000, 1999 and 1998, the Company recorded
a total tax provision of $1.4 million, $1.2 million and $0, respectively.
(11) 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 and several leases include options for renewal or purchase The
Company has also entered into marketing agreements and agreements with content
providers expiring at various dates through 2003. Future minimum payments under
noncancellable operating leases and agreements with initial terms of greater
than one year consist of the following (in thousands):
2001.............................. $ 27,754
2002.............................. 26,931
2003.............................. 16,718
2004.............................. 11,832
2005.............................. 11,285
Thereafter........................ 32,195
--------
$126,715
========
Total rental expense for the years ended December 31, 2000, 1999 and 1998
was approximately $29.4 million, $12.8 million and $4.0 million, respectively.
As of December 31, 2000, future minimum lease commitments included $12.1
million in commitments for computer software and equipment, $5.2 million in
commitments for marketing agreements and $2.8 million in commitments with
content providers.
The Company subleases office space under an operating lease agreement
expiring in 2005. As of December 31, 2000, the total future minimum rentals to
be received under this noncancellable sublease agreement are $1.6 million in
2001, $1.7 million in 2002, $1.8 million in 2003, $1.8 million in 2004 and $1.6
million in 2005.
Shares of Class A common stock sold in connection with the Company's
public offerings on June 16, 1998 and February 10, 1999, respectively, were sold
pursuant to prospectuses that contained financial statements that were
subsequently revised. The inclusion of these financial statements that required
revision in the registration statements and prospectuses used in the offering
and sale of these shares may constitute a violation of the Securities Act.
If the inclusion of these financial statements that required revision in
the registration statements and prospectuses used in the offerings did
constitute a violation of the Securities Act, the purchasers in these offerings
would have the right for a period of one year from the date that they
discovered, or should have discovered with reasonable diligence, that such
financial statements required revision in the applicable registration statement
and prospectus, but in no event later than three years from the date of the sale
of shares to them, to obtain recovery of the consideration paid in connection
with their purchase of Class A common stock or, if they have already sold the
81
stock, to sue the Company for damages based upon the difference between the
price they paid for Class A common stock and the proceeds they obtained from the
sale of the stock. The amount of these damages could be substantial. No
provision has been recorded in the Company's consolidated financial statements
as management believes that the occurrence of these events is remote.
(12) Litigation
The Company and certain of its officers and directors are defendants in a
private securities class action lawsuit alleging that they have violated Section
10(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
Rule 10b-5 promulgated thereunder, and Section 20(a) and Section 20A of the
Exchange Act in connection with various statements that were made with respect
to the 1999, 1998 and 1997 financial results. The action has been consolidated
in the United States District Court for the Eastern District of Virginia. The
class action complaint does not specify the amount of damages sought. In June
2000, purported holders of the Company's common stock filed a shareholder
derivative lawsuit in the Delaware Court of Chancery seeking recovery for
various alleged breaches of fiduciary duties by certain directors and officers
of the Company relating to the restatement of financial results for 1999, 1998
and 1997.
In October 2000, the Company entered into agreements to settle these
lawsuits. Both settlements are subject to confirmatory discovery, final
documentation, court approval and certain other conditions.
Under the class action settlement agreements, class members will receive:
1) five-year unsecured promissory notes issued by the Company having an
aggregate principal amount of $80.5 million and bearing interest at 7.5% per
year; 2) 550,000 shares of the Company's Class A common stock, with the number
of shares to be increased if the market value of the shares, based on the dollar
weighted average trading price during a specified trading period prior to the
district court settlement hearing, is less than $30 per share so that the
minimum value of the shares is $16.5 million; and 3) warrants issued by the
Company to purchase 1.9 million shares of the Company's Class A common stock at
an exercise price between $40 and $50 per share, based on the dollar weighted
average trading price during a specific trading period prior to the district
court settlement hearing, with the warrants expiring five years from the date
they are issued.
The Company will have the right, at any time, to prepay the promissory
notes, or to mandatorily convert the promissory notes into shares of the
Company's Class A common stock at a conversion price equal to 80% of the dollar
weighted average trading price per share for all round lot transactions in the
Company's stock on the Nasdaq National Market for the ten trading days ending
two days prior to the date that written notice of conversion has been given. The
warrants may be exercised for cash or by tendering promissory notes valued for
the purpose of warrant exercise at 133% of their principal amount plus accrued
interest.
Under the derivative settlement agreement, the Company will add a new,
independent director with finance experience to the audit committee of its Board
of Directors and will ensure continued adherence with applicable legal and
regulatory requirements regarding the independence of audit committee members
and trading by insiders. In addition, certain officers of the Company will
contribute a portion of the 550,000 shares of the Company's Class A common stock
that is to be issued to class members in settlement of the class action lawsuit.
Specifically, Michael J. Saylor, Sanju K. Bansal and Mark S. Lynch will
contribute to the class action settlement shares of Class A common stock held by
them with a total value of $10 million.
Based on the terms of the settlement agreements, the Company determined
that a liability related to these actions was probable and that the value was
reasonably estimable. Accordingly, the Company separately evaluated the
individual components of the settlement agreements in consideration of existing
market conditions and established an estimate for the cost of the litigation
settlement. The details of this estimate are as follows (in thousands):
Issuance of debt securities.................... $ 69,200
Issuance of Class A common stock............... 16,500
Issuance of warrants........................... 13,034
Legal fees..................................... 3,245
Administration costs........................... 750
--------
Total.......................................... 102,729
Less insurance recoveries...................... (13,000)
--------
Net estimated litigation settlement............ $ 89,729
========
82
The fair value of the debt securities was based on the present value of
future cash flows discounted at borrowing rates currently available for debt
with similar terms and maturities. Utilizing a market borrowing rate of 12%, a
discount of $11.3 million was computed on the debt securities to be issued. Upon
the issuance of the debt securities, the discount will be amortized to interest
expense over the term of the debt securities.
The fair value of each warrant was computed utilizing the Black-Scholes
pricing model with the following assumptions used for the calculation:
volatility factor of 119%, risk free interest rate of 6%, expected life of 5
years, and no dividend yield.
The Company has recorded the unpaid amounts of $99.5 million in the
accompanying consolidated balance sheet as a long-term liability pending
approval by the courts and satisfaction of certain other conditions and $2.0
million in accounts payable and accrued expenses related to amounts due
currently. Upon issuance of the securities, the Company will record such amounts
as liabilities or stockholders' equity based on the nature of the individual
securities. As of December 31, 2000, the Company had paid approximately $1.2
million in legal fees and had received all amounts recoverable from the
insurance company.
The final value of the settlements may differ significantly from the
estimates currently recorded depending on a variety of factors including the
market value of the Company's stock when issued and potential changes in market
conditions affecting the valuation of the other securities. Additionally, the
settlements are contingent on confirmatory discovery, final documentation, court
approval and certain other conditions. Accordingly, the Company will revalue the
estimate of the settlement on a quarterly basis and at the time the securities
are issued.
On January 19, 2001, the United States District Court authorized notice of
the proposed class action settlement to be sent to all putative class members.
The notice informs class members of their rights including their rights to
object to the proposed settlement and to pursue their claims separately. A
hearing has been scheduled for April 2, 2001 for the United States District
Court to consider and, if appropriate, approve the class action settlement. No
hearing has been scheduled for the Delaware Court of Chancery to review and, if
appropriate, approve the derivative settlement.
In March 2000, the Company was notified that the SEC had issued a formal
order of private investigation in connection with matters relating to the
Company's restatement of its financial results. The Company cooperated with the
SEC in its investigation. On December 14, 2000, the Company consented, without
admitting or denying the SEC's findings, to the entry of an administrative cease
and desist order finding that the Company had violated certain provisions of the
federal securities laws. As a part of the cease and desist order, the Company
made a number of undertakings pursuant to which the Company will implement
various corporate governance enhancements, hire additional compliance staff and
adopt policies and controls relating to our contract administration and
financial reporting functions. The cease and desist order imposed no monetary
fines or penalties on the Company.
In connection with the class action lawsuit and shareholder derivative
action and the SEC investigation relating to the restatement of financial
results for 1999, 1998 and 1997, Mr. Saylor and Mr. Bansal each retained
separate legal counsel to defend their individual interests in these
legal proceedings. Using a portion of the proceeds received from the
insurance company in connection with those proceedings, the Company
paid the legal fees of such separate counsel in the amounts of $1.0 million
and $335,000 on behalf of Mr. Saylor and Mr. Bansal, respectively, during
2000.
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.
(13) Series A Redeemable Convertible Preferred Stock
In June 2000, the Board of Directors of the Company authorized the
issuance of 17,500 shares of Series A redeemable convertible preferred stock
with a par value of $0.001 per share. Upon adoption of this resolution, the
Company issued 12,500 shares of its Series A redeemable convertible preferred
stock in a private placement to institutional investors for $119.6 million, net
of estimated offering costs of $5.4 million. Dividends are cumulative and
payable quarterly at a rate of 7% per annum, in cash or in shares of Class A
common stock. The preferred stock is currently convertible, at the option of the
holders of the preferred stock, into 3,744,152 shares of Class A common stock
based on the current conversion price of $33.39 per share. The conversion price
may be adjusted at certain
83
future dates, including the first and each subsequent anniversary of the initial
issuance date, dependent upon the trading price of the Company's Class A common
stock and an agreed upon formula. The preferred stock is also redeemable upon
certain triggering events such as suspension from trading or failure of the
Company's Class A common stock to be listed on the Nasdaq National Market for a
period of five consecutive trading days and other events as defined in the
Certificate of Designations, Preferences and Rights of the Series A Redeemable
Convertible Preferred Stock. In the event of redemption upon a triggering event,
the preferred stock is redeemable at the greater of 125% of the conversion
amount or an agreed upon formula. As of December 31, 2000, none of these
triggering events have occurred.
During the second quarter of 2000, the Company recorded a $19.4 million
charge attributable to the beneficial conversion feature of the Series A
redeemable convertible preferred stock based on the difference between the fair
market value of the Class A common stock on the closing date of the private
placement and the conversion rate. The conversion rate was computed based on the
volume weighted average price of the stock for the 17 trading days subsequent to
the closing date in accordance with the Certificate of Designations, Preferences
and Rights of the Series A Redeemable Convertible Preferred Stock. If the
conversion price is adjusted based upon certain contingent events as specified
in the Certificate of Designations, Preferences and Rights of the Series A
Redeemable Convertible Preferred Stock, such as the failure to maintain the
effectiveness of the related registration statement and issuance of certain
equity securities, an additional charge per share of outstanding preferred stock
may be recorded in the future.
Holders of the Series A redeemable convertible preferred stock have no
voting rights, except as required by law and as provided in the Certificate of
Designations, Preferences and Rights of the Series A Redeemable Convertible
Preferred Stock. The preferred stock ranks senior to common stock with respect
to distribution and payments upon the liquidation or dissolution of the Company
and to resolutions made by the Board of Directors of the Company. Additionally,
the Series A redeemable convertible preferred stock has a liquidation preference
of $10,000 per share plus an additional amount per share based upon an agreed
upon formula.
In accordance with the terms of the agreements relating to the issuance of
Series A redeemable convertible preferred stock, under certain circumstances,
the Company may be required to pay substantial penalties to a holder of the
preferred stock. Such penalties are generally paid in the form of interest
payments, subject to any restrictions imposed by applicable law. In the third
quarter of 2000, the Company incurred $578,000 in penalties as a result of a
14-day delay in the filing of a registration statement registering the shares of
Class A common stock issuable upon conversion of and in lieu of dividends on the
Series A redeemable convertible preferred stock.
For the year ended December 31, 2000, the Company paid dividends on such
preferred stock of $4.1 million through the issuance of 359,125 shares of Class
A common stock in lieu of cash. As of December 31, 2000, the Company has accrued
dividends of $599,000 which are included in accounts payable and accrued
expenses in the accompanying consolidated balance sheet. All accrued dividends
were paid subsequent to December 31, 2000 through the issuance of 63,146 shares
of Class A common stock in lieu of cash.
(14) Mandatorily Redeemable Convertible Preferred Stock of Consolidated
Subsidiary
In October 2000, the Board of Directors of Strategy.com authorized the
issuance of 47,884,011 shares of $0.001 par value Series A redeemable
convertible preferred stock. Dividends are accreted at a rate of $0.2552 per
annum. The preferred stock is automatically convertible into Class A common
stock of Strategy.com, at the then effective conversion rate, at the time of an
initial public offering resulting in at least $30.0 million of net proceeds to
Strategy.com. The preferred shares are mandatorily redeemable for $3.19 per
share plus any dividends accrued or declared but unpaid thereon at mandatory
redemption dates of October 17, 2005, 2006 and 2007, with the maximum redemption
portions at each date being 33%, 50% and 100%, respectively. Each holder of
outstanding shares of Series A redeemable convertible preferred stock of
Strategy.com shall be entitled to the number of votes equal to the number of
whole shares of Strategy.com common stock into which the shares of Series A
redeemable convertible preferred stock held by such holder are convertible as of
the record date for determining stockholders entitled to vote on such matters.
Additionally, the preferred stock has a liquidation preference of $3.19 per
share plus any dividends accrued or declared but unpaid thereon.
In October 2000, Strategy.com issued 13,401,253 shares of Series A
redeemable convertible preferred stock to a
84
group of institutional and accredited investors in exchange for $39.8 million,
net of offering costs of approximately $3.0 million, in an initial closing. In
January 2001, Strategy.com completed this round of financing in a second closing
and issued an additional 3,134,796 shares for proceeds of $10.0 million. The
investors own approximately 16% of the economic interest in the outstanding
equity of Strategy.com on an as converted, diluted basis. The remaining 84%
economic interest continues to be owned by the Company and the Company maintains
approximately 98% of the voting interest in Strategy.com.
During the year ended December 31, 2000, the Company has accreted
dividends of $713,000 on the preferred stock of its consolidated subsidiary,
Strategy.com. The dividends on Strategy.com's preferred stock are classified as
minority interest in the accompanying consolidated statements of operations. No
other minority interest has been recorded as all losses of Strategy.com are
included in the consolidated financial statements of the Company.
(15) 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 effected 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, Microstrategy adopted the 1996 Stock Plan in order to
provide an incentive to eligible employees and officers of Microstrategy. 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, 2000, options to purchase 15,337,838
shares have been granted, of which 4,289,640 have been canceled. As of December
31, 2000, 1,234,466 shares are available for grant under the 1996 Stock Plan.
The Company is no longer issuing options under this plan.
In March 1997, Microstrategy 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 1997 Stock Option Plan for French Employees. As of December 31, 2000,
options to purchase 377,618 shares have been granted. As of December 31, 2000,
268,161 shares are available for grant under the 1997 Stock Option Plan for
French Employees.
In September 1997, Microstrategy adopted the 1997 Director Option Plan,
which provides for grants of nonqualified stock options to non-employee
directors of Microstrategy. A total of 600,000 shares of Class A common stock
are reserved under the 1997 Director Option Plan, as amended. As of December 31,
2000, options to purchase 440,000 shares have been granted. As of December 31,
2000, 160,000 shares are available for grant under the 1997 Director Option
Plan.
In April 1999, Microstrategy adopted the 1999 Stock Option Plan, which
provides for grants of stock options to eligible employees and officers of
Microstrategy. A total of 11,000,000 shares of Class A common stock are reserved
under the 1999 Stock Option Plan, as amended. As of December 31, 2000, options
to purchase 12,992,404 shares have been granted, of which 2,390,039 have been
canceled. As of December 31, 2000, 397,635 shares are available for grant under
the 1999 Stock Option Plan.
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
Microstrategy's stock option plans may not be less than the determined fair
market value at the date of grant.
85
A summary of the status of the Microstrategy's stock option plans is 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.......................... -- -- --
Canceled........................... (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
Canceled........................... (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
Canceled........................... (2,065) 0.25--48.31 4.38
------ ------------- ------
Balance, December 31, 1999............ 12,818 0.25--115.66 13.07 2,128 $4.11
Granted............................ 9,929 10.50--313.00 40.48
Exercised.......................... (1,968) 0.25--22.09 2.41
Canceled........................... (3,537) 0.25--313.00 36.24
------ ------------- ------
Balance, December 31, 2000............ 17,242 $0.25-313.00 $25.70 2,976 $12.60
Options Outstanding at Options Exercisable at
December 31, 2000 December 31, 2000
----------------- -----------------
Weighted Average
Remaining
Range of Number of Contractual Life Weighted Average Number of Weighted Average
Exercise Prices Shares (Years) Exercise Price Shares Exercise Price
--------------- ------ ------- -------------- ------ --------------
$ 0.25 -- 0.75 1,191 5.1 $ 0.49 596 $ 0.49
1.00 -- 1.50 1,792 6.1 1.23 748 1.24
1.51 -- 4.00 949 6.5 2.38 213 2.38
4.01 -- 8.00 543 6.2 5.81 225 5.90
8.01 -- 14.00 1,994 6.8 11.10 459 11.16
14.01 -- 22.00 5,738 8.9 20.54 351 18.18
22.01 -- 35.00 1,133 7.8 27.18 88 27.71
35.01 -- 70.00 2,708 8.7 43.03 166 44.59
70.01 --140.00 871 8.3 101.69 115 88.82
140.01 --313.00 323 8.7 177.45 15 167.09
------ --- ------ ----- ------
17,242 7.7 $25.70 2,976 $12.60
In October 2000, Strategy.com adopted the 2000 Strategy.com Stock Option
Plan, which provides for grants of stock options to eligible employees,
officers, and non-employees of Strategy.com. A total of 17,200,000 shares of
Strategy.com Class A common stock are reserved under the 2000 Strategy.com Stock
Option Plan. As of December 31, 2000, options to purchase 3,651,430 and
2,479,900 shares have been granted to employees of Strategy.com and
MicroStrategy, respectively. As of December 31, 2000, 11,082,670 shares are
available for grant under the 2000 Strategy.com Stock Option Plan.
Shares of Strategy.com Class A common stock will be issued upon exercise
of any stock options granted under the stock plan. Stock options granted to date
vest over approximately five years from the date of grant and expire ten years
after grant. The stock option exercise price of incentive options under
Strategy.com's stock option plan may not be less than the determined fair value
at the date of grant.
86
A summary of the status of the 2000 Strategy.com Stock Option Plan is
presented (in thousands, except per share data):
Weighted Average
Exercise Price
Shares Per Share
------ ---------
Balance, December 31, 1999....... -- --
Granted....................... 6,131 $2.75
Exercised..................... -- --
Canceled...................... (14) 2.75
----- -----
Balance, December 31, 2000....... 6,117 $2.75
All options under the 2000 Strategy.com Stock Option Plan were granted at
the then determined per share fair market value at the date of grant of $2.75.
These options will expire if not exercised by December 2010 and the weighted
average remaining contractual life of the options outstanding at December 31,
2000 is approximately 9.9 years. At December 31, 2000, there were 11,750 options
vested but not exercisable under the 2000 Strategy.com Stock Option Plan, all of
which related to international employees.
During 1998, Microstrategy adopted the 1998 Employee Stock Purchase Plan
and reserved 800,000 shares, subject to annual increases. As of December 31,
2000, a total of 1,000,000 shares of common stock were reserved. The Purchase
Plan became effective upon the completion of the Microstrategy'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 2000, 758,465 shares have been issued
under the plan.
If compensation expense had been recorded based on the 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):
2000 1999 1998
---- ---- ----
Net loss:
As reported...................................... $(285,368) $(33,743) $(2,255)
Pro forma........................................ $(349,414) $(42,358) $(5,229)
Basic and diluted net loss per share, as reported... $ (3.58) $ (0.44) $ (0.03)
Pro forma basic and diluted net loss per share...... $ (4.38) $ (0.55) $ (0.08)
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 Microstrategy's stock option plans issued during 2000, 1999
and 1998, respectively: volatility factors of 119%, 95% and 80%, risk-free
interest rates of 6%, 6% and 5%, weighted-average expected life of 5 years, and
no dividend yields.
The following assumptions were used for shares issued during 2000, 1999
and 1998, respectively, under the Employee Stock Purchase Plan: volatility
factors of 119%, 96% and 80%, risk free interest rates of 6%, 5% and 5%,
weighted-average expected life of 6 months, and no dividend yields. The pro
forma amounts for options granted prior to the Microstrategy's initial public
offering are based on the minimum value method proscribed by SFAS 123.
The following assumptions were used for shares issued during 2000 to
employees of MicroStrategy under the 2000 Strategy.com Stock Option Plan:
volatility factor of 131%, risk free interest rate of 5%, weighted-average
expected life of 10 years, and no dividend yield.
The following assumptions were used for shares issued during 2000 to
employees and directors of Strategy.com under the 2000 Strategy.com Stock Option
Plan: volatility factor of 131%, risk free interest rate of 5%, weighted-average
expected life of 6 years, and no dividend yield.
87
The grant date fair value of grants made under Microstrategy's stock
option plans during 2000, 1999 and 1998 are $32.58, $21.44 and $9.52,
respectively. The fair value of grants made to employees of MicroStrategy and
Strategy.com under the 2000 Strategy.com Stock Option Plan during 2000 is $2.67
and $2.49, respectively.
During the year ended December 31, 1998, Microstrategy 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 is amortizing $1.4 million of compensation
expense related to these options ratably over the five-year vesting period. For
the years ended December 31, 2000, 1999 and 1998, the Company recorded
compensation expense of $271,000, $269,000 and $186,000, respectively. The
Company will record compensation expense of $270,000 in 2001 and 2002 and
$84,000 in 2003, if all of the related options vest.
(c) Distribution to S Corporation Stockholders
In 1998, 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 bore interest at the applicable federal
rate for short-term obligations and were repaid in 1999.
(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. As of December 31,
2000, the customer had exercised all 14,000 warrants in its possession.
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.
As of December 31, 2000, the customer had exercised 21,666 warrants in its
possession.
(e) Other stock-related transaction
In June 2000, the Company entered into an agreement with the controlling
stockholder of a software integrator. The primary purpose of the agreement was
to grant the Company the right to hire certain employees of the software
integrator. In exchange, the Company issued 57,143 shares of Class A common
stock to the controlling stockholder, which had a value of $1.6 million as of
the consummation date and which are restricted until registered with the SEC.
The Company will issue up to $3.4 million in additional shares of Class A common
stock over the next two years at the then current market price of the Class A
common stock on the date of issuance based on an agreed upon formula including
revenue and attrition objectives. The Company recorded the initial issuance of
stock as an intangible asset in the amount of $1.6 million and has recognized
$451,000 of amortization expense through December 31, 2000. The Company is
amortizing the intangible asset over its estimated period of benefit of two
years.
(16) Employee Benefit Plan
The Company sponsors a benefit 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
annual base pre-tax 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 presented.
88
(17) Segment Information
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 business
intelligence systems. Revenues are derived from sales of product licenses and
product support and other services, including technical support, education and
consulting services. Strategy.com's hosted one-to-one messaging platform enables
third-party content providers to offer their customers highly personalized,
timely information services through a wide variety of delivery methods including
the web, wireless applications protocol-enabled devices, e-mail, mobile phone,
fax, pager and regular telephone. Revenues are derived from license fees,
programming services, and subscriber and messaging services. 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. Prior to the establishment of
Strategy.com as a stand-alone subsidiary in October 2000, certain corporate
support costs were allocated to Strategy.com based on factors such as headcount,
gross asset value and the specific level of activity directly related to such
costs. Upon completion of the reorganization which resulted in the establishment
of Strategy.com as a stand-alone subsidiary, the Company entered into various
intercompany agreements whereby consulting services, sales and marketing
activities and administrative services are provided by MicroStrategy to
Strategy.com for a fee based on rates and factors specified in the agreements.
These rates and factors for determining fees are based upon the same allocations
utilized prior to the reorganization and include factors such as headcount,
gross asset value and specific level of activity directly related to such
services.
The following summary discloses certain financial information regarding
the Company's operating segments (in thousands):
MicroStrategy
Platform Strategy.com Consolidated
-------- ------------ ------------
Year ended December 31, 2000
Total license and service revenues .... $ 215,261 $ 8,669 $ 223,930
Gross profit (loss) ................... 137,700 (1,741) 135,959
Depreciation and amortization ......... 29,622 5,268 34,890
Operating expenses .................... 255,540 44,252 299,792
Loss from operations .................. (117,840) (45,993) (163,833)
Total assets .......................... 198,331 60,756 259,087
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
The following summary discloses total revenues and long-lived assets,
excluding long-term deferred tax assets and long-term investments, relating to
the Company's geographic regions (in thousands):
89
Domestic International Consolidated
-------- ------------- ------------
Year ended December 31, 2000
Total license and service revenues... $168,138 $ 55,792 $ 223,930
Long-lived assets.................... 95,603 3,340 98,943
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
Transfers of $12.7 million, $8.3 million and $6.6 million for the year
ended December 31, 2000, 1999 and 1998, respectively, from international to
domestic operations have been excluded from the above table and eliminated in
the consolidated financial statements.
For the years ended December 31, 2000, 1999 and 1998, no one customer
accounted for 10% or more of consolidated total revenue.
(18) Restructuring and Related Charges
During 2000, the Company announced a restructuring plan designed to bring
costs more in line with revenues and strengthen the financial performance of the
business. The restructuring plan included a reduction of the Company's workforce
by 231 or approximately 10% of the worldwide headcount and the cancellation of a
number of new jobs for which candidates had not yet started with the Company. As
a result of the reduction in headcount, the Company plans to consolidate its
facilities located in the vicinity of its Northern Virginia headquarters. In
addition, the Company is eliminating or reducing certain quarterly corporate
events, including the cancellation of its annual cruise. Finally, the Company is
reducing expenditures on external consultants and contractors across all
functional areas.
In connection with this restructuring plan, the Company incurred severance
costs for terminated employees and costs for rescinded offers of employment,
accelerated the vesting provisions of certain stock option grants, wrote-off
certain assets that are no longer of service, and accrued related professional
fees. In addition, Michael J. Saylor, the chairman and CEO of the Company, made
grants of the Company's Class A common stock to terminated employees from his
personal stock holdings. Since he is a principal shareholder of the Company, his
actions are deemed to be an action undertaken on behalf of the Company for
accounting purposes. Accordingly, the Company recognized an expense and a
capital contribution by Mr. Saylor for approximately $3.0 million, which
represents the fair value of the stock on the date of grant. The Company also
recognized a liability related to its commitments associated with the annual
cruise that the Company will no longer sponsor.
The following table sets forth a summary of these restructuring costs and
related charges (in thousands):
Severance and rescinded employment offers......................... $ 2,854
Stock grant and applicable payroll taxes.......................... 3,192
Compensation expense on accelerated stock options 1,483
Elimination of corporate events................................... 2,838
Write-off of impaired assets...................................... 360
Accrual for professional fees..................................... 108
-------
Total restructuring costs and related charges..................... $10,835
=======
Included in the $10.8 million restructuring charge incurred during 2000
are $6.2 million of cash costs and $4.6 million in non-cash related costs.
Substantially all restructuring costs and related charges had been paid as of
December 31, 2000. The unpaid amount of $48,000 is included in accounts payable
and accrued expenses in the accompanying consolidated balance sheets.
90
(19) Subsequent Events
On February 9, 2001, the Company entered into a loan and security
agreement which provides for aggregate borrowing capacity of up to $30.0 million
to be used for general working capital purposes (the "Credit Facility"). The
Credit Facility consists of a $10.0 million term loan and a revolving line of
credit for up to $20.0 million, subject to certain borrowing base limitations,
as defined in the agreement. The Credit Facility, which matures in February
2004, is collateralized by substantially all of the Company's assets, and
replaces the previous line of credit agreement. On February 9, 2001, the Company
borrowed $10.0 million under the term loan.
At the Company's option, borrowings under the revolving line of credit
will bear interest at a variable rate equal to LIBOR plus 3.25% or 3.75% or at a
variable rate equal to the prime rate plus 1.50% or 2.00%, depending on the
outstanding balance. The Credit Facility also includes a 1.50% unused letter of
credit fee and requires monthly payments of interest and other fees beginning on
the first day of the month following the execution of the agreement. Borrowings
under the term loan are based upon certain levels of maintenance revenue and
bear interest at a variable rate equal to the prime rate plus 3.00%. In addition
to the interest and other fees on borrowings under the Credit Facility, the
lender has been granted warrants to purchase 50,000 shares of the Company's
Class A common stock at an exercise price of $14.825 per share, subject to
adjustment as set forth therein.
Under the terms of the Credit Facility, the Company is required to
maintain certain financial covenants, the most restrictive of which are
achieving certain minimum earnings amounts, as defined in the agreement,
limitations on capital expenditures ($11.2 million in 2001, $14.4 million in
2002 and $21.0 million in 2003), minimizing the ability to invest further in
subsidiaries, and limitations on incurring additional indebtedness.
On March 20, 2001, NCR Corporation asked the Company to consider licensing
certain technology which NCR alleges is covered under patents that they hold.
NCR has implied that if the Company is unwilling to license this technology
they may seek to enforce their patents against the Company. Management
has not yet had an opportunity to fully review these matters. In the event
NCR seeks to enforce any of these patents and if such patents are found to
be valid and enforceable against the Company, the Company's business, operating
results and financial condition may be materially adversely affected. The
Company is not currently able to estimate the potential range of loss and the
outcome of the uncertainty is unknown. Accordingly, no provision for this matter
has been made in the accompanying consolidated financial statements.
(20) Selected Quarterly Financial Data (Unaudited)
The following tables contain unaudited Statement of Operations information
for each quarter of 2000 and 1999. The Company believes that the following
information reflects all normal recurring adjustments necessary for a fair
presentation of the information for the periods presented. The operating results
for any quarter are not necessarily indicative of results for any future period.
(in thousands, except per share data)
Quarter Ended
March 31 June 30 September 30 December 31 Year
1999
Revenues ...................... $ 29,322 $ 40,465 $ 35,309 $ 46,162 $ 151,258
Gross profit .................. 22,193 31,996 25,442 34,594 114,225
Net loss ...................... (3,804) (3) (12,774) (17,162) (33,743)
Net loss attributable to common
stockholders ............. (3,804) (3) (12,774) (17,162) (33,743)
Basic and diluted net loss per
share .................... (0.05) -- (0.17) (0.22) (0.44)
2000
Revenues ...................... $ 50,615 $ 50,344 $ 64,855 $ 58,116 $ 223,930
Gross profit .................. 34,249 28,176 38,582 34,952 135,959
Net loss ...................... (32,850) (52,142) (168,228) (8,086) (261,306)
Net loss attributable to common
stockholders ............. (32,850) (71,829) (170,416) (10,273) (285,368)
Basic and diluted net loss per
share .................... (0.42) (0.90) (2.13) (0.13) (3.58)
91
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 30th day of March, 2001.
MICROSTRATEGY INCORPORATED
(Registrant)
By: /s/ Michael J. Saylor
-------------------------------------
Name: Michael J. Saylor
Title: Chairman of the Board of
Directors 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 Chairman of the Board of Directors and Chief
- -------------------------------------- Executive Officer
Michael J. Saylor (Principal Executive Officer) March 30, 2001
/s/ Eric F. Brown President and Chief Financial Officer March 30, 2001
- -------------------------------------- (Principal Financial and Accounting Officer)
Eric F. Brown
/s/ Sanju K. Bansal Director March 30, 2001
- --------------------------------------
Sanju K. Bansal
/s/ Frank A. Ingari Director March 30, 2001
- --------------------------------------
Frank A. Ingari
Director
- --------------------------------------
Jonathan J. Ledecky
/s/ John W. Sidgmore Director March 30, 2001
- --------------------------------------
John W. Sidgmore
/s/ Ralph S. Terkowitz Director March 30, 2001
- --------------------------------------
Ralph S. Terkowitz
92
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNT
For the years ended December 31, 1998, 1999 and 2000
(in thousands)
Allowance for doubtful accounts
Balance at Additions Balance at
beginning of charged to the end of
the period expenses Deductions the period
---------- -------- ---------- ----------
31-Dec-98 ..... 770 1,468 (653) 1,585
31-Dec-99 ..... 1,585 4,625 (2,881) 3,329
31-Dec-00 ..... 3,329 10,129 (3,814) 9,644
93
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
3.1 Amended and Restated 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 Certificate of Designations, Preferences and Rights of the Series
A Convertible Preferred Stock (Filed as Exhibit 3.1 to the
registrant's Current Report on Form 8-K (File No. 000-24435)
filed on June 19, 2000 and incorporated by reference herein).
3.3 Certificate of Amendment to the Amended and Restated Certificate
of Incorporation of the registrant (Filed as Exhibit 3.2 to the
registrant's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2000 (File No. 000-24435) and incorporated
by reference herein).
3.4 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 (Filed
as Exhibit 10.3 to the registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1999 (File No. 000-24435)
and incorporated by reference herein).
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 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).
10.6 Amendment No. 1 to the 1999 Stock Option Plan of the registrant
(Filed as Exhibit 10.3 to the registrant's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2000 (File No.
000-24435) and incorporated by reference herein).
10.7 Master Lease Agreement No. VAC180, dated November 1, 1999,
between MLC Group, Inc. and the registrant (Filed as Exhibit 10.8
to the registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999 (File No. 000-24435) and
incorporated by reference herein).
10.8 Letter Agreement, dated December 1, 1999, between ePlus, Inc.
(f/k/a MLC Group, Inc.) and the registrant (Filed as Exhibit 10.9
to the registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999 (File No. 000-24435) and
incorporated by reference herein).
94
Exhibit
Number Description
------ -----------
10.9 Software Development and OEM Agreement, dated December 28, 1999,
between the registrant and Exchange Applications, Inc. (Filed as
Exhibit 10.10 to the registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999 (File No. 000-24435) and
incorporated by reference herein).
10.10 Software License Agreement, dated December 28, 1999, between the
registrant and Exchange Applications, Inc. (Filed as Exhibit
10.11 to the registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999 (File No. 000-24435) and
incorporated by reference herein).
10.11 Value-Added Reseller Agreement, dated December 28, 1999, between
the registrant and Exchange Applications, Inc. (Filed as Exhibit
10.12 to the registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999 (File No. 000-24435) and
incorporated by reference herein).
10.12 Payment and Registration Rights Agreement, dated December 28,
1999, between the registrant and Exchange Applications, Inc.
(Filed as Exhibit 10.13 to the registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1999 (File No.
000-24435) and incorporated by reference herein).
10.13 DSS Partner MicroStrategy Incorporated OEM Agreement, between the
registrant and NCR Corporation (Filed as Exhibit 10.14 to the
registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 (File No. 000-24435) and incorporated by
reference herein).
10.14 Memorandum of Understanding (Purchase), dated as of September 30,
1999, between, the registrant and NCR Corporation (Filed as
Exhibit 10.15 to the registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999 (File No. 000-24435) and
incorporated by reference herein).
10.15 Memorandum of Understanding (Joint Marketing), dated as of
September 30, 1999, between the registrant and NCR Corporation
(Filed as Exhibit 10.16 to the registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1999 (File No.
000-24435) and incorporated by reference herein).
10.16 Asset Purchase Agreement, dated December 23, 1999, between the
registrant and NCR Corporation (Filed as Exhibit 10.17 to the
registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 (File No. 000-24435) and incorporated by
reference herein).
10.17 Deed of Lease, dated January 7, 2000, between Tysons Corner
Property LLC and the registrant (Filed as Exhibit 10.18 to the
registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 (File No. 000-24435) and incorporated by
reference herein).
10.18 Registration Rights Agreement, dated as of June 17, 2000, by and
among MicroStrategy Incorporated and each of the signatories
thereto (Filed as Exhibit 10.1 to the registrant's Current Report
on Form 8-K (File No. 000-24435) filed on June 19, 2000 and
incorporated by reference herein).
10.19 Series A Preferred Stock Purchase Agreement by and among
Strategy.com Incorporated, Aether Capital LLC and the other
parties thereto, dated as of October 18, 2000 (Filed as Exhibit
10.1 to the registrant's Current Report of Form 8-K (File No.
000-24435) filed on November 6, 2000 and incorporated by
reference herein).
10.20 Amended and Restated Certificate of Incorporation of Strategy.com
Incorporated, dated as of October 17, 2000 (Filed as Exhibit 10.2
to the registrant's Current Report of Form 8-K (File No.
000-24435) filed on November 6, 2000 and incorporated by
reference herein).
95
Exhibit
Number Description
------ -----------
10.21 Investor Rights Agreement by and among Strategy.com Incorporated,
the registrant, Aether Capital LLC and the other parties thereto,
dated as of October 18, 2000 (Filed as Exhibit 10.3 to the
registrant's Current Report of Form 8-K (File No. 000-24435)
filed on November 6, 2000 and incorporated by reference herein).
10.22 Stockholders' Voting Agreement by and among Strategy.com
Incorporated, the registrant, Aether Capital LLC and the other
parties thereto, dated as of October 18, 2000 (Filed as Exhibit
10.4 to the registrant's Current Report of Form 8-K (File No.
000-24435) filed on November 6, 2000 and incorporated by
reference herein).
10.23 Memorandum of Understanding by and among the registrant,
Strategy.com Incorporated and certain other affiliates of the
registrant, dated as of October 17, 2000 (Filed as Exhibit 10.5
to the registrant's Current Report of Form 8-K (File No.
000-24435) filed on November 6, 2000 and incorporated by
reference herein).
10.24 United States Intellectual Property Assignment and License Back
Agreement by and between the registrant and Strategy.com
Incorporated, dated as of October 17, 2000 (Filed as Exhibit 10.6
to the registrant's Current Report of Form 8-K (File No.
000-24435) filed on November 6, 2000 and incorporated by
reference herein).
10.25 U.S. Intellectual Property License Agreement by and between the
registrant and Strategy.com Incorporated, dated as of October 17,
2000 (Filed as Exhibit 10.7 to the registrant's Current Report of
Form 8-K (File No. 000-24435) filed on November 6, 2000 and
incorporated by reference herein).
10.26 U.S. Software License Agreement by and between the registrant and
Strategy.com Incorporated, dated as of October 17, 2000 (Filed as
Exhibit 10.8 to the registrant's Current Report of Form 8-K (File
No. 000-24435) filed on November 6, 2000 and incorporated by
reference herein).
10.27 International Software License Agreement by and between
MicroStrategy International II Limited and Strategy.com
International Limited, dated as of October 17, 2000 (Filed as
Exhibit 10.9 to the registrant's Current Report of Form 8-K (File
No. 000-24435) filed on November 6, 2000 and incorporated by
reference herein).
10.28 International Intellectual Property License Agreement by and
between MicroStrategy International II Limited and Strategy.com
International Limited, dated as of October 17, 2000 (Filed as
Exhibit 10.10 to the registrant's Current Report of Form 8-K
(File No. 000-24435) filed on November 6, 2000 and incorporated
by reference herein).
10.29 Stipulation of Settlement regarding the settlement of the class
action lawsuit, dated as of January 11, 2001.
10.30 Loan and Security Agreement by and among Foothill Capital
Corporation, the registrant and MicroStrategy Services
Corporation, dated as of February 9, 2001 (Filed as Exhibit 10.1
to the registrant's Current Report of Form 8-K (File No.
000-24435) filed on February 15, 2001 and incorporated by
reference herein).
10.31 General Continuing Guaranty by and among the registrant, Aventine
Incorporated, MicroStrategy Capital Corporation and MicroStrategy
Management Corporation, dated as of February 9, 2001 (Filed as
Exhibit 10.2 to the registrant's Current Report of Form 8-K (File
No. 000-24435) filed on February 15, 2001 and incorporated by
reference herein).
96
Exhibit
Number Description
------ -----------
10.32 Security Agreement by and among the registrant, Aventine
Incorporated, MicroStrategy Capital Corporation, MicroStrategy
Management Corporation and Foothill Capital Corporation, dated as
of February 9, 2001 (Filed as Exhibit 10.3 to the registrant's
Current Report of Form 8-K (File No. 000-24435) filed on February
15, 2001 and incorporated by reference herein).
10.33 Warrant to Purchase Class A Common Stock of the registrant, dated
February 9, 2001, issued to 10.33 Woothill Capital Corporation
(Filed as Exhibit 10.4 to the registrant's Current Report of Form
8-K (File No. 000-24435) filed on February 15, 2001 and
incorporated by reference herein).
10.34 Registration Rights Agreement by and between the registrant and
Foothill Capital Corporation, dated as of February 9, 2001 (Filed
as Exhibit 10.5 to the registrant's Current Report of Form 8-K
(File No. 000-24435) filed on February 15, 2001 and incorporated
by reference herein).
21.1 Subsidiaries of the registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
97