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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED: SEPTEMBER 30, 1998 COMMISSION FILE NUMBER 000-24435
MICROSTRATEGY INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 51-0323571
(State of incorporation) (I.R.S. Employer Identification Number)
8000 TOWERS CRESCENT DRIVE, VIENNA, VA 22182
(Address of Principal Executive Offices)
(703) 848-8600
(Registrant's telephone number)
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 preceeding 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
----- -----
The number of shares of the registrant's Class A Common Stock and Class B
Common Stock outstanding on November 1, 1998 was 4,889,100 and 30,735,514,
respectively.
MICROSTRATEGY INCORPORATED
FORM 10Q
TABLE OF CONTENTS
PAGE
----
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets, September 30, 1998 (unaudited) and December 31, 1997.................... 1
Consolidated Statements of Operations and Comprehensive Income, Three Months Ended
September 30, 1998 and 1997 (unaudited)............................................................ 2
Consolidated Statements of Operations and Comprehensive Income, Nine Months Ended
September 30, 1998 and 1997 (unaudited)............................................................ 3
Consolidated Statements of Cash Flows, Nine Months Ended September 30, 1998 and 1997
(unaudited)........................................................................................ 4
Notes to Consolidated Financial Statements........................................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation............ 8
PART II--OTHER INFORMATION.................................................................................. 23
ITEM 1. FINANCIAL STATEMENTS
MICROSTRATEGY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
1998 1997
---------------- --------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents....................................................... $29,868 $ 3,506
Accounts receivable, net........................................................ 29,478 16,085
Prepaid expenses and other current assets....................................... 2,772 1,435
------- -------
Total current assets......................................................... 62,118 21,026
------- -------
Property and equipment, net....................................................... 11,690 6,891
Deposits and other assets......................................................... 2,755 2,148
------- -------
Total assets................................................................. $76,563 $30,065
======= =======
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable and accrued expenses........................................... $10,944 $ 9,406
Accrued compensation and employee benefits...................................... 4,690 3,633
Deferred revenue................................................................ 9,225 8,340
Line-of-credit.................................................................. -- 4,508
Notes payable, current portion.................................................. -- 900
Dividend notes payable.......................................................... 7,500 --
------- -------
Total current liabilities.................................................... 32,359 26,787
Notes payable, long-term portion.................................................. -- 2,658
Deferred revenue.................................................................. 795 1,047
------- -------
Total liabilities............................................................ 33,154 30,492
------- -------
Commitments and contingencies
Stockholders' (deficit) equity:
Preferred stock, par value $0.001 per share, 5,000,000 shares authorized,
no shares issued and outstanding....................................... -- --
Common stock, par value $0.001 per share, 50,000,000 shares authorized; no
shares issued or outstanding at September 30, 1998; 29,493,873 shares issued
and outstanding at December 31, 1997................................... -- 29
Class A Common Stock, par value $0.001 per share, 100,000,000 shares
authorized, 4,852,900 shares issued and outstanding at September 30, 1998;
no shares issued or outstanding at December 31, 1997................... 5 --
Class B Common Stock, par value $0.001 per share, 100,000,000 shares
authorized, 30,735,514 shares issued and outstanding at September 30, 1998;
no shares issued or outstanding at December 31, 1997................... 31 --
Additional paid-in capital...................................................... 41,544 20
Accumulated other comprehensive income.......................................... 553 158
Accumulated earnings (deficit).................................................. 2,463 (634)
Deferred compensation........................................................... (1,187) --
------- -------
Total stockholders' (deficit) equity......................................... 43,409 (427)
------- -------
Total liabilities and stockholders' (deficit) equity......................... $76,563 $30,065
======= =======
The accompanying notes are an integral part of these Consolidated Financial
Statements.
1
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
1998 1997
--------------- ---------------
Revenues:
Product licenses...................................................................... $ 16,949 $ 10,545
Product support....................................................................... 10,065 4,206
----------- -----------
Total revenues..................................................................... 27,014 14,751
----------- -----------
Cost of revenues:
Product licenses...................................................................... 586 434
Product support....................................................................... 4,658 2,462
----------- -----------
Total cost of revenues............................................................. 5,244 2,896
----------- -----------
Gross margin............................................................................ 21,770 11,855
Operating expenses:
Sales and marketing................................................................... 12,926 7,872
Research and development.............................................................. 3,218 1,487
General and administrative............................................................ 2,941 1,998
----------- -----------
Total operating expenses........................................................... 19,085 11,357
----------- -----------
Income from operations.................................................................. 2,685 498
Interest income......................................................................... 551 37
Interest expense........................................................................ (120) (48)
Other income (expense), net............................................................. (7) (1)
----------- -----------
Income before income taxes.............................................................. 3,109 486
Provision for income taxes.............................................................. 1,181 --
----------- -----------
Net income.............................................................................. $ 1,928 $ 486
=========== ===========
Other comprehensive income (expense):
Foreign currency translation adjustment............................................... 332 (125)
----------- -----------
Comprehensive income.................................................................... $ 2,260 $ 361
=========== ===========
Basic net income per share.............................................................. $0.05 $0.02
=========== ===========
Weighted average shares outstanding used in computing basic net income per share........ 35,543,737 29,493,873
=========== ===========
Diluted net income per share............................................................ $0.05 $0.02
=========== ===========
Weighted average shares outstanding used in computing diluted net income per share...... 40,881,728 31,850,842
=========== ===========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
2
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
1998 1997
----------------- ---------------
Revenues:
Product licenses.................................................................... $ 47,476 $ 23,410
Product support..................................................................... 23,223 11,353
----------- -----------
Total revenues................................................................... 70,699 34,763
----------- -----------
Cost of revenues:
Product licenses.................................................................... 1,676 1,187
Product support..................................................................... 11,934 6,320
----------- -----------
Total cost of revenues........................................................... 13,610 7,507
----------- -----------
Gross margin.......................................................................... 57,089 27,256
Operating expenses:
Sales and marketing................................................................. 35,759 20,200
Research and development............................................................ 8,086 3,137
General and administrative.......................................................... 8,104 4,163
----------- -----------
Total operating expenses......................................................... 51,949 27,500
----------- -----------
Income (loss) from operations......................................................... 5,140 (244)
Interest income....................................................................... 682 54
Interest expense...................................................................... (621) (202)
Other income (expense), net........................................................... (31) (3)
----------- -----------
Income before income taxes............................................................ 5,170 (395)
Provision for income taxes............................................................ 1,758 --
----------- -----------
Net income (loss)..................................................................... $ 3,412 $ (395)
=========== ===========
Other comprehensive income:
Foreign currency translation adjustment............................................. 392 (95)
----------- -----------
Comprehensive income (loss)........................................................... $ 3,804 $ (490)
=========== ===========
Basic net income (loss) per share..................................................... $0.10 $(0.01)
=========== ===========
Weighted average shares outstanding used in computing basic net income (loss) per
per share............................................................................ 32,771,485 29,501,012
=========== ===========
Diluted net income (loss) per share................................................... $0.09 $(0.01)
=========== ===========
Weighted average shares outstanding used in computing diluted net income (loss) per
per share............................................................................ 37,936,672 29,501,012
=========== ===========
Pro forma information (unaudited):
Income before income taxes, as reported............................................... $ 5,170
Pro forma income taxes................................................................ (1,965)
-----------
Pro forma net income.................................................................. $ 3,205
===========
Pro forma basic net income per share.................................................. $0.10
===========
Pro forma diluted net income per share................................................ $0.08
===========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS)
(UNAUDITED)
1998 1997
------------ -----------
Operating activities:
Net income (loss)......................................................................... $ 3,412 $ (395)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation and amortization............................................................. 2,045 648
Provision for doubtful accounts, net of write-offs and recoveries......................... 150 312
Other..................................................................................... 163 --
Changes in operating assets and liabilities, net of effect of foreign exchange rate
changes:
Accounts receivable....................................................................... (13,228) (1,192)
Prepaid expenses and other current assets................................................. (938) (240)
Accounts payable and accrued expenses, compensation and benefits.......................... 1,213 3,426
Deferred revenue.......................................................................... 1,145 2,589
Deposits and other assets................................................................. (48) 117
-------- -------
Net cash provided by (used in) operating activities.................................... (6,086) 5,265
Investing activities:
Acquisition of property and equipment..................................................... (6,144) (2,876)
Increase in capitalized software.......................................................... -- (1,400)
-------- -------
Net cash used in investing............................................................. (6,144) (4,276)
Financing activities:
Proceeds from sale of Class A common stock and exercise of stock options.................. 48,797 --
Repayments on short-term line of credit, net.............................................. (4,508) --
Proceeds from payments on notes receivable................................................ -- 41
Repayments of dividend notes payable................................................ (2,500) --
Proceeds from issuance of notes payable................................................... 862 1,272
Principal payments on notes payable....................................................... (4,211) (369)
-------- -------
Net cash provided by financing activities.............................................. 38,440 944
Effect of foreign exchange rate changes on cash........................................ 152 (113)
Net increase in cash and cash equivalents................................................... 26,362 1,820
-------- -------
Cash and cash equivalents, beginning of year................................................ 3,506 1,686
Cash and cash equivalents, end of period.................................................... $ 29,868 $ 3,506
======== =======
Supplemental disclosure of noncash investing and financing activities:
Retirement of treasury stock.............................................................. $ -- $ 193
======== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.................................................... $ 576 $ 144
======== =======
Cash paid during the year for income taxes................................................ $ 1,330 $ --
======== =======
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. BASIS OF PRESENTATION.
The consolidated balance sheet of MicroStrategy Incorporated as of
September 30, 1998, the related consolidated statements of operations for the
three month and nine month periods ended September 30, 1998 and 1997, and the
consolidated statements of cash flows for the nine months ended September 30,
1998 and 1997 are unaudited. In the opinion of management, all adjustments
(consisting of normal recurring items) necessary for a fair presentation of such
financial statements have been included. Interim results are not necessarily
indicative of results for a full year.
The consolidated financial statements and notes are presented as required
by Form 10-Q and do not contain certain information included in the Company's
annual financial statements and notes. These financial statements should be read
in conjunction with the Company's audited financial statements and the notes
thereto for the year ended December 31, 1997 filed with the Securities and
Exchange Commission.
2. INITIAL PUBLIC OFFERING.
On June 16, 1998, the Company issued 4.6 million shares of Class A Common
Stock in an initial public offering raising approximately $48.7 million (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.
3. RECENT ACCOUNTING STANDARDS.
As of September 30, 1998, the Company has adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which
requires additional disclosures with respect to certain changes in assets and
liabilities that previously were not required to be reported as results of
operations for the period. In addition, SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" was issued, which establishes
standards for the manner in which public companies report information about
operating segments, products and services, geographic areas and major customers
in annual and interim financial statements. SFAS No. 131 will be effective for
the Company's filing on Form 10-K for the year ending December 31, 1998.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits. The statement becomes
effective for the Company's fiscal year 1998 and standardizes the disclosure
requirements for pensions and other postretirement benefits to require
additional information on changes in the benefit obligation and fair values of
plan assets. The Company believes the adoption of SFAS No. 132 will not have a
material effect on the financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which will be effective for the Company's
fiscal year 2000. This statement establishes accounting and reporting standards
requiring that every dertivative instrument, including certain derivative
instruments imbedded in other contracts, be recorded in the balance sheet as
either an asset or liablility 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 believes the
adoption of SFAS No. 133 will not have a material effect on the financial
statements.
5
4. USE OF ESTIMATES.
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
5. INCOME TAXES.
Prior to the Initial Public Offering, the Company had elected to be treated
for federal and state income tax purposes as a Subchapter S corporation. Under
Subchapter S, the taxable income or loss is reported by the stockholders and,
accordingly, no federal or state income taxes had been provided in the financial
statements prior to consummation of the Initial Public Offering.
In connection with the Initial Public Offering, the Company converted to a
Subchapter C corporation and, accordingly, is no longer treated as a Subchapter
S corporation for tax purposes. The Company is now subject to federal and state
income taxes and will recognize deferred taxes in accordance with SFAS No. 109,
"Accounting For Income Taxes," which the Company adopted upon consummation of
the Initial Public Offering. 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 adoption
of SFAS No. 109 did not have a material impact on the Company's operating
results. As of September 30, 1998, the Company's deferred tax assets of
approximately $0.8 million consist primarily of net operating loss carryforwards
related to foreign operations net of deferred tax assets and liabilities due to
the change from cash to accrual basis taxpayer. The Company recorded a valuation
allowance amounting to the entire deferred tax asset balance due to the lack of
consistent earnings in several of its foreign operations and the uncertainty as
to whether the deferred tax asset is realizable.
The consolidated statement of operations includes pro forma information to
reflect income taxes as if the Company had been a Subchapter C corporation for
the nine months ended September 30, 1998.
6. NET INCOME (LOSS) PER SHARE.
Unaudited reconciliations of the basic net income (loss) per share and
diluted net income (loss) per share computations for the three months and nine
months ended September 30, 1998 and 1997 are as follows:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
----------------------------- ----------------------------
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ----------------------------
1998 1997 1998 1997
--------------- ------------ ------------ --------------
BASIC NET INCOME (LOSS) PER SHARE:
Weighted-average common shares outstanding.................... 35,543,737 29,493,873 32,771,485 29,501,012
=========== =========== =========== ===========
Net income (loss)............................................. $ 1,928 $ 486 $ 3,412 $ (395)
=========== =========== =========== ===========
Basic net income (loss) per share............................. $ 0.05 $ 0.02 $ 0.10 $ (0.01)
=========== =========== =========== ===========
DILUTED NET INCOME (LOSS) PER SHARE:
Weighted-average common shares oustanding..................... 35,543,737 29,493,873 32,771,485 29,501,012
----------- ----------- ----------- -----------
Common shares issuable on exercise of stock options, net
of shares assumed to be repurchased at the average
market price................................................. 5,337,991 2,356,968 5,165,187 --
=========== =========== =========== ===========
Weighted-average common shares outstanding assuming
40,881,728 31,850,842 37,936,672 29,501,012
dilution..................................................... =========== =========== =========== ===========
Net income (loss)............................................. $ 1,928 $ 486 $ 3,412 $ (395)
=========== =========== =========== ===========
Diluted net income (loss) per share........................... $ 0.05 $ 0.02 $ 0.09 $ (0.01)
=========== =========== =========== ===========
Common stock equivalents are included in the computation of diluted net
income (loss) per share using the
6
treasury stock method. During the nine-month period ended September 30, 1997,
stock options granted by the Company to purchase 2,345,096 common shares were
not included in the computation because the effect was anti-dilutive.
Immediately prior to the Initial Public Offering, all outstanding shares of
common stock were exchanged and converted into shares of Class A Common Stock
and exchanged for an identical number of shares of Class B Common Stock.
7. YEAR 2000.
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than two years, computer systems and
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements. The Company has designed the 5.0 version of its
products to be capable of handling four digit dates, and therefore the Company
believes that the direct impact of the Year 2000 problem on the Company's
products will not be significant. However, certain of the Company's products
incorporate third-party software. There can be no assurances that the Company's
current products (including those that incorporate third-party software and
those that do not) do not contain undetected errors or unanticipated defects
associated with the Year 2000 date functions that may result in material costs
to the Company. It has been widely reported that a significant amount of
"business interruption" litigation will arise out of Year 2000 compliance
issues. It is uncertain whether or to what extent the Company may be affected by
such litigation. In addition, Year 2000 issues may significantly affect the
purchasing patterns of customers and potential customers. Many companies are
expending significant resources to correct or patch their current software
systems for Year 2000 compliance. These expenditures may result in reduced funds
available to purchase software products such as those offered by the Company.
Although the Company is not aware of any material operational issues or
costs associated with preparing its internal systems for the Year 2000, there
can be no assurances that the Company will not experience unanticipated negative
consequences and/or material costs caused by undetected errors or defects in the
technology used in its internal systems, which are composed of the Company's own
software products with respect to software and which also include third party
software and hardware technology.
MicroStrategy has funded its Year 2000 compliance activities from cash
flows and has not allocated additional funds in the past to the Year 2000 effort
associated with either our software or internal systems. During 1999, the
Company intends to spend an estimated $100,000 on preparing its internal systems
for the Year 2000. The Company does not plan to utilize extensive outside
assistance in the completion of its internal Year 2000 effort.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The primary business of the Company following its incorporation in 1989 was
to provide software consulting services for customers to help them build custom
decision support systems. The Company's activities during 1994 and 1995
increasingly focused on the development and sale of software products,
culminating in the release of a full complement of DSS products in 1995. Since
this time, the Company has continued to focus significant resources on the
development of additional functionality and features to its DSS software
products. As a result, the Company has transitioned its primary business from
that of a provider of services to a provider of software products.
Since 1995, the Company has significantly increased its sales and
marketing, service and support, research and development and general and
administrative staffs. The Company has more than doubled its headcount each year
since 1995. At January 1, 1995, the Company had 59 employees, and at September
30, 1998, it had 841 employees. Although the Company's revenues have
significantly increased in each of the last nine quarters, the Company
experienced fluctuating operating margins during 1996, 1997 and the first half
of 1998 primarily as a result of increases in staff levels. The Company expects
to continue to increase staffing levels and incur additional associated costs in
future periods. If the Company is unable to achieve corresponding substantial
revenue growth, the Company could suffer operating losses in one or more fiscal
quarters and may be unable to forecast such losses prior to the end of any given
fiscal quarter. In addition, the Company has experienced net losses and losses
from operations for the fiscal years ended December 31, 1996 and December 31,
1994, and was only marginally profitable for the fiscal years ended December 31,
1997 and December 31, 1995.
The Company's revenues are derived from two principal sources (i) product
licenses and (ii) fees for maintenance, technical support, training and
consulting services (collectively, "Product Support"). Prior to January 1, 1998
the Company recognized revenue in accordance with Statement of Position 91-1,
"Software Revenue Recognition." Subsequent to December 31, 1997, the Company
began recognizing revenue in accordance with Statement of Position 97-2,
"Software Revenue Recognition." Product license revenues are generally
recognized upon the execution of a contract and shipment of the related software
product, provided that no significant vendor obligations remain outstanding and
the resulting receivable is deemed collectible by management. Maintenance
revenues are derived from customer support agreements generally entered into in
connection with initial product license sales and subsequent renewals. Fees for
the Company's maintenance and support plans are recorded as deferred revenue
when billed to the customer and recognized ratably over the term of the
maintenance and support agreement, which is typically one year. Fees for the
Company's training and consulting services are recognized at the time the
services are performed.
The sales cycle for the Company's products may span nine months or more.
Historically, the Company has typically recognized a substantial portion of its
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. Moreover, the
Company currently operates with virtually no order backlog because its software
products typically are shipped shortly after orders are received. Product
license revenues in any quarter are substantially dependent on orders booked and
shipped in that quarter. As a result of these and other factors, the Company's
quarterly results have varied significantly in the past and are likely to
fluctuate significantly in the future. Accordingly, the Company believes that
quarter-to-quarter comparisons of its results of operations are not necessarily
indicative of the results to be expected for any future period. See "Risk
Factors--Potential Fluctuations in Quarterly Operating Results."
The Company licenses its software through its direct sales force and
through, or in conjunction with, Value Added Resellers ("VARs") and Original
Equipment Manufacturers ("OEMs"). VARs and OEMs
8
accounted for, directly or indirectly, approximately 33%, 27.5%, 9.0% and 0.1%
of the Company's revenues for the nine months ended September 30, 1998 and for
the years ended 1997, 1996 and 1995, respectively. Although the Company believes
that direct sales will continue to account for a majority of product license
revenues, the Company intends to increase the level of indirect sales
activities. As a result, the Company expects that sales of its product licenses
through sales alliances, distributors, resellers and other indirect channels
will increase as a percentage of product license revenues. However, there can be
no assurance that the Company's efforts to continue to expand indirect sales
will be successful. The Company also intends to continue to expand its
international operations and has committed, and continues to commit, significant
management time and financial resources to developing direct and indirect
international sales and support channels.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
total revenues represented by certain items reflected in the Company's
consolidated statements of operations:
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ----------------------
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ----------------------
1998 1997 1998 1997
------------- ------------ ---------- ----------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Product licenses............................... 62.7% 71.5% 67.2% 67.3%
Product support................................ 37.3 28.5 32.8 32.7
----- ----- ----- -----
Total revenues.............................. 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenues:
Product licenses............................... 2.2 2.9 2.4 3.4
Product support................................ 17.2 16.7 16.9 18.2
----- ----- ----- -----
Total cost of revenues...................... 19.4 19.6 19.3 21.6
----- ----- ----- -----
Gross margin..................................... 80.6 80.4 80.7 78.4
----- ----- ----- -----
Operating expenses:
Sales and marketing............................ 47.8 53.4 50.6 58.1
Research and development....................... 11.9 10.1 11.4 9.0
General and administrative..................... 10.9 13.5 11.5 12.0
----- ----- ----- -----
Total operating expenses.................... 70.6 77.0 73.5 79.1
Income (loss) from operations.................... 10.0 3.4 7.2 (0.7)
Interest income.................................. 2.0 0.3 1.0 0.2
Interest expense................................. (0.4) (0.3) (0.9) (0.6)
Other income (expense), net...................... -- -- -- --
----- ----- ----- -----
Provision for income taxes....................... (4.4) -- (2.5) --
----- ----- ----- -----
Net income (loss)................................ 7.2 % 3.4 % 4.8% (1.1)%
===== ===== ===== =====
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Revenues. Total revenues increased to $27.0 million for the three months
ended September 30, 1998 from $14.8 million in the three months ended September
30, 1997, representing an increase of 83.1%. Total revenues consist of revenues
derived from sales of software product licenses and Product Support. There can
be no assurance that total revenues will continue to increase at the rates
experienced in prior periods.
Product License Revenues. Product license revenues increased to $16.9
million for the three months ended September 30, 1998 from $10.5 million in the
same period ended September 30, 1997, representing an increase of 60.7%. Product
license revenues constituted 62.7% and 71.5% of total revenues for the three
months ended September 30, 1998 and the three months ended September 30, 1997,
respectively. The significant increases in the dollar amount of product license
revenues were due to growing market acceptance of the Company's software
products and continued expansion of the Company's sales and marketing
organization.
9
Product Support Revenues. Product support revenues increased to
$10.1 million for the three months ended September 30, 1998 from $4.2 million in
the same period ended September 30, 1997, representing an increase of 139.3%.
Product support revenues constituted 37.3% and 28.5% of total revenues for the
three months ended September 30, 1998 and the three months ended September 30,
1997, respectively. The increases in the dollar amount of product support
revenues were primarily due to the increase in the number of DSS licenses sold,
in conjunction with several large consulting deployments during the quarter. The
Company expects product support revenues as a percentage of total revenues to
fluctuate on a period to period basis but generally not to vary significantly
from the percentage of total revenues achieved in 1997 and early 1998. However,
an element of the Company's sales and marketing strategy is to leverage third-
party implementation services to enable it to more rapidly penetrate its target
market. To the extent that such efforts are successful, the Company's product
support revenues could decline as a percentage of total revenues.
International Revenues. The Company recognized $6.5 million and
$4.5 million of international revenues for the three months ended September 30,
1998, and 1997, respectively, representing approximately 24.0% and 31% of total
revenues, respectively. The Company opened sales offices in Australia, Canada
and Italy in 1998; in Austria, France and the Netherlands in 1997; in Germany in
1996; in the United Kingdom in 1995; and in Spain in 1994.
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 and shipping paid to third parties. Cost of product license revenues
was $0.6 million and $0.4 million for the three months ended September 30, 1998
and the three months ended September 30, 1997, respectively, representing 3.5%
and 4.1% of total product license revenues, respectively. The increases in
dollar amounts of the Company's cost of product licenses are directly
attributable to the increases in the Company's product license revenues coupled
with the amortization of capitalized software. The total cost of product license
revenues as a percentage of revenues decreased during the three months ended
September 30, 1998 from the three months ended September 30, 1997, due to
economies of scale realized by producing larger volumes of product materials and
an increasing number of customers reproducing licenses at their sites. The
Company anticipates that the cost of product license revenues will increase in
dollar amount as license fee revenues increase, but remain relatively constant
as a percentage of product license revenues. However, in the event that the
Company enters into any royalty arrangements in the future, cost of product
license revenues as a percentage of total product license revenues may increase.
Cost of Product Support Revenues. Cost of product support revenues consists
of the costs of providing telephone support, training and consulting services to
customers and partners. Cost of product support revenues was $4.7 million and
$2.5 million during the three months ended September 30, 1998 and the three
months ended September 30, 1997, respectively, representing 46.3% and 58.5% of
total product support revenues, respectively. The dollar increase in cost of
product support revenues was primarily due to the increase in the number of
personnel providing consulting, training, and telephone support to customers and
to the training and related costs associated with increasing personnel levels.
Despite the increases in personnel and other costs in the three months ended
September 30, 1998, the total cost of product support revenues remained constant
as a percentage of revenues during the three months ended September 30, 1998
from the three months ended September 30, 1997, primarily due to increases in
maintenance revenues which typically do not require proportionate increases in
the costs required to perform associated maintenance services. The Company
expects to continue to increase the number of training and implementation
consultants in the future, as well as technical support personnel. To the extent
that the Company's product support revenues do not increase at anticipated
rates, the hiring of additional consultants and technical support personnel
could increase the cost of product support revenues as a percentage of product
support revenues.
Sales and Marketing Expenses. Sales and marketing expenses include
personnel costs, commissions, office facilities, travel, promotional events such
as trade shows, seminars and technical conferences, advertising and public
relations programs. Sales and marketing expenses were $12.9 million and $7.9
million for the three months ended September 30, 1998 and the three months ended
September 30, 1997, respectively, representing 47.8% and
10
53.4% of total revenues, respectively. The increase in sales and marketing
expenses in dollar amounts in the three months ended September 30, 1998 was
primarily due to increased staffing as the Company established new domestic and
international sales offices and expanded its existing direct sales force, and to
a lesser extent, increased commissions to sales representatives as a result of
increased sales of software licenses and increased promotional activities
relating to the announcement of certain product enhancements or releases. The
Company believes that it is critically important to gain market share among
high-end customers. The Company has invested and will continue to invest heavily
in sales and marketing in order to create better market awareness of the value-
added potential of DSS products and to seek to acquire market share.
Research and Development Expenses. Research and development expenses
consist primarily of salaries and benefits of software engineering personnel,
payments to contract programmers, depreciation of equipment and expendable
equipment purchases. Research and development expenses were $3.2 million and
$1.5 million in the three months ended September 30, 1998 and 1997,
respectively, representing 11.9% and 10.1% of total revenues, respectively. The
increases in research and development expenses were primarily due to additional
hiring of research and development personnel. The company expects that research
and development expenses will continue to increase in dollar amount as the
Company continues to invest in developing new products, applications and product
enhancements. In 1997, in accordance with SFAS No. 86, the Company capitalized
research and development costs due to the significant increase in product
development activities associated with the version 5.0 release of the Company's
DSS software product line. As a result, the Company capitalized approximately
$0.5 million of research and development costs during the three months ended
September 30, 1997. During the three months ended September 30, 1998, in
accordance with SFAS No. 86, the costs incurred between the establishment of
technological feasibility and general availability of the Company's products
were not material and therefore have been expensed rather than capitalized.
General and Administrative Expenses. General and administrative expenses
include the personnel and other costs of the finance, human resources,
information systems, administrative and executive departments of the Company as
well as outside professional fees. General and administrative expenses were
$2.9 million and $2 million in the three months ended September 30, 1998 and the
three months ended September 30, 1997, respectively, representing 10.9% and
13.5% of total revenues, respectively. The increases in the dollar amount of
general and administrative expenses were primarily the result of increased staff
levels and related costs associated with the growth of the Company's business
during these periods. Although the Company expects that the dollar amount of
general and administrative expenses will continue to increase in the foreseeable
future, such expenses are not expected to significantly vary as a percentage of
total revenues in the future.
Provision for Income Taxes. Prior to consummation of the Initial Public
Offering, the Company had elected to be treated as a Subchapter S corporation
for federal and state income tax purposes. Under Subchapter S, the Company's
income was allocated and taxable to the Company's individual stockholders rather
than to the Company. Accordingly, no federal or state income taxes have been
provided for in the financial statements, prior to consummation of the Initial
Public Offering.
The Company's S corporation status terminated shortly prior to consummation
of the Initial Public Offering at which time the Company became subject to
federal and state corporate income taxation as a Subchapter C corporation. As a
result, the Company will now account for income taxes as a Subchapter C
corporation and has adopted SFAS No. 109, "Accounting for Income Taxes." The
Company recorded income tax expense of $1.2 million for the three months ended
September 30, 1998. The adoption of SFAS No. 109 did not have a material impact
on the Company's operating results.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Revenues. Total revenues increased 103.4% to $70.7 million for the nine
months ended September 30, 1998 from $34.8 million for the nine months ended
September 30, 1997.
Product License Revenues. Product license revenues increased 102.8% to
$47.5 million for the nine months ended September 30, 1998 from $23.4 million
for the nine months ended September 30, 1997, representing 67.2%
11
and 67.3% of total revenues for the nine months ended September 30, 1998 and
1997, respectively. The significant increases in product license revenues were
due to growing market acceptance of the Company's software products and
continued expansion of the Company's sales and marketing organization.
Product Support Revenues. Product support revenues increased 104.6% to
$23.2 million for the nine months ended September 30, 1998 from $11.4 million
for the nine months ended September 30, 1997, representing 32.8% and 32.7% of
total revenues for the nine months ended September 30, 1998 and 1997,
respectively. The increase in the dollar amount of product support revenues was
primarily due to the increase in the number of DSS licenses sold. However,
product support revenues decreased as a percentage of total revenues during
these periods primarily due to the transition of the Company's business from a
provider of consulting services to a provider of software products.
International Revenues. The Company recognized $16.1 million and
$9.2 million of international revenues in the nine months ended September 30,
1998 and September 30, 1997, representing approximately 22.7% and 26.4% of total
revenues, respectively. The Company opened sales offices in Australia, Canada
and Italy in 1998; in Austria, France and the Netherlands in 1997; in Germany in
1996; in the United Kingdom in 1995; and in Spain in 1994.
Costs and Expenses
Cost of Product License Revenues. Cost of product license revenues
increased to $1.7 million for the nine months ended September 30, 1998 from
$1.2 million for the same period ended September 30, 1997, representing 2.4% and
3.4% of total product license revenues, respectively. The increase in the
Company's cost of product licenses was directly attributable to the increases in
the Company's product license revenue, coupled with the amortization of
capitalized software. The total cost of product license revenues as a percentage
of revenues decreased during 1998 from the same period in 1997, due to economies
of scale realized by producing larger volumes of product materials and an
increasing number of customers reproducing licenses at their sites.
Cost of Product Support Revenues. Cost of product support revenues
increased to $11.9 million for the nine months ended September 30, 1998 from
$6.3 million for the same period ended September 30, 1997, representing 16.9%
and 18.2% of total product support revenues, respectively. The increase in the
Company's cost of product support revenues in 1998 was primarily due to the
increase in the number of personnel providing consulting, training, and
telephone support to customers and to the training and related costs associated
with increasing personnel levels.
Sales and Marketing Expenses. Sales and marketing expenses increased to
$35.8 million for the nine months ended September 30, 1998 from $20.2 million
for the same period ended September 30, 1997, representing 50.6% and 58.1% of
total revenues, respectively. The increase in sales and marketing expenses in
1998 was primarily due to increased staffing as the Company established new
international sales offices and expanded its existing direct sales force in
addition to increased commissions to sales representatives as a result of
increased sales of software licenses and increased promotional activities
relating to the announcement of certain product enhancements or releases. The
Company believes that in light of the relatively long sales cycle associated
with decision support solutions and the recent emergence of the industry, it is
critically important to gain market share among high-end customers. The Company
has invested and will continue to invest heavily in sales and marketing in order
to create better market awareness of the value-added potential of DSS products
and to seek to acquire market share.
Research and Development Expenses. Research and development expenses
increased to $8.1 million for the nine months ended September 30, 1998 from
$3.1 million for the same period ended September 30, 1997, representing 11.4%
and 9.0% of total revenues, respectively. The increases in research and
development expenses were primarily due to additional hiring of research and
development personnel. The Company expects that research and development
expenses will continue to increase in dollar amount as the Company continues to
invest in developing new products, applications and product enhancements. In
1997, in accordance with SFAS No. 86, the Company capitalized research and
development costs due to the significant increase in product development
activities associated with the version 5.0 release of the Company's DSS software
product line. As a result, the
12
Company capitalized approximately $1.5 million of costs during the nine months
ended September 30, 1997. During the nine months ended September 30, 1998, in
accordance with SFAS No. 86, the costs incurred between the establishment of
technological feasibility and general availability of the Company's products
were not material and therefore have been expensed rather than capitalized.
General and Administrative Expenses. General and administrative expenses
increased to $8.1 million for the nine months ended September 30, 1998 from
$4.2 million for the same period ended September 30, 1997, representing 11.5%
and 12% of total revenues, respectively. The increase in the dollar amount of
general and administrative expenses was primarily the result of increased
staffing and related costs associated with the growth of the Company's business
during these periods.
Deferred Compensation Expense. During the nine months ended September 30,
1998 the Company granted options to purchase shares of common stock, of which
options to purchase 501,000 shares of common stock were granted at exercise
prices below fair market value. The Company will amortize approximately $1.3
million of compensation expense relating to these options ratably over the five
year vesting period of these options. The Company will record additional
compensation expense relating to the options to be allocated across the above
expense categories, as appropriate, for the years ending December 31, 1998,
1999, 2000, 2001, 2002 and 2003 of $0.2 million, $0.3 million, $0.3 million,
$0.2 million, $0.2 million and $0.1 million, respectively. For the nine months
ended September 30, 1998 compensation expense related to the aforementioned
options is approximately $0.15 million.
Provision for Income Taxes. Prior to consummation of the Company's Initial
Public Offering, the Company had elected to be treated as a Subchapter S
corporation for federal and state income tax purposes. Under Subchapter S, the
Company's income was allocated and taxable to the Company's individual
stockholders rather than to the Company. Accordingly, no federal or state income
taxes have been provided for in the financial statements, prior to consummation
of the Initial Public Offering.
The Company's S corporation status terminated shortly prior to consummation of
the Initial Public Offering. The Company is now subject to federal and state
corporate income taxation as a Subchapter C corporation. As a result, the
Company has adopted SFAS No. 109, "Accounting for Income Taxes." The Company
recorded income tax expense of $1.8 million for the nine months ended September
30, 1998. Had the Company been taxed as a C corporation for the entire nine
months ended September 30, 1998, the Company would have recorded income tax
expense of $2 million. The adoption of SFAS No. 109 did not have a material
impact on the Company's operating results.
RECENTLY ISSUED ACCOUNTING STANDARDS
As of September 30, 1998, the Company has adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which
requires additional disclosures with respect to certain changes in assets and
liabilities that previously were not required to be reported as results of
operations for the period. In addition, SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" was issued, which establishes
standards for the manner in which public companies report information about
operating segments, products and services, geographic areas and major customers
in annual and interim financial statements. SFAS No. 131 will be effective for
the Company's filing on Form 10-K for the year ending December 31, 1998.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits. The statement becomes
effective for the Company's fiscal year 1998 and standardizes the disclosure
requirements for pensions and other postretirement benefits to require
additional information on changes in the benefit obligation and fair values of
plan assets. The Company believes the adoption of SFAS No. 132 will not have a
material effect on the financial statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which will be effective for the Company's
fiscal year 2000. This statement establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments imbedded in other
13
contracts, be recorded in the balance sheet as either an asset or liablility
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 believes the adoption of SFAS No. 133
will not have a material effect on the financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has primarily financed its operations and
met its capital expenditure requirements through cash flows from operations and
short- and long-term borrowings. The Company raised $48.9 million, net of IPO
expenses paid to date, from its Initial Public Offering. As a result, at
September 30, 1998 and September 30, 1997, the Company had $29.9 million and
$3.5 million, respectively, of cash and cash equivalents.
Cash flows provided (used) by operations were $(6.1) million and
$5.3 million for the nine months ended September 30, 1998 and 1997,
respectively. The decrease in cash provided by operations in the nine month
period ended September 30, 1998 was primarily due to an increase in accounts
receivable, offset by an increase in accounts payable and other accrual
liabilities and a net operating loss in the nine month period ended September
30, 1997.
The Company's investing activities used cash of $6.1 and $4.3 million for
the nine months ended September 30, 1998 and 1997, respectively. The principal
use of cash in investing activities was for capital expenditures related to the
acquisition of computer equipment required to support expansion of the Company's
operations.
The Company's financing activities provided cash of $38.4. million and
$0.9 million for the nine months ended September 30, 1998 and 1997,
respectively. The principal source of cash from financing activities during the
nine-month period ended September 30, 1998 was from the Initial Public Offering
pursuant to which the Company raised $48.9 million, net of IPO expenses paid to
date, which was offset by net principal payments on bank borrowings of
$8.7 million. Prior to the Initial Public Offering, the Company's principal
source of cash from financing activities was net borrowings from commercial
lending institutions. In December 1996, the Company entered into a loan
agreement with a commercial bank (the "Business Loan"). The Business Loan, as
amended in September 1998, provides for a $5.0 million revolving line of credit
for general working capital purposes. Borrowings under the Business Loan may not
exceed 80% of eligible accounts receivable for the revolving working capital
line of credit. The borrowings bear interest at the lender's prime rate or LIBOR
plus 1.50% for the revolving line of credit. Borrowings under the Business Loan
are collateralized by substantially all of the Company's assets. In July 1998,
the Company repaid all net borrowings under the Business Loan. As of September
30, 1998, no amounts were outstanding under the Business Loan.
The Company declared a $10 million dividend to the shareholders of the
Company prior to the Initial Public Offering. The dividend was paid in the form
of promissory notes (the "Dividend Notes") prior to the termination of the
Company's S corporation election, which occurred immediately prior to the
consummation of the Initial Public Offering. The Dividend Notes have (i) a term
of one year; (ii) bear interest at the applicable federal rate for debt
obligations having a maturity of one year, which was 5.46% as of September 30,
1998, and (iii) are payable in four equal quarterly installments. The Dividend
Notes may be prepaid without penalty at any time at the option of the Company.
The Company intends to repay the Dividend Notes from cash flows generated from
operations, current available cash and cash equivalents, and, to the extent that
other sources are insufficient for this purpose, from the proceeds of the
Initial Public Offering. As of November 14, 1998, $5.0 million of the Dividend
Notes had been repaid.
The Company believes that the proceeds generated by the sale of Class A
Common Stock offered by the Company in its Initial Public Offering, the
available borrowings under the Business Loan and the cash generated internally
by operations will satisfy the Company's working capital requirements for the
foreseeable future.
14
RISK FACTORS
Management's Discussion and Analysis of Financial Condition and Results of
Operation contains a number of forward-looking statements. These statements are
based on current expectations and actual results could differ significantly.
Among the factors that could cause actual results to differ are the following:
LIMITED OPERATING HISTORY; UNCERTAINTY OF FUTURE OPERATING RESULTS
The Company did not begin shipping DSS Agent, the first product in the
Company's current product family, until 1994, and a number of the Company's
products were first introduced in 1995. Accordingly, the Company's prospects
must be considered in light of the risks and difficulties frequently encountered
by companies in the early stage of development, particularly companies in new
and rapidly evolving markets. The Company's limited operating history makes the
prediction of future operating results difficult, if not impossible. In
addition, the Company has experienced net losses and losses from operations for
the fiscal years ended December 31, 1996 and December 31, 1994, and was only
marginally profitable for the fiscal years ended December 31, 1997 and December
31, 1995. While the Company has experienced significant percentage growth in
revenues in recent periods, prior percentage growth rates should not be
considered as necessarily indicative of future growth rates or operating
results.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's operating results have in the past and are likely in the
future to vary significantly from quarter to quarter as a result of a number of
factors, including the size and timing of significant orders, the timing of new
product announcements, changes in pricing policies by the Company and its
competitors, market acceptance of decision support software generally and of new
and enhanced versions of the Company's products in particular, the length of the
Company's sales cycles, changes in operating expenses, personnel changes, the
Company's success in expanding its direct sales force and indirect distribution
channels, the pace and success of international expansion, delays or deferrals
of customer implementation and foreign currency exchange rates. Fluctuations in
quarterly operating results may in turn produce fluctuations in annual revenues
and operating results.
The Company's product revenues are not predictable with any significant
degree of certainty. Historically, the Company has typically recognized a
substantial portion of its 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.
Moreover, the Company currently operates with virtually no order backlog because
its software products typically are shipped shortly after orders are received.
As a result, product license revenues in any quarter are substantially dependent
on orders booked and shipped in that quarter. Product license revenues are also
difficult to forecast because the market for the Company's products is rapidly
evolving, and sales cycles, which may last many months, vary substantially from
customer to customer. The sales cycle is subject to a number of factors over
which the Company has little or no control, including customers' budgetary
constraints, the timing of budget cycles, concerns about the introduction of new
products by the Company or its competitors and potential downturns in general
economic conditions, which may be associated with reductions in demand for
management information systems. Product support revenues depend in substantial
part on maintenance revenues from existing customers, and to the extent that
existing customers do not require ongoing maintenance, revenues would be
adversely affected. Seasonal factors may also impact revenue trends as, for
example, European sales may tend to be relatively lower during the summer months
than during other periods.
In light of the planned expansion of the Company's business, the Company
anticipates substantial increases in operating costs and expenses, including
costs and expenses to be incurred in connection with expansion of its technical
support, research and development and sales and marketing organizations.
Substantial resources are also expected to be devoted to the expansion of
indirect sales channels and international operations. The Company's
15
operating expenses are budgeted on anticipated revenue trends, and achieving
expense reductions (or even reductions in the rate of expense growth) may not be
possible in the short term, irrespective of whether actual revenue growth is
commensurate with the budgeted growth on which expense levels are based. As a
result, variations in the timing and amounts of revenue could have a material
adverse effect on the Company's quarterly operating results.
Based upon all of the factors described above, the Company believes that
its quarterly revenues, expenses and operating results are likely to vary
significantly in the future, that period-to-period comparisons of its operating
results are not necessarily meaningful and that, in any event, such comparisons
should not be relied upon as indications of future performance. Furthermore, it
is possible that in some future quarters the Company's operating results will
fall below the expectations of the Company, market analysts and investors. In
such event, the price of the Class A Common Stock would likely be materially and
adversely affected.
LENGTHY SALES AND IMPLEMENTATION CYCLES
The licensing of the Company's software products is often an enterprise-
wide decision by prospective customers and generally involves a significant
commitment of capital and other resources. The period of time between initial
customer contact and an actual sales order may therefore span nine months or
more as customers seek approval within their organizations for large capital
expenditures and implementation of mission-critical technology. During the
course of this sales cycle, the competitive environment in which the Company
operates may change significantly, due, for example, to the introduction of new
products by other industry participants. Customers' budgetary and purchasing
priorities may also change significantly during the course of the sales cycle.
These factors may in turn have a significant impact on the duration or magnitude
of a customer's planned purchasing program. In addition, the time required to
deploy the Company's products can vary significantly with the needs of each
customer and the complexity of the customer's data warehousing requirements. The
deployment process generally extends for several months and may involve a pilot
implementation of the Company's software products. The complexity of customer
requirements, typically involving integration of databases, hardware and
software provided by multiple vendors, may also cause the Company on occasion to
experience difficulty implementing its products. There can be no assurance that
the Company will not experience delays in the implementation of orders in the
future or that third parties will be able to successfully install the Company's
products. Any delays in the implementation of the Company's products could have
a material adverse effect on the Company's business, operating results and
financial condition.
COMPETITION
The markets for decision support and Internet-based information services
are intensely competitive and subject to rapidly changing technology. The
Company's most direct competitors in these markets are providers of decision
support software, push products, browsers with webcasting functionality,
electronic and Internet commerce systems, vertical Internet information systems,
wireless communications products, on-line service providers ("OSPs") and event-
driven technology. Many of these competitors are offering (or may soon offer)
products and services that may compete with the Company's information analysis
and soon-to-be-released information broadcasting products. The bases of
competition in these markets include volume and type of information accessed,
timeliness of information delivery, degree of personalization, range of
information delivery media, quality of presentation, price/performance
sophistication of notification events and ease of implementation.
The Company's competitors in the decision support market fall generally
into the following categories: (i) vendors of relational online analytical
processing ("ROLAP") software such as Information Advantage, Inc. and Platinum
Technologies Corporation; (ii) vendors of desktop on-line analytical processing
("OLAP") software such as Business Objects S.A. and Cognos Incorporated; and
(iii) vendors of multidimensional OLAP software such as Oracle Corporation,
Arbor Software Corporation (which has entered into a strategic relationship with
International Business Machines ("IBM")), Seagate Software, Inc. ("Seagate") and
SAS Institute Incorporated ("SAS"). The Company anticipates continued growth and
competition in the decision support software market and the entrance of new
competitors into this market in the future. Such new competitors may include
Microsoft Corporation
16
("Microsoft"), which has indicated that it may introduce certain products in
1998 that may overlap to some extent with the functionality of the Company's
products.
Push product vendors such as PointCast Incorporated ("PointCast"), Marimba,
Inc. ("Marimba") and BackWeb Technologies Inc. ("BackWeb") offer technologies
that deliver information over the Internet to recipients via Web-browsers and
proprietary interfaces. Vendors of push products are focused generally on the
delivery of text-based information, such as news and sports, but often include
some level of numeric information such as stock price updates. Moreover, Marimba
has entered into technology partnerships that will extend the scope of its
offering to include the delivery of information and analysis from relational
data sources, which could provide the Company with increased competition.
Web-browsers with channels or webcasting functionality, such as Microsoft
Internet Explorer and Netscape Navigator, provide an infrastructure for
automatically updating a set of information on a recipient's computer. Although
this infrastructure is used by the Company to enhance the functionality of its
DSS Web product line, webcasting and desktop channels offer an alternative
information delivery infrastructure to the Company's DSS Broadcaster product
line.
Products and turn-key solutions for electronic commerce, Internet commerce
and electronic business, such as those provided by IBM, Open Market Inc., USWEB
Corp. ("U.S. Web"), Silicon Valley Internet Partners ("SVIP") and Sun
Microsystems ("Sun"), provide a set of functionality that could be used to
implement Internet-based information services. To the extent that these
information products sell information and analysis from relational databases
they will compete with the Company's products.
Vertical Internet information systems, including Microsoft Expedia,
Microsoft Investor, StockBoss, Microsoft CarPoint, Mercury Mail, TechWeb,
ESavers (US Airways, Inc.), C.O.O.L. (Continental Airlines, Inc.), and Internet
Travel Network, have developed custom applications and products for the
commercialization, analysis and delivery of specific information via the
Internet. These systems are generally tailored to a particular application and
built in a fashion that is difficult to leverage into other applications. These
systems represent competition, in that they provide similar functionality to
applications developed using the Company's products.
Wireless communications and messaging providers, such as AT&T Corp.
("AT&T"), Nextel Communications ("Nextel"), Sprint Corporation ("Sprint"), MCI
Communications Corporation ("MCI"), WorldCom, Inc. ("WorldCom"), Tridium Corp.
("Tridium"), PageNet, Inc. ("PageNet") and SkyTel Corp. ("SkyTel"), offer a
variety of alpha enabled mobile phones and pagers. It is possible that these
companies will implement custom-developed information services for consumers of
their mobile phones and pagers that will compete with applications using the
Company's products and services.
OSPs include companies such as America Online, Inc. ("America Online"),
Microsoft's Microsoft Network ("MSN"), Prodigy, Inc. ("Prodigy"), @ Home Network
("@Home") and WebTV Networks, Inc. ("WebTV") (acquired by Microsoft) that
provide text-based content, such as news and sports, over the Internet and on
proprietary online services. The potential exists for these companies to
implement applications that overlap with the functionality provided by the
Company.
Providers of event notification systems include companies such as TIBCO
Finance Technology Inc. ("TIBCO"), which markets a product that monitors stock
tickers and notifies subscribers when preset thresholds are crossed; Clarify
Inc. ("Clarify"), which handles loan applications with a financial system
developed by SAP AG; BEA Systems, Inc. ("BEA Systems"), which provides
middleware; and Vitria Technology Inc. ("Vitria Technology") which provides
event-based workflow software. The systems for event-driven notification
provided by these companies at present and in the future may result in
technology that overlaps with that provided by the Company.
The Company believes that it differentiates itself from other industry
participants by offering comprehensive support for all significant relational
database platforms. If a single vendor wins a substantial share of the
relational database market, the Company may find it more difficult to
differentiate its offerings from its competitors, which may materially adversely
affect the Company's business, operating results and financial condition.
17
Many of the Company's competitors have longer operating histories,
significantly greater financial, technical, marketing or other resources, or
greater name recognition than the Company. In addition, many of the Company's
competitors have well established relationships with current and potential
customers and extensive knowledge of the data warehouse industry. As a result,
these competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products, than can the
Company. Increased competition may result in price reductions, reduced gross
margins and loss of market share. There can be no assurance that the Company
will be able to compete successfully against current and future competitors or
that competitive pressures faced by the Company will not materially adversely
affect its business, operating results and financial condition.
Current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties,
thereby increasing their ability to address the needs of the Company's
prospective customers. The Company's current or future indirect channel partners
may establish cooperative relationships with current or potential competitors of
the Company, thereby limiting the Company's ability to sell its products through
particular distribution channels. Accordingly, it is possible that new
competitors or alliances among current and new competitors may emerge and
rapidly gain significant market share. Such competition could have a material
adverse effect on the Company's margins and its ability to obtain maintenance
revenues for new and existing product licenses on favorable terms.
MANAGEMENT OF GROWTH
The Company is experiencing rapid expansion in all areas of its operations,
and the Company anticipates that this expansion will continue. The total number
of Company employees grew from 59 on January 1, 1995 to 841 on September 30,
1998, and further significant increases in the number of employees are
anticipated. The Company's growth has placed, and is expected to continue to
place, significant demands on its administrative, operational, financial, and
personnel resources. In particular, the Company expects that current and planned
expansion of international operations will lead to increased financial and
administrative demands, such as increased operational complexity associated with
expanded facilities, administrative burdens associated with managing an
increasing number of relationships with foreign partners, and expanded treasury
functions to manage foreign currency risks. The Company may also be required to
expand its support organization significantly to further develop indirect
distribution channels that penetrate different and broader markets and to
accommodate growth in the Company's installed customer base. The failure of the
Company to manage its expansion effectively could have a material adverse effect
on the Company's business, operating results and financial condition.
NEED TO RECRUIT ADDITIONAL SKILLED PERSONNEL; DEPENDENCE ON KEY PERSONNEL
The Company's future success depends upon its continuing ability to
attract, train, assimilate and retain highly qualified personnel. Competition
for such personnel in the software industry is intense, and there can be no
assurance that the Company will be able to retain its key employees or that it
can attract, train, assimilate or retain other highly qualified personnel in the
future. The Company's success also depends in large part on the continued
service of its key management personnel, particularly Michael J. Saylor, the
Company's President and Chief Executive Officer, and Sanju K. Bansal, the
Company's Executive Vice President and Chief Operating Officer. The loss of the
services of one or more of these individuals or other key personnel could have a
material adverse effect on the Company's business, operating results and
financial condition.
DEPENDENCE ON NEW VERSIONS, NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE
The market for the Company's products is characterized by rapid
technological change, frequent new product introductions and enhancements,
uncertain product life cycles, changing customer demands and evolving industry
standards. The introduction of products embodying new technologies and the
emergence of new industry standards can render existing products obsolete and
unmarketable. Emergence of new standards in related fields may also
18
have an adverse effect on existing products. This could be the case, for
example, if new Web protocols were to emerge that were incompatible with
deployment of the Company's DSS applications over the Web. Although the
Company's DSS solutions allow the core database component to reside on nearly
all enterprise server hardware and operating system combinations (Mainframe,
AS/400, Unix, Windows NT, Windows), the Company's application server component
currently runs only on the Windows NT operating system. Therefore, the Company's
ability to increase sales of its products may depend on the continued acceptance
of the Windows NT operating system. To the extent that potential customers use
Unix operating systems as their application server, the Company would be
precluded from addressing that segment of the DSS application market. The
development of a Unix product would require a substantial investment of
resources by the Company and there is no assurance that such a product could be
introduced on a timely or cost effective basis or at all.
The Company believes that its future success will depend in large part on
its ability to continue to support a number of popular operating systems and
databases, and on its ability to maintain and improve its current product line
and to develop new products on a timely basis that achieve market acceptance,
maintain technological competitiveness and meet an expanding range of customer
requirements. As a result of the complexities inherent in DSS applications,
major new products and product enhancements can require long development and
testing periods. In addition, customers may delay their purchasing decisions in
anticipation of the general availability of new or enhanced versions of the
Company's products. Moreover, to date the Company has had only a limited number
of customers who have deployed its products in environments that involve
terabytes of data and thousands of active users, and widespread deployment in
these complex environments may create unexpected delays or other difficulties.
As a result, significant delays in the general availability of such new releases
or significant problems in the installation or implementation of such new
releases could have a material adverse effect on the Company's business,
operating results and financial condition. There can be no assurance that the
Company will be successful in developing and marketing, on a timely and cost
effective basis, product enhancements or new products that respond to
technological change, evolving industry standards or customer requirements, that
the Company will not experience difficulties that could delay or prevent the
successful development, introduction or marketing of these enhancements or that
the Company's new products and product enhancements will achieve market
acceptance.
DEPENDENCE ON GROWTH OF MARKET FOR DECISION SUPPORT SOFTWARE
All of the Company's revenues have been attributable to the sale of
decision support software and related maintenance, consulting and training
services, and such software and services are expected to account for the
Company's revenues for the foreseeable future. Although demand for decision
support software has grown in recent years, the market for decision support
software applications is still emerging. Further development of the market may
be impaired by, among other factors, resistance from consumer and privacy groups
to increased commercial collection and use of data regarding spending and other
personal behavior patterns. There can be no assurance that the market will
continue to grow or that, even if the market does grow, businesses will adopt
the Company's solutions. The Company has spent, and intends to continue to
spend, considerable resources educating potential customers about decision
support software generally and the Company's solutions in particular. However,
there can be no assurance that such expenditures will enable the Company's
products to achieve any additional degree of market acceptance and, if the
market fails to grow or grows more slowly than the Company currently
anticipates, the Company's business, operating results and financial condition
would be materially adversely affected.
YEAR 2000
The "Year 2000 Issue" refers generally to the problems that some software
may have in determining the correct century for the year. The problem began 40
years ago when hardware was expensive and storage space was at a premium. To
save space and money, dates were stored in a two-digit format (i.e. November 10,
1984 was stored as 11/10/84). The problem with storing dates in a two-digit
format is that computer systems may not be able to determine which century the
date falls in and as a result, may not function or may give incorrect results.
The Company has developed a Year 2000 readiness plan for the current
versions of its products. The plan includes development of corporate awareness,
assessment, implementation, validation testing and contingency
19
planning. The Company has largely completed all phases of its plan, except for
contingency planning, with respect to the current versions of all of its
products. The Company's total cost relating to these activities has not been and
is not expected to be material to the Company's financial position, results of
operations, or cash flows.
As a result of the Year 2000 readiness plan, the current versions of most
of its products are "Year 2000 Compliant," as defined below, when configured and
used in accordance with the related documentation, and provided that the
underlying operating system of the host machine and any other software used with
or in the host machine or MicroStrategy products are also Year 2000 Compliant.
The Company has not yet determined whether certain third-party software
incorporated in one of the Company's products is Year 2000 Compliant. Although
the Company is not currently aware of any material issues with such third-party
software products related to the Year 2000, the Company may experience material
unanticipated problems and costs caused by undetected errors or defects in the
third-party software.
The Company has defined "Year 2000 Compliant" in conformity with that
developed by the British Standards Institute. In order to be Year 2000
compliant, each of the following four conditions must be satisfied:
(i) No value for current date will cause any interruption in operation;
(ii) Date-based functionality must behave consistently for dates prior
to, during, and after year 2000;
(iii) In all interfaces and data storage, the century in any date must be
specified either explicitly or by unambiguous algorithms or inferencing rules;
and
(iv) Year 2000 must be recognized as a leap year.
Although MicroStrategy has done extensive testing on its software, the
Company has also identified four potential problem areas:
(i) MicroStrategy has not specifically assured the compliance of all
third-party software incorporated into its software;
(ii) Some of MicroStrategy's customers may be using a version of our
software that is not Year 2000 Compliant (although we have made an effort to
make sure that all our customers are using Year 2000 Compliant versions of the
Company's software, we can not be certain that they have installed the most
recent versions of our software);
(iii) Not all platforms or versions of the operating systems that the
Company currently supports are Year 2000 Compliant; and
(iv) Certain customers have elected to operate systems in a two-digit
year date environment.
The Company does not currently have any information concerning the Year
2000 compliance status of its customers. As is the case with other similarly
situated software companies, if the Company's current or future customers fail
to achieve Year 2000 compliance or if they divert technology expenditures
(especially technology expenditures that were reserved for enterprise decision
support software) to address Year 2000 compliance problems, the Company's
business, results of operations, or financial condition could be materially
adversely affected.
The Company's internal systems include both its information technology
("IT") and non-IT systems. The Company plans to initiate an assessment of its
material internal IT systems (including both the Company's own software products
and third-party software and hardware technology) and its non-IT systems (such
as its security system, building equipment, and embedded microcontrollers). The
Company expects to start that testing in the first quarter of 1999. The Company
intends to implement any required changes in the second and third quarters of
1999 and to conduct additional testing in the fourth quarter of 1999. To the
extent that the Company is not able to test the technology provided by third-
party vendors, the Company is seeking assurances from such vendors that their
systems are Year 2000 compliant. Although the Company is not currently aware of
any material operational
20
issues or costs associated with preparing its internal IT and non-IT systems for
the Year 2000, the Company may experience material unanticipated problems and
costs caused by undetected errors or defects in the technology used in its
internal IT and non-IT systems.
MicroStrategy has funded its Year 2000 compliance activities from cash
flows and has not allocated additional funds in the past to the Year 2000 effort
associated with either our software or internal systems. During 1999, the
Company intends to spend an estimated $100,000 on preparing its internal systems
for the Year 2000. The Company does not plan to utilize extensive outside
assistance in the completion of its internal Year 2000 effort.
The Company is beginning the process of developing a contingency plan
for handling the unlikely circumstance that the Company is unable to
achieve Year 2000 compliance status by the Year 2000. The Company is not certain
that all non-critical systems will be Year 2000 compliant, but believes that
failure of such systems would not have a material adverse affect on the
Company's business, financial condition or results of operations.
As the Company is in the business of selling software products, the
Company's risk of being subjected to lawsuits relating to Year 2000 issues with
its software products is likely to be greater than that of companies in other
industries. Because computer systems may incorporate components from different
manufacturers, it may be difficult to determine which component in a computer
system may cause a Year 2000 issue. As a result, the Company may be subjected to
Year 2000-related lawsuits independent of whether its products and services are
Year 2000 compliant. The outcomes of any such lawsuits and the impact on the
Company cannot be determined at this time.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European
Union are scheduled to establish fixed conversion rates between their existing
sovereign currencies and the euro. The participating countries have agreed to
adopt the euro as their common legal currency on that date. The Company has
formed a task force and has begun to assess the potential impact to the Company
that may result from the euro conversion. In addition to tax and accounting
considerations, the Company is assessing the potential impact from the euro
conversion in a number of areas, including the following: (1) the technical
challenges to adapt information technology and other systems to accommodate
euro-denominated transactions; (2) the competitive impact of cross-border price
transparency, which may make it more difficult for businesses to charge
different prices for the same products on a country-by-country basis; (3) the
impact on currency exchange costs and currency exchange rate risk; and (4) the
impact on existing contracts. At this early state of its assessment, the Company
can not yet predict the anticipated impact of the euro conversion on the
Company.
CONTROL BY MAJORITY STOCKHOLDER; ANTI-TAKEOVER EFFECT OF DUAL CLASSES OF COMMON
STOCK
Holders of the Company's Class A Common Stock are entitled to one vote per
share and holders of the Company's Class B Common Stock are entitled to ten
votes per share. As of September 30, 1998, the Company's Class B Common Stock
shareholders owned or controled 30,735,514 shares of Class B Common Stock
representing 98.5% of the voting power of the Company. Michael J. Saylor, the
Company's Chairman, President and Chief Executive Officer, through his sole
ownership and control of Alcantara LLC, controls 22,574,662 shares of Class B
Common Stock representing 72.3% of the voting power of the Company. Accordingly,
Mr. Saylor is able to control the Company through his ability to determine the
outcome of elections of the Company's directors, amend the Company's Certificate
of Incorporation and Bylaws and take certain other actions requiring the vote or
consent of stockholders, including mergers, going private transactions and other
extraordinary transactions and the terms thereof.
The Company's Certificate of Incorporation permits holders of Class B
Common Stock to transfer shares of Class B Common Stock, subject to approval of
the holders of a majority of the 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 other approval, transfer voting control of the
Company to a third party. Transfer of voting control
21
to such a transferee could have a material adverse effect on the Company's
business prospects and financial condition. Mr. Saylor will also be able to
prevent a change of control of the Company, regardless of whether holders of
Class A Common Stock might otherwise receive a premium for their shares over the
then-current market price.
RISKS ASSOCIATED WITH INTELLECTUAL PROPERTY
The Company regards its software products as proprietary and relies
primarily on a combination of statutory and common law copyright, trademark and
trade secret laws, customer licensing agreements, employee and third-party
nondisclosure agreements and other methods to protect its proprietary rights.
These laws and contractual provisions provide only limited protection of the
Company's proprietary rights. The Company has no patents or patent applications
pending and has no registered trademarks (other than MicroStrategy and
QuickStrike) or registered copyrights (other than the EISToolkit 2.0 reference
manual). Despite the Company's efforts to protect its proprietary rights, it may
be possible for a third party to copy or otherwise obtain and use the Company's
technology without authorization or to develop similar technology independently.
Furthermore, the laws of certain countries in which the Company sells its
products do not protect the Company's software and intellectual property rights
to the same extent as do the laws of the United States. If unauthorized copying
or misuse of the Company's products were to occur to any substantial degree, the
Company's business, results of operations and financial condition could be
materially adversely affected. There can be no assurance that the Company's
means of protecting its proprietary rights will be adequate or that the
Company's competitors will not independently develop similar technology.
There can be no assurance in the future that a third party will not claim
that the Company's technology infringes its proprietary rights. As the number of
software products in the Company's target market increases and the functionality
of these products further overlap, the Company believes that software developers
may become increasingly subject to infringement claims. Any such claims, whether
with or without merit, can be time consuming and expensive to defend. There can
be no assurance that third parties will not assert infringement claims against
the Company in the future with respect to its current or future products or that
any such assertion will not require the Company to enter into royalty
arrangements or litigation that could be costly to the Company.
INTERNATIONAL OPERATIONS
International sales accounted for 24.9%, 26.6%, 11.1%, and 11.3% of the
Company's total revenue for the Nine months ended September 30, 1998 and for the
fiscal years ended December 31, 1997, 1996 and 1995, respectively. The Company
intends to continue to expand its international operations and enter additional
international markets. Such expansion will require significant management
attention and financial resources and could adversely affect the Company's
business, operating results or financial condition. In order to expand
international sales successfully in 1998 and subsequent periods, the Company
must establish additional foreign operations, hire additional personnel and
recruit additional international resellers and distributors. There can be no
assurance that the Company will be able to do so in a timely manner, which may
limit the Company's growth in international sales. In addition, there can be no
assurance that the Company will be able to maintain or increase international
market demand for the Company's products. In addition to the foreign currency
risks described below, other risks inherent in the Company's international
business activities generally include unexpected changes in regulatory
requirements, tariffs and other trade barriers, costs of localizing products for
foreign countries, lack of acceptance of localized products in foreign
countries, longer accounts receivable payment cycles, difficulties in managing
international operations, potentially adverse tax consequences including
restrictions on the repatriation of earnings, weaker intellectual property
protection and the burden of complying with a wide variety of foreign laws. Such
factors may have a material adverse effect on the Company's future international
sales and, consequently, the Company's results of operations.
22
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of Class A Common Stock could adversely affect the market
price of the Class A Common Stock. Several of the Company's principal
stockholders hold a significant portion of the outstanding Class B Common Stock,
and a decision by one or more of these stockholders to convert such shares into
Class A Common Stock (which conversion may take place at any time) and sell
their shares could adversely affect the market price of the Class A Common
Stock. The holders of all the shares of Class B Common Stock (which may be
converted into Class A Common Stock at any time) have entered into agreements
with the underwriters of the Company's initial public offering (the "Lock-up
Agreements") which will provide that, until December 9, 1998, they will not
offer, sell, contract to sell or otherwise dispose of any shares of Class A
Common Stock or securities of the Company which are substantially similar to the
shares of Class A Common Stock or which are convertible into or exchangeable
for, or represent the right to receive, shares of Class A Common Stock without
the prior written consent of the representatives of the underwriters. Upon the
expiration of the Lock-up Agreements, a substantial majority of the shares
covered by the Lock-up Agreements will be eligible for sale pursuant to Rule
144.
The Company filed a Registration Statement on Form S-8 in September 1998
registering the 8,000,000, 300,000, 200,000 and 400,000 shares of Class A Common
Stock that are issuable upon the exercise of stock options either outstanding or
available for grant pursuant to the Company's Amended and Restated 1996 Stock
Plan ("1996 Stock Plan"), 1997 Stock Option Plan for French Employees ("French
Plan"), 1997 Director Option Plan ("Director Option Plan") and the 1998 Employee
Stock Purchase Plan (the "Purchase Plan" and together with the 1996 Stock Plan,
the French Plan and the Director Option Plan, the "Company Stock Plans"),
respectively. Consistent with the terms of the Company Stock Plans, holders of
options will be unable to sell any shares of Class A Common Stock received upon
the exercise of options granted thereunder until December 9, 1998, and no shares
will be acquired under the Purchase Plan prior to January 31, 1999. Options
granted under the 1997 Director Option Plan do not generally begin to vest until
October 1998.
23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds S-K 701(f)
The Company sold 4,440,000 shares of its Class A Common Stock, $.001 par
value, on June 16, 1998 pursuant to a Registration Statement on Form S-1
(Registration No. 333-49899), which was declared effective by the Securities
Exchange Commission on June 10, 1998 (the "Effective Date"). Certain
stockholders of the Company sold an aggregate of 160,000 shares of Class A
Common Stock pursuant to such registration statement. The managing underwriters
of the offering were Merrill Lynch & Co., Hambrecht & Quist, and Friedman,
Billings, Ramsey & Co., Inc. The aggregate gross proceeds raised in the offering
from the sale of Class A Common Stock by the Company and the selling
stockholders were $53.3 million and $1.9 million, respectively. The Company's
total expenses in connection with the offering were approximately $4.6 million,
of which $3.7 million was for underwriting discounts and commissions and, based
on the Company's reasonable estimate, approximately $0.9 million was for other
expenses. The Company's net proceeds from the offering were approximately $48.7
million. From the Effective Date through November 14, 1998, the Company used
$13.6 million of such net proceeds to repay all net borrowings under the
Business Loan. In addition, the Company used $5.0 million of such net proceeds
to repay a portion of the borrowings under the Company's $10.0 Dividend Notes
which were issued to certain shareholders of the Company prior to the
consummation of the offering. Approximately $4.8 million of the $5 million
dividend payment was paid to certain officers, directors and 10% shareholders of
the Company. As of November 14, 1998 the Company had approximately $24.6 million
of proceeds remaining from the Offering, and pending use of the proceeds, the
Company intends to invest such proceeds primarily in investment-grade, interest-
bearing instruments.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. A. Exhibits
3.1 Form of Amended and Restated Certificate of Incorporation of the
Company.
3.2 Form of Restated Bylaws of the Company.
4.1 Form of Certificate of Class A Common Stock of the Company.
10.1 Amended and Restated 1996 Stock Option Plan of the Company.
10.2 Lease Agreement between Prentiss Properties Acquisition
Partners, L.P. and the Company dated August 14, 1998.
27 Financial Data Schedule
B. Reports on Form 8-K
None
All other items are omitted because they are not applicable or the answers are
none.
24
SIGNATURE
PURSUANT TO THE REQUIREMENTS 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.
MicroStrategy Incorporated
By /s/ Michael J. Saylor
----------------------------
Michael J. Saylor
Chief Executive Officer and President
By /s/ Mark S. Lynch
----------------------------
Mark S. Lynch
Chief Financial Officer
Date: November 16, 1998
25
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Form of Amended and Restated Certificate of Incorporation of the Company. *
3.2 Form of Restated Bylaws of the Company. *
4.1 Form of Certificate of Class A Common Stock of the Company. *
10.1 Amended and Restated 1996 Stock Option Plan of the Company. Filed Herewith
10.2 Lease Agreement between Prentiss Properties Acquistion Partners, L.P. and Filed Herewith
the Company dated August 14, 1998.
27 Financial Data Schedule. Filed Herewith
* Filed with the Company's Registration Statement on Form S-1 (Registration No.
333-49899), and incorporated herein by reference.
26