<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 10, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MICROSTRATEGY INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7372 51-0323571
(Primary Standard (I.R.S. Employer
(State or other Industrial Identification No.)
jurisdiction of Classification Code
incorporation or Number)
organization)
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8000 TOWERS CRESCENT DRIVE
VIENNA, VIRGINIA 22182
(703) 848-8600
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
--------------
MR. MICHAEL J. SAYLOR
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MICROSTRATEGY INCORPORATED
8000 TOWERS CRESCENT DRIVE
VIENNA, VIRGINIA 22182
(703) 848-8600
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------
COPIES TO:
ALLEN L. MORGAN, ESQ. DAVID C. CHAPIN, ESQ.
JOHN D. WATSON, ESQ. ALISON T. BOMBERG, ESQ.
JAMES A. HUTCHINSON, ESQ. WILLIAM M. SHIELDS, ESQ.
LATHAM & WATKINS ROPES & GRAY
1001 PENNSYLVANIA AVENUE, N.W., ONE INTERNATIONAL PLACE
SUITE 1300 WASHINGTON, D.C. 20004 BOSTON, MA 02110
(202) 637-2200 (617) 951-7000
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
--------------
If any of the securities on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: [_]
--------------
CALCULATION OF REGISTRATION FEE
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
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<S> <C> <C>
Class A Common Stock, par value $0.001 per
share................................... $36,000,000 $10,620.00
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED APRIL 10, 1998
PROSPECTUS
SHARES
[MICROSTRATEGY LOGO]
CLASS A COMMON STOCK
-----------
All of the shares of Class A Common Stock of MicroStrategy
Incorporated, a Delaware corporation ("MicroStrategy" or the "Company") offered
hereby (the "Offering") are being sold by the Company. Upon completion of the
Offering, the Company's existing stockholders immediately prior to the date of
this Prospectus will own 100% of the outstanding Class B Common Stock of the
Company, which represents approximately % of the economic interest in the
Company (approximately % if the Underwriters' over-allotment option is
exercised in full). Each holder of Class B Common Stock is currently an
employee of the Company.
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. Holders of Class A Common Stock are generally entitled to vote
with holders of Class B Common Stock as one class on all matters as to which
the holders of Class B Common Stock are entitled to vote. Class B Common Stock
may be converted into Class A Common Stock at any time on a one-for-one basis.
Following the Offering, the shares of Class B Common Stock will represent
approximately % of the combined voting power of all classes of voting stock of
the Company (approximately % if the Underwriters' over-allotment option is
exercised in full). See "Description of Capital Stock."
Prior to the Offering, there has been no public market for the Class A Common
Stock. It is currently estimated that the initial public offering price will be
between $ and $ per share. For factors to be considered in determining
the initial public offering price, see "Underwriting."
Application has been made to have the Class A Common Stock approved for
quotation on the Nasdaq National Market under the symbol "MSTR."
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR CERTAIN CONSIDERATIONS RELEVANT TO
AN INVESTMENT IN THE CLASS A COMMON STOCK.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share.................................... $ $ $
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Total(3)..................................... $ $ $
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- --------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $ payable by the Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional shares of Class A Common Stock at the initial
offering price per share, less the underwriting discount, solely to cover
over-allotments. If such option is exercised in full, the total initial
public offering price, underwriting discount and proceeds to the Company
will be $ , $ and $ , respectively. See "Underwriting."
-----------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York,
on or about , 1998, against payment therefor in immediately available
funds.
-----------
MERRILL LYNCH & CO. HAMBRECHT & QUIST
-----------
The date of this Prospectus is , 1998.
<PAGE>
[ART WORK TO BE SUPPLIED BY AMENDMENT]
"MicroStrategy" and "Quick Strike" are registered trademarks of the Company
and "DSS Server," "DSS Agent," "DSS Web," "DSS Objects," "DSS Architect," "DSS
Administrator," "DSS Executive," "DSS Office," "DSS Broadcaster," "Query
Tone," and "QuickPilot" are trademarks of the Company. This Prospectus also
contains trademarks and registered trademarks of companies other than
MicroStrategy Incorporated.
The Company intends to distribute to its stockholders annual reports
containing audited financial statements and will make available copies of
quarterly reports containing unaudited interim financial information for the
first three quarters of each fiscal year of the Company.
----------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES AND THE IMPOSITION OF A PENALTY BID IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements and
Notes thereto appearing elsewhere in this Prospectus.
MicroStrategy is a leading worldwide provider of enterprise decision support
system ("DSS") software and related services. The Company's suite of products
("DSS Suite") enables both active and passive delivery of information from
large-scale databases, providing Global 2000 enterprise user communities with
timely answers to mission-critical questions. MicroStrategy's decision support
platform enables users to query and analyze the most detailed, transaction-
level databases, turning data into business intelligence. In addition to
supporting internal enterprise users, MicroStrategy's products extend DSS
beyond corporate boundaries to customers, partners and supply chain
constituencies through a broad range of pull and push technology such as the
Internet, e-mail, telephones, pagers and other wireless communications devices.
The growth of DSS applications has been driven by the demand for better
competitive business intelligence, improvements in the price/performance of
computers and increases in electronic data capture and storage. In addition,
the emergence of the Internet and other communications technologies has enabled
cost-effective access to and delivery of information to remote users throughout
the world. Potential users of such information also include those outside of
the organization such as suppliers, customers and consumers, which increasingly
enables companies to transform their organizational information from under-
utilized data to revenue-generating assets. Due to these factors, the overall
market for DSS is projected to grow substantially. According to Forrester
Research, the decision support component of the data warehouse market is
projected to grow from $1.1 billion in 1997 to $3.6 billion by 2001. In
addition, International Data Corporation ("IDC") projects that the market for
Internet-related DSS applications will grow from $40 million in 1996 to $2.3
billion by 2001.
MicroStrategy's DSS Suite, which includes DSS Server, DSS Web, DSS Agent, DSS
Architect and DSS Administrator, along with its newest product in Beta testing,
DSS Broadcaster, addresses the needs of the entire enterprise community, from
end-users to the managers of the information technology infrastructure. DSS
Suite provides the infrastructure and products used to implement three
categories of applications: (i) internal corporate information solutions; (ii)
business-to-business information solutions; and (iii) business-to-consumer
information solutions. The Company also offers a comprehensive set of
consulting, training and support services for its customers and partners.
MicroStrategy's objective is to become the world's leading provider of DSS
products. The Company believes that the future of DSS is "Query Tone." Query
Tone is universal knowledge enablement--the ability of any user, anywhere, to
ask any question, at any time. Just as dial tone makes telecommunications
services universally available, the Company believes that Query Tone will make
knowledge a ubiquitous utility. The Company intends to establish its DSS
platform as the standard enabling technology for Query Tone.
The Company has over 500 customers across such diverse industries as retail,
telecommunications, finance, insurance, healthcare, pharmaceuticals and
consumer packaged goods. MicroStrategy's customers use the Company's decision
support platform to perform mission-critical activities such as: customer
segmentation and profitability analysis; supply chain management; one-to-one
customer marketing; financial analysis; customer acquisition, retention, and
churn analysis; merchandising and inventory analysis; product category
management; and customer risk profiling. Representative MicroStrategy customers
include A.C. Nielsen, Bank of America, CVS Pharmacy, General Motors, Hallmark,
Kmart, MCI, Merck/Medco, The SABRE Group, USAA and Xerox.
MicroStrategy has approximately 700 employees and markets its software and
services primarily through its direct sales force with offices located in major
cities throughout the U.S. and Europe. The Company is represented by
distributors in countries where it does not have a direct sales force and has
also entered into relationships with more than 80 system integration,
application development and platform partners, including Acxiom, Andersen
Consulting, IBM, Intrepid Systems, NCR, Oracle and Price Waterhouse.
MicroStrategy was founded in 1989 by its President, CEO and Chairman, Michael
J. Saylor. The Company is incorporated in Delaware, and its worldwide
headquarters are located at 8000 Towers Crescent Drive, Vienna, Virginia 22182.
The Company's telephone number is (703) 848-8600, and its website is
www.strategy.com. The information on the Company's website is not part of this
Prospectus.
3
<PAGE>
THE OFFERING
Class A Common Stock
offered by the Company..... shares
Common Stock to be
outstanding after the
Offering:
Class A Common Stock.... shares(1)
Class B Common Stock.... 30,895,514 shares
Total Common Stock... shares(1)
Proposed Nasdaq National
Market Symbol.............. "MSTR"
Use of Proceeds............. For general corporate purposes, including working
capital, capital expenditures, repayment of
indebtedness and possible acquisitions or
investments. See "Use of Proceeds."
Voting Rights............... 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. Holders of
Class A Common Stock are generally entitled to
vote with holders of Class B Common Stock as one
class on all matters as to which the holders of
Class B Common Stock are entitled to vote. Class
B Common Stock may be converted into Class A
Common Stock at any time on a one-for-one basis.
Following the Offering, the shares of Class B
Common Stock will represent approximately % of
the combined voting power of all classes of
voting stock of the Company (approximately % if
the Underwriters' over-allotment option is
exercised in full). See "Description of Capital
Stock."
- --------
(1) Excludes 4,911,863 shares of Class A Common Stock issuable upon exercise of
employee and director stock options outstanding at December 31, 1997 with
exercise prices ranging from $0.50 to $4.00 per share and with a weighted
average exercise price of $1.70 per share. The Class A Common Stock and the
Class B Common Stock are referred to herein collectively as "Common Stock."
See "Management--Stock Option Plans" and Note 8 of "Notes to Consolidated
Financial Statements."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1993 1994 1995 1996 1997(1)
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues................ $ 4,102 $ 4,980 $ 9,777 $ 22,603 $ 53,557
Income (loss) from
operations............. 710 (3) 77 (2,290) 372
Net income (loss)....... 761 (61) 48 (2,375) 121
Basic net income (loss)
per share.............. $ 0.03 $ 0.00 $ 0.00 $ (0.08) $ 0.00
Shares used in computing
basic net income (loss)
per share.............. 24,640,000 27,988,000 28,896,622 29,493,873 29,493,873
Diluted net income
(loss) per share....... $ 0.03 $ 0.00 $ 0.00 $ (0.08) $ 0.00
Shares used in computing
diluted net income
(loss) per share....... 24,640,000 27,988,000 28,896,622 29,493,873 31,726,591
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
------------------------------------
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
------- ------------ --------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................. $ 3,506 $ 3,506
Working capital (deficit)................. (5,761) (15,761)
Total assets.............................. 30,065 31,133
Notes payable, long-term portion.......... 2,658 2,658
Total stockholders' (deficit) equity...... (427) (9,359)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED(4)
-------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996 1997 1997 1997 1997
--------- -------- ------------- ------------ --------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues................ $4,086 $5,553 $6,370 $6,594 $8,137 $11,875 $14,751 $18,794
Income (loss) from
operations............. (5) 242 (538) (1,989) (941) 199 498 616
Net income (loss)....... (22) 218 (674) (1,897) (1,003) 122 486 516
</TABLE>
- --------
(1) As of December 31, 1997, the Company was an S corporation, and accordingly,
was not liable for corporate income taxes. On a pro forma basis, had the
Company been a tax paying entity, the Company would have recorded an income
tax provision of approximately $489,000 and a net loss of approximately
$368,000 for the year ended December 31, 1997. Pro forma basic and diluted
loss per share would have been $0.01. See Note 1 to "Notes to Consolidated
Financial Statements" for basis of computing pro forma basic and diluted
net loss per share.
(2) Pro forma for the effect of a $10.0 million dividend to be paid to the
Existing Stockholders in the form of short-term notes prior to the
termination of the Company's S corporation election, which is expected to
occur shortly prior to closing of the Offering. See "Termination of S
Corporation Election and S Corporation Distribution" and "Dividend Policy."
(3) As adjusted to reflect the sale of shares of Class A Common Stock
offered hereby at an assumed public offering price of $ per share after
deducting the underwriting discount and the estimated offering expenses
payable by the Company.
(4) The operating results for any quarter are not necessarily indicative of
results for any future period. See "Risk Factors--Potential Fluctuations in
Quarterly Operating Results" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Quarterly Financial
Results."
5
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should consider carefully the following risk factors in evaluating
the Company and its business before purchasing the Class A Common Stock
offered hereby. This Prospectus contains forward-looking statements that are
based largely on the Company's current expectations and that are subject to a
number of risks and uncertainties. The Company's actual results could differ
materially from the results discussed in "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Prospectus.
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.
See "--Lengthy Sales and Implementation Cycles." 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
6
<PAGE>
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 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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 six 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. See "--
Potential Fluctuations in Quarterly Operating Results," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business--Sales and Marketing" and "Professional Services and Customer
Support."
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.
7
<PAGE>
The Company's competitors in the decision support market fall generally into
the following categories: (i) vendors of relational on-line 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 ("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.
8
<PAGE>
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.
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. See "Business--Competition."
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 590 on December
31, 1997 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business--Sales and Marketing" and
"Management."
9
<PAGE>
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. See "Business--Employees" and "Management."
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 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 on the
Windows NT operating system only. 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. See "Business--Research and
Product Development."
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Company currently is not subject to direct regulation by any
governmental agency, other than laws and regulations generally applicable to
businesses. However, certain U.S. laws and laws of other countries restricting
the use of consumers' personal information may apply to the Company. Due to
the increasing popularity and use of the Internet and the dramatically
increased access to personal information enabled by technologies such as those
offered by the Company, it is possible that laws and regulations may be
adopted in the U.S. and abroad to
10
<PAGE>
limit access to personal information over the Internet and other public data
networks. In response to consumer pressures, legislation applicable to the
Company in areas such as privacy protection has been proposed in the U.S.
Congress and various state legislatures, and it is possible that some such
legislation may become law. Moreover, the applicability to the Company of
existing laws governing issues such as personal privacy over the Internet or
other public data networks is uncertain. The majority of such laws were
adopted before the widespread use and commercialization of the Internet and
other public data networks and, as a result, do not contemplate or address the
unique issues presented by such media. Any new law or regulation or any
expanded governmental enforcement of existing regulations may limit the
Company's growth or increase the Company's legal exposure, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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. 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.
CONTROL BY EXISTING STOCKHOLDERS; 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. Upon completion of the Offering, the existing stockholders
immediately prior to termination of the Company's S corporation election (the
"Existing Stockholders") will own or control 30,895,514 shares of Class B
Common Stock representing % of the voting power of the Common Stock. Michael
J. Saylor, the Company's Chairman, President and Chief Executive Officer,
through his sole ownership and control of Alcantara, LLC, will control
22,574,662 shares of Class B Common Stock representing % of the voting power
of the Common Stock. Accordingly, Mr. Saylor will be 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 charter permits holders of Class B Common Stock to transfer
their shares to third parties, subject to the consent 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 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.
RELIANCE ON CHANNEL PARTNERS
In addition to its direct sales force, the Company relies on channel
partners such as original equipment manufacturers ("OEMs") and value added
resellers ("VARs") for licensing and support of its products in the United
States and internationally. In particular, for the fiscal year ended December
31, 1997, channel partners accounted for, directly or indirectly, 27.5% of the
Company's total revenues. The Company's channel partners
11
<PAGE>
generally offer products of several different companies, including, in some
cases, products that compete with the Company's products. The Company intends
to expand its relationships with strategic partners and to increase the
proportion of the Company's customers licensed through these indirect
channels. The Company is currently investing, and intends to increasingly
invest in the future, significant resources to develop these channels, which
could adversely affect the Company's operating results if the Company's
efforts do not generate significant license revenues. There can be no
assurance that the Company will be able to attract strategic partners that
will be able to market the Company's products effectively and will be
qualified to provide timely and cost-effective customer support and service.
The Company's ability to achieve revenue growth in the future will depend in
part on its success in recruiting strategic partners and maintaining
successful relationships with those partners on a going-forward basis. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview" and "Business--Sales and Marketing."
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, QuickStrike, EISToolkit and Strategy System) or registered
copyrights. 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.
Although the Company has never been the subject of a material intellectual
property dispute, 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. See "Business--Intellectual Property and Licenses."
INTERNATIONAL OPERATIONS
International sales accounted for 11.3%, 11.1% and 26.6% of the Company's
total revenue in fiscal years 1995, 1996 and 1997, 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. Additional
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
12
<PAGE>
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.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Business--Sales and Marketing."
CURRENCY FLUCTUATIONS
The Company's international revenues and expenses are denominated in foreign
currencies (principally the British Pound Sterling and the German Deutsche
Mark). The functional currency of the Company's foreign subsidiaries is each
subsidiary's local currency. Fluctuations in exchange rates between the U.S.
Dollar and such currencies may have a material adverse effect on the Company's
business, results of operations and financial condition, particularly its
operating margins, although foreign currency translation gains and losses have
been immaterial to date. The impact of future exchange rate fluctuations on
the Company's results of operations cannot be accurately predicted. To date,
the Company has not sought to hedge the risks associated with fluctuations in
exchange rates but may undertake such transactions in the future. There can be
no assurance that any hedging techniques implemented by the Company in the
future would be successful or that the Company's business, results of
operations and financial condition will not be materially adversely affected
by exchange rate fluctuations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISK OF SOFTWARE DEFECTS; POTENTIAL PRODUCT LIABILITY FOR SOFTWARE DEFECTS
Software products as internally complex as those offered by the Company may
contain errors or defects, especially when first introduced or when new
versions are released. Despite extensive product testing, the Company has in
the past discovered software errors in certain of its new products after their
introduction. Although the Company has not experienced material adverse
effects resulting from any such errors to date, there can be no assurance
that, despite testing by the Company and by current and potential customers,
errors will not be found in new products or releases after commencement of
commercial shipments, resulting in loss of revenue or delay in market
acceptance, which could have a material adverse effect upon the Company's
business, operating results and financial condition. See "Business--Products."
The Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims. It is possible, however, that the limitation of liability
provisions contained in the Company's license agreements may not be effective
under the laws of certain domestic or international jurisdictions. Although
the Company has not experienced product liability claims to date, the license
and support of products by the Company may entail the risk of such claims. A
successful product liability claim brought against the Company could have a
material adverse effect on the Company's business, operating results and
financial condition.
YEAR 2000 ISSUES; POTENTIAL IMPACT ON CUSTOMERS
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 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. Year 2000 issues, however, 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, which could result in a material adverse effect on the Company's
business, operating results and financial condition.
13
<PAGE>
NO PRIOR PUBLIC MARKET
Prior to the Offering, there has been no public market for the Class A
Common Stock. Accordingly, there can be no assurance that an active trading
market will develop or be sustained upon completion of the Offering or that
the market price of the Class A Common Stock will not decline below the
initial public offering price. The initial public offering price of the Class
A Common Stock will be determined by negotiations between the Company and the
representatives of the Underwriters and may not be indicative of the prices
that will prevail in the public market. See "Underwriting."
The trading prices of the Class A Common Stock could be subject to wide
fluctuations in response to quarter-to-quarter variations in the Company's
operating results, developments or disputes concerning intellectual property
rights, technological innovations or new products, governmental regulatory
action, general conditions in the software industry, increased price
competition, changes in earnings estimates by analysts or other events or
factors, many of which are beyond the Company's control. In addition, the
stock market has experienced extreme price and volume fluctuations, which have
particularly affected the market prices of many computer software companies
and which have often been unrelated to the operating performance of such
companies.
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 shares of Class A Common Stock offered hereby (plus any shares
issued upon exercise of the Underwriters' over-allotment option) will be
freely tradeable without restriction in the public market as of the date of
this Prospectus, except as described under "Underwriting." The holders of all
the shares of Class B Common Stock that will be outstanding upon the
completion of the Offering (which may be converted into Class A Common Stock
at any time) have agreed to enter into agreements with the Underwriters (the
"Lock-up Agreements") which will provide that, until the expiration of 180
days after the date of this Prospectus, they will not offer, sell, contract to
sell or otherwise dispose of any 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 either Class A or Class B (collectively "Common Stock") or
securities that are substantially similar to the 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 of the Commission.
The Company intends to file a Registration Statement on Form S-8 as soon as
practicable after the date of this Prospectus to register the 8,000,000,
300,000 and 200,000 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 1996 Stock Plan ("1996 Stock Plan"), 1997 Stock Option Plan
for French Employees ("French Plan") and 1997 Director Option Plan ("Director
Option Plan," and together with the 1996 Stock Plan and the French Plan, the
"Company Stock Plans"), respectively. Such registration statement is expected
to become effective immediately upon filing; however, 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 the expiration of 180 days after the date of this
Prospectus. Options granted under the 1997 Director Option Plan do not
generally begin to vest until October 1998. Following effectiveness, shares
covered by the Registration Statement on Form S-8 will be eligible for sale in
the public markets, subject to Rule 144 limitations applicable to affiliates
as well as to the limitations on sale and vesting described above. See
"Management--Stock Option Plans."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Class A Common Stock offered hereby will incur immediate
and substantial dilution in net tangible book value per share. To the extent
options to purchase the Company's Class A Common Stock are exercised, there
will be further dilution. See "Dilution."
14
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of Class A
Common Stock offered hereby are estimated to be approximately $ million
($ million if the Underwriters' over-allotment option is exercised in full)
based on an assumed initial public offering price of $ per share and after
deducting the estimated underwriting discount and offering expenses payable by
the Company.
The principal purposes of the Offering are to increase the Company's equity
capital, to create a public market for the Class A Common Stock, to enhance
the Company's visibility and credibility with present and prospective
customers and employees and to facilitate future access to public equity
markets.
The Company currently intends to use the net proceeds of the Offering for
general corporate purposes, including working capital, increased sales and
marketing expenditures, capital expenditures and repayment of indebtedness
outstanding under the Company's business loan facility. For information
regarding the terms of the indebtedness expected to be repaid, see
"Management's Discussion and Analysis of Financial Condition and Results
Operations--Liquidity and Capital Resources." Furthermore, the Company may
acquire or invest in other businesses, products, technologies or securities,
and a portion of the net proceeds may be used for these purposes. The Company
has no plans, commitments or agreements with respect to any material
acquisitions or investments as of the date of this Prospectus, and there can
be no assurance that any such acquisitions or investments will be made.
Accordingly, the Company's management will retain broad discretion as to the
allocation of a substantial portion of the net proceeds from the Offering.
Pending such uses, the Company plans to invest the net proceeds in interest-
bearing, investment-grade securities.
DIVIDEND POLICY
The Company expects to pay a $10.0 million dividend to the Existing
Stockholders in the form of short-term notes due and payable at various times
during 1998, prior to the termination of the Company's S corporation election,
which is expected to occur shortly prior to the Offering. See "Termination of
S Corporation Election and S Corporation Distribution" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
The Company anticipates that following completion of the Offering, future
earnings, if any, will be retained for the development of its business, and
the Company does not anticipate paying any cash dividends on the Common Stock
in the foreseeable future.
15
<PAGE>
TERMINATION OF S CORPORATION ELECTION
AND S CORPORATION DISTRIBUTION
Effective January 1, 1992, the Company elected to be treated as an S
corporation for federal and state income tax purposes. As a result, the
Company currently pays no federal or state income tax, and all of the earnings
of the Company are subject to federal and state income taxation directly at
the stockholder level. The Company's S corporation status will terminate
shortly prior to the closing of the Offering, at which time the Company will
become subject to corporate income taxation under Subchapter C of the Internal
Revenue Code of 1986, as amended. See Note 6 of Notes to Consolidated
Financial Statements for information regarding pro forma federal income tax
provisions as if the Company had been a C corporation under the Code during
the relevant periods.
The Company has entered into a tax indemnification agreement (the "Tax
Indemnification Agreement") with the Existing Stockholders. The Tax
Indemnification Agreement provides for, among other things, the
indemnification of the Company by such stockholders for any federal and state
income taxes (including interest and penalties) incurred by the Company if for
any reason the Company is deemed to be treated as a C corporation during any
period for which it reported its taxable income as an S corporation. The tax
indemnification obligation of the Existing Stockholders is limited to the
lesser of (i) the amount of any reduction in their tax liability as a result
of any such determination or (ii) the aggregate amount received in
distributions from the Company from January 1, 1990 until the S corporation
termination date. The Tax Indemnification Agreement also provides for the
cross-indemnification by the Company of each Existing Stockholder for any
losses or liabilities with respect to certain additional taxes (including
interest and penalties) resulting from the Company's operations during the
period in which it was an S corporation. Purchasers of Class A Common Stock in
the Offering who are not Existing Stockholders will not be parties to the Tax
Indemnification Agreement.
The Company expects to pay a $10.0 million dividend to the Existing
Stockholders in the form of short-term notes prior to termination of the
Company's S corporation election, which is expected to occur shortly prior to
closing of the Offering. The notes issued to the Existing Stockholders by the
Company will bear interest at the "applicable federal rate" for short-term
obligations and will be due and payable at various times during 1998. The
Company plans to repay the notes from cash flows from future operations of the
Company in accordance with the terms of the notes. See "Dividend Policy" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
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<PAGE>
DILUTION
The pro forma net tangible book value of the Company at December 31, 1997
was $(12.3) million, or $(0.40) per share of Common Stock. Pro forma net
tangible book value per share represents the amount of total tangible assets
of the Company reduced by the amount of its total liabilities divided by the
total number of shares of Common Stock outstanding. After giving effect to the
Company's sale of shares of Class A Common Stock in the Offering at an
initial public offering price of $ per share, and after deducting the
underwriting discount and estimated offering expenses payable by the Company,
the net tangible book value of the Company at December 31, 1997 would have
been $ million, or $ per share of Common Stock. This represents an
immediate increase in net tangible book value of $ per share to the
Company's existing stockholders and an immediate dilution in net tangible book
value of $ per share to new investors purchasing shares of Class A Common
Stock in the Offering. The following table illustrates this per share dilution
in net tangible book value to new investors:
<TABLE>
<S> <C> <C>
Initial public offering price per share............................. $
Net tangible book (deficit) value per share of Class A Common
Stock before the Offering........................................ $
Increase per share attributable to new investors.................. $
Pro forma net tangible book (deficit) value per share after the Of-
fering............................................................. $
---
Dilution per share to new investors................................. $
===
</TABLE>
The following table sets forth, as of December 31, 1997, the differences in
the number of shares of Class B Common Stock purchased from the Company, the
consideration paid to the Company and the average price per share paid by the
Existing Stockholders and by the new investors purchasing shares of Class A
Common Stock in the Offering (assuming no exercise of the Underwriters' over-
allotment option and without giving effect to the underwriting discount and
estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 29,493,873 % $ 195,000 % $0.01
New investors...........
---------- --- ------------ ------- -----
Total................... 100% $ 100% $
========== === ============ ======= =====
</TABLE>
The preceding table assumes no exercise of any stock options outstanding at
December 31, 1997. At December 31, 1997, there were director and employee
stock options outstanding to purchase a total of 4,911,863 shares of Class A
Common Stock with a weighted average exercise price of $1.70 per share. To the
extent that such options are exercised, there will be further dilution to new
investors. See "Management--Stock Option Plans" and Note 8 of "Notes to
Consolidated Financial Statements."
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997 (i) on an actual basis and (ii) as adjusted to reflect the
exchange by the Existing Stockholders of 29,493,873 shares of Common Stock
outstanding at December 31, 1997 into an identical number of shares of Class B
Common Stock, the issuance of a total of 1,401,641 shares of Class B Common
Stock to two of the Existing Stockholders in exchange for their interests in
certain of the Company's international subsidiaries, the payment of a $10.0
million dividend to the Existing Stockholders in the form of short-term notes
prior to the termination of the Company's S corporation election and the sale
by the Company of shares of Class A Common Stock in the Offering at an
initial public offering price of per share (after deduction of the
underwriting discount and estimated offering expenses).
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------
ACTUAL AS ADJUSTED
------------- ---------------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
<S> <C> <C>
Line of credit................................... $ 4,508 $
Notes payable, long-term portion................. 2,658
Stockholders' 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, 29,493,873
shares issued and outstanding, actual; no
shares issued and outstanding, as adjusted.... 29
Class A Common Stock, par value $0.001 per
share, 50,000,000 shares authorized, no shares
issued and outstanding; shares issued and
outstanding, as adjusted...................... --
Class B Common Stock, par value $0.001 per
share, 50,000,000 shares authorized, no shares
issued and outstanding, actual; shares
issued and outstanding, as adjusted........... --
Additional paid-in capital..................... 20
Cumulative foreign currency translation
adjustment.................................... 158
Accumulated deficit............................ (634)
------------- -----------
Total stockholders' (deficit) equity......... (427)
------------- -----------
Total capitalization......................... $ 6,739 $
============= ===========
</TABLE>
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the "Consolidated Financial Statements," the
"Notes to Consolidated Financial Statements" and the other financial
information included elsewhere in this Prospectus. The statement of operations
data for the years ended December 31, 1995, 1996 and 1997, and the balance
sheet data as of December 31, 1996 and 1997, are derived from audited
financial statements included elsewhere in this Prospectus. The statement of
operations data for the year ended December 31, 1994 and the balance sheet
data as of December 31, 1994 and 1995 is derived from audited financial
statements not included herein. The statement of operations data and the
balance sheet data for the year ended December 31, 1993 have been derived from
the Company's unaudited consolidated financial statements, which, in
management's opinion, reflect all adjustments necessary to fairly present this
information when read in conjunction with the Consolidated Financial
Statements and the Notes thereto included elsewhere in the Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1993 1994 1995 1996 1997(1)
------------------------ ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues:
Product licenses....... $ 676 $ 622 $ 4,077 $ 15,873 $ 36,601
Product support........ 3,426 4,358 5,700 6,730 16,956
------------ ----------- ----------- ----------- -----------
Total revenues....... 4,102 4,980 9,777 22,603 53,557
------------ ----------- ----------- ----------- -----------
Costs and expenses:
Cost of revenues....... 1,502 2,057 2,458 5,257 11,116
Sales and marketing.... 274 771 2,992 13,054 30,468
Research and
development........... 153 200 1,855 2,840 5,049
General and
administrative........ 1,463 1,955 2,395 3,742 6,552
------------ ----------- ----------- ----------- -----------
Total costs and
expenses............ 3,392 4,983 9,700 24,893 53,185
------------ ----------- ----------- ----------- -----------
Income (loss) from
operations.............. 710 (3) 77 (2,290) 372
Interest income
(expense), net.......... 6 (34) (40) (105) (239)
Other income (expense),
net..................... 45 (24) 11 20 (12)
------------ ----------- ----------- ----------- -----------
Net income (loss)........ $ 761 $ (61) $ 48 $ (2,375) $ 121
============ =========== =========== =========== ===========
Basic net income (loss)
per share(2)............ $ 0.03 $ 0.00 $ 0.00 $ (0.08) $ 0.00
Shares used in computing
basic net income (loss)
per share(2)............ 24,640,000 27,988,000 28,896,622 29,493,873 29,493,873
Diluted net income (loss)
per share............... $ 0.03 $ 0.00 $ 0.00 $ (0.08) $ 0.00
Shares used in computing
diluted net income
(loss) per share(2)..... 24,640,000 27,988,000 28,896,622 29,493,873 31,726,591
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............... $ 141 $ 249 $ 643 $ 1,686 $ 3,506
Working capital (deficit)............... 1,752 848 1,343 (2,237) (5,761)
Total assets............................ 2,352 3,209 5,838 13,004 30,065
Notes payable, long-term portion........ 323 193 600 460 2,658
Total stockholders' (deficit) equity.... 1,564 1,446 1,546 (793) (427)
</TABLE>
- --------
(1) As of December 31, 1997, the Company was an S corporation, and accordingly
was not liable for corporate income taxes. On a pro forma basis, had the
Company been a tax paying entity, the Company would have recorded an
income tax provision of approximately $489,000 and a net loss of
approximately $368,000 for the year ended December 31, 1997. Pro forma
basic and diluted loss per share would have been $0.01. See Note 1 of
"Notes to Consolidated Financial Statements" for the basis of computing
pro forma basic and diluted net loss per share.
(2) The basis for the determination of shares used in computing net income per
share is described in Note 1 of "Notes to Consolidated Financial
Statements."
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operation
of the Company should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto, and the other financial information
included elsewhere in this Prospectus.
OVERVIEW
Incorporated in November 1989, the Company's primary business initially
consisted of providing 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.
Throughout 1996 and 1997, the Company 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
December 31, 1997, it had 590 employees. Although the Company's revenues have
significantly increased in each of the last eight quarters, the Company
experienced fluctuating operating margins during 1996 and 1997 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. While the Company has had three consecutive quarters of
positive income from operations, there can be no assurances that the Company
will remain profitable on a quarterly basis or achieve profitability on an
annual basis.
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"). The Company recognizes
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. For the year ended December 31, 1997, no single customer accounted
for more than 3.5% of the Company's revenues.
The sales cycle for the Company's products may span six 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
20
<PAGE>
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 "Quarterly Financial Results" and "Risk
Factors--Potential Fluctuations in Quarterly Operating Results."
The Company licenses its software through its direct sales force and
increasingly through, or in conjunction with, VARs and OEMs. Channel partners
accounted for, directly or indirectly, approximately 27.5%, 9.0% and 0.1% of
the Company's revenues for 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. See "Risk
Factors--International Operations" and "--Reliance on Channel Partners."
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995 1996 1997
----- ----- ------ -----
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Product licenses................................. 12.5% 41.7% 70.2% 68.3%
Product support.................................. 87.5 58.3 29.8 31.7
----- ----- ------ -----
Total revenues................................. 100.0 100.0 100.0 100.0
----- ----- ------ -----
Cost of revenues:
Product licenses................................. 1.6 2.6 4.5 3.1
Product support.................................. 39.7 22.5 18.7 17.7
----- ----- ------ -----
Total cost of revenues......................... 41.3 25.1 23.3 20.8
----- ----- ------ -----
Gross margin....................................... 58.7 74.9 76.7 79.2
----- ----- ------ -----
Operating expenses:
Sales and marketing.............................. 15.5 30.6 57.8 56.9
Research and development......................... 4.0 19.0 12.6 9.4
General and administrative....................... 39.3 24.5 16.6 12.2
----- ----- ------ -----
Total operating expenses....................... 58.8 74.1 86.9 78.5
Income (loss) from operations...................... (0.1) 0.8 (10.1) 0.7
Interest income.................................... 0.0 0.2 0.1 0.2
Interest expense................................... (0.7) (0.6) (0.6) (0.7)
Other income (expense), net........................ (0.5) 0.1 0.1 0.0
----- ----- ------ -----
Net income (loss).................................. (1.2)% 0.5% (10.5)% 0.2%
===== ===== ====== =====
</TABLE>
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
REVENUES. Total revenues increased to $53.6 million in 1997 from $22.6
million in 1996 and from $9.8 million in 1995, representing increases of
136.9% and 131.2%, respectively. Total revenues consist of revenues
21
<PAGE>
derived from sales of software product licenses, services and maintenance.
There can be no assurance that total revenues will continue to increase at the
rates experienced in prior periods, if at all.
Product License Revenues. Product license revenues increased to $36.6
million in 1997 from $15.9 million in 1996 and from $4.1 million in 1995,
representing increases of 130.6% and 289.3%, respectively. Product license
revenues constituted 68.3%, 70.2% and 41.7% of total revenues for 1997, 1996
and 1995, 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. The significant increases in product licenses as a
percentage of total revenues from 1995 through 1997 were primarily attributed
to the transition of the Company's business during that period from a provider
of consulting services to a provider of software products. These factors
contributed to increases in the number and average contract dollar amount of
DSS licenses sold. To date, sales of product licenses have principally been
derived from direct sales to customers.
Product Support Revenues. Product support revenues increased to $17.0
million in 1997 from $6.7 million in 1996 and from $5.7 million in 1995,
representing increases of 151.9% and 18.1%, respectively. Product support
revenues constituted 31.7%, 29.8%, and 58.3% of total revenues for 1997, 1996
and 1995, respectively. The increases in the dollar amount of product support
revenues were primarily due to the increase in the number of DSS licenses
sold. However, product support revenues significantly 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. Notwithstanding the foregoing, the Company
expects product support revenues as a percentage of total revenues to continue
to fluctuate on a period to period basis but generally not to vary
significantly from the percentage of total revenues achieved in 1997. 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 continue to decline as a percentage of total
revenues.
International Revenues. The Company recognized $14.3 million, $2.5 million
and $1.1 million of international revenues in 1997, 1996 and 1995,
respectively, representing approximately 26.6%, 11.1% and 11.3% 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. The Company
expects to open additional international sales offices in 1998. International
sales are subject to a number of risks. See "Risk Factors--International
Operations" and "--Currency Fluctuations."
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 $1.6 million, $1.0 million and $0.3 million in 1997, 1996
and 1995, respectively, representing 4.5%, 6.4% and 6.3% 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. 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 $9.5
million, $4.2 million and $2.2 million in 1997, 1996 and 1995, respectively,
representing 55.9%, 63.0% and 38.6% of product support revenues, respectively.
The increase in cost of product support revenues, both in dollar amount and as
a percentage of 1996 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. The Company expects to continue
to
22
<PAGE>
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 $30.5 million,
$13.1 million and $3.0 million in 1997, 1996 and 1995, respectively,
representing 56.9%, 57.8% and 30.6% of total revenues, respectively. The
significant increase in sales and marketing expenses in dollar amounts in 1997
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 increase in sales and marketing expenses
in 1996 was primarily attributable to increased costs associated with the
development of a direct sales force, increased commissions to Company sales
representatives due to increased sales of product licenses and increased
marketing activities. 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 acquire
market share. The Company believes that the dollar amount of sales and
marketing expenses will continue to increase, but should probably decrease
over time as a percentage of total revenues from the levels experienced in
1997 and 1996.
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. See Note 1 of "Notes to Consolidated Financial
Statements." Research and development expenses were $5.1 million, $2.8 million
and $1.9 million in 1997, 1996 and 1995, respectively, representing 9.4%,
12.6% and 19.0% of total revenues, respectively. The increases in research and
development expenses were primarily due to additional hiring of research and
development personnel. In 1997, in accordance with SFAS No. 86, the Company
began to capitalize 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 $1.9 million of research and development costs in 1997.
Expenditures for research and development costs prior to capitalizing software
were $7.0 million in 1997. The Company anticipates that for the foreseeable
future technological feasibility and the general availability of the Company's
products will substantially coincide. As a result, the Company believes that
no future software development costs will meet the requirements for
capitalization under SFAS No. 86.
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
$6.6 million, $3.7 million and $2.4 million in 1997, 1996 and 1995,
respectively, representing 12.2%, 16.6% and 24.5% 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. The
decreases in general and administrative expenses as a percentage of total
revenues in 1997 and 1996 were primarily due to the substantial increase in
total revenues. 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. The Company has elected to be treated as a
Subchapter S corporation under the Internal Revenue Code for federal and state
income tax purposes. Under Subchapter S, the Company's income has been
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. The Company's S corporation status will
terminate shortly prior to the closing of the Offering, at which time the
Company will become subject to corporate income taxation under Subchapter C of
the Code.
23
<PAGE>
Upon termination of the Company's S corporation status, the Company will
account for income taxes in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Had the Company been taxed
as a C corporation, the Company would have recorded a net deferred tax
liability of approximately $0.4 million as of December 31, 1997. As of
December 31, 1997 the Company would have recorded a valuation allowance of
$1.8 million, primarily against the net operating loss carryforwards in
foreign jurisdictions. Management has concluded that no valuation allowance is
required on the domestic net deferred tax assets based on its assessment that
current and expected future levels of taxable income are sufficient to realize
domestic deferred tax assets. See Note 6 of Notes to Consolidated Financial
Statements.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" and Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information." These statements are
effective for financial statements for periods beginning after December 15,
1997. Management believes the adoption of these statements will not have a
material effect on the Company's financial statements.
24
<PAGE>
QUARTERLY FINANCIAL RESULTS
The following tables set forth the unaudited consolidated statement of
operations data for the eight quarters ended December 31, 1997, as well as
such data expressed as a percentage of the Company's total revenues for the
periods indicated. This data has been derived from unaudited interim
consolidated financial statements that, in the opinion of management, have
been prepared on a basis consistent with Consolidated Financial Statements
contained elsewhere herein and include all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of such
information when read in conjunction with the Consolidated Financial
Statements and Notes thereto. The operating results for any quarter are not
necessarily indicative of results for any future period. See "Risk Factors--
Potential Fluctuations in Quarterly Operating Results."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996 1997 1997 1997 1997
--------- -------- ------------- ------------ --------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues:
Product licenses....... $2,702 $3,975 $4,500 $ 4,696 $ 4,731 $8,134 $10,545 $13,191
Product support........ 1,384 1,578 1,870 1,898 3,406 3,741 4,206 5,603
------ ------ ------ ------- ------- ------ ------- -------
Total revenues......... 4,086 5,553 6,370 6,594 8,137 11,875 14,751 18,794
------ ------ ------ ------- ------- ------ ------- -------
Cost of revenues:
Product licenses....... 185 233 269 333 357 396 434 454
Product support........ 883 1,008 1,151 1,195 1,799 2,059 2,462 3,155
------ ------ ------ ------- ------- ------ ------- -------
Total cost of
revenues.............. 1,068 1,241 1,420 1,528 2,156 2,455 2,896 3,609
------ ------ ------ ------- ------- ------ ------- -------
Gross margin............ 3,018 4,312 4,950 5,066 5,981 9,420 11,855 15,185
Operating expenses:
Sales and marketing.... 1,968 2,789 3,634 4,663 5,292 7,036 7,872 10,268
Research and
development........... 439 617 874 910 735 915 1,487 1,912
General and
administrative........ 616 664 980 1,482 895 1,270 1,998 2,389
------ ------ ------ ------- ------- ------ ------- -------
Total operating
expenses.............. 3,023 4,070 5,488 7,055 6,922 9,221 11,357 14,569
Income (loss) from
operations............. (5) 242 (538) (1,989) (941) 199 498 616
Interest income......... 10 -- 1 11 -- 17 37 40
Interest expense........ (27) (24) (20) (56) (61) (93) (48) (131)
Other income (expense),
net.................... -- -- (117) 137 (1) (1) (1) (9)
------ ------ ------ ------- ------- ------ ------- -------
Net income (loss)....... $ (22) $ 218 $ (674) $(1,897) $(1,003) $ 122 $ 486 $ 516
====== ====== ====== ======= ======= ====== ======= =======
PERCENT OF TOTAL
REVENUES:
Revenues:
Product licenses....... 66.1% 71.6% 70.6% 71.2% 58.1% 68.5% 71.5% 70.2%
Product support........ 33.9 28.4 29.4 28.8 41.9 31.5 28.5 29.8
------ ------ ------ ------- ------- ------ ------- -------
Total revenues......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------- ------- ------ ------- -------
Cost of revenues:
Product licenses....... 4.5 4.2 4.2 5.1 4.4 3.3 2.9 2.4
Product support........ 21.6 18.2 18.1 18.1 22.1 17.3 16.7 16.8
------ ------ ------ ------- ------- ------ ------- -------
Total cost of
revenues.............. 26.1 22.4 22.3 23.2 26.5 20.6 19.6 19.2
------ ------ ------ ------- ------- ------ ------- -------
Gross margin............ 73.9 77.6 77.7 76.8 73.5 79.4 80.4 80.8
Operating expenses:
Sales and marketing.... 48.2 50.2 57.0 70.7 65.0 59.3 53.4 54.6
Research and
development........... 10.7 11.1 13.7 13.8 9.0 7.7 10.1 10.2
General and
administrative........ 15.1 12.0 15.4 22.5 11.0 10.7 13.5 12.7
------ ------ ------ ------- ------- ------ ------- -------
Total operating
expenses.............. 74.0 73.3 86.1 107.0 85.0 77.7 77.0 77.5
Income (loss) from
operations............. (0.1) 4.3 (8.4) (30.2) (11.6) 1.7 3.4 3.3
Interest income......... 0.2 -- -- 0.2 -- 0.1 0.2 0.2
Interest expense........ (0.7) (0.4) (0.3) (0.8) (0.7) (0.8) (0.3) (0.7)
Other income (expense),
net.................... -- -- (1.8) 2.1 -- -- -- --
------ ------ ------ ------- ------- ------ ------- -------
Net income (loss)....... (0.6)% 3.9% (10.5)% (28.7)% (12.3)% 1.0% 3.3% 2.8%
====== ====== ====== ======= ======= ====== ======= =======
</TABLE>
25
<PAGE>
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 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 the 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.
See "Risk Factors--Lengthy Sales and Implementation Cycles." 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
expansion of indirect sales channels and international operations. The
Company's 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.
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. At December 31, 1997 and 1996, the
Company had $3.5 million and $1.7 million, respectively, of cash and cash
equivalents.
Cash flows provided (used) by operations were $5.0 million, $0.9 million and
$(0.3) million in 1997, 1996 and 1995, respectively. The increase in cash
provided by operations in fiscal 1997 and 1996 was primarily due
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to an increase in deferred revenue and accounts payable, offset by an increase
in accounts receivable and a net operating loss in 1996. The decrease in cash
from operations in 1995 was due to an increase in accounts receivable offset
by an increase in deferred revenue.
The Company's investing activities used cash of $7.9 million, $1.7 million
and $0.5 million in 1997, 1996 and 1995, 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 $4.6 million, $1.8
million and $1.1 million in 1997, 1996 and 1995, respectively. The principal
source of cash for financing activities has been net borrowings from
commercial lending institutions. In December of 1996, the Company entered into
its current borrowing arrangement with a commercial bank (the "Business
Loan"). Pursuant to the Business Loan, the Company originally had available a
$6.4 million revolving line of credit, a $2.0 million revolving equipment line
and, since November 1997, a $2.0 million non-revolving equipment loan. On
March 31, 1998, the Company increased the revolving line of credit by $3.0
million to $9.4 million, increased the non-revolving equipment loan by $2.0
million to $4.0 million and amended certain of its debt covenants. Borrowings
under the Business Loan may not exceed 80% of eligible accounts receivable for
the revolving credit line and 80% of the cost of the asset for the equipment
credit lines. The borrowings bear interest at (i) the lender's prime rate or
LIBOR plus 2.75% for the revolving line of credit and (ii) for the equipment
lines of credit (revolving and non-revolving) at the lender's prime rate plus
0.5% or a rate equal to the yield of U.S. Treasury Bonds plus 2.65% for loans
with a three-year maturity or 2.85% for loans with a four-year maturity. In
addition, borrowings under the Business Loan are collateralized by
substantially all of the Company's assets and are partially guaranteed by a
stockholder and officer of the Company for up to $2.0 million for all amounts
borrowed under the Business Loan in excess of $2.0 million. As of December 31,
1997, $4.5 million and $3.3 million were outstanding under the revolving line
of credit and revolving equipment line, respectively. Subsequent to December
31, 1997, the Company had additional net borrowings of $0.9 million under the
revolving line of credit and $0.4 million under the revolving equipment lines.
The Business Loan requires the Company to maintain certain financial ratios
and to comply with certain other covenants. From time to time, the Company has
not been in compliance with certain of these covenants. However, the Company
obtained a waiver from the financial institution for events of non-compliance
with these covenants through December 31, 1997. Since December 31, 1997, under
the amended Business Loan, the Company has been in compliance with the revised
covenants, and the Company expects that it will continue to be in compliance
with such covenants in the future. The Company intends to repay all
indebtedness outstanding under the Business Loan using a portion of the net
proceeds of the Offering. The Company also intends following completion of the
Offering to enter into negotiations with the lender under the Business Loan
regarding possible amendments to the terms and conditions thereof.
The Company expects to pay a $10.0 million dividend to the Existing
Stockholders in the form of short-term notes prior to termination of the
Company's S corporation election, which is expected to occur shortly prior to
closing of the Offering. The notes issued to the Existing Stockholders by the
Company will bear interest at the "applicable federal rate" for short-term
obligations and will be due and payable at various times during 1998. The
Company plans to repay the notes from cash flows from future operations of the
Company in accordance with the terms of the notes. See "Dividend Policy."
The Company believes that the proceeds generated by the sale of Class A
Common Stock offered by the Company in the 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.
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BUSINESS
The following description of the Company's business should be read in
conjunction with the information included elsewhere in this Prospectus. This
description contains certain forward-looking statements that are based largely
on the Company's current expectations and are subject to a number of risks and
uncertainties. The Company's actual results could differ significantly from
the results discussed in the forward-looking statements as a result of certain
of the factors set forth below and elsewhere in this Prospectus.
OVERVIEW
MicroStrategy is a leading worldwide provider of enterprise DSS software
applications and related services. The Company's DSS Suite enables both active
and passive delivery of information from large-scale databases, providing
Global 2000 enterprise user communities with timely answers to mission-
critical questions. MicroStrategy's decision support platform enables users to
query and analyze the most detailed, transaction-level databases, turning data
into business intelligence. In addition to supporting internal enterprise
users, MicroStrategy's products extend DSS beyond corporate boundaries to
customers, partners, and supply chain constituencies through a broad range of
pull and push technology such as the Internet, e-mail, telephones, pagers and
other wireless communications devices.
INDUSTRY BACKGROUND
ONLINE TRANSACTION PROCESSING; CONSTRUCTION OF DATA WAREHOUSES. The
development of the DSS industry has been made possible by the widespread
implementation over the past ten years of online transaction processing
("OLTP") systems which create large volumes of transaction-oriented data. OLTP
applications include standardized resource planning packages from vendors such
as SAP AG, The Baan Company, Peoplesoft, Inc., Oracle and J.D. Edwards, as
well as custom and semi-custom systems which have been created to process
transactions such as securities trading, bank deposit withdrawals, airline
reservations, mortgage payments, wire transfers, retail sales, credit card
payments and telephone billing.
The transactional data created by OLTP systems is typically detailed and
updated regularly, and has a short utility time horizon. In contrast, data
required by decision support analysts is typically detailed, summarized and
has a lengthy utility time horizon. In order to provide data to decision
support analysts, relevant transactional data must often be extracted from
OLTP systems, cleansed, encoded, summarized and uploaded into a database known
as a data warehouse. Data warehouses have been developed in order to store the
vast historical logs of transaction details generated from one or more OLTP
applications. Data warehouses are substantially larger than the OLTP
databases, as data warehouses contain a broader scope of transaction data
spanning longer periods of time. The majority of Global 2000 companies have
constructed or are constructing data warehouses to serve as an information
foundation for analyzing and optimizing their business operations. According
to Forrester Research, the size of the decision support component of the data
warehouse market will grow at a 40% compound annual rate from $1.1 billion in
1997 to $3.6 billion in 2001.
THE ENTERPRISE DSS MARKET OPPORTUNITY. The construction of data warehouses
from OLTP applications has created the market opportunity for scalable,
sophisticated and maintainable DSS applications that are capable of extracting
from data warehouses highly useful business information. The mission of DSS
applications is different but complementary to that of OLTP applications--
while OLTP enables companies to "do business" by processing transactions that
are similar in nature, cost, frequency and complexity, DSS enables companies
to "do business better" by allowing rapid, effective and comprehensive data
analysis. Using OLTP applications, companies may mail proposals to prospects,
bill customers, reverse fraudulent charges or book airline seats. In contrast,
using DSS applications, companies may select prospect lists to receive direct
mail, allocate inventory to sell to customers, identify potentially fraudulent
charges or allocate airline seats among various travel routes. Business
analysts often employ DSS applications to translate business questions into
database-interpretable queries. DSS applications mathematically process query
results to provide the business analyst with insightful answers to their
questions. "Enterprise DSS" refers to applications designed to answer
questions at all levels of
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detail, ranging from minute, operational questions to large-scale strategic
assessments, targeted at all types of decision makers within an enterprise.
Enterprise DSS applications help users address critical uncertainties
affecting their business by answering highly focused performance questions.
These questions vary by industry and examples include:
Retail. What products or groups of products should be sold? Where? At what
price? How much shelf space should be allocated for specific products? How
much promotion should each product receive? Which products sell well together?
How much inventory should be carried? What are the primary customer
characteristics?
Banking & Finance. Who should be targeted for direct marketing efforts?
What products are most likely to appeal to existing customers? How profitable
are existing customers? Which customer groups are credit risks? What is the
proper pricing strategy for a given set of financial products? How much
fraudulent activity is occurring? How efficiently are underwriters and credit
officers performing?
Healthcare. What is the range of outcomes for a given treatment? How
frequently is this treatment proscribed? Which drugs, hospitals, doctors,
healthplans are most effective? Which patient groups are most at risk? How
efficient and effective is a given technique for treating a specific illness?
The promise of Enterprise DSS is to offer decision makers across a broad
range of industries the opportunity to ask and answer mission-critical
questions about their businesses using transactional data assets that have
been captured but not exploited to their fullest extent.
FACTORS DRIVING ENTERPRISE DSS DEVELOPMENT. Despite the significant promise
of Enterprise DSS applications, until recently a number of technical and cost
constraints had impaired development of the DSS market. The increase in
electronically captured and stored transactional data, together with recent
advances in software, hardware and networking, have converged to help resolve
these technical and cost constraints. Factors driving Enterprise DSS
development include:
Increased Electronic Capture of Transactional Data. Electronically-
captured data is critical to Enterprise DSS. In industries such as retail,
telecommunications, financial services and healthcare, an increasing
percentage of customer and supply chain transactions are captured and stored
electronically. The rapid growth in the electronic capture of business
transactions and the increased availability of related profile data on the
parties or products involved in each transaction are providing a rich data
foundation for the growth of Enterprise DSS.
Improved RDBMS Software. Relational database management system ("RDBMS")
technology has become accepted as the primary data storage and access platform
for Enterprise DSS applications. Traditionally optimized for OLTP applications
only, RDBMS technology has been improved specifically for DSS applications and
such improvements have removed many of the database size, manageability and
query performance constraints that have traditionally made Enterprise DSS
development difficult.
Improved Price/Performance of Computing and Storage Hardware. The
widespread availability of scalable hardware from a variety of server vendors
has produced significant improvements in server price and performance. In the
early 1990's, building and managing databases of one to five gigabytes of
stored data was considered typical. Over the past four years, symmetric multi-
processing ("SMP") servers running Unix have achieved commercial acceptance,
providing RDBMS vendors with the first non-proprietary hardware platforms
capable of supporting enterprise-scale databases which considerably exceed
five gigabytes. Based on a survey of 60 companies in the Fortune 1,000
published by Forrester Research, the average data warehouse was 132 gigabytes
in 1997 and is expected to grow to 259 gigabytes by 1999. SMP servers have
provided the capacity to store, index, aggregate, query and manage these large
data volumes, and, because no one hardware vendor controls the market for
these servers, the capacity is available on a cost-effective basis. Further
developments such as massively parallel processing ("MPP") servers are
expected to provide substantial improvements in
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performance over SMP servers, and are also now becoming commercially available
from a wide variety of hardware vendors.
Improved Networking Protocols and Infrastructure. The emergence of
protocols such as TCP/IP, HTML, ActiveX and Java, combined with commercially
available servers and browsers supporting these protocols (collectively
comprising the infrastructure of the Web), bandwidth, security products,
authoring tools, administrative suites, access devices and third party
expertise have substantially decreased the cost of deploying multi-user
applications such as Enterprise DSS. The corresponding advances in usability,
reliability, maintainability and connectivity have accelerated the commercial
acceptance of Enterprise DSS by making such deployment less risky, less
expensive and less time-consuming for information systems organizations.
THE EMERGENCE OF NEW DSS APPLICATIONS. Synergies produced by the combination
of improved database software, abundant computing power and efficiently
connected networks are resulting in a dramatic increase in overall DSS market
potential and growth rate. According to IDC, the market for Internet-related
Enterprise DSS will grow from $40 million in 1996 to $2.3 billion in 2001, and
based on its survey of 60 Fortune 1,000 companies, Forrester Research
estimates that 80% of the survey sample will have Web access to its databases
by 1999. As these advances converge, the value of DSS applications (and
therefore the size of information technology budgets which support their
development) is being enhanced by increasing the number of users, the
frequency of use and the importance of the information obtained and by
transforming under-utilization data into revenue-generating assets, not simply
measures for cost control. These advances are also increasing the size of the
market by enabling entirely new types of applications to be deployed to new
constituencies from the same central data warehouse. In particular, three new
classes of DSS applications are becoming factors in the growth of the DSS
market.
Remote DSS. The purpose of Remote DSS applications is to provide
information to operational professionals throughout an enterprise and enable
them to improve performance on a routine basis. Potential users include
managers and other professional staff throughout the sales, marketing,
manufacturing, logistics, finance, human resources and technology functions
regardless of their geographic location. Although an enterprise rarely has
more than a few hundred centralized analysts and executives for any given DSS
application, the same enterprise may have thousands of remote enterprise
users, spread across dozens, hundreds or even thousands of locations. For
example, a Remote DSS application that profiles customers and provides
relevant sales information allows account executives located across a business
organization to identify problem accounts, discern abnormal trends in their
territory and proactively manage sales calls.
Supply Chain DSS. The purpose of Supply Chain DSS applications is to allow
and encourage trading partners to give preferential treatment to one another
in exchange for greater certainty and visibility up and down their value
chains. In order to obtain the information that enables this visibility and
certainty, partners may want to offer more favorable terms, invest more in co-
marketing, make available increased levels of supplies, provide more shelf-
space or pay higher prices. Potential users include a firm's vendors,
distributors, partners, outsourcers, resellers and financing sources. The
number of potential Supply Chain DSS users can range from hundreds to tens of
thousands. For example, a DSS application that provides access to retail sales
information would be valuable to the manufacturers who stock the shelves
within each store. This information can be used to design new products, refine
marketing campaigns, develop optimal pricing schemes, rationally allocate
inventory and proactively schedule factory production.
Commercial DSS. The purpose of Commercial DSS applications is to offer
customers a new value-added information service that can result in improved
pricing, greater market share, longer customer retention or a new revenue
stream for the owner of the DSS. Information systems have been successfully
bundled with products and services over the past decade, although largely in
the context of OLTP applications such as automated teller machines, voice
response units and ticketing reservation systems. Those firms in the best
position to exploit the opportunities of Commercial DSS include major banks,
financial services, healthcare providers, retailers, publishers, utilities and
travel service providers all of whom have large volumes of customers who must
make intricate decisions on a routine basis. Many of these systems have the
potential for hundreds of
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thousands, or even millions, of users. For example, healthcare providers that
use DSS applications to offer outcome analysis for various combinations of
patients, treatments, drugs, hospitals and doctors could provide patients with
substantial peace of mind, possibly encouraging them to be treated by that
provider.
CHALLENGES FACED BY ENTERPRISE DSS DEVELOPERS
Notwithstanding the market potential for DSS applications, attempts to build
and deploy Enterprise DSS applications have traditionally been hampered by a
variety of factors, including the following:
OPTIMAL QUERY GENERATION IS TECHNICALLY CHALLENGING. Although Standard Query
Language ("SQL") has been held out as a universal software standard to enable
database queries, each RDBMS vendor has added extensions and created a SQL
interpreter that favors certain queries. In many cases, the same SQL will not
work against two different RDBMSs and in most cases, the same SQL will not be
optimal for both. Changes in the RDBMS version, data warehouse design, query
profiles or application requirements may require costly and time-consuming
revisions to the SQL execution plans. Since RDBMS vendors are constantly
seeking to gain competitive advantage for their particular database engine,
severe maintenance demands have been imposed on those firms developing their
own DSS applications that generate SQL directly against the RDBMS. Certain DSS
tools force the designer to "hardwire" application logic directly against the
logical database schema, resulting in either a "brittle" solution that may
preclude any future enhancements to the database, a "crippled" solution that
prevents many types of analysis from being implemented, or a "slow" solution
because optimal query response requires dynamic repathing at runtime.
ADMINISTRATIVE TOOLS ARE LACKING. Companies need to deploy a multitude of
applications to a variety of constituencies, each with their own set of
security and access privileges. These constituencies need to share the same
data and application reporting objects, while using them to perform different
tasks. Users also require tools for version control, customer billing,
performance management and tuning, usage assessment, application maintenance
and mass upgrades. Because the DSS market is relatively new and still
developing, many of the administrative tools that are taken for granted in the
OLTP market are still missing. Given the lack of management tools, it is quite
challenging to scale up a workgroup application meant to serve a small,
localized set of users into a family of DSS services.
END-USER APPLICATION PROTOCOL INTERFACES ("APIS") ARE IN FLUX. Currently,
users interact with their DSS applications through a variety of interfaces
including: (i) native Windows applications that are tailored to the power-user
or analyst; (ii) executive information system ("EIS") interfaces; (iii)
printed reports; (iv) Microsoft Excel add-in modules; (v) Web browsers
supporting only HTML, Java, Active X or various combinations of these
protocols; (vi) custom interfaces constructed in Visual Basic, C++ or other
programming languages; (vii) Microsoft Access and (viii) other Microsoft
Office applications, such as Word or PowerPoint. The optimal interface is a
function of the user, their level of comfort with the DSS application, the
client hardware and the client operating system. Since these factors are
continually changing, it has been and remains unlikely that any dominant
interface will emerge. Accordingly, DSS developers are required to develop
applications that are compatible with a number of different APIs, without the
emergence of clear standards. This interface flux introduces additional
design, development, quality assurance and support requirements into the
typical Enterprise DSS project.
CERTAIN DSS TOOLSETS ARE NOT SCALABLE. A number of DSS vendors have
developed OLAP and hybrid OLAP ("HOLAP") database toolsets in an attempt to
solve data warehouse design and query generation challenges. In contrast to
ROLAP technology, OLAP and HOLAP solutions require the creation of
intermediate data caches or proprietary, non-relational databases that provide
the basis for their analytical capabilities. These proprietary databases have
traditionally been optimized for the type of summary analysis that a financial
auditor or executive would find valuable in the context of a
planning/budgeting review, and their design reflects explicit trade-offs
between performance, simplicity, power and flexibility. Technically, they have
been optimized to handle low-cardinality, low-dimensionality data structures.
Due to the rapid increase in the size of decision support databases in recent
years, the design constraints of OLAP and HOLAP architectures have become
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increasingly visible. For example, these "solutions" may truncate the range of
schema designs (which are the physical and logical models of how the data
should be stored within a database), limit data volumes, limit the breadth and
richness of a data set and require indexing, consolidating, caching and
loading schemes that are prohibitively expensive for Enterprise DSS
applications. Published benchmarks of OLAP vendors have seldom attempted to
analyze more than one gigabyte of input data. However, market research
suggests that the typical data warehouse contains in excess of 100 gigabytes
of input data. Thus, while very well suited for solving certain decision
support problems, many currently available OLAP toolsets are optimized to
analyze datasets which are two orders of magnitude smaller than those required
for Enterprise DSS.
EXISTING DSS TOOLS LACK FEATURES. Multi-dimensional analysis (OLAP)
performed on a large, relatively amorphous relational database can prove quite
challenging due to the stresses placed on the application server, network and
client interface during the analytical process. The tools typically used for
DSS application development have been designed to satisfy a lowest common
denominator requirement-- making certain assumptions about the volume and
nature of the data along with the complexity of analyses in order to simplify
the engineering challenges. Most do not allow the designer the ability to
articulate the sophisticated queries necessary for granular transaction-level
analysis (e.g. fraud detection, market basket analysis, call detail analysis,
database marketing, credit analysis, patient outcomes analysis). Others lack
object-based development environments, preventing developers from reusing
standard application logic. DSS tools may limit the range of dimensionality,
attribute richness, hierarchical choices, and filtering options available to
the end-user. They may lack advanced analytical capabilities such as rankings
("top 10 vendors by department"), decilings ("bottom quartile of customers in
sales"), time-based calculations ("percent change over the same period last
year") and multi-dimensional calculations ("product contribution to division
profitability"). Many tools also lack sophisticated SQL generators and are
forced to rely upon intermediate data caches that are created on the desktop
or application server in order to perform their analysis. These caches create
network and CPU bottlenecks which prevent the execution of certain queries and
slow the performance of the MPP and SMP servers storing the database.
THE EXISTING RDBMS MARKET IS FRAGMENTED. According to Giga Group, the data
warehouse market is fragmented, with no single RDBMS provider having more than
a 30% share of the market. Supporting the multiplicity of RDBMS APIs, as well
as the Interface APIs, is difficult without incurring significant sacrifices
in functionality and scalability. Global 2000 companies, VARs, data
syndicators, OEMs and system integrators require DSS platforms that run well
against RDBMS platforms such as Oracle, Informix, Red Brick, Sybase, Tandem,
Teradata, DB2/390, DB2/400 and DB2/UDB from IBM and SQL Server and Access from
Microsoft. Providing this portability may not be desirable or even possible
for DSS vendors that have a disproportionately large investment in one of the
competing RDBMS standards. Even DSS vendors which claim to be "open" often
have not invested the resources necessary to provide scalable performance
against each of these databases.
ESSENTIAL ENTERPRISE DSS SERVICES ARE SCARCE. Most RDBMS vendors have tended
to design their products for OLTP performance, rather than DSS performance. As
the data warehousing market began to grow, the vendors of these products have
added features and modified their core products in order to better serve the
needs of the DSS user. However, as a database grows in depth and breadth, and
the queries become more sophisticated, it has proven increasingly difficult to
create high-performance database designs that properly balance performance,
functionality and maintainability requirements. Designs can vary based upon
the nature of the RDBMS platform, server hardware, network, client hardware,
data set, user constituencies and query profile. The complexities of data
warehouse design have created a critical, but largely unmet, need for
Enterprise DSS services, including: (i) data warehouse design education; (ii)
DSS application design education; (iii) end-user DSS usage education; (iv)
data warehouse consulting to assist with hardware selection, RDBMS selection,
network and database tuning, database design and project management; (v) DSS
consulting to assist with metric, filter and report definition and development
and (vi) telephone, Web-based and onsite support from professionals that
understand Enterprise DSS. Successful Enterprise DSS developers must be able
to resolve problems quickly that arise in a heterogeneous environment
consisting of multiple hardware servers, database servers, application
servers, networks, APIs and client hardware devices from multiple vendors.
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THE MICROSTRATEGY SOLUTION
Through DSS Suite, MicroStrategy offers a comprehensive set of products and
services that function as a platform for developing and deploying Enterprise
DSS applications. MicroStrategy's software is designed to address the
requirements of DSS application developers who are required to create
scalable, portable and highly functional systems. DSS Suite frees application
developers from the need to divert scarce resources to the technical and
system integration challenges that are common across every industry. Instead,
developers are able to focus on solving the business critical analytical
problems unique to their particular industry. The advantages of DSS Suite
include:
EXTREMELY POWERFUL ANALYTICS TO TRANSACTION-LEVELS OF DETAIL. DSS Suite
offers support beyond summary and detail queries to include queries at the
most detailed level. This feature is critical to a wide range of applications,
including call detail analysis, market basket analysis, fraud detection,
credit analysis and campaign management. DSS Suite supports analysis ranging
from 10 attributes to 10,000 attributes, as well as support for sophisticated
multi-dimensional qualities (for example, weather, loan status or promotional
flags) and many-to-many relationships (colors, features). This sophistication
allows the creation of granular, transaction-specific DSS applications that
provide insight into customer behavior. Examples of the difference between
"Summary" and "Detail" questions (which many DSS tools can offer) and
"Transaction" level questions (where the Company believes it holds a distinct
advantage over its competition) are illustrated below for a typical retailer:
Summary: What were sales by department for the month of January?
Detail: What were sportswear item sales and costs by store for
Mondays in January?
Transaction: What were sales and costs for the top 5 selling items in
January? What were the 5 items most often purchased with
each of those items, and what is the typical customer
profile of individuals who buy these items by age, gender
and income bracket? What percentage of profits are
derived from the 5 items associated with our best
sellers?
Applications built with DSS Suite can access volumes of data ranging from a
few megabytes to terabytes--the Company's benchmark database for assessing
core functionality and scalability is 147 gigabytes. Using DSS Suite,
customers of the Company have successfully deployed DSS applications with
terabytes of data, thousands of attributes, and billions of rows of detail.
This scalability is accomplished with support for VLDB schemes (partitioned
snowflakes, multi-facts), a three-tier architecture with support for query
governing and asynchronous execution and a relational query engine that
intelligently leverages the RDBMS server, thereby avoiding any middle tier or
client caching bottlenecks.
OPTIMIZED SUPPORT FOR ALL MAJOR RDBMS/HARDWARE COMBINATIONS. DSS Suite
supports all major RDBMS platforms commonly used for Enterprise DSS with SQL-
optimizing drivers that contain hundreds of optimization rules. DSS Suite has
been designed to take into account the strengths, weaknesses and
idiosyncrasies of each database's SQL interpreter so that queries are made in
as efficient a manner as possible. Databases supported by DSS Suite include
Oracle, Informix, Sybase, Red Brick, Tandem, Teradata, SQL Server, Access,
DB2/390, DB2/400, DB2/UDB, Adabas D, Paradox and Dbase. The databases can be
run on platforms that support Unix, MVS, OS400, Windows NT, Windows, Tandem
NonStop and OpenVMS and that include hardware from companies such as Tandem,
NCR, IBM, Sun, Sequent, HP, Pyramid, SNI, Data General, DEC and SGI.
APPLICATIONS DEPLOYABLE TO MULTIPLE TYPES OF USERS WITH FULL INTERFACE
FLEXIBILITY. DSS Suite enables developers to create DSS applications in a
modular fashion and to deploy common components across the enterprise in a
variety of different forms without redundant coding. The same report logic can
be tailored for different constituencies such as non-computer users, company
executives, spreadsheet analysts, operations personnel, novices, power users,
suppliers, customers and consumers. Applications developed using DSS Suite
will simultaneously run the following interfaces: (i) DSS Agent analytical
interface on Windows 3.1,
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Windows 95, Windows NT and OS/2; (ii) DSS Executive information system
interface on the Windows platform; (iii) Microsoft Excel on the Windows
platform; (iv) Custom applications developed using VBA, Visual Basic, C or C++
combined with DSS Objects on the Windows Platform; (v) Netscape Navigator with
various combinations of HTML, Java and ActiveX on all platforms supported by
Netscape; and (vi) Internet Explorer with various combinations of HTML, Java
and ActiveX.
SUPPORT FOR LARGE NUMBERS OF USERS IN FLEXIBLE CONFIGURATIONS. The Company's
ROLAP technology allows applications built with DSS Suite to be deployed to
any number of users, from one to tens of thousands. DSS Suite fully leverages
the parallel processing and clustering features of the underlying RDBMS.
Applications can be run in the following modes: (i) stand-alone and untethered
on a single laptop; (ii) local area network with direct connection to the
database server; (iii) wide area network ("WAN") with a high-speed connection
to the application server, which in turn connects to the data warehouse server
via a slower speed WAN; (iv) Internet via DSS Web and a standard browser; and
(v) remote using DSS Web combined with wireless modems or satellite link-ups.
DSS Suite offers a wide variety of features to support international
deployment, including modular language support and support for many
international character sets.
FULL RANGE OF SERVICES NECESSARY FOR ENTERPRISE DSS SUCCESS. The Company
offers a full range of support services to ensure the success of its
customers. During the "proof of concept phase," the Company's consultants
assist with application prototyping, infrastructure assessments, feasibility
studies and provide overall Enterprise DSS architecture guidance. The
Company's educational courses such as "Introduction to DSS and Data
Warehousing" provide the customer's information system professionals with a
framework for planning and managing the process during this concept stage.
During the data warehouse "construction phase," Company consultants provide
project oversight and data warehouse design services, while Company educators
teach courses such as "Data Warehousing--Data Modeling and Design" to the
customer's information system professionals. In order to support the "full-
scale development phase," Company consultants assist with end-user
requirements analysis, DSS application design, project management and quality
assurance. Company educators offer courses in DSS design and development and
certify DSS development professionals. During the "deployment phase," Company
consultants offer end-user support, system administration, performance tuning
and troubleshooting assistance. Company educators teach courses in Enterprise
DSS management and administration. Throughout all phases, the Company's
support staff provides online support for databases and system utilities over
the Web, along with hotline telephone, fax and e-mail support. Company support
engineers are fully certified DSS engineers, capable of debugging
client/server networks, providing RDBMS configuration and tuning guidance,
offering data warehouse design support, DSS application development support,
and are fully certified in the installation, configuration and usage of the
Company's products. In the event that technical issues cannot be resolved
remotely, Company field engineers are dispatched on location to ensure the
customer's success in implementing the Company's product.
STRATEGY
The Company's objective is to become the world's leading provider of DSS
products and related services implemented by Global 2000 companies. The
Company's strategy for achieving this objective includes marketing,
technological and sales dimensions:
MARKETING STRATEGY--CREATE WIDESPREAD DEMAND FOR DECISION SUPPORT
SERVICES. The Company's marketing strategy focuses on communicating the
possibilities for value creation that new DSS technology offers to data
content owners and other potential users. Organizations that have accumulated
substantial data assets are frequently unaware of the "resonance" these data
assets may have both within and outside their enterprise--i.e., the extent to
which decision makers may benefit from the ability to query and analyze data
assets in diverse, sophisticated and spontaneous ways. In other cases, there
is a clear latent demand for information, but organizations are unaware that
the tools now exist to facilitate the creation of "industrial strength" DSS
applications that can satisfy this demand. Accordingly, the Company's
marketing strategy is primarily
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educational, seeking to create demand for DSS applications among the broadest
possible set of decision makers, while at the same time providing a clear
technology solution to the information technology professionals who are
charged with building these applications. The Company believes that the future
of decision support is "Query Tone," a cue signaling the availability of
information on demand. The Company seeks to position DSS application services
as a utility, comparable to water, electricity, telecommunications and radio,
to be relied upon daily by individuals in both their professional and personal
lives.
A principal theme of the Query Tone concept involves appealing to the
individual's "need to know." The Company believes that Query Tone will
ultimately enable knowledge workers to pose questions against databases that
they previously had thought were impossible to ask: How loyal are my
customers? In which geographic areas are they concentrated? What are their
demographic characteristics? How should marketing funds be allocated? To which
customers should sales efforts be targeted? Consumers may similarly benefit
from Query Tone's interrogatory potential. How much money is in my bank
account? What is my stock portfolio worth? Is someone using my credit card
fraudulently? Which hospital has the best safety record for elective surgery?
Which vacation resorts have the most loyal customer base?
The Company believes that Query Tone will become as commonplace as the dial
tone, the universally recognized cue signaling the availability of
communication on demand. The Company believes that Query Tone will provide
data content owners with a business opportunity that allows them to
differentiate their current offerings, capture new revenue streams, increase
market share and ensure the continued loyalty of existing customers.
TECHNOLOGY STRATEGY--PROVIDE A SCALABLE, SOPHISTICATED AND MAINTAINABLE DSS
PLATFORM. The Company's technological strategy is to provide scalable,
sophisticated and maintainable solutions that support the RDBMS platforms
maintained by the major vendors in the VLDB segment of the data warehouse
market, including IBM, Oracle, NCR, Tandem/Compaq, Informix, Sybase and
Microsoft. Through its commitment to cross-platform flexibility, the Company
is improving its competitive position vis-a-vis larger data warehouse
developers by exploiting the reluctance of the major vendors to provide
optimal support for each other's platforms and protocols. The Company intends
to further differentiate its product offerings by increasing functionality
along the key dimensions of: (i) capacity--the volume of information that can
be efficiently analyzed; (ii) concurrency--the number of users which can be
supported simultaneously; (iii) sophistication--the range of analytical
methods available to the application designer; (iv) performance--the response
time of the system to user queries; (v) schema flexibility--the range of DSS
and OLTP databases which the software is capable of efficiently querying
without modification; (vi) maintainability--the ease with which applications
can be deployed, modified, upgraded and tuned; (vii) interface flexibility--
the number interface options and display features supported; and (viii)
robustness--the reliability and availability of the software in mission
critical environments.
SALES STRATEGY--ACQUIRE MARKET SHARE AMONG HIGH-VOLUME DATA CONTENT
OWNERS. The Company's sales strategy focuses on building direct sales
infrastructure and relationships with indirect channel partners that are each
targeted toward acquiring market share among high-volume data content owners
both domestically and abroad. The Company believes that in many data-rich
industries, including retail, financial services and healthcare, a relative
handful of large firms control a disproportionate share of the data assets
that have widespread business applications both within those firms and
throughout the larger economy. The Company also believes that in light of the
relatively long sales cycle associated with acquiring DSS products and the
recent emergence of the DSS industry, it is critically important to gain
market share with the firms that have "resonant" data assets and that have the
highest potential to attract large numbers of decision makers. The Company is
aggressively targeting key departments within these firms that can be expected
to help spread demand for the Company's DSS solutions across the enterprise as
a whole. The Company also is expanding its active consulting practice to
enable ongoing customers to maximize the value of their investment, as well as
a support function to ensure that current customers have access to the
Company's field engineering and tele-support. Finally, the Company is
expanding its education program to enhance its potential customers' and
channel partners' understanding of the power of DSS applications.
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PRODUCTS
As illustrated by the following diagram, DSS Suite enables the access and
analysis of information stored in large relational databases through various
access devices. DSS Suite provides the infrastructure and products used to
implement three categories of applications: (i) internal corporate information
solutions; (ii) business-to-business information solutions; and (iii)
business-to-consumer information solutions.
[ILLUSTRATION IN DIAGRAM FORM OF THE INTERRELATIONSHIP BETWEEN THE COMPANY'S
PRODUCTS, RELATIONAL DATABASES AND VARIOUS DELIVERY APPLICATIONS.]
RELATIONAL ONLINE ANALYTICAL PROCESSING SERVER
DSS Server-High Performance Server for Analysis of Very Large
Databases. DSS Server provides multidimensional analysis against
MicroStrategy's broad array of supported relational databases, including
Oracle, Informix, DB2, Tandem, Sybase, SQL Server, Teradata and Red Brick. In
order to optimize DSS application performance, DSS Server also contains
MicroStrategy's High Performance Drivers, a set of optimization rules built
into MicroStrategy's ROLAP Engine that tunes the SQL generated by DSS Server
for superior query performance against the target data warehouse RDBMS.
Specifically designed for enterprise and commercial data warehouse
applications, DSS Server scales to meet the decision making requirements of
thousands of users accessing terabytes of information.
DSS Server provides a sophisticated array of enterprise-critical management
tools such as caching of frequently accessed data sets and query governing to
streamline performance and batch job scheduling. DSS Server also has built-in
multi-threaded user and queue management for load balancing. With this broad
set of management tools, organizations have the flexibility to tailor their
DSS architecture to work optimally within their business environment.
DSS Server also has the capability to create dynamic relational data marts
to create summary tables within the data warehouse for improved performance
and to pull subsets of the data warehouse into another relational data store
for focused analysis.
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LARGE-SCALE DEPLOYMENT SERVERS
DSS Web--Interactive Analysis Environment for the World Wide Web. DSS Web
extends information access and analysis capabilities of DSS Server to any
Internet- or intranet-connected user with a Web browser. Using the DSS Web
infrastructure, corporations can rapidly implement systems that allow local
and remote users to develop and access business reports that contain
information from a relational database.
DSS Web provides a broad array of options for viewing information sets,
such as spreadsheet grids and a wide variety of graphs. Through DSS Web's
exception reporting capabilities, users receive key elements of a report in
easily interpretable, plain English messages. DSS Web also allows users to
drill dynamically to a lower level of detail to view the underlying
information or to create and save new analyses. For sensitive information, DSS
Web's security plug-ins allow businesses to extend the standard security
functionality with additional user authentication routines.
DSS Web includes an interface API that allows businesses to customize,
integrate and embed DSS Web functionality into other applications. For
example, a data syndicator for healthcare information could utilize DSS Web
with a customized interface to sell access to this information to HMOs,
hospitals, and pharmacies.
DSS Broadcaster--Personalized Information Broadcast Server. DSS
Broadcaster, which commenced Beta testing in February 1998, is a powerful,
information broadcast server capable of delivering personalized messages to
many thousands of recipients via e-mail, fax, pager and mobile phone. DSS
Broadcaster sends personalized information to subscribers at pre-defined
intervals when business metrics exceed pre-defined thresholds. Continually
monitoring business conditions ensures that the appropriate information is
delivered when it is required. DSS Broadcaster's support for consumer devices
delivers information where it is most convenient, improving productivity by
eliminating the need for users to actively log onto a dedicated information
analysis application.
DSS Broadcaster provides both a platform for distributing information
throughout the corporate enterprise and an infrastructure to implement
information products and services over the Internet to target a broader
community. For example, a retailer could offer suppliers a subscription to a
set of services that delivers product performance information to a supplier's
fax machine or e-mail.
DSS Broadcaster reduces information overload and helps security
requirements by automatically customizing the contents of broadcast messages
for each individual subscriber. Microsoft Excel enclosures and embedded
hyperlinks to DSS Web products provide access to the underlying details for
further, interactive analysis.
ADVANCED ANALYSIS AND APPLICATIONS DEVELOPMENT INTERFACES
DSS Agent--Desktop Environment for Sophisticated Analysis and
Development. DSS Agent is a desktop product that allows users to ask
sophisticated business questions against relational databases. DSS Agent
provides a broad range of business reporting views, including spreadsheet
grids, a wide variety of graphs, mapping, and presentation-quality report
writing. DSS Agent provides an advanced set of analytical capabilities such as
rankings, deciles, time-based calculations and multi-dimensional calculations.
The information filtering capabilities provided by DSS Agent enable users to
specify in plain English precisely which constraints they wish to apply to the
targeted information, allowing them to ask questions such as: "What are the
sales in Boston on weekends in June for customers who are single, earn more
than $30,000 per year and increased their purchases by 15% over last year?"
Once users have run a business report, DSS Agent provides capabilities for
analytical follow-up such as successively interjecting new information into
the report, and drilling throughout the user's business information. DSS
Agent's intelligent agents and alerts also allow users to take actions by
automatically scanning the data warehouse and highlighting exception areas.
DSS Agent's filtering, reporting and analytical capabilities provide users
with the ability to scan through transaction-level detail in their data
warehouse and perform sophisticated market basket analyses.
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Through DSS Agent's ability to build a sophisticated analytical report, users
can understand what products sell well together and whether or not that
combination of product sales is more or less profitable than the average
market basket of products sold. All reports and analyses developed with DSS
Agent can be distributed via the Internet with DSS Web and by e-mail, fax,
pager, and mobile phone with DSS Broadcaster. The sample retail report in the
figure below illustrates DSS Agent's powerful reporting capabilities.
[ILLUSTRATION OF A WINDOWS DISPLAY OF A SAMPLE RETAIL REPORT GENERATED BY THE
COMPANY'S PRODUCTS.]
DSS Objects--API for Custom Application Development. DSS Objects is a
development tool for building customized applications on top of DSS Server.
Specialized applications (such as forecasting, category management, scenario
analysis, and budgeting) and applications that tightly integrate DSS with OLTP
are easily developed in Visual Basic, VBA, Delphi, and Visual C++. DSS Objects
allows systems integrators, VARs, in-house application developers and vertical
solution providers to develop customized ROLAP applications.
DSS Objects also is packaged with an Excel Add-In that enables ROLAP
analyses to be conducted directly within Microsoft Excel for those end-users
who wish to use Excel as their analytical front-end interface. The Excel Add-
In allows users to run reports against the data warehouse and conduct follow-
on analyses on that data through the use of the drill everywhere capabilities
included in the Excel Add-In.
APPLICATION DEVELOPMENT AND MANAGEMENT TOOLS
DSS Architect--Tool for Rapid DSS Development. DSS Architect is a tool for
implementing information analysis applications on top of a relational
database. DSS Architect creates a set of business definitions and rules based
on the underlying structure of the relational database. Users of applications
such as
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DSS Agent, DSS Objects, DSS Web, and DSS Broadcaster can use these business
definitions to ask questions and conduct analysis of information in the
database. DSS Architect is highly automated and is based on an open, flexible
metadata architecture, which greatly reduces the cost and time required to
implement and maintain systems.
DSS Executive--Object-Based EIS Development Tool. DSS Executive is a
design tool for developing EIS or briefing books, that provide high-level
users with a series of views that describe their business. Once created, end-
users can access briefing books by running DSS Agent in EIS mode. These
systems are easily implemented on top of any DSS Agent application by simply
compiling sets of analyses into dynamic pages that immediately focus users on
their key business drivers.
DSS Administrator--Management and Monitoring Tools for Enterprise
Deployments. DSS Administrator provides a complete set of tools for managing
and monitoring large-scale decision support applications. System monitoring
capabilities provide the information needed to tune systems for high
performance and availability. The user and object management functionality
provided by DSS Administrator enables organizations to maintain enterprise
systems supporting thousands of users.
DSS Administrator's Billing module provides the infrastructure needed to
implement billing systems for Internet-based information services. The Billing
module can be used to track system usage and generate the reports needed to
charge users of an Internet-based information service.
CUSTOMER CASE STUDIES
The following case studies illustrate the application and implementation of
the Company's products and related services by certain of the Company's
customers.
HALLMARK. Hallmark is a leader in the greeting card industry.
Representative Questions. Which type of retail outlets are over-stocked
for a particular Hallmark greeting card? Should Hallmark change its marketing
campaign strategy before shipping more cards from its distribution center?
Problem. With over 40,500 domestic retail outlets and 40,000 products,
Hallmark faces an enormous challenge in monitoring the inventory of its
individual stores. The company's ability to track inventory and to determine
which retail outlets are over-stocked or under-stocked for particular greeting
cards has important implications with respect to marketing, distribution and
development decisions. To address these challenges, Hallmark sought out a
software system that would allow 300 managers, product analysts, and high-
level executives to access over one billion rows of transaction level and
product level data. The company needed a system that could run against a
variety of platforms and relational databases, provide a single tool with the
capability to build point-of-sale and financial reporting applications,
support complex data drilling, and offer an intuitive, easy-to-use executive
interface.
Solution. By combining several different products from DSS Suite, Hallmark
created a DSS system that enables Hallmark personnel, from product analysts to
high-level executives, to utilize previously inaccessible information. For
example, using the system, product managers can quickly analyze detailed
point-of-sale data to determine the profitability of new products. By making
strategic decisions based on this information, product managers can eliminate
poorly selling products from the development cycle. Additionally, reports of
actionable trends at the end of each business day provide critical information
that managers use to make inventory decisions which help avoid out-of-stock
and over-stock situations. As a result, the system has reduced product
development time and improved product performance and inventory management.
LA CAIXA. La Caixa is the largest Spanish financial institution and one of
the largest savings banks in Europe.
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Representative Questions. How many customers does La Caixa have with
current account balances greater than 5 million pesetas? Which customers have
at least one credit card and what is the distribution of these customers by
age and income?
Problem. Like many large banks with a diverse customer base, La Caixa
prefers to target-market specific products to those groups of customers who,
based on demographic and other information, would most likely benefit from
such products. In order to achieve this objective, the bank's product managers
and financial analysts needed a software system that would enable them to
access and analyze approximately one terabyte of detailed customer
information, and which was scalable to several terabytes of data. This system
had to provide high performance access to La Caixa's existing database, allow
for intranet database access to enable executives to analyze predefined
reports and offer a low maintenance solution for the company's information
technology department.
Solution. Using DSS Suite, La Caixa enabled more than 250 bank managers
to analyze over 15,000 customer characteristics to define market segmentation,
understand product profitability, monitor cash flow and analyze the loan risk
of customers of the bank's 3,500 branches. Such powerful analytic capabilities
have enabled La Caixa to improve the effectiveness of its marketing campaigns
and reduce the risk in the personal loans it grants. Additionally, executives
now can view high level reports through their intranet interface, creating a
cost effective and low maintenance solution.
SOURCE INFORMATICS, A SUBSIDIARY OF NATIONAL DATA CORPORATION. Source
Informatics is a leading data solutions and information provider to the
healthcare industry.
Representative Question: To what degree was a specific company's market
share affected when the patent expired on its most successful drug? Who are
the top 100 prescribers of Amoxicillin in Manhattan?
Problem. Source Informatics collects information on approximately 130
million claims per month from a number of the largest pharmacies across the
United States and on 2.8 billion prescriptions from 893,000 doctors. In the
past this information was distributed through a limited number of channels to
a narrow set of large pharmaceutical companies. As a result, Source
Informatics was not utilizing the full potential of its data warehouse. The
Web made it possible to allow new mass markets to access the information in
its data warehouse. In order to realize this possibility, National Data needed
to implement a system that would deploy a multitude of analytical applications
to a large number of customers simultaneously, where each of these customers
requires a different set of security and access privileges. Such a system had
to analyze multi-terabytes of data, handle many concurrent users and provide
the high levels of customized analytic complexity.
Solution. Source Informatics looked to the Company's DSS Suite,
particularly DSS Web, to develop and implement a creative solution to its
problem. The diagram below illustrates how the Company addressed Source
Informatics' needs. Using various components of the DSS Suite, Source
Informatics divides its multi-terabyte data warehouse into focused subsets of
information which are then offered to specific target markets. Customers who
do not need all the raw data now leverage these information subsets via the
Web on a subscription or a per-access basis. The DSS Administrator component
of the DSS Suite is then used to administer and monitor usage patterns of
potentially thousands of users, creating a complete analysis, distribution and
maintenance system. As a result, Source Informatics is able to leverage its
data warehouse via the Web to reach a larger set of paying customers who can
now answer their questions using empirical data.
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[ILLUSTRATION OF SOURCE INFORMATICS' USE OF THE COMPANY'S PRODUCTS TO ACCESS,
QUERY AND DISSEMINATE TRANSACTION LEVEL DATA.]
PROFESSIONAL SERVICES AND CUSTOMER SUPPORT
DSS CONSULTING--DATA WAREHOUSE AND DSS IMPLEMENTATION SERVICE. DSS Consulting
is dedicated to providing clients with the DSS industry's most focused data
warehouse and DSS implementation expertise. The Company's QuickStrike program,
a consulting program for organizations who have already committed to a DSS
development effort, includes ten working days of consulting provided by an
experienced MicroStrategy data warehouse DSS expert at a client's facilities.
MicroStrategy consultants contribute to the success of Enterprise DSS projects
by providing services such as: (i) DSS application design, development, test
and deployment; (ii) data warehouse design, population, development, tuning,
and maintenance; (iii) system integration project planning, methodology and
audit oversight; and (iv) custom application design, development and
implementation methodology for those who wish to develop applications with
proprietary interfaces using DSS Objects.
DSS EDUCATION--DATA WAREHOUSE AND DSS IMPLEMENTATION
METHODOLOGY. MicroStrategy offers training courses to provide current and
potential customers with an effective way to learn about decision support
systems and data warehousing. These courses have been developed and are taught
by senior MicroStrategy consultants with years of experience designing and
implementing data warehouses and DSS solutions. MicroStrategy's training
curriculum includes: (i) Introduction to DSS and Data Warehousing; (ii) Data
Warehousing, Decision Support and the Web; (iii) Advanced DSS Functionality and
Architecture; and (iv) Data Warehousing--DSS Modeling and Design.
DSS SUPPORT--HOTLINE, KNOWLEDGE BASE AND FIELD ENGINEERING
SERVICES. MicroStrategy provides full product implementation cycle support for
Enterprise DSS development and deployment through a variety of channels
including a Web-accessible knowledge base, a telephone hotline, e-mail and fax.
The Company's support engineers are capable of providing client/server
configuration assistance, data warehouse design support, DSS application
development assistance, RDBMS tuning and configuration assistance and
installation, configuration, tuning, and usage support for all of
MicroStrategy's products. The Company's support engineers maintain close
relationships with the development centers of the major RDBMS providers in
order to quickly resolve VLDB performance issues that arise from the
interaction between DSS and RDBMS software. In the event that it is not
possible to troubleshoot an issue remotely, Company field engineers are
available to be dispatched directly to a client site to isolate and solve
problems locally. MicroStrategy support personnel are capable of providing
mission critical support and will interface on behalf of the customer with the
relevant VLDB
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and RDBMS providers to address incompatibilities, particular to a given
configuration, that are impairing the successful deployment of the Company's
DSS applications.
The diagram set forth below illustrates the complete range of the Company's
consulting, education and support services.
[ILLUSTRATION IN DIAGRAM FORM DESCRIBING THE COMPANY'S PROFESSIONAL SERVICES
WITHIN THE AREAS OF CONSULTING, EDUCATION AND CUSTOMER SUPPORT.]
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CUSTOMERS
MicroStrategy provides DSS products and related services that can support
thousands of users in multiple countries, speaking different languages and
working with different currencies. MicroStrategy has in excess of 500
customers, spread across a variety of major industries. A representative list
of the firms that since December 31, 1995 have purchased over $250,000 of the
Company's products and services is as follows:
BANKING & FINANCE TELECOMMUNICATIONS CONSUMER PACKAGED GOODS
Bank of America* Ameritech Borax, US
Banco Santander Bell South* Brown & Williamson
Barnett Bank Concert Management Services CPC Baking
CIBC Hughes Galaxy* CPC International
First Data MCI* Estee Lauder
First Union* Pacific Bell* Hallmark
First USA Bank Sprint* Heublein
Freddie Mac* WorldCom MCA Universal*
GE Capital*
Ralston Purina*
J.P. Morgan PHARMACEUTICAL & HEALTHCARE S.C. Johnson Wax*
La Caixa* Cardinal Health
Societe General Glaxo Wellcome* TECHNOLOGY
The Provident Bank MedPartners AC Nielsen*
Merck/Medco* NCR
RETAIL Premier Healthcare Oculus AB
Asda Stores Warner Lambert* Perot Systems*
B & Q* Software AG*
Belk Department Stores Tandem Computers*
Best Buy* GROCERY & PHARMACY Western Digital
Comet American Stores*
Dayton Hudson* Associated Food Stores OTHER
Eddie Bauer* DM--Drogerie Market* Detroit Edison
Elder Beerman CVS Pharmacy* London Electricity
Federated Systems Group* Food Lion McDonald's
Kmart* Hannaford Bros. Co.* Pacific Gas &
Liz Claiborne* Harris Teeter Electric
Littlewoods* Marsh Supermarkets Penn Traffic
LCBO Price Waterhouse*
Metro MGI Informatik* MANUFACTURING & INDUSTRIAL The SABRE Group*
Nieman Marcus Allied Signal U.S. Air Force
DuPont*
Payless Cashways
Payless Shoe Source Exxon Chemical INSURANCE
ShopKo* General Motors* Commercial Union Ins.
The Burton Group* Koch Industries Nationwide Insurance
Victoria's Secret Lexmark USAA*
Woolworths* Messer Grieshem Winterthur
Monsanto*
Nissan
Samsung
Shaw Industries
Xerox Inc*
* Indicates that customer has purchased in excess of $500,000 in products and
services since December 31, 1995.
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SALES AND MARKETING
DIRECT SALES ORGANIZATION. MicroStrategy markets its software and services
primarily through its direct sales organization. As of December 31, 1997, the
Company had domestic sales offices in Atlanta, Bedminster, Boston, Chicago,
Cincinnati, Dallas, Denver, Detroit, Kansas City, Los Angeles, Minneapolis,
New York City, San Francisco, Seattle, Tampa and Washington, D.C., and
international sales offices located in The Netherlands (Amsterdam), Spain
(Barcelona and Madrid), Germany (Cologne), the United Kingdom (London), France
(Paris), and Austria (Vienna). The Company is represented by distributors in
countries in which it does not have sales offices, including Australia,
Brazil, Chile, Columbia, Czech Republic, Finland, Greece, Ireland, New
Zealand, Singapore, South Africa, South Korea and Sweden.
INDIRECT SALES CHANNELS. The Company has entered into relationships with
over 80 system integration, application development and platform partners
whose products and services are used in conjunction with the Company's.
Agreements with these partners generally provide them with non-exclusive
rights to market the Company's products and services and allow access to the
Company's marketing materials, product training and direct sales force for
field level assistance. In addition, the Company offers its partners product
discounts. By using indirect sales channels, the Company obtains favorable
product recommendations from the leading system integration, application
developers and platform partners, thereby increasing MicroStrategy's market
coverage. The Company also believes that such indirect sales channels allow it
to leverage sales and service resources, marketing and industry specific
expertise to expand the Company's user base. The Company is not dependent upon
any single third party partner or small group of partners, the loss of which
would have a material adverse effect on the Company.
VALUE-ADDED RESELLERS. VARs who resell DSS Suite bundled with their own
Enterprise DSS application and/or syndicated data products include:
RETAIL PHARMACEUTICAL FINANCE
AC Nielsen Concepts Dynamics American Management
Consist International IMS America Systems
FourGen Software IMS Canada Databasics
ICL Retail Systems Source Informatics PaySys
Intrepid Systems TELECOM CROSS INDUSTRY
Price Waterhouse CableData Acxiom
Radiant Systems Cincinnati Bell Chilton Research
Radius Retail Information Systems Services
Retek Systems UTILITY CIC/MetroMail
Technology Investments james + martin Naviant
RDI--DW Specialists
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SYSTEM INTEGRATORS. MicroStrategy has also entered into agreements to
provide training, support, marketing and sales assistance to a number of
system integrators, including:
AMS EMS PRAGMATEK Consulting
Andersen Consulting Ernst & Young Group
Archer Decision Sciences H.I.T. Price Waterhouse
Anubis Solutions james + martin Professional Software
Beggsheidt Enterprise Consulting Consulting
John Galt
CBSI Knightsbridge Solutions ProLink
Clarity Consulting Lancet Software DevelopmentEIS Pulse
CMS Manifest Solutions Retail Dynamics (RDI)
Computer Sciences Corporation RIS Information
Marketing Info Systems Services
Coopers & Lybrand
Naviant Technology Solutions
Cornerstone Concepts NCR Revere Group
Database Technologies NexGen SI Shamrock Computer
Decision Support Associates Nichols Research Resources
Deloitte & Touche Noblestar Systems Software AG
DMR/Trecom Olympus Group Stonebridge
Emergent Corporation Technologies
Perspective Data Architecture
Syndicated Technologies
Virtual Solutions
Zyga
PLATFORM PARTNERS. The Company's platform partners consist of firms which
co-sell and co-market complementary technology to the same target customer
base. These platform partners include IBM, Tandem/Compaq, NCR, Sequent, ICL,
Data General, Informatica, Oracle, Informix and Red Brick.
RESEARCH AND PRODUCT DEVELOPMENT
The Company has made substantial investments in research and product
development. The Company believes that its future performance will depend in
large part on its ability to maintain and enhance its current product line,
develop new products that achieve market acceptance, maintain technological
competitiveness and meet an expanding range of customer requirements. As of
December 31, 1997, the Company's research and product development staff
consisted of 113 employees. The Company's total expenses for research and
development for the years 1997, 1996 and 1995 were $5.1 million, $2.8 million
and $1.9 million, respectively.
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, 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 ROLAP software such as Information
Advantage, Inc. and Platinum Technologies Corporation; (ii) vendors of desktop
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
IBM), Seagate and 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, which has indicated
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<PAGE>
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, Marimba and 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, U.S. Web,
SVIP and 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, Nextel,
Sprint, MCI, WorldCom, Tridium, PageNet and 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, MSN, Prodigy, @Home and 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,
which markets a product that monitors stock tickers and notifies subscribers
when preset thresholds are crossed, Clarify; which handles loan applications
with a financial system developed by SAP AG; BEA Systems, which provides
middleware; and 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.
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
46
<PAGE>
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. See "Business--Competition."
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.
INTELLECTUAL PROPERTY AND LICENSES
The Company relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary technology. For example, the Company licenses rather
than sells its software and requires licensees to enter into license
agreements which impose certain restrictions on licensees' use of the
software. In addition, the Company has made efforts to avoid disclosure of its
trade secrets, including but not limited to requiring those persons with
access to the Company's proprietary technology and information to enter into
confidentiality agreements with the Company and restricting access to the
Company's source code. The Company seeks to protect its software,
documentation and other written materials under trade secret and copyright
laws, which afford only limited protection. The Company presently has no
patents or patent applications pending. Despite the Company's efforts to
protect its proprietary rights, unauthorized parties may attempt to copy
aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. Policing unauthorized use of the Company's
products is difficult, and while the Company is unable to determine the extent
to which piracy of its software products exists, software piracy can be
expected to be a persistent problem. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to as great an
extent as do the laws of the United States. 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.
Although the Company has never been the subject of a material intellectual
property dispute, there can be no assurance that third parties will not claim
infringement by the Company with respect to current or future products. The
Company expects that software product developers will increasingly be subject
to infringement claims as the number of products and competitors in the
Company's industry segment grows and the functionality of products in
different industry segments overlaps. Any such claims, with or without merit,
could be time-consuming, result in costly litigation, cause product shipment
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on
terms acceptable to the Company or at all, which could have a material adverse
effect upon the Company's business, operating results and financial condition.
EMPLOYEES
As of December 31, 1997, the Company had a total of 590 employees, of which
465 were based in the United States and 125 based internationally. Of the
total, 210 were engaged in sales and marketing, 113 in product development,
170 in professional services and 97 in finance, administration and corporate
operations. The Company's future performance depends in significant part upon
the continued service of its key management personnel, none of whom is bound
by an employment agreement. The loss of the services of one or more of the
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<PAGE>
Company's key employees could have a material adverse effect on the Company's
business, operating results and financial condition. The Company's future
success also depends on its continuing ability to attract, train and retain
highly qualified technical, sales, service, marketing and managerial
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company can retain its key personnel in the future. None of
the Company's employees is represented by a labor union. The Company has not
experienced any work stoppages and considers its relations with its employees
to be good.
The Company believes that effective recruiting, education, and nurturing of
human resources is critical to its success and has traditionally made
substantial investments in these areas in order to differentiate itself from
its competition, increase employee loyalty and create a culture conducive to
creativity, cooperation and continuous improvement. These measures include:
PROFESSIONAL EDUCATION. All newly hired professionals complete a
professional orientation course that ranges from 4-8 weeks long presented by
"MicroStrategy University," the Company's in-house education function. The
curriculum consists of lectures, problem sets and independent and group
projects, covering data warehousing, Enterprise DSS, MicroStrategy's products,
the Company's competitors and customers. Certain lectures also deal with
general business practices, ethics and teamwork. At the end of this training,
students must pass a number of oral and written examinations in order to begin
their assignments. Following this introductory course, veteran employees
normally complete at least two weeks of continuing professional development
each year. Course content for MicroStrategy University is created by the most
experienced members of the professional staff, who generally have an annual
obligation to create "expert content" based upon the best practices they have
most recently observed in the field. This expert content is then used to
upgrade and revitalize the Company's education, consulting, support,
technology and marketing operations.
COMPANY DAYS. Each quarter, the Company invites the entire employee base
together for knowledge transfer within functions, across functions and across
geographic boundaries. These events are generally built around a set of
company-wide meetings and breakout sessions, but they also have particular
cultural themes. These events include: the "Company Retreat," which allows
employees to network with colleagues in an informal setting and which
traditionally has consisted of a Company-sponsored cruise; "University Week,"
which focuses on continuing professional development along with the creation
and codification of industry-best practices; "Friends and Family Weekend,"
during which the Company sponsors a weekend-long open house and plays host to
immediate and extended family, as well as significant others of employees; and
"Customer and Partner Festival," where the Company's business partners and
customers are encouraged to mix with the employee base in order to exchange
information and strengthen the firm's ties to the marketplace. The Company
believes that its "Company Day" events are long-term investments which will,
over time, result in superior productivity, morale, and loyalty among the
employee base, and the Company expects to continue to engage in these
activities in the future.
FACILITIES
The Company's principal offices currently occupy approximately 79,000 square
feet in Vienna, Virginia pursuant to multiple leases which expire between July
1998 and February 2001, and the Company has recently signed a four year lease
commencing in June 1999 for approximately 66,000 additional square feet in the
Vienna area. In addition, the Company also leases sales offices domestically
in the metropolitan areas of Atlanta, Bedminster, Boston, Chicago, Cincinnati,
Dallas, Detroit, Los Angeles, Minneapolis, New York City, San Francisco,
Seattle and Washington, D.C. and internationally in Amsterdam, Barcelona,
Cologne, London, Madrid, Paris, Vienna and Milan. The Company believes that
suitable additional or alternative space will be available in the future on
commercially reasonable terms as needed.
LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation that arises in the
normal course of its business operations. As of the date of this Prospectus,
the Company is not presently a party to any such litigation that the Company
believes could reasonably be expected to have a material adverse effect on its
business or results of operation.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information concerning members of the Board of
Directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
President, Chief Executive Officer and Chairman of
Michael J. Saylor... 33 the Board of Directors
Executive Vice President, Chief Operating Officer and
Sanju K. Bansal..... 32 Director
Eduardo S. Sanchez.. 41 Vice President, International Operations
Stephen D. Foley.... 38 Vice President, Sales
Stephen S. Trundle.. 29 Vice President, Technology
Mark S. Lynch....... 34 Vice President, Finance and Chief Financial Officer
Charles A. Veley.... 32 Vice President, Corporate Development
Ralph S. Terkowitz.. 47 Director
Frank A. Ingari..... 48 Director
</TABLE>
Michael J. Saylor has served as President, Chief Executive Officer and
Chairman of the Board of Directors since founding the Company in November
1989. Prior to joining the Company, Mr. Saylor was employed by E.I. du Pont de
Nemours & Company as a Venture Manager from 1988 to 1989 and by Federal Group,
Inc. as a Consultant from 1987 to 1988. Mr. Saylor received an S.B. in
Aeronautics and Astronautics and an S.B. in Science, Technology and Society
from the Massachusetts Institute of Technology.
Sanju K. Bansal has served as Executive Vice President and Chief Operating
Officer since 1993 and was previously Vice President, Consulting since joining
the Company in 1990. He has been a member of the Board of Directors of the
Company since September 1997. Prior to joining the Company, Mr. Bansal was a
consultant at Booz Allen & Hamilton, a worldwide technical and management
consulting firm, from 1987 to 1990. Mr. Bansal received an S.B. in Electrical
Engineering from the Massachusetts Institute of Technology and an M.S. in
Computer Science from The Johns Hopkins University.
Eduardo S. Sanchez has served as Vice President, International Operations
since July 1997. From 1994 to 1997, he served as Managing Director, European
Operations and prior to that as Senior Manager, U.S. Consulting since joining
the Company in 1992. Prior to joining the Company, Mr. Sanchez was a
manufacturing consultant in Europe, the United States, South America and
Japan. Mr. Sanchez received an M.S. in Systems Engineering from George Mason
University and a B.S. in Electrical Engineering from the University of La
Plata in Argentina.
Stephen D. Foley has served as Vice President, Sales since October 1997.
From March 1997 to October 1997, he served as Vice President, Sales for
Diffusion, an information delivery software provider. From 1996 to March 1997,
Mr. Foley served as Vice President of Sales for XDB Systems, a database
middleware company. From 1994 to 1996, he was Vice President, North American
Sales, for Visix, an application development tools company. Prior to joining
Visix, Mr. Foley served as Vice President, U.S. Direct Sales for Cognos, a
decision support software company, from 1991 to 1993. Mr. Foley received a
B.S. in Industrial Organization Psychology from Michigan State University.
Stephen S. Trundle has served as Vice President, Technology since July 1997
and as Director, Technology from 1994 to 1997. From 1992 to 1994, Mr. Trundle
served as a Consultant and then a Senior Consultant with the Company. Prior to
joining the Company, Mr. Trundle worked for Bath Iron Works on the Aegis
Destroyer program from 1991 to 1992. Mr. Trundle received an A.B. in
Engineering and an A.B. in Government from Dartmouth College.
Mark S. Lynch has served as Vice President, Finance and Chief Financial
Officer since September 1997. Prior to joining the Company, Mr. Lynch was
Chief Financial Officer for WorldCorp and World Airways from 1996 to 1997, and
before that was Vice President, Finance for Intelidata, an electronic commerce
firm, from
49
<PAGE>
1991 to 1996. Mr. Lynch has also held several senior accounting positions with
KPMG Peat Marwick and Clark Construction Group. Mr. Lynch is a certified
public accountant and received a B.S. in Accounting from Penn State and an
M.B.A. from George Washington University.
Charles A. Veley has served as Vice President, Corporate Development since
October 1997 and as Director, Corporate Development from 1996 to October 1997.
From 1994 to 1996, Mr. Veley was an Account Executive for Cambridge Technology
Partners, a client/server system integrator. From 1991 to 1994, Mr. Veley was
employed by the Company as Vice President, Sales and Marketing. Prior to
joining the Company in 1991, Mr. Veley was an Associate Consultant with the
Boston Consulting Group. Mr. Veley received an A.B. in Computer Science from
Harvard College.
Ralph S. Terkowitz has been a member of the Board of Directors of the
Company since September 1997. Mr. Terkowitz is Vice President, Technology for
the Washington Post Company, a position he has held since 1992. Until February
1996, Mr. Terkowitz was Chief Executive Officer, President and publisher of
Digital Ink, an Internet publishing venture that launched, among other
ventures, WashingtonPost.com and PoliticsNow. Mr. Terkowitz is a director of
Junglee, an Internet startup venture, and was a director of New Century
Network, a Web publishing consortium, from its inception until 1998. Mr.
Terkowitz received an A.B. in Chemistry from Cornell University and an M.S. in
Chemical Physics from the University of California, Berkeley.
Frank A. Ingari has been a member of the Board of Directors of the Company
since October 1997. Mr. Ingari is Chairman of the Board of Directors of Shiva
Corporation and was the President and Chief Executive Officer of Shiva
Corporation from 1993 to 1997. Mr. Ingari also serves as Chief Executive
Officer of Growth Ally, L.L.C., a consulting firm specializing in assisting
private technology companies in accelerating their growth. Prior to joining
Shiva Corporation, Mr. Ingari was Vice President, Marketing at Lotus
Development Corporation. From 1991 to 1992, he served as Chairman of the Board
of Directors and Chief Executive Officer of ONTOS, Inc., a supplier of object-
oriented database management systems and application development software. Mr.
Ingari received a B.A. in Creative Writing and U.S. Foreign Relations from
Cornell University.
BOARD OF DIRECTORS
The Company's Bylaws currently provide that the number of directors shall be
fixed by the Board. The Board of Directors has fixed the number of directors
at four. The Bylaws provide that directors shall be elected by a plurality
vote, with no cumulative voting, at the annual meeting of stockholders. Each
elected director holds office for a term of one year or until his successor
shall have been duly elected and qualified. Each of the Company's directors
has been elected to serve until the Company's 1998 annual meeting of
stockholders, or until his successor shall have been duly elected and
qualified. The Company plans to hold annual stockholders' meetings in the
future for the election of directors.
The Board of Directors has established a Compensation Committee and an Audit
Committee consisting in each case of Messrs. Terkowitz and Ingari. Mr.
Terkowitz is the Chairman of the Compensation Committee and Mr. Ingari is
Chairman of the Audit Committee. The Compensation Committee will be
responsible for making recommendations to the Board concerning salaries and
incentive compensation for officers and employees of the Company. The Audit
Committee will be responsible for reviewing the results and scope of the audit
and other accounting related services.
Directors do not receive any fees or other cash compensation for serving on
the Company's Board of Directors or any committee thereof, but each non-
employee director who has served during the prior six month period shall be
entitled to receive an option to purchase 5,000 shares of Class A Common Stock
on the date of each annual stockholders meeting pursuant to the terms of the
Director Option Plan. All directors are reimbursed for their reasonable out-
of-pocket expenses arising from attendance of meetings of the Board of
Directors,
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<PAGE>
committees thereof or in respect of Company-related business. Mr. Terkowitz
and Mr. Ingari, who are not current or former officers of the Company, were
granted options to purchase 45,000 shares each of Class A Common Stock under
the Director Option Plan described below in connection with their election to
the Board of Directors. See "--Stock Option Plans."
EMPLOYMENT AGREEMENTS
Employees of the Company are generally required to enter into
confidentiality agreements prohibiting such employee from disclosing any
confidential or proprietary information of the Company. In addition, the
agreements generally provide that upon termination such employee will not work
for a competitor and will not solicit Company customers and employees for a
period of one year. At the time of commencement of employment, the Company's
employees also generally sign offer letters specifying certain basic terms and
conditions of employment. Otherwise, employees of the Company are not subject
to written employment agreements.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal years ended December 31, 1996 and 1997, the Board of
Directors had no Compensation Committee. Decisions regarding compensation for
1996 and 1997 were made by the Company's senior management. On a going-forward
basis, the Compensation Committee will be responsible for making
recommendations to the Board of Directors concerning salaries and incentive
compensation (including option grants) for officers and directors of the
Company. See "Board of Directors."
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION. The following table provides certain summary
information concerning compensation paid or accrued by the Company to or on
behalf of the Company's Chief Executive Officer and each of the other
executive officers of the Company who earned more than $100,000 (salary and
bonus) for all services rendered in all capacities to the Company during the
fiscal year ended December 31, 1997 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION(1) AWARDS
---------------------- -------------------------
NAME AND PRINCIPAL POSITION SALARY BONUS SHARES UNDERLYING OPTIONS
- --------------------------- ----------- ---------- -------------------------
<S> <C> <C> <C>
Michael J. Saylor............. $ 124,000 $ 30,000 --
Chairman of the Board, Chief
Executive Officer
and President
Sanju K. Bansal............... 102,100 30,000 --
Executive Vice President and
Chief Operating Officer
Eduardo S. Sanchez............ 122,300 -- 54,000
Vice President, International
Operations
Stephen S. Trundle............ 100,100 -- --
Vice President, Technology
Charles A. Veley.............. 90,250 50,000 --
Vice President, Corporate
Development
</TABLE>
- --------
(1) With respect to each of the Named Executive Officers, the aggregate
amount of perquisites and other personal benefits, securities or property
received was less than either $50,000 or 10% of the total annual salary
and bonus reported for such Named Executive Officer.
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<PAGE>
STOCK OPTIONS. The following table contains information concerning the stock
option grants made to each of the Named Executive Officers during the fiscal
year ended December 31, 1997:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(3)
------------------------------------------------ ----------------------
NUMBER OF
SHARES OF
CLASS A
COMMON % OF TOTAL
STOCK OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (1) 1997 PER SHARE(2) DATE 5% 10%
- ---- ----------- ------------ ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Saylor....... -- -- $ -- -- $ -- $ --
Sanju K. Bansal......... -- -- -- -- -- --
Eduardo S. Sanchez...... 54,000 2.03% 2.50 9/30/07 32,125 131,118
Stephen S. Trundle...... -- -- -- -- -- --
Charles A. Veley........ -- -- -- -- -- --
</TABLE>
- --------
(1) The options vest over a five-year period and expire on the tenth
anniversary of the date of grant.
(2) The exercise price may be paid in cash or in shares of Class A Common
Stock valued at fair market value on the exercise date.
(3) Assumes appreciation in the independently appraised value of the Class A
Common Stock of 5% and 10% per year over the ten-year option period as
mandated by the rules and regulations of the Securities and Exchange
Commission, and does not represent the Company's estimate or projection
of the future value of the Class A Common Stock. The actual value
realized may be greater or less than the potential realizable values set
forth in the table.
The following table sets forth information concerning option holdings
through December 31, 1997 by each of the Named Executive Officers:
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES OF CLASS A
COMMON STOCK UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT YEAR END (1) AT YEAR-END (2)
------------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Michael J. Saylor... -- -- $ -- $ --
Sanju K. Bansal..... -- -- -- --
Eduardo S. Sanchez.. 5,200 74,800 18,200 153,800
Stephen S. Trundle.. 20,200 80,800 70,700 282,800
Charles A. Veley.... 14,000 56,000 38,500 154,000
</TABLE>
- --------
(1) "Exercisable" refers to those options which will be vested and
exercisable immediately upon completion of the Offering, while
"Unexercisable" refers to those options which will be unvested at such
time.
(2) Value is determined by subtracting the exercise price from the fair
market value of the Class A Common Stock at December 31, 1997 ($4.00 per
share), multiplied by the number of shares underlying the options.
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<PAGE>
STOCK OPTION PLANS
1996 STOCK PLAN. The Company's 1996 Stock Plan (the 1996 Stock Plan), as
amended, was approved by the Board of Directors and by the stockholders in
August of 1997. The 1996 Stock Plan provides for the granting to employees of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and for the granting of nonqualified stock
options to employees (including officers and employee directors) and
consultants. A total of 8,000,000 shares of Class A Common Stock have been
reserved for issuance under the 1996 Stock Plan, and options to purchase
4,720,863 shares have been granted thereunder. To date, substantially all
options granted under the 1996 Stock Plan have been designated as incentive
stock options. The 1996 Stock Plan is currently administered by the Company's
Board of Directors.
Options granted under the 1996 Stock Plan are not transferable by the
optionee other than by will or the laws of descent and distribution, and each
option is exercisable during the lifetime of the optionee only by such
optionee. The exercise price of all incentive stock options granted under the
Stock Plan must be at least equal to the fair market value of the shares of
Class A Common Stock on the date of grant. With respect to any participant who
owns stock possessing more than 10% of the voting power of all classes of the
Company's outstanding capital stock, the exercise price of any incentive stock
option must be equal to at least 110% of the fair market value of the shares
of Class A Common Stock on the grant date and the maximum term of the option
must not exceed five years. The terms of all other incentive options granted
under the Stock Plan may not exceed 10 years.
Stock options granted under the 1996 Stock Plan generally vest over a five-
year period. No portion of an option shall be exercisable, whether or not
vested, until the earliest of (i) the closing of an underwritten public
offering of the Company's Class A Common Stock, (ii) a change in control of
the Company or (iii) 78 months following the date of grant of an option. In
the event of a merger of the Company with or into another corporation, each
option would be assumed or an equivalent option substituted by the successor
corporation. In the event that such successor corporation refuses to assume
the option or to substitute an equivalent option, the option shall be deemed
exercisable to the extent of the greater of (x) 40% of the number of shares of
Common Stock subject to the option and (y) the number of shares then vested
immediately prior to the change in control. As of December 31, 1997, no
options to purchase shares of Class A Common Stock had been exercised. Options
to purchase 4,821,863 shares at a weighted average exercise price of $1.70 per
share are currently outstanding under the 1996 Stock Plan and options to
purchase 3,088,137 shares of Class A Common Stock remain available for future
grants under the 1996 Stock Plan.
FRENCH PLAN. The 1997 Stock Option Plan for French employees (the French
Plan) was approved by the Board of Directors in March of 1997. The French Plan
provides for the granting of options to employees of MicroStrategy France
SARL, the Company's French subsidiary. A total of 300,000 shares of Class A
Common Stock has been reserved for issuance under the French Plan, and options
to purchase 101,000 shares have been granted thereunder. The French Plan is
administered by the Company's Board of Directors. Options granted under the
French Plan are not transferable by the optionee other than by will or by the
laws of descent and distribution. The exercise price for each option granted
under the French Plan shall be 100% of the fair market value of the shares of
Class A Common Stock on the date the option is granted and the maximum term of
the option must not exceed ten years.
Stock options granted under the French Plan vest over a five year period
with 40% of options vesting on the second anniversary of the vesting
commencement date and 20% vesting on each subsequent anniversary. Options
issued under the French Plan have the same limitations on exercisability and
provisions for vesting upon a merger of the Company as options issued under
the 1996 Stock Plan described above.
1997 DIRECTOR OPTION PLAN. The Company's 1997 Director Option Plan (the
Director Option Plan) was adopted by the Board of Directors and the
stockholders in September of 1997. A total of 200,000 shares of Class A Common
Stock has been reserved for issuance under the Director Option Plan. The
Director Option Plan provides for the grant of nonqualified stock options to
non-employee directors of the Company.
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<PAGE>
The Director Option Plan provides that each person who becomes a non-
employee director of the Company shall, on the date on which the optionee
first becomes a director of the Company, be granted an option to purchase
45,000 shares of Class A Common Stock (the "First Option"). On the date of
each annual stockholders meeting thereafter, each non-employee director shall
be granted an option to purchase 5,000 shares of Class A Common Stock (a
"Subsequent Option") if, on such date, he or she shall have served on the
Company's Board of Directors for at least six months. Options to purchase
45,000 shares of Class A Common Stock have been granted to each of Mr.
Terkowitz and Mr. Ingari at an exercise price of $2.50 per share. None of such
options are presently vested or exercisable.
The Director Option Plan sets neither a maximum nor a minimum number of
shares subject to options that may be granted to any one non-employee
director, but does stipulate the method of making a grant. No option granted
under the Director Option Plan is transferable by the optionee other than by
will or the laws of descent and distribution, and each option is exercisable,
during the lifetime of the optionee, only by such optionee. The Director
Option Plan provides that the First Option shall become exercisable in
installments of one-fifth of the shares subject to the First Option on each of
the first, second, third, fourth and fifth anniversaries of the date of grant
of the First Option, and that each Subsequent Option shall become exercisable
in full on the fifth anniversary of its date of grant. The exercise price of
all stock options granted under the Director Option Plan shall be equal to the
fair market value of the shares of Class A Common Stock on the date of grant
of the option. Options granted under the Director Option Plan have a term of
10 years. In the event of a merger of the Company with or into another
corporation or a sale of substantially all of the Company's assets, each
option will be assumed or an equivalent option substituted by the successor
corporation. If the successor corporation does not assume outstanding options,
the exercisability of all outstanding options shall be accelerated. The Board
of Directors may amend or terminate the Director Option Plan, provided,
however, that no such action may adversely affect any outstanding option and
provided further that the provisions affecting the grant and terms of options
may not be amended more than once during any six-month period.
1998 EMPLOYEE STOCK PURCHASE PLAN. Prior to the closing of the Offering, the
Board will submit to the Existing Stockholders, and the Existing Stockholders
are expected to approve, an Employee Stock Purchase Plan (the "Purchase
Plan"), covering an aggregate of 400,000 shares of Class A Common Stock. The
Purchase Plan is intended to qualify for favorable tax treatment under Section
423 of the Internal Revenue Code of 1986, as amended. Under the Purchase Plan,
eligible employees may purchase shares of the Company's Class A Common Stock
through periodic payroll deductions. The Purchase Plan will be implemented
through a series of six month offering periods commencing on each January 1
and July 1 (each an "Offering Period"), except for the initial Offering Period
which will begin on the effective date of this offering and end on December
31, 1998. All employees of the Company or its majority-owned subsidiaries who
work at least twenty hours per week and more than five months per calendar
year are eligible to participate in the Purchase Plan.
During the first Offering Period, participants may designate not more than
10% of their cash compensation, and in subsequent Offering Periods not more
than 10% of their average total compensation, to be deducted each pay period
for the purchase of Class A Common Stock under the Purchase Plan. Participants
may purchase no more than $15,000 in Class A Common Stock in any one calendar
year. The purchase price per share will be 85% of the lesser of the fair
market value of the Class A Common Stock on the beginning or end of the
Offering Period. Employees may terminate their participation in the Purchase
Plan at any time during an Offering Period, but may not alter their rate of
payroll deduction for that offering. Participation ends automatically on
termination of employment with the Company. The Purchase Plan will terminate
no later than December 31, 2002.
54
<PAGE>
CERTAIN TRANSACTIONS
EQUITY ISSUANCE, STOCKHOLDER LOANS AND LOAN GUARANTEES
Effective January 1, 1998, the Company issued a total of 1,401,641 shares of
Class B Common Stock to Messrs. Saylor and Bansal to purchase their
approximately 21% minority interest in certain of the Company's foreign
subsidiaries. After such exchange, each such subsidiary was wholly-owned by
the Company. The Company obtained an independent, third-party valuation of the
interests held by Messrs. Saylor and Bansal. Mr. Saylor received 1,134,662
shares of Class B Common Stock in such exchange and Mr. Bansal received
266,979 such shares.
The Company expects to pay a $10.0 million dividend to the Existing
Stockholders in the form of short-term notes prior to termination of the
Company's S corporation election, which is expected to occur shortly prior to
closing of the Offering. The notes issued to the Existing Stockholders by the
Company will bear interest at the "applicable federal rate" for short-term
obligations and will be due and payable at various times during 1998. The
amounts due under such promissory notes are expected to be repaid out of
otherwise available cash and cash equivalents and cash generated from
operations, not from net proceeds of the Offering. See "Dividend Policy" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The Company has on occasion advanced certain sums to Mr. Saylor and Mr.
Bansal. As of December 31, 1997, the Company had notes receivable due from
Messrs. Saylor and Bansal of $113,983 and $50,910, respectively. These notes
resulted primarily from the Company paying S corporation taxes for these
individuals and other miscellaneous expenses since the Company's inception.
Mr. Saylor has guaranteed amounts outstanding under the Company's Business
Loan to the extent that such amounts exceed $2.0 million. Mr. Saylor's
liability under the guarantee is capped at $2.0 million. The guarantee
automatically terminates upon the closing of the Offering. Mr. Saylor did not
receive any compensation from the Company for providing such guarantee.
STOCK PURCHASE
On February 28, 1995, Messrs. Sanchez and Trundle purchased 442,408.08 and
294,938.72 shares, respectively, of Common Stock at a price of $0.107 per
share, such purchase price to be payable in four installments. Upon the
payment of each installment, Messrs. Sanchez and Trundle acquired 25% of the
total shares. Installments were paid on February 28, 1995 and each succeeding
December 31, with the final installment paid on December 31, 1997.
EXISTING STOCKHOLDERS AGREEMENT
The Company has entered into certain agreements with the Existing
Stockholders ("Existing Stockholders Agreements"). Each Existing Stockholders
Agreement provides for, among other things, the indemnification of the Company
by such stockholders for any federal and state income taxes (including
interest and penalties) incurred by the Company, if for any reason, the
Company is deemed to be treated as a C corporation during any period for which
it reported its taxable income as an S corporation. The tax indemnification
obligation of the Existing Stockholders is limited to the lesser of (i) the
amount of any reduction in their tax liability as a result of any such
determination or (ii) the aggregate amount received in distributions from the
Company from January 1, 1990 until the S corporation termination date. The
Existing Stockholders Agreement also provides for the cross-indemnification by
the Company of each Existing Stockholder for any losses or liabilities with
respect to certain additional taxes (including interest and penalties)
resulting from the Company's operations during the period in which it was an S
corporation. Purchasers of Class A Common Stock in the Offering will not be
parties to any Existing Stockholders Agreement. See "Termination of S
Corporation Election and S Corporation Distribution."
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 31, 1998 and as adjusted
to reflect the sale of the shares of Class A Common Stock offered hereby, (i)
by each person who is known by the Company to own beneficially more than 5% of
the Company's Common Stock, (ii) by each Named Executive Officer and member of
the Board of Directors and (iii) by all executive officers and directors as a
group.
<TABLE>
<CAPTION>
PERCENT OF OWNERSHIP
NUMBER OF SHARES --------------------
BENEFICIALLY BEFORE THE AFTER THE
NAME OWNED(1)(2) OFFERING OFFERING
---- ---------------- ---------- ---------
<S> <C> <C> <C>
Alcantara, LLC (3)................... -- --
Michael J. Saylor (4)................ 22,574,662 73.1%
Shangri-La, LLC (5).................. -- --
Sanju K. Bansal (6).................. 5,066,979 16.4%
Eduardo S. Sanchez(7)................ 452,808 1.5%
Charles A. Veley(8).................. 334,000 1.1%
Stephen S. Trundle(9)................ 335,339 1.1%
Frank A. Ingari...................... -- --
Ralph S. Terkowitz................... -- --
All executive officers and directors
as a group (9 persons)(1)........... 28,763,788 93.1%
</TABLE>
- --------
(1) Shares listed in the table are shares of Class B Common Stock which have
ten votes per share, except that 10,400, 14,000 and 40,400 shares of
Common Stock held by Mr. Sanchez, Mr. Veley and Mr. Trundle, respectively,
consist of options to purchase Class A Common Stock. 64,800 shares held by
the executive officers and directors as a group consist of options to
purchase Class A Common Stock. Options held by Messrs. Ingari and
Terkowitz are to purchase shares of Class A Common Stock; however, none of
such options are vested or exercisable within 60 days of March 31, 1998.
(2) The persons named in this table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable. Beneficial ownership
is determined in accordance with the rules of the United States Securities
and Exchange Commission. In computing the number of shares beneficially
owned by a person and the percentage ownership of that person, shares of
Common Stock subject to options held by that person that are currently
exercisable or exercisable within 60 days after March 31, 1998 are deemed
outstanding. Such shares, however, are not deemed outstanding for the
purpose of computing the percentage ownership of any other person. Options
that would be exercisable within 60 days after March 31, 1998 but for the
fact that the Company had not completed its initial public offering as of
such date are treated as exercisable within 60 days after March 31, 1998
and are included in this table.
(3) In connection with the Offering, it is anticipated that Mr. Saylor will
transfer his interest in the Company to Alcantara, LLC, an entity that is
controlled by Mr. Saylor.
(4) Represents shares of Class B Common Stock that, upon the closing of the
Offering, will be held beneficially by Mr. Saylor as a result of his
ownership interest in Alcantara.
(5) In connection with the Offering, it is anticipated that Mr. Bansal will
transfer his interest in the Company to Shangri-La, LLC, an entity that is
controlled by Mr. Bansal.
(6) Represents shares of Class B Common Stock that, upon the closing of the
Offering, will be held beneficially by Mr. Bansal as a result of his
ownership interest in Shangri-La.
(7) Includes 10,400 shares of Class A Common Stock issuable upon exercise of
options.
(8) Includes 14,000 shares of Class A Common Stock issuable upon exercise of
options.
(9) Includes 40,400 shares of Class A Common Stock issuable upon exercise of
options.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description is a summary and is subject to and qualified in
its entirety by reference to the Restated Certificate of Incorporation of the
Company (the "Charter") and the By-Laws of the Company (the "By-Laws"), copies
of which are filed as exhibits to the Registration Statement of which this
Prospectus forms a part.
As of the date of this Prospectus, the authorized capital stock of the
Company will consist of 50,000,000 shares of Class A Common Stock, 50,000,000
shares of Class B Common Stock and 5,000,000 shares of preferred stock. As of
the date of this Prospectus, there will be no shares of Class A Common Stock,
30,895,514 shares of Class B Common Stock and no shares of preferred stock
outstanding.
COMMON STOCK
VOTING RIGHTS. Holders of Class A Common Stock are entitled to one (1) vote
per share. Holders of Class B Common Stock are entitled to ten (10) votes per
share. Holders of Class A Common Stock and Class B Common Stock vote together
as a single class on all matters presented to the stockholders for their vote
or approval, except as may be required by Delaware law. The Company, by action
of its Board of Directors and the affirmative vote of the holders of Class A
Common Stock and Class B Common Stock, voting together as a class, may
increase or decrease the number of authorized shares of any class of capital
stock of the Company.
DIVIDENDS. Holders of Class A Common Stock and Class B Common Stock are
entitled to receive dividends at the same rate, when and if declared by the
Board of Directors, out of legally available funds. The Company may not make
any dividend or distribution with respect to any class of Common Stock unless
at the same time the Company makes a ratable dividend or distribution with
respect to each outstanding share of Common Stock regardless of class. In the
case of a stock dividend or other distribution payable in shares of a class of
Common Stock, only shares of Class A Common Stock may be distributed with
respect to Class A Common Stock and only shares of Class B Common Stock may be
distributed with respect to Class B Common Stock, and the number of shares of
Common Stock payable per share will be equal for each class.
SPLIT, SUBDIVISION OR COMBINATION. None of the Class A Common Stock or the
Class B Common Stock may be subdivided or combined in any manner unless the
other classes are subdivided or combined in the same proportion.
CONVERSION RIGHTS. Class A Common Stock has no conversion rights. Each share
of Class B Common Stock is convertible at any time, at the option of the
holder, into one share of Class A Common Stock.
MERGER; LIQUIDATION. Upon the merger or consolidation of the Company,
holders of each class of Common Stock will be entitled to receive equal per
share payments or distributions, except that in any transaction in which
shares of capital stock are distributed, such shares may differ only to the
extent that the Class A Common Stock and the Class B Common Stock differ as
provided in the Company's Charter.
Upon any dissolution or liquidation of the Company, the holders of the Class
A Common Stock and Class B Common Stock will be entitled to receive ratably
all assets of the Company available for distribution to stockholders after the
holders of any series of Preferred Stock which may be issued have received any
preferential amount fixed for such shares.
RESTRICTIONS ON TRANSFER OF CLASS B COMMON STOCK. Shares of Class B Common
Stock may not be transferred, whether by sale, assignment, gift, bequest,
appointment or otherwise, except with the consent of holders of a majority of
the Class B Common Stock outstanding. Notwithstanding the foregoing (i) a
holder of Class B Common Stock may pledge his shares of Class B Common Stock
to a financial institution pursuant to a bona fide pledge of such shares as
collateral for indebtedness; provided that such shares remain subject to the
transfer restrictions and that, if the pledgee forecloses or takes similar
action, such Class B Common Stock must
57
<PAGE>
be converted into shares of Class A Common Stock and (ii) the foregoing
transfer restrictions shall not apply in the case of a merger or similar
transaction by the Company in which all of the outstanding shares of Common
Stock of the Company regardless of class are purchased by the acquiror.
OTHER PROVISIONS. The holders of the Class A Common Stock and Class B Common
Stock are not entitled to preemptive rights. The rights of holders of Class A
Common Stock and Class B Common Stock are subject to the rights of holders of
shares of any series of Preferred Stock that the Company may designate and
issue in the future.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue shares of preferred stock from time to time in one or
more series. Each series of preferred stock will have the number of shares,
designations, powers, preferences and special or relative rights and
privileges as may be determined by the Board of Directors, which may include
dividend rights, voting rights, redemption and sinking fund provisions,
liquidation preferences, conversion rights and preemptive rights. The
authority of the Board of Directors to issue preferred stock without further
action by the stockholders provides flexibility in connection with possible
acquisitions and other corporate purposes, but may also result in the issuance
of preferred stock with voting, conversion or other rights that could
adversely affect the voting power and other rights of the holders of Common
Stock or which could make it more difficult for a third party to gain control
of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Class A Common Stock will be
.
LISTING
Application has been made to have the Class A Common Stock approved for
quotation on the Nasdaq National Market under the trading symbol "MSTR."
CERTAIN ANTI-TAKEOVER, LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS
DELAWARE ANTI-TAKEOVER LAW. The Company is a Delaware corporation that is
subject to Section 203 of the Delaware General Corporation Law ("DGCL"). Under
Section 203, certain "business combinations" between a Delaware corporation
whose stock generally is publicly traded or held of record by more than 2,000
stockholders and an "interested stockholder" are prohibited for a three-year
period following the date that such stockholder became an interested
stockholder, unless (i) the corporation has elected in its certificate of
incorporation not to be governed by Section 203 (the Company has not made such
an election), (ii) the business combination was approved by the board of
directors of the corporation before such stockholder became an interested
stockholder, (iii) upon consummation of the transaction that made such
stockholder an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the
commencement of the transaction (excluding voting stock owned by directors who
are also officers or held in employee benefit plans in which the employees do
not have a confidential right to tender or vote stock held by the plan) or
(iv) the business combination is approved by the board of directors of the
corporation and ratified by two-thirds of the voting stock which the
interested stockholder did not own. The three-year prohibition also does not
apply to certain business combinations proposed by an interested stockholder
following the announcement or notification of certain extraordinary
transactions involving the corporation and a person who had not been an
interested stockholder during the previous three years or who became an
interested stockholder with the approval of a majority of the corporation's
directors. The term "business combination" is defined generally to include
mergers or consolidations between a Delaware corporation and an interested
stockholder, transactions with an interested stockholder involving the assets
or stock of the corporation or its majority-owned subsidiaries, and
transactions which increase an interested stockholder's percentage ownership
of stock. The term "interested stockholder" is defined generally as those
stockholders who become beneficial owners of 15% or more of a Delaware
corporation's voting stock, together with the affiliates or associates of that
stockholder.
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<PAGE>
LIMITATION OF DIRECTOR LIABILITY AND INDEMNIFICATION ARRANGEMENTS. The
Company's Certificate of Incorporation provides that a director of the Company
will not be personally liable to the Company or its stockholders for monetary
damages for any breach of fiduciary duty as a director, except in certain
cases where liability is mandated by the DGCL. The provision has no effect on
any non-monetary remedies that may be available to the Company or its
stockholders, nor does it relieve the Company or its directors from compliance
with federal or state securities laws. The Bylaws of the Company generally
provide that the Company shall indemnify, to the fullest extent permitted by
law, any person who was or is a party or is threatened to be made a party to
any threatened, pending or completed action, suit, investigation,
administrative hearing or any other proceeding (each, a "Proceeding") by
reason of the fact that he is or was a director or officer of the Company, or
is or was serving at the request of the Company as a director, officer,
employee or agent of another entity, against expenses incurred by him in
connection with such Proceeding.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market or the availability of substantial amounts of Common Stock for
sale could adversely affect prevailing market prices.
Upon the closing of the Offering, the Company will have shares of Common
Stock outstanding, assuming no exercise of the Underwriters' over-allotment
option and no exercise of outstanding options to purchase Class A Common
Stock. Of these shares, the shares of Class A Common Stock sold in the
Offering are freely tradable without restriction or further registration under
the Securities Act of 1933, as amended (the "Securities Act"), except that any
shares held by an "affiliate" of the Company, as that term is defined in Rule
144 under the Securities Act ("Rule 144"), may generally only be sold in
compliance with the limitations of Rule 144 described below. The remaining
30,895,514 shares of Class B Common Stock are "restricted securities" within
the meaning of Rule 144 in that they have not been registered under the
Securities Act. These restricted securities will generally be available for
sale in the open market after the Offering, subject to the 180-day Lock-up
Agreements (defined below) and the applicable requirements of Rule 144.
In general, Rule 144 provides that after a period of one year has elapsed
between the later of the date on which restricted securities were acquired
from the Company and the date on which they were acquired from an affiliate of
the Company, the holder of such restricted securities (including an affiliate)
is entitled to sell a number of shares within any three-month period that does
not exceed the greater of (i) one percent of the then outstanding shares of
the Class A Common Stock or (ii) the average weekly reported volume of trading
of the Class A Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 also are subject to certain requirements pertaining
to the manner of such sales, notice of such sales and the availability of
current public information concerning the Company. Affiliates may sell shares
not constituting restricted securities in accordance with the foregoing volume
limitations and other requirements of Rule 144 but without regard to the one
year holding period. Under Rule 144(k), after a period of two years has
elapsed between the later of the date on which restricted securities were
acquired from the Company and the date on which they were acquired from an
affiliate, a holder of such restricted securities who is not an affiliate of
the Company at the time of the sale and has not been an affiliate for at least
three months prior to the sale would be entitled to sell the shares
immediately without regard to the volume limitations and other conditions of
Rule 144 described above.
The holders of all of the 30,895,514 shares of Class B Common Stock
outstanding prior to the Offering have agreed to enter into agreements with
the Underwriters (the "Lock-up Agreements") which will provide that, until the
expiration of 180 days after the date of this Prospectus, they will not offer,
sell, contract to sell or otherwise dispose of, any shares of Class A Common
Stock or any securities of the Company that are substantially similar to the
Class A Common Stock (including Class B Common Stock) or which are convertible
into or exchangeable for, or represent the right to receive, Common Stock or
securities that are substantially similar to the Class A Common Stock
(including Class B Common Stock) without the prior written consent of the
representatives of the Underwriters. In addition, the Company has agreed not
to sell or otherwise dispose of
59
<PAGE>
any shares of Common Stock during the 180-day period following the date of the
Prospectus, except the Company may issue, and grant options to purchase,
shares of Class A Common Stock under the Company Stock Plans. In addition, the
Company may issue shares of Class A Common Stock in connection with any
acquisition of another company if the terms of such issuance provide that such
Class A Common Stock shall not be resold prior to the expiration of the 180-
day period referenced in the preceding sentence.
The Company intends to file a Registration Statement on Form S-8 as soon as
practicable after the date of this Prospectus to register the 8,000,000,
300,000 and 200,000 shares of Class A Common Stock that are issuable upon the
exercise of stock options either outstanding or available for grant pursuant
to the 1996 Stock Plan, the French Plan and the Director Option Plan,
respectively. Such registration statement is expected to become effective
immediately upon filing; however, 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
the expiration of 180 days after the date of this Prospectus. Options granted
under the Director Option Plan do not begin to vest until October of 1998.
Following effectiveness, shares covered by the Registration Statement on Form
S-8 will be eligible for sale in the public markets, subject to Rule 144
limitations applicable to affiliates as well as to the limitations on sale and
vesting described above. See "Shares Eligible for Future Sale."
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Underwriting Agreement") between the Company and each of the underwriters
named below (the "Underwriters"), the Company has agreed to sell to each of
the Underwriters, and each of the Underwriters has severally agreed to
purchase from the Company the aggregate number of shares of Class A Common
Stock set forth opposite its name below.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...............................................
Hambrecht & Quist LLC.......................................
---
Total.....................................................
===
</TABLE>
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Hambrecht & Quist LLC
are acting as representatives (the "Representatives") of the Underwriters.
The Underwriters propose to offer the shares of Class A Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at
such prices less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share to certain brokers and dealers. After the shares of
Class A Common Stock are released for sale to the public, the offering price
and other selling terms may from time to time be varied by the
Representatives.
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares
of Class A Common Stock offered by them.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of shares
of Class A Common Stock solely to cover over-
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<PAGE>
allotments, if any at the public offering price. If the Underwriters exercise
their over-allotment option, the Underwriters have severally agreed, subject
to certain conditions, to purchase approximately the same percentage thereof
that the number of shares to be purchased by each of them, as shown in the
foregoing table, bears to the shares of Class A Common Stock offered
hereby.
The holders of all of the shares of Class B Common Stock outstanding prior
to completion of the Offering have agreed to enter into Lock-up Agreements
which will provide that, until the expiration of 180 days after the date of
this Prospectus, they will not offer, sell, contract to sell or otherwise
dispose of, any shares of Class A Common Stock or any securities of the
Company that are substantially similar to the Class A Common Stock (including
Class B Common Stock) or which are convertible into or exchangeable for, or
represent the right to receive, Common Stock or securities that are
substantially similar to the Class A Common Stock (including Class B Common
Stock) without the prior written consent of the Representatives. The Company
Stock Plans restrict option holders under the plans from selling, transferring
or otherwise disposing of Class A Common Stock or any security convertible
into or exchangeable or exercisable for Class A Common Stock, without the
prior written consent of the Representatives, for a period of 180 days after
the date of this Prospectus. In addition, the Company has agreed not to sell
or otherwise dispose of any shares of Common Stock during the 180-day period
following the date of the Prospectus, except the Company may issue, and grant
options to purchase, shares of Common Stock under the Stock Plans. In
addition, the Company may issue shares of Class A Common Stock in connection
with any acquisition of another company if the terms of such issuance provide
that such Class A Common Stock shall not be resold prior to the expiration of
the 180-day period referenced in the preceding sentence.
At the Company's request, the Underwriters have reserved for sale at the
initial public offering price up to ten percent of the shares of Class A
Common Stock offered hereby for employees of the Company and certain other
individuals who have expressed an interest in purchasing such shares of Class
A Common Stock in the Offering. The number of shares available for sale to the
general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares not so purchased will be offered by the
Underwriters to the general public on the same basis as other shares offered
hereby.
Prior to the Offering, there has been no public market for the shares of
Class A Common Stock. The initial public offering price will be negotiated
among the Company and the representatives of the Underwriters. Among the
factors to be considered in determining the initial public offering price of
the Class A Common Stock, in addition to prevailing market conditions, will be
the Company's historical performance, estimates of the business potential and
earnings prospects of the Company, an assessment of the Company's management
and the consideration of the above factors in relation to market valuation of
companies in related businesses.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
In connection with the Offering, the Underwriters may purchase and sell the
Class A Common Stock in the open market. These transactions may include over-
allotment and stabilizing transactions and purchases to cover short positions
created by the Underwriters in connection with the Offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of
preventing or retarding a decline in the market price of the Class A Common
Stock; and syndicate short positions involve the sale by the Underwriters of a
greater number of shares of Class A Common Stock than they are required to
purchase from the Company in the Offering. The Underwriters also may impose a
penalty bid, whereby selling concessions allowed to broker-dealers in respect
of the securities sold in the Offering may be reclaimed by the Underwriters if
such shares of Class A Common Stock are repurchased by the Underwriters in
stabilizing or covering transactions. These activities may stabilize, maintain
or otherwise affect the market price of the Class A Common Stock, which may be
higher than the price that may otherwise prevail in the open market; and these
activities, if commenced, may be discontinued at any time. These transactions
may be effected on the Nasdaq National Market, in the over-the-counter market
or otherwise.
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<PAGE>
LEGAL MATTERS
The validity of the Class A Common Stock offered hereby and certain other
legal matters will be passed upon for the Company by Latham & Watkins,
Washington, D.C. A partner of Latham & Watkins holds nonstatutory options to
purchase approximately 25,000 shares of Class A Common Stock. Certain legal
matters in connection with the Offering will be reviewed for the Underwriters
by Ropes & Gray, Boston, Massachusetts.
EXPERTS
The consolidated balance sheets of MicroStrategy Incorporated, as of
December 31, 1996 and 1997, and the consolidated statements of operations,
stockholders' (deficit) equity, and cash flows for each of the three years in
the period ended December 31, 1997 included in this Prospectus, have been
audited by Coopers & Lybrand L.L.P., independent accountants, as set forth in
their report thereon appearing elsewhere herein and are included in reliance
upon such report given upon the authority of such firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., 20549, a Registration Statement on Form S-1
under the Securities Act of 1933, as amended, with respect to the Class A
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. Certain items are omitted in accordance with the rules and
regulations of the Commission. For further information with respect to the
Company and the Class A Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedules files as a part thereof.
Statements contained in this Prospectus as to the contents of any contract or
any other document referred to are not necessarily complete, and, in each
instance, if such contract or document is filed as an exhibit, reference is
made to the copy of such contract or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference to such exhibit. The Registration Statement, including exhibits
and schedules thereto, may be inspected without charge at the public reference
facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C., 20549, and the Commission's regional offices located at 500
West Madison Street, Suite 1400, Chicago, Illinois, 60661 and Seven World
Trade Center, 13th Floor, New York, New York, 10048. Copies of all or any part
thereof may be obtained from the Commission after payment of fees prescribed
by the Commission. The Commission also maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants, including the Company, that file electronically with the
Commission. The address of this site is http://www.sec.gov.
62
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and Pro Forma
as of December 31, 1997 (unaudited)...................................... F-3
Consolidated Statements of Operations for the Years Ended December 31,
1995, 1996 and 1997...................................................... F-4
Consolidated Statements of Stockholders' (Deficit) Equity for the Years
Ended December 31, 1995, 1996 and 1997 .................................. F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997...................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
MicroStrategy Incorporated
We have audited the accompanying consolidated balance sheets of
MicroStrategy Incorporated and its subsidiaries as of December 31, 1996 and
1997, and the related consolidated statements of operations, stockholders'
(deficit) equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of MicroStrategy Incorporated and its subsidiaries as of December 31, 1996 and
1997, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P
McLean, Virginia
January 30, 1998
F-2
<PAGE>
MICROSTRATEGY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------ DECEMBER 31,
1996 1997 1997
-------- -------- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 1,686 $ 3,506 $ 3,506
Accounts receivable, net.................... 8,475 16,085 16,085
Prepaid expenses and other current assets... 395 1,435 1,435
-------- -------- --------
Total current assets...................... 10,556 21,026 21,026
-------- -------- --------
Property and equipment, net................... 2,197 6,891 6,891
Deposits and other assets..................... 251 2,148 3,216
-------- -------- --------
Total assets.............................. $ 13,004 $ 30,065 $ 31,133
======== ======== ========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Line-of-credit.............................. $ 2,758 $ 4,508 $ 4,508
Notes payable, current portion.............. 356 900 900
Notes payable to stockholders............... -- -- 10,000
Accounts payable and accrued expenses....... 2,811 9,406 9,406
Accrued compensation and employee benefits.. 1,748 3,633 3,633
Deferred revenue............................ 5,120 8,340 8,340
-------- -------- --------
Total current liabilities................. 12,793 26,787 36,787
Notes payable, long-term portion.............. 460 2,658 2,658
Deferred revenue.............................. 544 1,047 1,047
-------- -------- --------
Total liabilities......................... 13,797 30,492 40,492
-------- -------- --------
Commitments and contingencies
Stockholders' (deficit) equity:
Preferred stock, par value $0.001 per share,
5,000,000 shares authorized, no shares
issued or outstanding...................... -- -- --
Common stock, par value $0.001 per share,
50,000,000 shares authorized; 31,442,673 in
1996, 29,493,873 in 1997, and 30,895,514 in
pro forma 1997 shares issued and
outstanding................................ 31 29 31
Class A Common Stock, par value $0.001 per
share, 50,000,000 shares authorized, no
shares issued or outstanding............... -- -- --
Class B Common Stock, par value $0.001 per
share, 50,000,000 shares authorized, no
shares issued or outstanding............... -- -- --
Additional paid-in capital.................. 213 20 1,279
Cumulative foreign currency translation
adjustment................................. -- 158 158
Accumulated deficit......................... (755) (634) (10,827)
Notes receivable from stockholders.......... (87) -- --
Less cost of treasury stock, 1,948,800
shares in 1996 and no shares in 1997....... (195) -- --
-------- -------- --------
Total stockholders' (deficit) equity...... (793) (427) (9,359)
-------- -------- --------
Total liabilities and stockholders'
(deficit) equity........................ $ 13,004 $ 30,065 $ 31,133
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-3
<PAGE>
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Product licenses........................ $ 4,077 $ 15,873 $ 36,601
Product support......................... 5,700 6,730 16,956
---------- ---------- ----------
Total revenues........................ 9,777 22,603 53,557
---------- ---------- ----------
Cost of revenues:
Product licenses........................ 257 1,020 1,641
Product support......................... 2,201 4,237 9,475
---------- ---------- ----------
Total cost of revenues................ 2,458 5,257 11,116
---------- ---------- ----------
Gross margin.............................. 7,319 17,346 42,441
Operating expenses:
Sales and marketing..................... 2,992 13,054 30,468
Research and development................ 1,855 2,840 5,049
General and administrative.............. 2,395 3,742 6,552
---------- ---------- ----------
Total operating expenses.............. 7,242 19,636 42,069
---------- ---------- ----------
Income (loss) from operations............. 77 (2,290) 372
Interest income........................... 16 22 94
Interest expense.......................... (56) (127) (333)
Other income (expense), net............... 11 20 (12)
---------- ---------- ----------
Net income (loss)......................... $ 48 $ (2,375) $ 121
========== ========== ==========
Basic net income (loss) per share......... $ 0.00 $ (0.08) $ 0.00
========== ========== ==========
Weighted average shares outstanding used
in computing basic net income (loss) per
share.................................... 28,896,622 29,493,873 29,493,873
========== ========== ==========
Diluted net income (loss) per share....... $ 0.00 $ (0.08) $ 0.00
========== ========== ==========
Weighted average shares outstanding used
in computing diluted net income (loss)
per share................................ 28,896,622 29,493,873 31,726,591
========== ========== ==========
PRO FORMA INFORMATION (UNAUDITED):
Net income, as reported................... $ 121
Pro forma income taxes.................... (489)
==========
Pro forma net loss........................ $ (368)
==========
Pro forma basic net loss per share........ $ (0.01)
==========
Pro forma diluted net loss per share...... $ (0.01)
==========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-4
<PAGE>
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED RETAINED NOTES
COMMON STOCK ADDITIONAL FOREIGN EARNINGS RECEIVABLE TREASURY STOCK
------------------ PAID-IN CURRENCY (ACCUMULATED FROM ------------------
SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT) STOCKHOLDERS SHARES AMOUNT TOTAL
---------- ------ ---------- ----------- ------------ ------------ ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... 31,328,000 31 40 -- 1,738 -- 3,648,000 (363) 1,446
Issuance of common
stock in exchange for
notes receivable from
stockholders.......... 1,666,404 2 157 -- -- (159) -- -- --
Proceeds from payments
on notes receivable... -- -- -- -- -- 52 -- -- 52
Retirement of treasury
stock................. (688,000) (1) -- -- (66) -- (688,000) 67 --
Net income............. -- -- -- -- 48 -- -- -- 48
---------- ---- ----- ---- ------- ----- ---------- ----- -------
Balance, December 31,
1995................... 32,306,404 32 197 -- 1,720 (107) 2,960,000 (296) 1,546
Issuance of common
stock in exchange for
notes receivable from
stockholders.......... 147,469 -- 16 -- -- (16) -- -- --
Proceeds from payments
on notes receivable... -- -- -- -- -- 36 -- -- 36
Retirement of treasury
stock................. (1,011,200) (1) -- -- (100) -- (1,011,200) 101 --
Net loss............... -- -- -- -- (2,375) -- -- -- (2,375)
---------- ---- ----- ---- ------- ----- ---------- ----- -------
Balance, December 31,
1996................... 31,442,673 31 213 -- (755) (87) 1,948,800 (195) (793)
Proceeds from payments
on notes receivable... -- -- -- -- -- 87 -- -- 87
Retirement of treasury
stock................. (1,948,800) (2) (193) -- -- -- (1,948,800) 195 --
Translation
adjustment............ -- -- -- 158 -- -- -- -- 158
Net income............. -- -- -- -- 121 -- -- -- 121
---------- ---- ----- ---- ------- ----- ---------- ----- -------
Balance, December 31,
1997................... 29,493,873 $ 29 $ 20 $158 $ (634) $ -- $ -- $ -- $ (427)
========== ==== ===== ==== ======= ===== ========== ===== =======
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-5
<PAGE>
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income (loss)............................. $ 48 $ (2,375) $ 121
Adjustments to reconcile net loss to net cash
from operating activities:
Depreciation and amortization................. 283 306 1,243
Provision for doubtful accounts, net of write-
offs and recoveries.......................... 36 381 312
Loss on sale of property and equipment........ -- 17 --
Compensation expense recognized in exchange
for notes payable............................ 397 -- --
Changes in operating assets and liabilities, net
of effect of foreign exchange rate changes:
Accounts receivable........................... (2,771) (4,859) (8,235)
Prepaid expenses and other current assets..... (4) (230) (1,051)
Accounts payable and accrued expenses,
compensation and benefits.................... 117 3,780 8,951
Deferred revenue.............................. 1,627 3,985 3,512
Deposits and other assets..................... -- (58) 102
-------- -------- --------
Net cash provided by (used in) operating
activities................................. (267) 947 4,955
-------- -------- --------
Investing activities:
Acquisition of property and equipment......... (469) (1,680) (5,954)
Increase in capitalized software.............. -- -- (1,928)
-------- -------- --------
Net cash used in investing activities:...... (469) (1,680) (7,882)
-------- -------- --------
Financing activities:
Borrowings on short-term line of credit, net.. 750 2,008 1,750
Proceeds from payments on stockholders' notes
receivable................................... 52 36 87
Proceeds from issuance of note payable........ 438 306 3,264
Principal payments on notes payable........... (110) (574) (521)
-------- -------- --------
Net cash provided by financing activities... 1,130 1,776 4,580
-------- -------- --------
Effect of foreign exchange rate changes on
cash....................................... -- -- 167
-------- -------- --------
Net increase in cash and cash equivalents....... 394 1,043 1,820
Cash and cash equivalents, beginning of year.... 249 643 1,686
-------- -------- --------
Cash and cash equivalents, end of year.......... $ 643 $ 1,686 $ 3,506
======== ======== ========
Supplemental disclosure of noncash investing and
financing activities:
Issuance of notes receivable in exchange for
common stock................................. $ 159 $ 16 $ --
======== ======== ========
Retirement of treasury stock.................. $ 67 $ 101 $ 195
======== ======== ========
Supplemental disclosure of cash flow
information:
Cash paid during the year for interest........ $ 58 $ 112 $ 290
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-6
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization
MicroStrategy Incorporated (the "Company") designs, develops, markets and
supports high performance, mission critical client/server relational database
management systems and provides related software and services for data
warehouse applications. The Company provides its products and services to
customers both domestically and worldwide.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries located in France, Germany, United Kingdom,
the Netherlands and Spain. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The Company owns 79% of its foreign owned subsidiaries with the remaining
21% being owned by the company's majority stockholders. Due to the management
control the Company has over its foreign subsidiaries, the Company has
consolidated the financial statements of these foreign subsidiaries for
financial reporting.
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.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents include various short-term money market instruments.
Software Development Costs
In accordance with SFAS No. 86, "Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed," software development
costs are expensed as incurred until technological feasibility has been
established, at which time such costs are capitalized until the product is
available for general release to customers. Capitalized costs are amortized
over the estimated product life using the greater of the straight-line method
or the ratio of current product revenues to total projected future revenues.
Software development costs net of accumulated amortization are $1,831 at
December 31, 1997, and are included in deposits and other assets on the
balance sheet. Amortization expense related to software development costs was
$97 for the year ended December 31, 1997. Prior to the year ended December 31,
1997, the establishment of technological feasibility of the Company's products
and general release of such software had substantially coincided. As a result,
software development costs qualifying for capitalization were insignificant
and, therefore, the Company had not capitalized any software development costs
prior to 1997.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three to ten years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful lives of the
assets or the terms of the leases.
F-7
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Depreciation and amortization expense related to property and equipment was
$283, $306 and $1,141, respectively, for the years ended December 31, 1995,
1996 and 1997.
Revenue Recognition
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants' (AICPA) Statement of Position (SOP) 91-1
Software Revenue Recognition. Revenue from product licensing arrangements is
generally recognized after execution of a licensing agreement and shipment of
the product, provided that no significant vendor obligations remain and the
resulting receivable is deemed collectible by management. Services revenue,
which includes training and consulting, is recognized at the time the service
is performed. The Company defers and recognizes maintenance revenue ratably
over the terms of the contract period, ranging from 12 to 36 months.
In October 1997, the AICPA issued SOP 97-2 which will supersede SOP 91-1
effective January 1, 1998. Management has assessed this new statement and
believes that its adoption will not have a material effect on the timing of
the Company's revenue recognition or cause changes to its revenue recognition
polices.
Income Taxes
The Company has elected to be treated for federal and state income tax
purpose 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 have been provided in the financial statements.
In connection with the initial public offering of the Company's common stock
(the Offering), the Company will no longer be treated as a Subchapter S
corporation for tax purposes. The Company will be subject to federal and state
income taxes and will recognize deferred taxes in accordance with Statement of
Financial Accounting Standard No. 109, "Accounting For Income Taxes". This
statement provides for a liability approach under which deferred income taxes
are provided based upon enacted tax laws and rates applicable to the periods
in which the taxes become payable.
The consolidated statement of operations includes pro forma information to
reflect income taxes as if the Company had been a C Corporation for the year
ended December 31, 1997.
Basic and Diluted Net Income (Loss) Per Share
Net income (loss) per share is computed on a basic and diluted basis using
the weighted average number of shares of Common Stock, assuming conversion of
dilutive common stock equivalent shares from common stock options.
Pro Forma Basic and Diluted Net Loss per Share (Unaudited)
Unaudited pro forma basic net income per share for the year ended December
31, 1997 is based on the weighted average number of common shares outstanding
during the period. The unaudited pro forma weighted average number of common
shares includes shares of common stock to be issued to two of the existing
shareholders in exchange for their minority interests in certain of the
Company's foreign subsidiaries. In addition, the unaudited pro forma weighted
average number of common shares outstanding includes the number of shares
whose proceeds would be necessary to pay the dividend as required by Staff
Accounting Bulletin topic 1.B.3. The Company expects to pay the dividend out
of cash flows from future operations. The unaudited pro forma weighted average
number of common shares assuming dilution includes shares issuable upon the
exercise of stock options, computed in accordance with the treasury stock
method.
F-8
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Foreign Currency Translation
The assets and liabilities of non-U.S. operations are translated into U.S.
dollars at exchange rates in effect as of each balance sheet date. To date,
the Company has not sought to hedge the risks associated with fluctuations in
exchange rates but may undertake such transactions in the future. Revenue and
expense accounts of these operations are translated at average exchange rates
prevailing during the period the transactions occur. Accordingly, translation
gains and losses are included as component of stockholders' equity. Foreign
currency transaction gains and losses are included in determining net income.
To date, such gains and losses have not been significant.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash, cash equivalents and accounts
receivable. The Company sells products and services to various companies
across several industries throughout the world in the ordinary course of
business. The Company routinely assesses the financial strength of its
customers and maintains allowances for anticipated losses.
For the years ended December 31, 1996 and 1997, no one customer accounted
for 10% or more of total revenues. For the year ended December 31, 1995, one
customer accounted for 14% of total revenues.
For the year ended December 31, 1995, one customer accounted for 13% of
accounts receivable. For the years ended December 31, 1996 and 1997, no one
customer accounted for 10% or more of total accounts receivable.
Fair Value of Financial Instruments
The Company's financial instruments, which consist of cash, cash
equivalents, accounts receivable, payables, line of credit and notes payable,
approximate fair value. The carrying amounts of the line of credit and notes
payable approximate fair value as these financial instruments contain variable
interest rates which reprice frequently.
Purchase of Minority Interest in Foreign Subsidiaries
Effective January 1, 1998, the Company issued a total of 1,401,641 shares of
Class B Common Stock to certain existing stockholders in exchange for their
approximate 21% minority interest in certain of the Company's foreign
subsidiaries. After the exchange, each subsidiary was wholly-owned by the
Company. The Company obtained an independent, third-party valuation of the
interests held by the stockholders. The Company recorded goodwill of $1,068
which is included in deposits and other assets in the 1997 pro forma balance
sheet representing the excess of the fair market value over the cost of the
non-controlling interest of one of the shareholders. The Company expects to
amortize the goodwill over a period of 15 years.
NOTE 2--ACCOUNTS RECEIVABLE
Accounts receivable, net of allowances, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------ -------
<S> <C> <C>
Billed...................................................... $7,947 $16,621
Unbilled.................................................... 986 234
Less allowance for doubtful accounts........................ (458) (770)
------ -------
$8,475 $16,085
====== =======
</TABLE>
F-9
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- -------
<S> <C> <C>
Computer equipment and software............................ $ 2,209 $ 6,703
Furniture and equipment.................................... 494 1,512
Leasehold improvements..................................... 47 292
Less: accumulated depreciation and amortization............ (553) (1,616)
------- -------
$ 2,197 $ 6,891
======= =======
</TABLE>
NOTE 4--BANK BORROWINGS
On December 10, 1996, the Company entered into a business loan with a bank
(the "Business Loan"). This Business Loan was used to repay the Company's
previous line of credit with another financial institution. Pursuant to the
Business Loan, at December 31, 1997 the Company had available a $6.4 million
revolving line of credit, a $2.0 million revolving equipment line and, since
November 1997, a $2.0 million non-revolving equipment loan. On March 31, 1998,
the Company increased the revolving credit line by $3 million to $9.4 million
and increased the non-revolving equipment loan by $2 million to $4 million.
Borrowings under the Business Loan may not exceed 80% of eligible accounts
receivable for the revolving credit line and 80% of the cost of the asset for
the equipment credit lines. The borrowings bear interest at the lender's prime
rate or LIBOR plus 2.75% for the revolving line of credit and prime plus one-
half percent or a rate equal to the yield of U.S. Treasury Bonds plus 2.65%
for loans with a 3-year maturity or 2.85% for loans with a 4-year maturity for
the equipment lines of credit (revolving and non-revolving). In addition,
borrowings under the Business Loan are collateralized by substantially all of
the Company's assets and are partially guaranteed by a stockholder and officer
of the Company for up to $2.0 million for all amounts borrowed under the
Business Loan in excess of $2.0 million. As of December 31, 1997, $4.5 million
and $3.3 million were outstanding under the revolving line of credit and
revolving equipment lines of credit, respectively.
Subsequent to December 31, 1997, the Company had additional net borrowings
of $0.9 million under the revolving line of credit and $0.4 million under the
revolving equipment line.
The Business Loan requires the Company to maintain certain financial ratios
and to comply with certain other covenants. From time to time, the Company has
not been in compliance with certain of these covenants. However, the Company
has obtained a waiver from the financial institution for events of non-
compliance with these covenants through December 31, 1997.
F-10
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 5--NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
----- ------
<S> <C> <C>
Notes payable to financial institution with interest rates
varying from 8.8% to 9.4%, at December 31, 1997, maturities
through December 31, 2001, repayable in monthly
installments and collateralized by the related equipment... $ 306 $3,328
Note payable to consultant bearing interest at 8.5%,
repayable in monthly installments of $9 through December
2000....................................................... 315 230
Notes payable to stockholders............................... 195 --
----- ------
Total notes payable......................................... 816 3,558
Less: current portion....................................... (356) (900)
----- ------
Notes payable, long term portion............................ $ 460 $2,658
===== ======
</TABLE>
Annual maturities of long-term debt at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998.................................................................. $ 900
1999.................................................................. 976
2000.................................................................. 991
2001.................................................................. 691
------
$3,558
======
</TABLE>
NOTE 6--PRO FORMA INCOME TAXES (UNAUDITED)
As of December 31, 1997 the Company was an S corporation, and accordingly,
the Company was not liable for corporate income taxes. Had the Company been a
tax-paying entity, the tax provision would have consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Current:
Federal....................................................... $ (148)
State......................................................... 71
Foreign....................................................... 124
-------
47
Deferred:
Federal....................................................... 794
State......................................................... 170
Foreign....................................................... (1,443)
-------
(479)
Increase in valuation allowance................................. 921
-------
$ 489
=======
</TABLE>
F-11
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Pre tax income for the year ended December 31, 1997 for the domestic
operations was $1,031. The pro forma provision for income taxes differs from
the amount computed by applying the federal statutory income tax rate to the
Company's pro forma income before taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Income tax benefit at federal statutory rate.................... $ 41
State income tax, net of federal tax effect..................... 5
Foreign income taxes............................................ 2
Research and development tax credit............................. (480)
Change in valuation allowance................................... 921
-----
Provision for income taxes...................................... $ 489
=====
</TABLE>
Significant components of the Company's pro forma deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Deferred tax assets:
Accounts receivable allowances................................ $ 287
Accrued compensation.......................................... 384
Deferred revenue.............................................. 595
Foreign net operating losses.................................. 1,801
-------
3,067
Valuation allowance........................................... (1,801)
-------
Net deferred tax assets......................................... 1,266
-------
Deferred tax liabilities:
Prepaid assets................................................ 447
Depreciation.................................................. 558
Capitalized software.......................................... 703
-------
Total deferred tax liabilities.............................. 1,708
-------
Total net deferred tax liability................................ $ (442)
=======
</TABLE>
Upon termination of its S corporation status, the Company will account for
income taxes in accordance with Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes". Had the Company been taxed as a C
corporation, the Company would have recorded net deferred tax liability of
$442 as of December 31, 1997. As of December 31, 1997, the Company would have
recorded a valuation allowance of $1,801, primarily against the net operating
loss carryforwards in foreign jurisdictions. As of December 31, 1997,
management has concluded that no valuation allowance is required on the
domestic deferred tax assets based on its assessment that current and expected
future levels of taxable income are sufficient to realize domestic deferred
tax assets.
NOTE 7--COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space under operating lease agreements expiring at
various dates through 2000. In addition to base rent, the Company is
responsible for certain taxes, utilities, and maintenance costs. Future
F-12
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
minimum lease payments under noncancelable operating leases with a remaining
term in excess of one year at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998................................................................... $ 781
1999................................................................... 795
2000................................................................... 667
2001................................................................... 321
2002................................................................... 184
</TABLE>
Total rental expense for 1995, 1996 and 1997 was approximately $298, $699
and $1,635, respectively.
Contingencies
The Company is involved in proceedings through the normal course of
business, however, the ultimate resolution of these proceedings cannot be
predicted with certainty. Management believes that any unfavorable outcome
related to these proceedings will not have a material effect on the Company's
financial position or results of operations.
NOTE 8--STOCKHOLDERS EQUITY
Net Income (Loss) Per Share
Reconciliations of the basic net income (loss) per share and diluted net
income (loss) per share computations for the years ended December 31, 1995,
1996 and 1997 are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, (UNAUDITED)
--------------------------------- PRO FORMA
1995 1996 1997 1997
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
BASIC NET INCOME (LOSS) PER
SHARE:
Weighted-average common shares
outstanding..................... 28,896,622 29,493,873 29,493,873 33,395,514
========== ========== ========== ==========
Net income (loss)................ $ 48 $ (2,375) $ 121 $ (368)
========== ========== ========== ==========
Basic net income (loss) per
share........................... $ 0.00 $ (0.08) $ 0.00 $ (0.01)
========== ========== ========== ==========
DILUTED NET INCOME (LOSS) PER
SHARE:
Weighted-average common shares
outstanding..................... 28,896,622 29,493,873 29,493,873 33,395,514
---------- ---------- ---------- ----------
Common shares issuable on
exercise of stock options,
net of shares assumed to be
repurchased at the average
market price.................... -- -- 2,232,718 2,232,718
---------- ---------- ---------- ----------
Weighted-average common shares
outstanding, assuming dilution.. 28,896,622 29,493,873 31,726,591 35,628,232
========== ========== ========== ==========
Net income (loss)................ $ 48 $ (2,375) $ 121 $ (368)
========== ========== ========== ==========
Diluted net income (loss) per
share........................... $ 0.00 $ (0.08) $ 0.00 $ (0.01)
========== ========== ========== ==========
</TABLE>
Common stock equivalents are included in the computation of diluted net
income (loss) per share using the treasury stock method. During 1996, stock
options granted by the Company were not included in the computation because
the effect was anti-dilutive.
F-13
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Pro forma weighted average shares outstanding during 1997 includes 1,401,641
shares of common stock issued to two of the existing stockholders effective
January 1, 1998 in exchange for their minority interests in certain of the
Company's foreign subsidiaries and also includes the assumed issuance of an
additional 2,500,000 shares of common stock which would be necessary for the
Company to pay a $10 million dividend to the existing shareholders.
Employee and Directors Stock Option Plans
In February, 1996, the Company adopted a Stock Plan (the "1996 Stock Plan")
in order to provide an incentive to eligible employees, consultants and
officers of the Company. Under the 1996 Stock Plan, as amended, 8,000,000
shares of common stock are reserved, options to purchase 4,720,863 shares of
which have been granted.
In March, 1997, the Company adopted the "French Plan", which provides for
the granting of options to employees of MicroStrategy France SARL, the
Company's French subsidiary. A total of 300,000 shares of common stock has
been reserved under the French Plan, options to purchase 101,000 shares of
which have been granted as of December 31, 1997.
In September, 1997, the Company adopted the "1997 Director Option Plan",
which provides for the grants of nonqualified stock options to non-employee
directors of the Company. A total of 200,000 shares of common stock has been
reserved under the Director Option Plan, options to purchase 90,000 shares of
which have been granted as of December 31, 1997.
The stock option exercise price of options under the Company's stock option
plans may not be less than the determined fair market value at the date of
grant. Stock options to date generally vest ratably over five years from the
date of grant and expire ten years after grant. Vested stock options are
exercisable at the earliest of (1) the closing of an underwritten public
offering, (2) change in control of the Company or (3) 78 months following the
date of grant of an option.
A summary of the status of the Company's stock option plans as required by
SFAS 123 is presented below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING WEIGHTED
OPTION PRICE CONTRACTUAL AVERAGE
SHARES RANGE PER SHARE LIFE (YEARS) EXERCISE PRICE
--------- --------------- ------------ --------------
<S> <C> <C> <C> <C>
Outstanding at December
31, 1995............... -- $ -- -- $ --
Granted............... 2,482,416 0.50--1.25 8.5 0.84
Exercised............. -- -- -- --
Surrendered........... (23,000) 0.50--1.13 8.3 0.55
--------- ----------- --- -----
Outstanding at December
31, 1996............... 2,459,416 0.50--1.25 8.5 0.84
Granted............... 2,660,363 1.50--4.00 9.7 2.44
Exercised............. -- -- -- --
Surrendered........... (207,916) 0.50--2.50 8.8 1.10
--------- ----------- --- -----
Outstanding at December
31, 1997............... 4,911,863 0.50--4.00 9.1 1.70
========= =========== === =====
Options vested at
December 31, 1997...... 456,300 $0.50--1.25 8.5 $0.83
========= =========== === =====
</TABLE>
F-14
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
In 1996, the Company adopted Statement of Financial Accounting Standards No.
123 (SFAS 123), "Accounting for Stock--Based Compensation." As permitted by
SFAS 123, the Company has elected to continue following the provisions of
Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock
Issued to Employees," and to adopt the disclosure only provisions of SFAS No.
123. If compensation expense had been recorded based on the fair value at the
grant dates for awards under the Plans, the Company's net loss would have been
adjusted to the pro forma amounts presented below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1996 1997
------- ------
<S> <C> <C>
Net income (loss)
As reported................................................. $(2,375) $ 121
Pro forma................................................... $(2,467) $ (258)
Basic net income (loss) per share, as reported.............. $ (0.08) $ 0.00
Diluted net income (loss) per share, as reported............ $ (0.08) $ 0.00
Pro forma basic net income (loss) per share................. $ (0.08) $(0.01)
Pro forma diluted net income (loss) per share............... $ (0.08) $(0.01)
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants issued during the years ended December 31, 1996 and 1997, respectively:
volatility factors of 70% and 60%, weighted-average expected life of 5 years
and 2.5 years, risk-free interest rates of 6%, and no dividend yields. The
weighted average fair value of grants made during the years ended December 31,
1996 and 1997 are $0.52 and $1.04, respectively.
Distribution to S Corporation Stockholders
The Company intends to distribute a dividend of $10,000 to the existing
stockholders of the S corporation in the form of short-term notes prior to the
termination of the Company's S corporation election. The notes issued to the
existing stockholders by the Company will bear interest at the "applicable
federal rate" for short-term obligations and will be due and payable at
various times during 1998. The Company plans to repay the notes from cash
flows from future operations of the Company in accordance with the terms of
the notes. This dividend has been reflected in the Company's unaudited pro
forma balance sheet at December 31, 1997.
NOTE 9--EMPLOYEE BENEFIT PLAN
The Company sponsors a plan to provide retirement and incidental benefits
for its employees, known as the MicroStrategy 401(k) plan (the "Plan").
Participants may make voluntary contributions to the Plan of up to 20% of
their compensation not to exceed the Federally determined maximum allowable
contribution. The Plan permits for discretionary company contributions;
however, no contributions were made for the years ended December 31, 1995,
1996 and 1997.
F-15
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 10--SEGMENT INFORMATION
The following table presents a summary of operations by geographic region,
including eliminations of all significant intercompany transactions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
REVENUE:
Domestic........................................ 8,675 20,089 39,310
Europe.......................................... $ 1,102 $ 2,514 $ 14,247
------- -------- --------
Total revenue................................. $ 9,777 $ 22,603 $ 53,557
======= ======== ========
OPERATING (LOSS) INCOME:
Domestic........................................ 129 (1,172) (639)
Europe.......................................... $ (52) $ (1,118) $ 1,011
------- -------- --------
Total operating (loss) income................. $ 77 $ (2,290) $ 372
======= ======== ========
IDENTIFIABLE ASSETS:
Domestic........................................ 9,046 21,376
Europe.......................................... $ 3,958 8,689
-------- --------
Total assets.................................. $ 13,004 $ 30,065
======== ========
</TABLE>
Transfers of $365, $1,047, and $4,443 for the years ended December 31, 1995,
1996 and 1997 from domestic to foreign operations have been excluded from the
above table and eliminated in the consolidated financial statements.
F-16
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR IN-
CORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTA-
TIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SO-
LICITATION OF AN OFFER TO BUY THE COMMON STOCK IN ANY JURISDICTION WHERE, OR
TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEI-
THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE
IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 15
Termination of S Corporation Election and S Corporation Distribution..... 16
Dilution................................................................. 17
Capitalization........................................................... 18
Selected Consolidated Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 28
Management............................................................... 49
Certain Transactions..................................................... 55
Principal Stockholders................................................... 56
Description of Capital Stock............................................. 57
Shares Eligible for Future Sale.......................................... 59
Underwriting............................................................. 60
Legal Matters............................................................ 62
Experts.................................................................. 62
Additional Information................................................... 62
Index to Consolidated Financial Statements............................... F-1
</TABLE>
----------------
THROUGH AND INCLUDING , 1998 (THE 25TH DAY AFTER THE DATE OF THIS PROSPEC-
TUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER
OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PRO-
SPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PRO-
SPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOT-
MENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SHARES
MICROSTRATEGY
CLASS A COMMON STOCK
----------------
PROSPECTUS
----------------
MERRILL LYNCH & CO.
HAMBRECHT & QUIST
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of the Class A Common Stock being registered hereby. All of the
amounts shown are estimates except for the Commission registration fee and the
NASD filing fee.
<TABLE>
<S> <C>
Commission Registration Fee......................................... $10,620
NASD Filing Fee..................................................... 4,100
Nasdaq National Market Listing Fees................................. 25,000
Accounting Fees and Expenses........................................ *
Blue Sky Fees and Expenses.......................................... *
Legal Fees and Expenses............................................. *
Printing and Engraving Expenses..................................... *
Transfer Agent Fees................................................. *
Miscellaneous Expenses.............................................. *
-------
TOTAL............................................................. $ *
=======
</TABLE>
- --------
* To be filed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware
("Section 145") permits a Delaware corporation to indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending,
or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (other than an action by or in the right of
the corporation) by reason of the fact that such person is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, or other enterprise,
against expenses (including attorneys' fees), judgments, fines, and amounts
paid in settlement actually and reasonably incurred by such person in
connection with such action, suit, or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe such person's conduct
was unlawful.
In the case of an action by or in the right of the corporation, Section 145
permits the corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action
or suit by or in the right of the corporation to procure a judgment in its
favor by reason of the fact that such person is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner such person reasonably believed to be
in or not opposed to the best interest of the corporation. No indemnification
may be made in respect of any claim, issue, or matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to
the extent that the Court of Chancery or the court in which such action or
suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such person is a fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
To the extent that a director, officer, employee or agent of a corporation
has been successful on the merits or otherwise in defense of any action, suit
or proceeding referred to in the preceding two paragraphs, Section 145
requires that such person be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
therewith.
II-1
<PAGE>
Section 145 provides that expenses (including attorneys' fees) incurred by
an officer or director in defending any civil, criminal, administrative, or
investigative action, suit or proceeding may be paid by the corporation in
advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such director or officer to repay
such amount if it shall ultimately be determined that such person is not
entitled to be indemnified by the corporation as authorized in Section 145.
Article of the Company's Amended and Restated Certificate of Incorporation
eliminates the personal liability of the directors of the Company to the
Company or its stockholders for monetary damages for breach of fiduciary
indemnification of directors and officers of the Company, and for advancement
of litigation expenses to the fullest extent permitted by Section 145.
The Underwriting Agreement filed herewith as Exhibit 1.1 provides for
indemnification of the directors, certain officers and controlling persons of
the Company by the Underwriters against certain civil liabilities, including
liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following transactions reflect the issuance during the previous three
years of securities not registered under the Securities Act:
1. At various times during the period from March 31, 1996 through
December 31, 1997, the Company has granted to employees and directors
options to purchase an aggregate of 4,911,863 shares of Common Stock with
exercise prices ranging from $0.50 to $4.00 and with a weighted average
exercise price of $1.70 per share.
2. On February 28, 1995, the Company issued 1,327,224.32 shares of Common
Stock for an aggregate purchase price of $142,152.75 to four employees of
the Company. The purchase price for the Common Stock was to be paid in four
cash installments, the first due on the date of issuance and the remaining
payments due on December 31 of each year over the next three-year period.
3. On March 23, 1995, the Company issued 294,938.72 shares of the Common
Stock for a purchase price of $31,589.50 to an employee of the Company. The
purchase price for the Common Stock was to be paid in four cash
installments, the first due on the date of issuance and the remaining
payments due on December 31 of each year over the next three-year period.
4. On March 29, 1995, the Company issued 44,240.80 shares of the Common
Stock for a purchase price of $4,738.42 to an employee of the Company. The
purchase price for the Common Stock was to be paid in four cash
installments, the first due on the date of issuance and the remaining
payments due on December 31 of each year over the next three-year period.
5. On January 10, 1996, the Company issued 147,469.44 shares of the
Common Stock for a purchase price of $15,794.75 to an employee of the
Company. The purchase price for the Common Stock was to be paid in three
cash installments, the first due on the date of issuance and the remaining
payments due on December 31 of each year over the next two-year period.
6. Effective January 1, 1998, the Company issued a total of 1,401,641
shares of Common Stock to Messrs. Saylor and Bansal in exchange for their
interests in certain of the Company's international subsidiaries.
All of the shares of Common Stock described in paragraphs 2 through 6 above
are being exchanged for an identical number of shares of Class B Common Stock
prior to completion of the Offering. The issuances of the securities described
above were made in reliance on one or more of the exemptions from registration
under the Securities Act, including those provided for by Section 4(2) and
Rule 701 thereunder. The purchasers of these securities represented that they
had adequate access, through their employment with the Company, to information
about the Company.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Certificate of Incorporation, as amended, of the Company (current).
3.2* Form of Restated Certificate of Incorporation of the Company (as
proposed to be effective upon closing of the Offering).
3.3* Bylaws of the Company (current).
3.4* Form of Restated Bylaws of the Company (as proposed to be effective
upon closing of the Offering).
4.1* Form of Certificate of Class A Common Stock of the Company.
5.1* Opinion of Latham & Watkins.
10.1* Stock Purchase Agreement dated September 8, 1991 between the Company
and Sanju K. Bansal.
10.2* Stock Purchase Agreement dated October 11, 1992 between the Company
and Charles A. Veley.
10.3* Stock Purchase Agreement dated February 28, 1995 between the Company
and Eduardo S. Sanchez.
10.4* Stock Purchase Agreement dated February 28, 1995 between the Company
and Stephen S. Trundle.
10.5* 1996 Stock Plan (as amended) of the Company.
10.6* 1997--Stock Option Plan for French Employees.
10.7* 1997 Director Option Plan of the Company.
10.8* Business Loan/Security Agreement between the Company and NationsBank,
N.A., dated December 10, 1996.
10.9* First Modification of Business Loan/Security Agreement between the
Company and NationsBank, N.A. dated November 20, 1997.
10.10* Second Modification of Business Loan/Security Agreement between the
Company and NationsBank, N.A. dated March 31, 1998.
21.1* Subsidiaries of the Company.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2* Consent of Latham & Watkins.
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
(b) Financial Statement Schedules
The following schedule to the Financial Statements of the Company and its
subsidiaries is included in this Registration Statement:
<TABLE>
<S> <C>
Schedule I Valuation and Qualifying Accounts and Reserves
</TABLE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred
II-3
<PAGE>
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such new securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
MICROSTRATEGY INCORPORATED HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN VIENNA,
VIRGINIA ON APRIL 10, 1998.
MicroStrategy Incorporated
By: /s/ Michael J. Saylor
----------------------------------
MICHAEL J. SAYLOR
CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE
OFFICER AND PRESIDENT
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints Michael J. Saylor, Sanju K. Bansal and Mark S.
Lynch, and each of them, his true and lawful attorneys-in-fact and agents with
full power of substitution, for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments thereto (including post-
effective amendments) to this Registration Statement, and to sign any
registration statement for the same offering covered by this Registration
Statement that is to be effective upon filing pursuant to Rule 462(b)
promulgated under the Securities Act of 1933, and all post-effective
amendments thereto, and to file the same, with all exhibits thereto and all
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or his
or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
NAME TITLE DATE
---- ----- ----
/s/ Michael J. Saylor Chairman of the April 10, 1998
- ------------------------------------- Board, Chief
MICHAEL J. SAYLOR Executive Officer
and
President(Principal
Executive Officer)
/s/ Sanju K. Bansal Executive Vice April 10, 1998
- ------------------------------------- President and Chief
SANJU K. BANSAL Operating Officer
/s/ Mark S. Lynch Vice President, April 10, 1998
- ------------------------------------- Finance and Chief
MARK S. LYNCH Financial Officer
(Principal
Financial and
Accounting Officer)
/s/ Frank A. Ingari Director April 10, 1998
- -------------------------------------
FRANK A. INGARI
/s/ Ralph S. Terkowitz Director April 10, 1998
- -------------------------------------
RALPH S. TERKOWITZ
II-5
<PAGE>
SCHEDULE 1
VALUATION QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING OF CHARGED TO END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
- ----------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts...............
December 31, 1995....... 41 36 -- 77
December 31, 1996....... 77 432 (51) 458
December 31, 1997....... 458 579 (267) 770
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
MicroStrategy Incorporated
In connection with our audits of the consolidated financial statements of
MicroStrategy Incorporated as of December 31, 1996 and 1997, and for each of
the three years in the period ended December 31, 1997, which financial
statements are included in the Prospectus, we have also audited the financial
statement schedule listed in Item 16 herein.
In our opinion, this financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, present fairly,
in all material respects, the information required to be included therein.
Coopers & Lybrand L.L.P
McLean, Virginia
January 30, 1998
S-1
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Certificate of Incorporation, as amended, of the Company (current).
3.2* Form of Restated Certificate of Incorporation of the Company (as
proposed to be effective upon closing of the Offering).
3.3* Bylaws of the Company (current).
3.4* Form of Restated Bylaws of the Company (as proposed to be effective
upon closing of the Offering).
4.1* Form of Certificate of Class A Common Stock of the Company.
5.1* Opinion of Latham & Watkins.
10.1* Stock Purchase Agreement dated September 8, 1991 between the Company
and Sanju K. Bansal.
10.2* Stock Purchase Agreement dated October 11, 1992 between the Company
and Charles A. Veley.
10.3* Stock Purchase Agreement dated February 28, 1995 between the Company
and Eduardo S. Sanchez.
10.4* Stock Purchase Agreement dated February 28, 1995 between the Company
and Stephen S. Trundle.
10.5* 1996 Stock Plan (as amended) of the Company.
10.6* 1997 Stock Option Plan for French Employees.
10.7* 1997 Director Option Plan of the Company.
10.8* Business Loan/Security Agreement between the Company and NationsBank,
N.A., dated December 10, 1996.
10.9* First Modification of Business Loan/Security Agreement between the
Company and NationsBank, N.A. dated November 20, 1997.
10.10* Second Modification of Business Loan/Security Agreement between the
Company and NationsBank, N.A. dated March 31, 1998.
21.1* Subsidiaries of the Company.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2* Consent of Latham & Watkins.
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1
of our reports dated January 30, 1998, on our audits of the consolidated
financial statements and financial statement schedule of MicroStrategy,
Incorporated. We also consent to the reference to our firm under the captions
"Experts" and "Selected Consolidated Financial Data".
Coopers & Lybrand L.L.P.
McLean, Virginia
April 8, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,506,000
<SECURITIES> 0
<RECEIVABLES> 16,855,000
<ALLOWANCES> (770,000)
<INVENTORY> 0
<CURRENT-ASSETS> 21,026,000
<PP&E> 8,507,000
<DEPRECIATION> (1,616,000)
<TOTAL-ASSETS> 30,065,000
<CURRENT-LIABILITIES> 26,787,000
<BONDS> 0
0
0
<COMMON> 29,000
<OTHER-SE> 20,000
<TOTAL-LIABILITY-AND-EQUITY> 30,065,000
<SALES> 53,557,000
<TOTAL-REVENUES> 53,557,000
<CGS> 11,116,000
<TOTAL-COSTS> 42,069,000
<OTHER-EXPENSES> (82,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (333,000)
<INCOME-PRETAX> 121,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 121,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 121,000
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
