SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-24435
MICROSTRATEGY INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation)
8000 Towers Crescent Drive, Vienna, VA
(Address of Principal Executive Offices)
22182
(Zip Code)
51-0323571
(I.R.S. Employer
Identification Number)
Registrant's telephone number, including area code: (703) 848-8600
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes |X| No |_|
The number of shares of the registrant's Class A common stock and Class B
common stock outstanding on August 1, 2000 was 24,749,285 and 55,164,115,
respectively.
<PAGE>
MICROSTRATEGY INCORPORATED
FORM 10-Q
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2000 (unaudited)
and December 31, 1999......................................... 1
Consolidated Statements of Operations For the Three Months
Ended June 30, 2000 and 1999 (unaudited)...................... 2
Consolidated Statements of Operations For the Six Months Ended
June 30, 2000 and 1999 (unaudited) ........................... 3
Consolidated Statements of Cash Flows For the Six Months Ended
June 30, 2000 and 1999 (unaudited)............................ 4
Notes to Consolidated Financial Statements (unaudited)........ 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 35
PART II.OTHER INFORMATION
Item 1. Legal Proceedings............................................. 36
Item 2. Changes in Securities and Use of Proceeds..................... 36
Item 4. Submission of Matters to a Vote of Security Holders........... 37
Item 6. Exhibits and Reports on Form 8-K.............................. 38
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MICROSTRATEGY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
(unaudited)
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents.......................... $ 93,823 $ 25,941
Restricted cash.................................... 28,600 ---
Short-term investments............................. 6,208 42,418
Accounts receivable, net........................... 40,716 37,586
Prepaid expenses and other current assets.......... 16,041 15,461
-------- --------
Total current assets.............................. 185,388 121,406
Property and equipment, net.......................... 54,154 30,594
Intangible assets, net of accumulated amortization of
$8,651 and $503, respectively...................... 43,078 47,154
Deposits and other assets............................ 5,057 4,214
-------- --------
Total assets...................................... $287,677 $203,368
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses.............. $ 46,656 $ 15,357
Accrued compensation and employee benefits......... 16,025 14,912
Deferred revenue and advance payments.............. 69,262 38,028
-------- --------
Total current liabilities......................... 131,943 68,297
Deferred revenue and advance payments................ 10,611 33,255
Other long-term liabilities.......................... 2,710 ---
-------- --------
Total liabilities................................. 145,264 101,552
-------- --------
Commitments and contingencies
Series A convertible preferred stock, par value
$0.001 per share, 18 shares authorized, 13 shares
issued and outstanding ............................ 119,794 ---
Stockholders' equity:
Preferred stock undesignated, par value $0.001 per
share, 4,982 shares authorized; no shares issued
or outstanding .................................. --- ---
Class A common stock, par value $0.001 per share,
330,000 shares authorized; 24,680 and 22,384
shares issued and outstanding, respectively...... 25 22
Class B common stock, par value $0.001 per share,
165,000 shares authorized; 55,164 and 55,867
shares issued and outstanding, respectively...... 55 56
Additional paid-in capital......................... 145,987 138,943
Accumulated other comprehensive income............. 256 1,643
Deferred compensation.............................. (759) (895)
Accumulated deficit................................ (122,945) (37,953)
-------- --------
Total stockholders' equity........................ 142,413 101,816
-------- --------
Total liabilities and stockholders' equity........ $287,677 $203,368
======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
1
<PAGE>
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended June 30, 2000 and 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
2000 1999
---- ----
(unaudited) (unaudited)
Revenues:
<S> <C> <C>
Product licenses..................................... $ 21,829 $ 25,177
Product support and other services................... 28,515 15,288
-------- --------
Total revenues..................................... 50,344 40,465
Cost of revenues:
Product licenses..................................... 392 563
Product support and other services................... 21,776 7,906
-------- --------
Total cost of revenues............................. 22,168 8,469
-------- --------
Gross profit........................................... 28,176 31,996
-------- --------
Operating expenses:
Sales and marketing.................................. 38,343 21,125
Research and development............................. 15,813 6,088
General and administrative........................... 17,385 5,316
Amortization of intangible assets.................... 4,242 20
-------- --------
Total operating expenses........................... 75,783 32,549
-------- --------
Loss from operations................................... (47,607) (553)
Interest income........................................ 441 671
Interest expense....................................... (7) (51)
Other expense, net..................................... (4,969) (14)
-------- --------
(Loss) income before income taxes...................... (52,142) 53
Provision for income taxes............................. --- 56
-------- --------
Net loss............................................... $(52,142) $ (3)
-------- --------
Accrued preferred stock dividends...................... $ (312) $ ---
Beneficial conversion feature.......................... $(19,375) $ ---
-------- --------
Net loss attributable to common stockholders........... $(71,829) $ (3)
======== ========
Basic and diluted net loss per share................... $ (0.90) $ (0.00)
======== ========
Weighted average shares used in computing basic and
diluted net loss per share............................. 79,757 76,052
======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
2
<PAGE>
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 2000 and 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
---- ----
(unaudited) (unaudited)
Revenues:
<S> <C> <C>
Product licenses..................................... $ 47,840 $ 41,595
Product support and other services................... 53,119 28,192
-------- --------
Total revenues..................................... 100,959 69,787
Cost of revenues:
Product licenses..................................... 997 1,083
Product support and other services................... 37,537 14,515
-------- --------
Total cost of revenues............................. 38,534 15,598
-------- --------
Gross profit........................................... 62,425 54,189
-------- --------
Operating expenses:
Sales and marketing.................................. 79,855 37,879
Research and development............................. 32,013 11,149
General and administrative........................... 29,503 9,549
Amortization of intangible assets.................... 8,148 40
-------- --------
Total operating expenses........................... 149,519 58,617
-------- --------
Loss from operations................................... (87,094) (4,428)
Interest income........................................ 901 1,175
Interest expense....................................... (10) (143)
Other income, net...................................... 1,461 32
-------- --------
Loss before income taxes............................... (84,742) (3,364)
Provision for income taxes............................. 250 443
-------- --------
Net loss............................................... $(84,992) $ (3,807)
-------- --------
Accrued preferred stock dividends...................... $ (312) ---
Beneficial conversion feature.......................... $(19,375) $ ---
-------- --------
Net loss attributable to common stockholders........... $(104,679) $ (3,807)
========= ========
Basic and diluted net loss per share................... $ (1.32) $ (0.05)
========= ========
Weighted average shares used in computing basic and
diluted net loss per share............................. 79,321 74,926
========= ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
<PAGE>
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2000 and 1999
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
2000 1999
---- ----
(unaudited) (unaudited)
Operating activities:
<S> <C> <C>
Net loss............................................. $(84,992) $ (3,807)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization...................... 14,252 2,855
Provision for doubtful accounts.................... 2,004 773
Amortization of deferred compensation.............. 136 134
Gain on sale of short-term investments............. (1,356) ---
Changes in operating assets and liabilities:
Accounts receivable.............................. (5,442) (2,236)
Prepaid expenses and other current assets........ 429 (1,454)
Deposits and other assets........................ (2,994) (85)
Accounts payable and accrued expenses, compensation
and benefits................................... 34,167 (285)
Deferred revenue and advance payments............ 1,665 3,558
Other long-term liabilities...................... 1,508 ---
-------- --------
Net cash used in operating activities............. (40,623) (547)
-------- --------
Investing activities:
Purchases of property and equipment.................. (28,032) (10,469)
Purchases of short-term investments.................. (1,496) (22,491)
Maturities of short-term investments................. 5,500 3,000
Proceeds from sale of short-term investments......... 38,388 ---
Increase in restricted cash.......................... (28,600) ---
Purchases of intangible assets....................... (2,428) ---
-------- --------
Net cash used in investing activities............. (16,668) (29,960)
-------- --------
Financing activities:
Proceeds from sale of Class A common stock and
exercise of stock options, net of offering costs... 5,758 43,236
Proceeds from sale of Series A convertible
preferred stock, net of offering costs............. 119,794 ---
Payments of dividend notes payable................... --- (5,000)
------- --------
Net cash provided by financing activities......... 125,552 38,236
-------- --------
Effect of foreign exchange rate changes on cash
and cash equivalents............................ (379) (427)
-------- --------
Net increase in cash and cash equivalents.............. 67,882 7,302
Cash and cash equivalents, beginning of period......... 25,941 27,491
-------- --------
Cash and cash equivalents, end of period............... $ 93,823 $ 34,793
======== ========
Supplemental disclosure of noncash investing and
financing activities:
Change in unrealized gain on short-term investments,
net of tax ....................................... $ (1,266) $ (74)
======== ========
Stock received in exchange for products and services $ 5,974 $ ---
======== ========
Issuance of Class A common stock related to
consulting services agreement..................... $ 1,600 $ ---
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest............ $ 8 $ 87
======== ========
Cash paid during the period for income taxes........ $ 86 $ 500
======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) Basis of Presentation
The consolidated balance sheet of MicroStrategy Incorporated as of June
30, 2000, the related consolidated statements of operations for the three and
six months ended June 30, 2000 and 1999, and the consolidated statements of
cash flows for the six months ended June 30, 2000 and 1999 are unaudited. In
the opinion of management, all adjustments (consisting of normal recurring
items) necessary for a fair presentation of such financial statements have
been included. Interim results are not necessarily indicative of results for
a full year.
The consolidated financial statements and notes are presented as required
by Form 10-Q and do not contain certain information included in the Company's
annual financial statements and notes. These financial statements should be
read in conjunction with the Company's audited financial statements and the
notes thereto filed with the Securities and Exchange Commission ("SEC") in
the Company's Annual Report on Form 10-K for the year ended December 31,
1999.
Certain amounts in the prior year consolidated financial statements have
been reclassified to conform to the current year presentation.
(2) Restatement of Financial Statements
Subsequent to the filing of a registration statement on Form S-3 with the
SEC in the first quarter of 2000 which included the Company's audited
financial statements for the years ended December 31, 1999, 1998 and 1997,
the Company became aware that the timing and amount of reported earned
revenues from license transactions in 1999, 1998 and 1997 required revision.
As discussed in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999 in Note 3 of the Notes to Consolidated Financial
Statements, these revisions primarily addressed the recognition of revenue
for certain software arrangements which should be accounted for under the
subscription method or the percentage of completion method, which spread the
recognition of revenue over the entire contract period. The effect of these
revisions is to defer the time in which revenue is recognized for large,
complex contracts that combine both products and services. These revisions
also resulted in a substantial increase in the amount of deferred revenue
reflected on the Company's balance sheet as of December 31, 1999. The Company
subsequently reviewed license agreements executed near the end of the quarter
ended June 30, 1999 and determined that revisions to its reported revenues
for the quarter ended June 30, 1999 were necessary, primarily to ensure that
all agreements for which the Company was recognizing revenue in a reporting
period were executed by both parties no later than the end of the reporting
period in which the revenue is recognized. The effect of all revisions for
the three and six months ended June 30, 1999 was to reduce total revenues by
$5.2 million and $11.6 million, respectively.
Additionally, the Company also made certain revisions to its balance
sheet as of December 31, 1999. These revisions are discussed in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999 in Note 3 of
the Notes to Consolidated Financial Statements.
Accordingly, such financial statements for the periods presented in this
Form 10-Q have been restated as follows (in thousands, except per share
data):
5
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
------------- -------------
As Reported Restated As Reported Restated
----------- -------- ----------- --------
Statements of Operations Data
Revenues:
<S> <C> <C> <C> <C>
Product licenses............ $ 31,057 $ 25,177 $ 54,181 $ 41,595
Product support and other
services ................. 14,581 15,288 27,241 28,192
Income (loss) from operations. 4,573 (553) 7,114 (4,428)
Provision for income taxes ... 1,968 56 3,108 443
Net income (loss)............. 3,211 (3) 5,070 (3,807)
Net income (loss) per share:
Basic....................... $ 0.04 $ (0.00) $ 0.07 $ (0.05)
Diluted..................... $ 0.04 $ (0.00) $ 0.06 $ (0.05)
</TABLE>
(3) Recent Accounting Pronouncements
In December 1999, the SEC released Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition in Financial Statements," which provides guidance
on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. Subsequently, the SEC released SAB 101A,
which delayed the implementation date of SAB 101 for registrants with fiscal
years that begin between December 16, 1999 and March 15, 2000. In June 2000,
the SEC issued SAB 101B, further delaying the required implementation of SAB
101 by the Company until the fourth quarter of fiscal year 2000. The Company
does not expect the application of SAB 101 to have a material impact on its
financial position or results of operations.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation ("FIN") No. 44, "Accounting for Certain Transactions
Involving Stock Compensation - An Interpretation of APB Opinion No. 25." FIN
44 clarifies the application of APB Opinion No. 25 and, among other issues,
clarifies the following: the definition of an employee for purposes of
applying APB Opinion No. 25; the criteria for determining whether a plan
qualifies as a non-compensatory plan; the accounting consequence of various
modifications to the terms of previously fixed stock options or awards; and
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in
FIN 44 cover specific events that occurred after either December 15, 1998 or
January 12, 2000. The Company does not expect the application of FIN 44 to
have a material impact on its financial position or results of operations.
In June 1999, FASB issued Statement of Financial Accounting Standards
("SFAS") No. 137, which delays the effective date of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which will be
effective for our fiscal year 2001. This statement establishes accounting
and reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded in
the balance sheet as either an asset or liability measured at its fair
value. The statement also requires that changes in the derivative's fair
value be recognized in earnings unless specific hedge accounting criteria are
met. The Company does not expect the adoption of SFAS Nos. 133 and 137 to
have a material impact on its financial position or results of operations.
(4) Short-term Investments
In December 1999, the Company received 824,742 shares (adjusted for a
two-for-one stock split) of Exchange Applications stock valued at $21.5
million, in consideration for the sale of MicroStrategy software, technical
support and consulting services. In March 2000, the Company sold 412,372 of
these shares at an average price of $41.72 per share, which resulted in a
realized gain of $6.4 million.
6
<PAGE>
During May 2000, the Company sold its economic interest in the remaining
412,370 shares of Exchange Applications stock to a financial institution for
$5.8 million, from which the Company recognized a realized loss of $4.9
million. Overall, the Company has sold all of its economic interest in the
shares it received in December 1999 for a total net realized gain of $1.5
million. Also during the quarter, the Company sold certain other securities,
which resulted in a realized loss of $137,000.
On June 30, 2000, the Company received an additional 224,359 shares of
Exchange Applications stock, valued at $6.0 million, in consideration for the
sale of MicroStrategy software, technical support and consulting services.
(5) Accounts Receivable
Accounts receivable, net of allowances, consist of the following, as of
(in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Billed and billable.................... $ 82,142 $ 66,181
Less deferred revenue.................. (36,093) (25,266)
-------- --------
46,049 40,915
Less allowance for doubtful accounts .. (5,333) (3,329)
-------- --------
$ 40,716 $ 37,586
======== ========
</TABLE>
(6) Consulting Services Agreement
In June 2000, the Company entered into a consulting services agreement
with the controlling stockholder of a software integrator. The agreement
requires the controlling stockholder to refer the employees of the software
integrator to the Company and also to perform certain management services for
the Company. In exchange for these services, the Company issued 57,143
shares of Class A common stock to the controlling stockholder, which had a
value of $1.6 million as of the consummation date and which are restricted
until registered with the SEC. The Company will issue up to $3.4 million in
additional shares of Class A common stock over the next two years at the then
current market price of the Class A common stock on the date of issuance
based on an agreed upon formula including revenue and attrition objectives.
The Company has recorded $1.5 million, net of $51,000 in amortization
expense, related to the first installment as deferred consulting costs. The
first installment will be amortized over two years, the duration of the
management services.
(7) Bank Borrowings
In March 1999, the Company entered into a line of credit agreement with a
commercial bank, which provided for a $25.0 million unsecured revolving line
of credit for general working capital purposes. On May 15, 2000, the Company
entered into a modification of the line of credit agreement, which, among
other things, increased the line to include an additional letter of credit,
removed any financial covenants and cured any financial covenant defaults.
The line of credit is secured by $28.6 million of cash and cash equivalents,
which is classified as restricted cash on the balance sheet. The cash is
restricted through May 31, 2001, the expiration of the agreement. The
modified line of credit bears interest at LIBOR plus 1.75%, includes a 0.2%
unused line of credit fee, and requires monthly payments of interest. As of
June 30, 2000, after consideration of outstanding letters of credit, the
Company had $21.2 million of borrowing capacity under this credit line.
7
<PAGE>
(8) Deferred Revenue and Advance Payments
Deferred revenue and advance payments from customers consist of the
following, as of (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
Current:
<S> <C> <C>
Deferred product revenue............... $ 48,634 $ 38,164
Deferred product support and other
services revenue..................... 46,352 24,267
-------- --------
94,986 62,431
Less amount in accounts receivable..... (25,724) (24,403)
-------- --------
$ 69,262 $ 38,028
======== ========
Non-current:
Deferred product revenue............... $ 10,015 $ 9,461
Deferred product support and other
services revenue..................... 10,965 24,657
-------- --------
20,980 34,118
Less amount in accounts receivable..... (10,369) (863)
-------- --------
$ 10,611 $ 33,255
======== ========
</TABLE>
(9) Commitments and Contingencies
The Company has $2.6 million in commitments relating to a software, data and
consulting agreement, which terminates in 2003, and $1.0 million in
commitments with content providers which extend through 2002.
In April 2000, the Company entered into an agreement to lease additional
office space. Total commitments under the lease, which expires in 2005, are
approximately $540,000.
(10) Litigation
The Company and certain of our officers and directors are defendants in a
private securities class action lawsuit alleging that we have violated
Section 10(b) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), Rule 10(b) (5) promulgated thereunder, and section 20(a)
and section 20A of the Exchange Act. The complaint does not specify the
amount of the damages sought. Accordingly, the Company is unable to determine
or estimate the outcome at this time. In June 2000, purported holders of our
common stock filed a shareholder derivative lawsuit in the Delaware Court of
Chancery seeking recovery for various alleged breaches of fiduciary duties by
certain of our directors and officers relating to our restatement of
financial results. We have not answered or otherwise responded to the
derivative complaint. It is possible that the Company may be required to pay
substantial damages or settlement costs which could have a material adverse
effect on the Company's financial condition or results of operations. The
Company intends to defend the matters vigorously.
In March 2000, the Company was notified that the SEC had issued a formal
order of private investigation in connection with matters relating to the
Company's restatement of its financial results. The SEC has requested that
the Company provide the SEC with certain documents concerning the Company's
revision of its financial results and financial reporting documents. The SEC
indicated that its inquiry should not be construed as an indication by the
SEC or its staff that any violation of law has occurred, nor as an adverse
reflection upon any person, entity or security. The Company is cooperating
with the SEC in connection with this investigation and its outcome cannot yet
be determined.
The Company is also involved in other legal proceedings through the
normal course of business. Management believes that any unfavorable outcome
related to these other proceedings will not have a material effect on the
Company's financial position, results of operations or cash flows.
8
<PAGE>
(11) Convertible Preferred Stock
On June 19, 2000, the Company issued 12,500 shares of its Series A
convertible preferred stock in a private placement to institutional investors
for $119.8 million, net of estimated closing costs of $5.2 million. Dividends
are payable quarterly at a rate of 7% per annum, in cash or in shares of
Class A common stock. The convertible preferred stock is currently
convertible into 3,744,152 shares of Class A common stock based on the
current conversion price of $33.39 per share. The conversion price may be
adjusted at certain future dates dependent upon the trading price of the
Class A common stock and an agreed upon formula. The convertible preferred
stock is also redeemable upon certain triggering events such as failure of
the registration statement to be declared effective on or before the first
anniversary of the initial issuance date and other events as defined in the
Certificate of Designations, Preferences and Rights of the Series A
Convertible Preferred Stock.
The Company recorded a $19.4 million charge attributable to the
beneficial conversion feature of the Series A convertible preferred stock
based on the difference between the fair market value of the Class A common
stock on the closing date of the private placement and the conversion rate.
The conversion rate was computed based on the volume weighted average price
of the stock for the 17 trading days subsequent to the closing date in
accordance with the Certificate of Designations, Preferences and Rights of
the Series A Convertible Preferred Stock.
The Company has accrued dividends of $312,000 during the three months
ended June 30, 2000.
(12) Comprehensive Loss
Comprehensive loss includes foreign currency translation adjustments and
unrealized gains and losses on short-term investments, net of related tax
effects, that have been excluded from net loss and reflected in stockholders'
equity as accumulated other comprehensive income.
Comprehensive loss for the three and six months ended June 30, 2000 and
1999 is calculated as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss...................... $(52,142) $ (3) $(84,992) $(3,807)
Foreign currency translation
gain (loss)................. 258 (273) (121) (608)
Unrealized loss on short-term
investments, net of applicable
taxes ...................... (10,837) (74) (1,266) (74)
-------- ------- -------- -------
Total comprehensive loss...... $(62,721) $ (350) $(86,379) $(4,489)
======== ======= ======== =======
</TABLE>
(13) Basic and Diluted Net Loss Per Share
Basic net loss per share is determined by dividing the net loss
applicable to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted net loss per share is
determined by dividing the net loss applicable to common stockholders by the
weighted average number of common shares and potential common shares
outstanding during the period. Potential common shares are included in the
diluted net loss per share calculation when dilutive. Potential common shares
consisting of common stock issuable upon exercise of outstanding common stock
options, convertible preferred stock and warrants are computed using the
treasury stock method. The Company's net loss per share calculation for basic
and diluted is based on the weighted average common shares outstanding. There
are no reconciling items in the numerator and denominator of the Company's net
loss per share calculation. Employee stock options of 15,241,056 and 11,572,918
and warrants of 78,334 and 114,000 for the three and six month periods ended
June 30, 2000 and 1999, respectively, have been excluded from the net loss per
share calculation because their effect would be anti-dilutive. Additionally,
Series A preferred stock, which is convertible
9
<PAGE>
into 3,744,152 shares of Class A common stock, was excluded from the net loss
per share calculation for the three and six months ended June 30, 2000 because
their effect would be anti-dilutive.
(14) Segment Information
The Company applies provisions of SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information." SFAS No. 131 requires
certain disclosures about operating segments, products and services,
geographic areas, and major customers. The method for determining what
information to report is based on the way that management organizes the
operating segments within the Company for making operational decisions and
assessments of financial performance. The Company's chief operating decision
maker is considered to be the Company's CEO. The CEO reviews financial
information presented on a consolidated basis accompanied by disaggregated
information about revenues by operating segments for purposes of making
operating decisions and assessing financial performance.
The Company has two operating segments, MicroStrategy Platform and
Strategy.com. MicroStrategy Platform provides scalable, sophisticated and
maintainable solutions that enable businesses to develop and deploy
intelligent e-business systems. Revenues are derived from sales of product
licenses and product support and other services, including technical support,
education and consulting and hosting services. Strategy.com delivers
personalized information to consumers through its personal intelligence
network via the web, wireless applications, protocol-enabled devices, e-mail,
mobile phone, fax, pager and regular telephone. Strategy.com syndicates its
channels through network affiliates and offers them to consumers directly
through its website. Revenues are derived from network affiliate fees, OEM
and subscription fees, royalty fees, advertising fees, hosting fees, and
transaction fees. The Company began operating its business as two segments in
the latter part of 1999. Revenues were recognized for Strategy.com beginning in
2000. Prior years' segment information has been restated to reflect the
operations of Strategy.com.
The accounting policies of both segments are the same as those described
in the summary of significant accounting policies in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999. Certain corporate
support costs are allocated to Strategy.com based on factors such as
headcount, gross asset value and the specific level of activity directly
related to such costs.
10
<PAGE>
The following summary discloses certain financial information regarding
the Company's operating segments (in thousands):
<TABLE>
<CAPTION>
MicroStrategy
Platform Strategy.com Consolidated
-------- ------------ ------------
Three Months Ended June 30, 2000
<S> <C> <C> <C>
Total license and service revenues $ 49,200 $ 1,144 $ 50,344
Gross profit...................... 28,214 (38) 28,176
Depreciation and amortization..... 7,111 1,010 8,121
Operating expenses................ 63,895 11,888 75,783
Loss from operations.............. (35,681) (11,926) (47,607)
Total assets...................... 273,464 14,213 287,677
Three Months Ended June 30, 1999
Total license and service revenues $ 40,465 $ --- $ 40,465
Gross profit...................... 31,996 --- 31,996
Depreciation and amortization..... 1,369 96 1,465
Operating expenses................ 31,439 1,110 32,549
Loss from operations.............. 557 (1,110) (553)
Total assets...................... 110,893 1,961 112,854
</TABLE>
<TABLE>
<CAPTION>
MicroStrategy
Platform Strategy.com Consolidated
-------- ------------ ------------
Six Months Ended June 30, 2000
<S> <C> <C> <C>
Total license and service revenues $ 99,702 $ 1,257 $100,959
Gross profit...................... 62,557 (132) 62,425
Depreciation and amortization..... 12,471 1,781 14,252
Operating expenses................ 126,247 23,272 149,519
Loss from operations.............. (63,690) (23,404) (87,094)
Total assets...................... 273,464 14,213 287,677
Six Months Ended June 30, 1999
Total license and service revenues $ 69,787 $ --- $ 69,787
Gross profit...................... 54,189 --- 54,189
Depreciation and amortization..... 2,739 116 2,855
Operating expenses................ 57,064 1,553 58,617
Loss from operations.............. (2,875) (1,553) (4,428)
Total assets...................... 110,893 1,961 112,854
</TABLE>
The following summary discloses total revenues and long-lived assets,
excluding long-term deferred tax assets, relating to the Company's geographic
regions (in thousands):
<TABLE>
<CAPTION>
Domestic International Consolidated
-------- ------------- ------------
Three Months Ended June 30, 2000
<S> <C> <C> <C>
Total license and service revenues $ 39,246 $ 11,098 $ 50,344
Long-lived assets................. 99,294 2,995 102,289
Three Months Ended June 30, 1999
Total license and service revenues $ 33,254 $ 7,211 $ 40,465
Long-lived assets................. $ 22,010 $ 1,935 $ 23,945
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Domestic International Consolidated
-------- ------------- ------------
Six Months Ended June 30, 2000
<S> <C> <C> <C>
Total license and service revenues $ 78,431 $ 22,528 $100,959
Long-lived assets................. 99,294 2,995 102,289
Six Months Ended June 30, 1999
Total license and service revenues $ 54,964 $ 14,823 $ 69,787
Long-lived assets................. $ 22,010 $ 1,935 $ 23,945
</TABLE>
Transfers of $1.8 million and $1.4 million for the three months ended
June 30, 2000 and 1999, respectively, and transfers of $4.3 million and $3.1
million for the six months ended June 30, 2000 and 1999, respectively, from
international to domestic operations have been excluded from the above table
and eliminated in the consolidated financial statements.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We are a leading worldwide provider of intelligent e-business software
and related services that enable the transaction of one-to-one electronic
business through web, wireless and communication channels. Our product line
enables both proactive and interactive delivery of information from
large-scale databases. Our objective is to provide the largest 2000
enterprises in the world, leading Internet businesses and high-volume data
providers with a software platform to develop solutions that deliver insight
and intelligence to their enterprises, customers and supply-chain partners.
Our software platform enables users to query and analyze the most
detailed, transaction-level databases, turning data into business
intelligence. In addition to supporting internal enterprise users, the
platform delivers critical business information beyond corporate boundaries
to customers, partners and supply chain constituencies through a broad range
of communication channels such as the Internet, e-mail, telephones and
wireless communications devices. Our platform is ideal for developing
e-business solutions that are personalized and proactive and that reach
millions of users. We also offer a comprehensive set of consulting, education
and technical support services for our customers and partners.
In July 1999, we launched a new business unit called Strategy.com.
Strategy.com is our personal intelligence network, a new form of media that
brings speed to transactions by actively delivering highly personalized,
relevant and timely information to individuals through a wide variety of
delivery methods, including e-mail, telephone and wireless devices. The
Strategy.com network leverages the MicroStrategy software platform and is
organized around a suite of information channels. The network currently
operates Finance, News and Weather Channels and plans to launch additional
information channels in the future. Strategy.com syndicates its channels
through other companies that serve as network affiliates and network
associates, which we refer to collectively as affiliates. Affiliates offer
the Strategy.com channels and services on a co-branded basis directly to
their customers and in turn share with Strategy.com a percentage of revenues
they generate. Strategy.com also provides application maintenance,
development, customer billing, hosting and support services for these
channels, enabling affiliates to focus on their core businesses. As of August
10, 2000, Strategy.com has established approximately 210 network affiliate
agreements with leading Internet companies, communications carriers, media
companies and financial institutions and now has over 400,000 subscribers to
its Strategy.com network.
Since 1995, we have significantly increased our sales and marketing,
service and support, research and development and general and administrative
staff. Although our revenues have significantly increased over the last three
years, we experienced fluctuating operating margins during 1997, 1998 and
1999 primarily as a result of increases in staff levels. Our net loss
increased substantially in the first half of 2000, as our growth in revenues,
and particularly higher margin product license revenues, decreased
substantially, while our expenses have significantly increased due primarily
to aggressive hiring of additional personnel and increased legal and
professional fees relating to class action lawsuits and an SEC investigation
in connection with matters relating to our restatement of our 1999, 1998 and
1997 financial statements, described in Note 2 of the Notes to Consolidated
Financial Statements. Continued losses of the magnitude experienced in the
second quarter of 2000 would have a materially adverse impact on our liquidity
and would require us to raise additional external financing or take additional
actions to align our cost structure with expected revenues. We also expect
that our ongoing investment in Strategy.com at current levels would result in
significantly increased operating losses.
Our revenues historically have been derived from two principal sources,
fees for product licenses and fees for maintenance, technical support,
education and consulting services, which we refer to collectively as product
support and other services. We recognize revenue in accordance with Statement
of Position ("SOP") 97-2, "Software Revenue Recognition," as amended by
SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2" and
SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition," and SOP
81-1, "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts," as applicable.
13
<PAGE>
Product license revenues are generally recognized upon the execution of a
contract and shipment of the related software product if no significant
obligations remain outstanding on our part and the resulting receivable is
deemed collectible by management.
Technical support revenues are derived from customer support agreements
generally entered into in connection with initial product license sales and
subsequent renewals. Fees for our technical support services are displayed as
deferred revenue when paid by the customer and recognized ratably over the
term of the maintenance and support agreement, which is typically one year.
We also record as deferred revenue the fair value of implicit maintenance
arrangements when resellers or other customers that sell our software to end
users offer these end users the right to receive the then current version of
our software at the time of resale. Certain of these agreements extend over
several years. Fees for our education and consulting services are typically
recognized at the time the services are performed.
Revenues recognized from multiple-element software arrangements are
allocated to each element of the arrangement based on the relative fair
values of the elements, such as software products, upgrades, enhancements,
technical support, installation or education. The determination of fair value
of each element is based on objective evidence based on historical sales of
the individual element by us to other customers. If such evidence of fair
value for each element of the arrangement does not exist, all revenue from
the arrangement is deferred until such time that evidence of fair value does
exist or until all elements of the arrangement are delivered.
Customers at times require consulting and implementation services which
include evaluating their business needs, identifying resources necessary to
meet their needs and installing the solution to fulfill their needs. When the
software license arrangement requires the Company to provide significant
consulting services to produce, customize or modify software or when the
customer considers these services essential to the functionality of the
software product, both the product license revenue and product support and
other services revenue are recognized in accordance with the provisions of
SOP 81-1. The Company recognizes revenue from these arrangements using the
percentage of completion method and, therefore, both product license and
product support and other services revenue are recognized as work progresses.
If the software license arrangement obligates the Company to the delivery of
unspecified future products, then revenue is recognized on the subscription
basis, ratably over the term of the contract.
Beginning initially in the fourth quarter of 1998 we began to sell our
products and services to customers for large scale e-commerce applications
and have continued to enter into similar transactions through the current
quarter. In contrast to earlier periods in which our typical customer
transaction involved a stand-alone software license and maintenance, these
transactions typically involve multiple software products and services for
use by very large numbers of end users across web, wireless and voice
communications channels, and often incorporate elements from our Strategy.com
network. These multiple element transactions also often include significant
implementation and other consulting work and may also include our providing
the customer with hosting services, in which we manage the operation of
hosting the customer's specific e-commerce application. Customers often use
our products and services in a variety of ways, including internal use,
integration with their own products for resale to end users and creation of
e-commerce applications. These arrangements typically lead to our recording
revenue from multiple sources, including product license fees, product
support fees and royalties based on advertising, e-commerce transactions or
the resale of solutions that incorporate our software platform.
These large, multiple element transactions typically involve more complex
licensing and product support arrangements than the software licensing and
product support arrangements that comprised the bulk of our revenues in
earlier periods. Based on the revenue recognition criteria established in SOP
97-2 and SOP 81-1, revenue from many of these large, multiple element
contracts is not recognizable upon full execution and delivery of the
software product as in the past, but instead is initially recorded as
deferred revenue upon receipt of cash, with product revenue recognized using
the percentage of completion method based on cost inputs or ratably over the
entire term of the contract. As a result of the size and complexity of these
transactions, our results for any quarter may depend significantly on the
types of customer transactions that we enter into during the quarter and on
the mix of product licenses, support agreements, implementation work and
other specific terms of each transaction, each of which may have a
significant effect on the manner in which we recognize revenue from the
transaction.
14
<PAGE>
The sales cycle for our products may span nine months or more.
Historically, we have recognized a substantial portion of our revenues in the
last month of a quarter, with these revenues frequently concentrated in the
last two weeks of a quarter. Even minor delays in booking orders may have a
significant adverse impact on revenues for a particular quarter. To the
extent that delays are incurred in connection with orders of significant
size, the impact will be correspondingly greater. Product license revenues in
any quarter can be dependent on orders booked and shipped in that quarter.
Due to a business slowdown during the summer, particularly in Europe, our
third quarter sequential growth rate in revenues historically has been, and
may continue to be, less than the sequential growth rate in other quarters.
As a result of these and other factors, our quarterly results have varied
significantly in the past and are likely to fluctuate significantly in the
future. Accordingly, we believe that quarter-to-quarter comparisons of our
results of operations are not necessarily indicative of the results to be
expected for any future period.
We license our software through our direct sales force and increasingly
through, or in conjunction with, value-added resellers, system integrators
and original equipment manufacturers. Channel partners accounted for,
directly or indirectly, approximately 40.3%, 39.2%, 33.6% and 27.0% of our
revenues for the six months ended June 30, 2000 and the years ended December
31, 1999, 1998 and 1997, respectively. Although we believe that direct sales
will continue to account for a majority of product license revenues, we
intend to increase the level of indirect sales activities. However, there can
be no assurance that our efforts to continue to expand indirect sales will be
successful. We also intend to continue to expand our international operations
and have committed, and continue to commit, management time and financial
resources to developing direct and indirect international sales and support
channels.
Our operations and prospects have been and will be significantly affected
by the developments relating to our revision to our 1999, 1998 and 1997
financial statements described in Note 2 of the Notes to Consolidated
Financial Statements. We are a defendant in a class action suit alleging that
we and certain of our officers and directors violated various securities laws
and in March 2000, we were notified that the SEC had issued a formal order of
private investigation in connection with the matters relating to our
restatement of our financial results. These legal proceedings are more fully
described in Note 10 of the Notes to Consolidated Financial Statements and in
"Other Information-Legal Proceedings" of Part II of this Quarterly Report
on Form 10-Q. The revision to our financial statements and these legal
proceedings could have a material adverse effect on our business, financial
condition and results of operations. See "Risk Factors" discussed below.
15
<PAGE>
Results of Operations
The following table sets forth for the periods indicated the percentage
of total revenues represented by certain items reflected in our consolidated
statements of operations:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
Statements of Operations Data
Revenues:
<S> <C> <C> <C> <C>
Product licenses.................... 43.4% 62.2% 47.4% 59.6%
Product support and other services.. 56.6 37.8 52.6 40.4
----- ----- ----- -----
Total revenues................... 100.0 100.0 100.0 100.0
Cost of revenues:
Product licenses..................... 0.8 1.4 1.0 1.6
Product support and other services... 43.3 19.5 37.2 20.8
----- ----- ----- -----
Total cost of revenues............ 44.1 20.9 38.2 22.4
----- ----- ----- -----
Gross profit.......................... 55.9 79.1 61.8 77.6
Operating expenses:
Sales and marketing.................. 76.2 52.3 79.1 54.3
Research and development............. 31.4 15.1 31.7 16.0
General and administrative........... 34.5 13.1 29.2 13.7
Amortization of goodwill and other
intangible assets.................. 8.4 --- 8.1 ---
----- ----- ----- -----
Total operating expenses.......... 150.5 80.5 148.1 84.0
Loss from operations.................. (94.6) (1.4) (86.3) (6.4)
Interest income....................... 0.9 1.6 0.9 1.7
Interest expense...................... (---) (0.1) (---) (0.2)
Other income (expense), net........... (9.9) (---) 1.4 ---
Provision for income taxes............ --- 0.1 0.2 0.6
----- ----- ----- -----
Net loss..............................(103.6)% (0.0)% (84.2)% (5.5)%
====== ==== ===== ====
</TABLE>
Comparison of the Three and Six Months Ended June 30, 2000 and 1999
Revenues
Total revenues consist of revenues derived from sales of product licenses
and product support and other services, including technical support,
education and consulting services. Total revenues increased from $40.5
million to $50.3 million for the three months ended June 30, 1999 and 2000,
respectively, an increase of 24.4%, and increased from $69.8 million to $101.0
million for the six months ended June 30, 1999 and 2000, respectively, an
increase of 44.7%. There can be no assurance that total revenues will continue
to increase at the rates experienced in prior periods. Additionally, based on
the revenue recognition criteria established in SOP 97-2 and SOP 81-1, revenue
from many large, multiple element arrangements is recorded as deferred revenue
upon receipt of cash, with both product license revenues and product support and
other services revenues recognized using the percentage of completion method
based on cost inputs or ratably over the entire term of the contract or over the
hosting period, as applicable.
In 1999, we launched the Strategy.com Finance Channel, in 2000 we
launched the Strategy.com News and Weather Channels, and we plan to launch
additional information channels in the future. We did not recognize revenues
related to Strategy.com until 2000 in which, during the three and six months
ended June 30, 2000, we recognized $1.1 million and $1.3 million,
respectively, in network affiliate and subscription fees which are included
in product license and product support and other services revenues. We
expect increased revenues from network affiliate, OEM and subscription,
royalty, advertising, hosting, transaction and other fees from our
Strategy.com service by the end of 2000, but, we do not expect these amounts
to be material.
16
<PAGE>
Product License Revenues. Product license revenues decreased from $25.2
million to $21.8 million for the three months ended June 30, 1999 and 2000,
respectively, a decrease of 13.3%, and increased from $41.6 million to $47.8
million for the six months ended June 30, 1999 and 2000, respectively, an
increase of 15.0%. The decrease in product license revenues for the three
months ended June 30, 2000 compared to the same period in 1999 was due to
customer uncertainty related to the publicity associated with our restatement
of financial results and our financial position and the timing of the closing
of certain large deals and the recognition of revenue from these agreements.
The increase in product license revenues for the six months ended June 30,
2000 compared to the same period in 1999 was primarily due to the effect of
our restatement of reported revenues to ensure that all agreements for which
we recognized revenue in each quarter were fully executed by the end of the
period. As a result of restatement revisions, $5.1 million of revenues
recognized in the first quarter of the six months ended June 30, 2000 were
attributable to contracts that we had not fully executed by December 31,
1999. We are attracting new customers and our existing customer base is
purchasing additional licenses and new products to support their e-business
solutions. As we continue to pursue our new business model of larger-scale,
multiple element transactions, we expect product license revenues as a
percentage of total revenues to fluctuate on a period-to-period basis and
vary significantly from the percentage of total revenues achieved in prior
years. There can be no assurance that we will be able to maintain or continue
to increase market acceptance for our family of products, including our newly
released MicroStrategy 7.0 software.
Product Support and Other Services Revenues. Product support and other
services revenues increased from $15.3 million to $28.5 million for the three
months ended June 30, 1999 and 2000, respectively, an increase of 86.5%, and
increased from $28.2 million to $53.1 million for the six months ended June
30, 1999 and 2000, respectively, an increase of 88.4%. The increase in
product support and other services revenues was primarily due to new product
licenses sold associated with a continuing increase in large-scale e-commerce
applications which require significant implementation and other consulting
work. As a result of expected fluctuations in product license revenue
discussed above, we expect product support and other services revenues as a
percentage of total revenues to fluctuate on a period-to-period basis and
vary significantly from the percentage of total revenues achieved in prior
years.
International Revenues. International revenues increased from $7.2
million to $11.1 million for the three months ended June 30, 1999 and 2000,
respectively, an increase of 53.9%, and increased from $14.8 million to $22.5
million for the six months ended June 30, 1999 and 2000, respectively, an
increase of 52.0%. The increase in these revenues is due to the expansion of
our international operations, new product offerings and growing international
market acceptance of our software products. We opened new sales offices in
Argentina and Switzerland in 2000 and in Brazil in 1999. We anticipate that
international revenues will continue to account for a significant amount of
total revenues and management expects to continue to commit significant time
and financial resources to the maintenance and ongoing development of direct
and indirect international sales and support channels. We may not be able to
maintain or continue to increase international market acceptance for our
family of products.
Costs and Expenses
Cost of Product License Revenues. Cost of product license revenues
consists primarily of the costs of product manuals, media, amortization of
capitalized software expenses and royalties paid to third party software
vendors. Cost of product license revenues decreased from $563,000 to $392,000
million for the three months ended June 30, 1999 and 2000, respectively, and
from $1.1 million to $1.0 million for the six months ended June 30, 1999 and
2000, respectively. As a percentage of product license revenues, cost of
product license revenues decreased from 2.2% to 1.8% for the three months
ended June 30, 1999 and 2000, respectively, and from 2.6% to 2.1% for the six
months ended June 30, 1999 and 2000, respectively. The decrease in cost of
product license revenues as a percentage of product license revenues was due
to economies of scale realized by producing larger volumes of product
materials and decreased materials costs due to an increase in the percentage
of customers reproducing product documentation at their sites. We anticipate
that the cost of product license revenues may increase as product license
revenues increase, but expect that costs of product license revenues will
decrease as a percentage of product
17
<PAGE>
license revenues. However, in the event that we enter into any royalty
arrangements with strategic partners in the future, cost of product license
revenues as a percentage of total product license revenues may increase.
Cost of Product Support and Other Services Revenues. Cost of product
support and other services revenues consists of the costs of providing
technical support, education and consulting services to customers and
partners. Cost of product support and other services revenues increased from
$7.9 million to $21.8 million for the three months ended June 30, 1999 and
2000, respectively, and from $14.5 million to $37.5 million for the six
months ended June 30, 1999 and 2000, respectively. As a percentage of product
support and other services revenues, cost of product support and other
services revenues increased from 51.7% to 76.4% for the three months ended
June 30, 1999 and 2000, respectively, and from 51.5% to 70.7% for the six
months ended June 30, 1999 and 2000, respectively. The increase in cost of
product support and other services revenues was primarily due to the increase
in the number of personnel providing consulting, education and technical
support to customers as a result of new product licenses sold associated with
a continuing increase in large-scale e-commerce applications and complex
Strategy.com deployments. The total cost of product support and other
services revenues increased as a percentage of product support and other
services revenues due to the significant increase in the use of third parties
to perform consulting services, an increase in consulting services revenues
as a percentage of total product support and other services revenues, which
are at lower margins than other product support revenues, and excess capacity
in consulting personnel.
We have hired additional consulting, education and technical support
personnel based on anticipated increases in revenues. To the extent our
product support and other services revenues increase at anticipated rates, we
expect cost of product support and other services revenues as a percentage of
product support and other services revenues to decrease. In addition, the
cost of providing hosting services and operating the Strategy.com network may
become more significant as we build up our customer base, further increasing the
cost of product support and other services revenues as a percentage of
product support and other services revenues.
Sales and Marketing Expenses. Sales and marketing expenses include costs
related to personnel costs, commissions, office facilities, travel,
advertising, public relations programs and promotional events, such as trade
shows, seminars and technical conferences. Sales and marketing expenses
increased from $21.1 million to $38.3 million for the three months ended June
30, 1999 and 2000, respectively, and from $37.9 million to $79.9 million for
the six months ended June 30, 1999 and 2000, respectively. As a percentage of
total revenues, sales and marketing expenses increased from 52.3% to 76.2%
for the three months ended June 30, 1999 and 2000, respectively, and from
54.3% to 79.1% for the six months ended June 30, 1999 and 2000, respectively.
The increase in sales and marketing expenses was primarily the result of
increased staffing levels in the sales force, increased commissions earned,
increased promotional activities and advertising, increased marketing efforts
for Strategy.com and other general marketing efforts. Additionally, during
the first quarter of 2000, we invested heavily in advertising, including a
national television and print advertising campaign and other marketing
efforts in order to create better market awareness of the value-added
potential of our product suite and Strategy.com and to seek to acquire market
share. As a result of these significant expenses during the first quarter of
2000, sales and marketing expenses decreased in the second quarter compared
to the first quarter. We intend to continue to market our MicroStrategy 7.0
software; however, we expect to minimize our overall advertising and marketing
efforts going forward in order to align our costs with anticipated revenues.
Research and Development Expenses. Research and development expenses
consist primarily of salaries and benefits of software engineering personnel,
depreciation of equipment and other costs. Research and development expenses
increased from $6.1 million to $15.8 million for the three months ended June
30, 1999 and 2000, respectively, and from $11.1 million to $32.0 million for
the six months ended June 30, 1999 and 2000, respectively. As a percentage of
total revenues, research and development expenses increased from 15.1% to
31.4% for the three months ended June 30, 1999 and 2000, respectively, and
from 16.0% to 31.7% for the six months ended June 30, 1999 and 2000,
respectively. The increase in research and development expenses was primarily
due to hiring additional research and development personnel to continue
development of Strategy.com channels, new products, product releases and
e-commerce technology. We intend to increase our investment over the next
twelve months to develop other channels as part of our suite of information
channels of our Strategy.com network. In addition, we expect that research
and development expenses will increase as we continue to invest in developing
new products,
18
<PAGE>
applications and product enhancements for our existing platform business and
the Strategy.com network.
During the three months ended June 30, 2000, in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs
of Computer Equipment to be Sold, Leased, or Otherwise Marketed," we
capitalized approximately $1.0 million in research and development costs
associated with the release of the MicroStrategy 7.0 software. The $1.0
million represents the research and development expenses incurred from the
time that technological feasibility was reached until the general release of
the software. These costs will be amortized over approximately 3 years.
General and Administrative Expenses. General and administrative expenses
include personnel and other costs of our finance, human resources,
information systems, administrative and executive departments as well as
outside professional fees. General and administrative expenses increased from
$5.3 million to $17.4 million for the three months ended June 30, 1999 and
2000, respectively, and from $9.5 million to $29.5 million for the six months
ended June 30, 1999 and 2000, respectively. As a percentage of total
revenues, general and administrative expenses increased from 13.1% to 34.5%
for the three months ended June 30, 1999 and 2000, respectively, and from
13.7% to 29.2% for the six months ended June 30, 1999 and 2000, respectively.
The increase in general and administrative expenses was the result of
increased staff levels, costs associated with the growth of our business and
an increase in outside professional fees, specifically legal and other
consultancy fees related to the recent litigation associated with our
restatement of our financial statements and the related SEC investigation.
We expect that general and administrative expenses will continue to increase
while these legal matters remain pending.
Amortization of Intangible Assets. In June 2000, we entered into a
consulting services agreement with the controlling stockholder of a software
integrator. The agreement requires the controlling stockholder to refer the
employees of the software integrator to us and also to perform certain
management services for us. In exchange for these services, we issued 57,143
shares of Class A common stock to the controlling stockholder. We will issue up
to $3.4 million in additional shares of Class A common stock over the next two
years based on an agreed upon formula including revenue and attrition
objectives. We have recorded $1.6 million related to the first installment
as deferred consulting costs. The first installment will be amortized over
two years, the duration of the management services.
Beginning in December 1999 and during the first half of 2000 we acquired
the right to use certain Internet domain names for $2.4 million. We are
amortizing these assets over their expected useful life of 3 years.
In December 1999, in connection with the purchase of intellectual
property and other tangible and intangible assets relating to NCR's Teracube
project, we allocated $46.8 million to tangible and intangible assets. As a
result, we have incurred and will continue to incur substantially increased
amortization expense in periods subsequent to December 1999. The intangible
assets are being amortized over their useful lives, ranging from one to three
years.
In January 1998, we recorded $1.1 million for acquired intangible assets
representing the excess of the fair market value of the shares issued in
exchange for the non-controlling interests' shares in the foreign
subsidiaries. The intangible assets consist primarily of distribution
channels, trade name and customer lists and are being amortized on a
straight-line basis over weighted average useful lives of approximately 14
years.
As a result, we have recorded $4.2 million and $20,000 in amortization
expense for the three months ended June 30, 2000 and 1999, respectively, and
$8.1 million and $40,000 in amortization expense for the six months ended
June 30, 2000 and 1999, respectively, relating to intangible assets. We
expect our amortization expense to be substantially the same over the next 3
years as the rate of amortization expense incurred in the first half of 2000.
Provision for Income Taxes. We recorded no income tax expense and $56,000
of income tax expense for the three months ended June 30, 2000 and 1999,
respectively, and $250,000 and $443,000 of income tax expense for the
six months ended June 30, 2000 and 1999, respectively. The provision for
both quarters and the six months ended in each year relates to income taxes
payable in certain foreign jurisdictions where we were profitable in 1999 and
expect to be profitable in 2000.
Beneficial Conversion Feature. The Company recorded a $19.4 million
charge attributable to the beneficial
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conversion feature of the Series A convertible preferred stock based on the
difference between the fair market value of the Class A common stock on the
closing date of the private placement and the conversion rate. The conversion
rate was computed based on the volume weighted average price of the stock for
the 17 trading days subsequent to the closing date in accordance with the
Certificate of Designations, Preferences and Rights of the Series A Convertible
Preferred Stock. In addition, in the event the conversion price decreases, in
accordance with the Certificate of Designations, Preferences and Rights of
the Series A Convertible Preferred Stock, an additional charge per share of
outstanding convertible preferred stock will be recorded in the future for
the difference between the current conversion price and the new conversion
price.
Deferred Revenue
Deferred revenue represents product support and other services fees that
are collected in advance; product license and product support and other
services fees relating to multiple element software arrangements for which
the fair value of each element cannot be established; or product license and
product support and other services fees relating to arrangements which
require implementation related services that are significant to the
functionality of features of the software product, including arrangements
with subsequent hosting services. Deferred revenue was $79.9 million as of
June 30, 2000 compared to $71.3 million as of December 31, 1999. We expect to
recognize approximately $69.3 million of this deferred revenue over the next
12 months; however, the timing and ultimate recognition of our deferred
revenue depends on our performance of various service obligations. Because of
the possibility of customer changes in development schedules, delays in
implementation and development efforts and the need to satisfactorily perform
product support and other services, deferred revenue as of any particular
date may not be representative of actual revenue for any succeeding period.
Liquidity and Capital Resources
From inception until our initial public offering, we primarily financed
our operations and met our capital expenditure requirements through cash
flows from operations and short- and long-term borrowings. On June 16, 1998,
we raised $48.2 million, net of offering costs, from our initial public
offering, and we raised an additional $40.1 million, net of offering costs,
on February 10, 1999 from a public offering of 3,170,000 shares of Class A
common stock. On June 17, 2000, we issued 12,500 shares of our Series A
convertible preferred stock in a private placement to institutional investors
for cash proceeds of $119.8 million, net of offering costs. On June 30, 2000
and December 31, 1999, we had $128.6 million and $68.4 million of cash, cash
equivalents, and short-term investments, respectively, of which $28.6 million
is restricted cash as of June 30, 2000.
Cash used in operations was $40.6 million and $547,000 for the six
months ended June 30, 2000 and 1999, respectively. The increase in cash used
in operations from 1999 to 2000 was primarily attributable to a substantial
increase in sales and marketing and other operating expenses which increased
at a significantly greater rate than revenues. We intend to aggressively
pursue financing to allow us to maintain our current cost structure to
market, develop and operate our core business and Strategy.com. Because of
this anticipated ongoing investment, we will need to obtain significant
external financing.
Cash used in investing activities was $16.7 million and $30.0 million for
the six months ended June 30, 2000 and 1999, respectively. In December 1999,
we received 824,742 shares (adjusted for a two-for-one stock split) of
Exchange Applications, valued at $21.5 million, in consideration for the sale
of MicroStrategy software, technical support and application development. In
March 2000, we sold 412,372 of these shares at an average price of
approximately $41.72 per share, which resulted in a realized gain of $6.4
million. In May 2000, we sold our economic interest in the remaining 412,370
shares for $5.8 million, which resulted in a realized loss of $4.9 million.
Overall, we have sold all of our economic interest in the shares we received
in December 1999 for a total net realized gain of $1.5 million. The
decrease in cash used in investing activities from 1999 to 2000 reflected the
sale of these shares and other short-term investments offset by the increase
in restricted cash and purchases of additional short-term investments and
capital expenditures related to the acquisition of computer and office
equipment required to support expansion of our operations and building of
infrastructure to support Strategy.com. As of June 30, 2000,
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the Company has $2.6 million in commitments relating to a software, data and
consulting agreement, which terminates in 2003, and $1.0 million in commitments
with content providers which extend through 2002.
In April 2000, the Company entered into an agreement to lease additional
office space. Total commitments under the lease, which expires in 2005, are
approximately $540,000.
Our financing activities provided cash of $125.6 million and $38.2
million for the six months ended June 30, 2000 and 1999, respectively. In
June 2000, we issued 12,500 shares of our Series A convertible preferred
stock in a private placement to institutional investors for cash proceeds of
$119.8 million, net of closing costs. Dividends are payable quarterly at a
rate of 7% per annum, in cash or in shares of Class A common stock. The
convertible preferred stock is currently convertible into 3,744,152 shares of
Class A common stock based on the current conversion price of $33.39 per
share. The conversion price may be adjusted at certain future dates
dependent upon the trading price of the Class A common stock and an agreed
upon formula. The convertible preferred stock is also redeemable upon
certain triggering events such as failure of the registration statement to be
declared effective by the SEC on or prior to the first anniversary of the
initial issuance date and other events as defined in the Certificate of
Designations, Preferences and Rights of the Series A Convertible Preferred
Stock.
We also recorded a $19.4 million charge attributable to the beneficial
conversion feature of the Series A convertible preferred stock equal to the
difference between the fair market value of the Class A common stock on the
closing date of the private placement and the conversion rate. The
conversion rate was computed based on the volume weighted average price of
the stock for the 17 trading days subsequent to the closing date in
accordance with the Certificate of Designations, Preferences and Rights of
the Series A Convertible Preferred Stock. We have accrued dividends of
$312,000 during the three months ended June 30, 2000.
Prior to this private placement, the principal source of cash from
financing activities during 1999 was from the sale of 3,170,000 shares of
Class A common stock in which we raised $40.1 million, net of offering costs.
Prior to our initial public offering, we declared a $10.0 million dividend to
our stockholders. The dividend was paid in the form of notes, prior to the
termination of our S corporation election, which occurred immediately prior
to the consummation of our initial public offering. As of June 30, 2000, the
entire $10.0 million of the dividend notes had been repaid.
In March 1999, we entered into a line of credit agreement with a
commercial bank, which provided for a $25.0 million unsecured revolving line
of credit for general working capital purposes. On May 15, 2000, we entered
into a modification of the line of credit agreement, which, among other
things, increased to include an additional letter of credit, removed any
financial covenants and cured any financial covenant defaults. The line of
credit is secured by $28.6 million of cash and cash equivalents, which is
classified as restricted cash on the balance sheet. The cash is restricted
through May 31, 2001, the expiration of the agreement. The modified line of
credit bears interest at LIBOR plus 1.75%, includes a 0.2% unused line of
credit fee, and requires monthly payments of interest. As of June 30, 2000,
after consideration of outstanding letters of credit, we had $21.2 million of
borrowing capacity under this credit line.
We have significantly grown the Company over the last year and prior
years in anticipation of our high revenue growth. We have presently
discontinued headcount growth and are minimizing capital expenditures and
marketing investments. If revenues do not grow at anticipated rates we will
require additional external financing through credit facilities, sale of
additional equity in MicroStrategy or in our Strategy.com subsidiary or other
financing facilities to support our current cost structure. There are no
assurances that such financing facilities would be available on acceptable
terms. We believe that our existing cash, cash generated internally by
operations and the amended line of credit entered into in May 2000 will meet
our working capital requirements for at least the next 12 months; provided
that we would be required to modify our current cost structure by
implementing cost reduction measures which may include, for example,
consolidation of certain functions, reducing levels of capital expenditures,
and other cost control measures.
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Recent Accounting Pronouncements
In December 1999, the SEC released Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition in Financial Statements," which provides guidance
on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. Subsequently, the SEC released SAB 101A,
which delayed the implementation date of SAB 101 for registrants with fiscal
years that begin between December 16, 1999 and March 15, 2000. In June 2000,
the SEC issued SAB 101B, further delaying our required implementation of SAB
101 until the fourth quarter of fiscal year 2000. We do not expect the
application of SAB 101 to have a material impact on our financial position or
results of operations.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation ("FIN") No. 44, "Accounting for Certain Transactions
Involving Stock Compensation - An Interpretation of APB Opinion No. 25." FIN
44 clarifies the application of APB Opinion No. 25 and, among other issues,
clarifies the following: the definition of an employee for purposes of
applying APB Opinion No. 25; the criteria for determining whether a plan
qualifies as a non-compensatory plan; the accounting consequence of various
modifications to the terms of previously fixed stock options or awards; and
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in
FIN 44 cover specific events that occurred after either December 15, 1998 or
January 12, 2000. We do not expect the application of FIN 44 to have a material
impact on our financial position or results of operations.
In June 1999, FASB issued Statement of Financial Accounting Standards
("SFAS") No. 137, which delays the effective date of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which will be
effective for our fiscal year 2001. This statement establishes accounting
and reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded in
the balance sheet as either an asset or liability measured at its fair
value. The statement also requires that changes in the derivative's fair
value be recognized in earnings unless specific hedge accounting criteria are
met. We do not expect the adoption of SFAS Nos. 133 and 137 to have a material
impact on our financial position or results of operations.
Risk Factors
The following important factors, among others, could cause actual results
to differ materially from those contained in forward-looking statements made
in this quarterly report on Form 10-Q or presented elsewhere by management
from time to time. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial may also impair
our business operations.
If any of the events described in the following risks actually occur, our
business, financial condition or results of operations could be materially
adversely affected. In such case, the trading price of our Class A common
stock could decline and you may lose all or part of your investment.
We will need additional financing which could be difficult to obtain
We will require additional external financing through credit facilities,
sale of additional equity in MicroStrategy or in our Strategy.com subsidiary or
other financing facilities to support our current cost structure. We expect
to incur operating losses for the foreseeable future. Therefore, we will
require significant external financing in the future. Obtaining additional
financing will be subject to a number of factors, including:
. market conditions;
. our operating performance; and
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. investor sentiment.
These factors may make the timing, amount, terms and conditions of
additional financing unattractive to us. If we are unable to raise capital to
fund our growth, our business, operating results and financial condition
would be materially and adversely affected.
Our quarterly operating results, revenues and expenses may fluctuate
significantly, which could have an adverse effect on the market price of our
stock
For a number of reasons, including those described below, our operating
results, revenues and expenses may vary significantly from quarter to
quarter. These fluctuations could have an adverse effect on the market price
of our Class A common stock.
Fluctuations in Quarterly Operating Results. Our quarterly operating
results may fluctuate as a result of:
. the size, timing and execution of significant orders and shipments;
. the mix of products and services of customer orders, which can affect
whether we recognize revenue upon the signing and delivery of our
software products or whether revenue must be recognized as work
progresses or over the entire contract period;
. the timing of new product announcements;
. changes in our pricing policies or those of our competitors;
. market acceptance of business intelligence software generally and of
new and enhanced versions of our products in particular;
. the length of our sales cycles;
. changes in our operating expenses;
. personnel changes;
. our success in expanding our direct sales force and adding to our
indirect distribution channels;
. the pace and success of our international expansion;
. utilization of our consulting personnel, which can be affected by
delays or deferrals of customer implementation of our software
products and consulting, education and support services;
. changes in foreign currency exchange rates; and
. seasonal factors, such as our traditionally lower pace of new sales in
the summer.
Limited Ability to Adjust Expenses. Because we have sought to expand our
business, our operating expenses have increased substantially in the past
twelve months. In particular, we have increased significantly the costs
associated with marketing, developing and operating our Strategy.com network
and with expanding our technical support, research and development and sales
and marketing organizations. We also have devoted substantial resources to
expanding our indirect sales channels and international operations. We base
our operating expense budgets on expected revenue trends. In the short term
we may not be able to reduce the actual operating expenses associated with
our planned expansion.
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Based on the above factors, we believe that quarter-to-quarter
comparisons of our operating results are not a good indication of our future
performance. It is possible that in one or more future quarters, our
operating results may be below the expectations of public market analysts and
investors. In that event, the trading price of our Class A common stock may
fall.
We have recently introduced Strategy.com and it is uncertain whether it will
achieve widespread acceptance
We have implemented the Finance, News and Weather Channels of our
Strategy.com networks. We plan to introduce additional channels as part of
our suite of information channels, but they are still in development. While
we expect to implement these additional channels on a commercial basis by the
end of 2000, we may encounter delays or difficulties in this commercial
introduction. We expect that a portion of our future revenue will depend on
fees from subscribers for the use of the Strategy.com network service, from
products and services offered through this network, and from royalties from
affiliates who bundle our Strategy.com network with their own product and
service offerings. We have not, to date, generated any material revenue from
our Strategy.com network and may not be able to do so in the future. If this
service, or the products and services offered through it, fails to achieve
widespread customer acceptance, our business, operating results and financial
condition would be materially adversely affected. In addition, revenue from
Strategy.com would be adversely affected if our affiliates do not perceive
that the integration of our Strategy.com network with their product and
service offerings will increase demand for their products and services or
will otherwise be able to generate a sufficient return on their investment in
the use of our network.
We intend to make significant expenditures in developing our Strategy.com
network, which would result in us incurring operating losses and require
additional external financing
We plan to substantially increase the amounts we will expend on our
Strategy.com network compared to the expenses we have incurred to date, in
order to expand the network's product offerings and capabilities. We will
only be able to make these expenditures if we are able to secure significant
additional external financing. We would then substantially increase our
investment in Strategy.com over the next twelve months to market, develop and
operate Strategy.com and would expect operating losses to increase in 2000
and 2001.
We may lose sales, or sales may be delayed, due to the long sales and
implementation cycles for our products, which would reduce our revenues
To date, our customers have typically invested substantial time, money
and other resources and involved many people in the decision to license our
software products. As a result, we may wait nine months or more after the
first contact with a customer for that customer to place an order while they
seek internal approval for the purchase of our products. During this long
sales cycle, events may occur that affect the size or timing of the order or
even cause it to be canceled. For example, our competitors may introduce new
products, or the customer's own budget and purchasing priorities may change.
Even after an order is placed, the time it takes to deploy our products
varies widely from one customer to the next. Implementing our product can
sometimes last several months, depending on the customer's needs and may
begin only with a pilot program. It may be difficult to deploy our products
if the customer has complicated deployment requirements, which typically
involve integrating databases, hardware and software from different vendors.
If a customer hires a third party to deploy our products, we cannot be sure
that our products will be deployed successfully.
Our employees, investors, customers, vendors and lenders may react adversely
to the revision of our 1999, 1998 and 1997 revenues and operating results
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Our future success depends in large part on the support of our key
employees, investors, customers, vendors and lenders, who may react adversely
to the revision of our 1999, 1998 and 1997 revenues and operating results.
The revision of our 1999, 1998 and 1997 revenues and operating results has
resulted in substantial amounts of negative publicity about us and we believe
that this publicity has caused some of our potential customers to defer
purchases of our software or to do business with other vendors. We may not be
able to retain key employees and customers if they lose confidence in us, and
our vendors and lenders may reexamine their willingness to do business with
us. In addition, investors may lose confidence, which may cause the trading
price of our Class A common stock to decrease. If we lose the services of our
key employees or are unable to retain and attract our existing and new
customers, vendors and lenders, our business, operating results and financial
condition could be materially and adversely affected.
Our recognition of deferred revenue is subject to future performance
obligations and may not be representative of actual revenues for succeeding
periods
Our deferred revenue was $79.9 million as of June 30, 2000. The timing
and ultimate recognition of our deferred revenue depends on our performance
of various service obligations. Because of the possibility of customer
changes in development schedules, delays in implementation and development
efforts and the need to satisfactorily perform product support services,
deferred revenue at any particular date may not be representative of actual
revenue for any succeeding period.
We face litigation that could have a material adverse effect on our business,
financial condition and results of operations
We and some of our directors and executive officers are named as
defendants in a private securities class action lawsuit. Although we intend
to defend these actions vigorously, no assurance can be given as to the
outcomes. It is possible that we may be required to pay substantial damages
or settlement costs which could have a material adverse effect on our
financial condition or results of operation. In addition, the SEC has issued
a formal order of private investigation in connection with matters relating
to the restatement of our financial results. The SEC has requested that we
provide them with certain documents concerning the revision of our financial
results and financial reporting documents. We are cooperating with the SEC in
connection with this investigation. Regardless of the outcome of any of these
actions, it is likely that we will incur substantial defense costs and that
such actions will cause a diversion of management time and attention.
We are currently unable to borrow additional amounts under our master
equipment lease agreement
We signed a three-year master lease agreement to lease up to $40.0
million of computer equipment, of which we have leased approximately $17.8
million as of August 1, 2000. Future drawdowns and interest rates under the
lease agreement are subject to our credit worthiness. Currently, we are not
able to draw down additional amounts under the lease agreement.
We face intense competition, which may lead to lower prices for our products,
reduced gross margins, loss of market share and reduced revenue
The markets for e-business, e-commerce, customer relationship management,
portals, business intelligence and Internet-based and wireless-based
information networks are intensely competitive and subject to rapidly
changing technology. In addition, many of our competitors in these markets
are offering, or may soon offer, products and services that may compete with
our products and our Strategy.com network.
Our most direct competitors provide:
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. e-business infrastructure software;
. customer relationship management products;
. e-commerce transaction systems;
. business intelligence products;
. web portals and information networks;
. vertical Internet portals and information networks; and
. wireless communications and wireless access protocol enabled products.
Each of these market segments are discussed more fully below.
E-business Infrastructure Software. In the e-business infrastructure
market, BroadVision, E.piphany, Vignette, Net Perceptions, Broadbase, Art
Technology Group, Engage Technologies, Doubleclick and Personify all provide
products that compete directly or indirectly with our software platform. Many
of these companies provide alternatives to our technology for adding
intelligence and personalization to e-commerce applications. For example,
customer information, such as past purchases, clickstream data and stated
preferences, can be used to create a personalized e-commerce experience that
targets customers with offers and interactions to which they are more likely
to respond.
Customer Relationship Management Products. Companies that deliver
customer relationship management products alone or in conjunction with
e-commerce applications, such as BroadVision, E.piphany, Vignette and Siebel,
compete with our intelligent e-business products.
E-Commerce Transaction Systems. Products that support e-commerce
transactions, such as those provided by Microsoft, IBM, America Online's
Netscape division, BroadVision, Open Market, InterWorld and Oracle, could
provide competition for us. These products have the potential to extend their
capabilities to use customer information as the basis for generating
targeted, personalized product offers, which would compete with our
e-business products.
Business Intelligence Products. In the business intelligence market, we
compete with providers of software used to enable businesses to analyze and
optimize their operations. In the enterprise category, which is generally
focused on large deployments, Information Advantage, which was recently
acquired by Sterling Software, competes with us. In the desktop analysis and
reporting category, we face competition from companies such as Business
Objects, Cognos and Brio Technology. A third category includes products from
companies such as Oracle, Microsoft and IBM that are generally bundled with
or designed to work with their own relational databases.
Web Portals and Information Networks. Web portals and information
networks, such as Microsoft Network, Yahoo, Lycos, Excite, America Online and
InfoSpace.com, offer an array of information that is similar to information
provided by Strategy.com. Strategy.com seeks to differentiate itself by:
. providing a greater level of personalization;
. allowing users to receive the precise information they want across the
broadest range of information delivery devices including through
email, wireless phone, pager, wireless access protocol enabled
products, fax, personal digital assistants and the telephone; and
. partnering with financial institutions, device manufacturers, Internet
companies, communication carriers, media companies and wireless
companies, to embed Strategy.com information services as an ingredient
in
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their own offerings.
One or more of these companies, however, could expand their offerings and
reduce our differentiation in these three areas.
Vertical Internet Portals and Information Networks. Expedia, Weather.com,
CNBC.com, ABC.com, ESPN.com, Microsoft Investor, StockBoss, Microsoft
CarPoint, InfoBeat, Internet Travel Network and others have developed custom
applications and products to commercialize, analyze and deliver specific
information over the Internet. These systems are usually tailored to one
application, such as providing news, sports or weather, but in the aggregate,
they offer applications similar to those provided by Strategy.com. Any one of
these companies could expand their offerings to more closely compete with
Strategy.com.
Wireless Communications and Wireless Access Protocol Enabled Products.
Wireless communications providers, such as AT&T, Sprint, MCI WorldCom, Nextel
Communications, British Telecom, Deutsche Telekom, PageNet, Nokia, Ericsson,
Aether Systems, 3COM and Palm offer a variety of mobile phones and wireless
devices over which Strategy.com delivers information. These companies may
develop in-house information services or partner with other companies to
deliver information that is competitive to that offered by Strategy.com.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing or other resources, and greater name
recognition than we do. In addition, many of our competitors have strong
relationships with current and potential customers and extensive knowledge of
the e-business industry. As a result, they may be able to respond more
quickly to new or emerging technologies and changes in customer requirements
or devote greater resources to the development, promotion and sale of their
products than we can. Increased competition may lead to price cuts, reduced
gross margins and loss of market share. We cannot be sure that we will be
able to compete successfully against current and future competitors or that
the competitive pressures we face will not have a material adverse effect on
our business, operating results and financial condition.
Current and future competitors may also make strategic acquisitions or
establish cooperative relationships among themselves or with others. By doing
so, they may increase their ability to meet the needs of our potential
customers. Our current or prospective indirect channel partners may establish
cooperative relationships with our current or future competitors. These
relationships may limit our ability to sell our products through specific
distribution channels. Accordingly, it is possible that new competitors or
alliances among current and future competitors may emerge and rapidly gain
significant market share. These developments could harm our ability to obtain
maintenance revenues for new and existing product licenses on favorable
terms.
We have increased our operating costs in anticipation of an expansion of our
business and our failure to manage this expansion effectively, as well as the
strain on our resources, could have a material adverse effect on our
business, operating results and financial condition
We have been expanding rapidly and we expect to continue expanding our
operations subject to the availability of additional financing. Our total
number of employees has grown from 907 on December 31, 1998 to 2,279 on June
30, 2000. We have placed significant demands on our administrative,
operational, financial and personnel resources and expect to continue doing
so. In particular, we expect the current and planned growth of our
international operations to lead to increased financial and administrative
demands. For example, expanded facilities will complicate operations,
managing relationships with new foreign partners will mean additional
administrative burdens, and managing foreign currency risks will require
expanded treasury functions. We may also need to expand our support
organization to develop our indirect distribution channels in new and
expanded markets and to accommodate growth in our installed customer base.
Failure to manage our expansion effectively could have a material adverse
effect on our business, operating results and financial condition.
In addition, the development of our Strategy.com network could divert the
time and attention of our senior management from our other business. Michael
J. Saylor, our chairman, president and chief executive officer, currently is
responsible for the strategic planning and direction of both our
MicroStrategy Platform and
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Strategy.com businesses. If Mr. Saylor does not effectively manage his time and
attention between our businesses, it could materially adversely affect our
business, operating results and financial condition.
If we are unable to recruit or retain skilled personnel, or if we lose the
services of any of our key management personnel, our business, operating
results and financial condition would be materially adversely affected
Our future success depends on our continuing ability to attract, train,
assimilate and retain highly skilled personnel. Competition for these
employees is intense. We may not be able to retain our current key employees
or attract, train, assimilate or retain other highly skilled personnel in the
future. Our future success also depends in large part on the continued
service of key management personnel, particularly Michael J. Saylor, our
chairman, president and chief executive officer, and Sanju K. Bansal, our
executive vice president and chief operating officer. If we lose the services
of one or both of these individuals or other key personnel, or if we are
unable to attract, train, assimilate and retain the highly skilled personnel
we need, our business, operating results and financial condition could be
materially adversely affected.
Our inability to develop and release product enhancements and new products to
respond to rapid technological change in a timely and cost-effective manner
would have a material adverse effect on our business, operating results and
financial condition
The market for our products is characterized by rapid technological
change, frequent new product introductions and enhancements, changing
customer demands and evolving industry standards. The introduction of
products embodying new technologies can quickly make existing products
obsolete and unmarketable. We believe that our future success depends largely
on three factors:
. our ability to continue to support a number of popular operating
systems and databases;
. our ability to maintain and improve our current product line; and
. our ability to rapidly develop new products that achieve market
acceptance, maintain technological competitiveness and meet an
expanding range of customer requirements.
Business intelligence applications are inherently complex, and it can
take a long time to develop and test major new products and product
enhancements. In addition, customers may delay their purchasing decisions
because they anticipate that new or enhanced versions of our products will
soon become available. We cannot be sure that we will succeed in developing
and marketing, on a timely and cost-effective basis, product enhancements or
new products that respond to technological change, introductions of new
competitive products or customer requirements, nor can we be sure that our
new products and product enhancements will achieve market acceptance.
The emergence of new industry standards may adversely affect our ability to
market our existing products
The emergence of new industry standards in related fields may adversely
affect the demand for our existing products. This could happen, for example,
if new web standards and technologies emerged that were incompatible with
customer deployments of our MicroStrategy applications. Although the core
database component of our business intelligence solutions is compatible with
nearly all enterprise server hardware and operating system combinations, such
as OS/390, AS/400, Unix and Windows, our application server component runs
only on the Windows operating system. Therefore, our ability to increase
sales currently depends on the continued acceptance of the Windows operating
system. We cannot market our current business intelligence applications to
potential customers who use Unix operating systems as their application
server. We would have to invest substantial resources to develop a Unix
product and we cannot be sure that we could introduce such a product on a
timely or cost-effective basis, if at all.
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The legal environment regarding collection and use of personal information is
uncertain and new laws or government regulations could have a material
adverse effect on our business, operating results and financial condition
Although some existing laws govern the collection and use of personal
information obtained through the Internet or other public data networks, it
is unclear whether they apply to our products and us. Most of these laws were
adopted before the widespread use and commercialization of the Internet and
other public data networks. As a result, the laws do not address the unique
issues presented by these media.
Due to increasing use of the Internet and the dramatically increased
access to personal information made possible by technologies like ours, the
U.S. federal and various state and foreign governments have recently proposed
limitations on the collection and use of personal information of users of the
Internet and other public data networks.
Although we attempt to obtain permission from users prior to collecting
or processing their personal data, new laws or regulations governing personal
privacy may change the ways in which we and our customers and affiliates may
gather this personal information. There may be significant costs and delays
involved with adapting our products to any change in regulations.
Our business, and in particular our Strategy.com network, depends upon
our receiving detailed personal information about subscribers in order to
provide them with the services they select. Privacy concerns may cause some
potential subscribers to forego subscribing to our service. If new laws or
regulations prohibit us from using information in the ways that we currently
do, or if users opt out of making their personal preferences and information
available to us and our affiliates, the utility of our products will
decrease, which could have a material adverse effect on our business,
operating results and financial condition. If personal information is misused
by us, our customers or our network affiliates, our legal liability may be
increased and our growth may be limited.
The Federal Trade Commission has recently launched investigations of the
data collection practices of various Internet companies. In addition,
numerous individuals and privacy groups have filed lawsuits or administrative
complaints against other companies asserting that they were harmed by the
misuse of their personal information. If comparable legal proceedings were
commenced against us, regardless of the merits of the claim, we could be
required to spend significant amounts on legal defense and our senior
management's time and attention could be diverted from our business. In
addition, demand for our products could be reduced if companies are not
permitted to use clickstream data derived from their web sites. This could
materially and adversely affect our business, operating results and financial
condition.
In addition, in Europe, the European Union Directive on Data Protection,
a comprehensive administrative and regulatory program, currently limits the
ability of companies to collect, store and exchange personal data with other
entities. Because the U.S. may not currently provide a level of data
protection sufficient to meet the guidelines under the European Union
Directive, U.S. companies could be prohibited from obtaining personal data
from or exchanging such data with companies in Europe.
Our business may suffer if either the Internet infrastructure or the wireless
communication infrastructure is unable to effectively support the growth in
demand placed upon it
Our Strategy.com network and our other products depend increasingly upon
the Internet infrastructure and wireless communications infrastructures to
collect information and deliver information to customers. We cannot assure
you that either of these infrastructures will continue to effectively support
the capacity, speed and security demands placed upon them as they continue to
experience increased numbers of users, frequency of use and increased
requirements for data transmission by users. Even if the necessary
infrastructure or technologies are developed, we may incur considerable costs
to adapt our solutions accordingly. Furthermore, the Internet has experienced
a variety of outages and other delays due to damage to portions of its
infrastructure or attacks by
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hackers. These outages and delays could impact the web sites using our products
or hosting our Strategy.com network and could materially affect our business,
operating results and financial condition.
If the market for business intelligence software fails to grow as we expect,
or if businesses fail to adopt our products, our business, operating results
and financial condition would be materially adversely affected
Nearly all of our revenues to date have come from sales of business
intelligence software and related technical support, consulting and education
services. We expect these sales to account for a large portion of our
revenues for the foreseeable future. Although demand for business
intelligence software has grown in recent years, the market for business
intelligence software applications is still emerging. Resistance from
consumer and privacy groups to increased commercial collection and use of
data on spending patterns and other personal behavior may impair the further
growth of this market, as may other developments. We cannot be sure that this
market will continue to grow or, even if it does grow, that businesses will
adopt our solutions. We have spent, and intend to keep spending, considerable
resources to educate potential customers about business intelligence software
in general and our solutions in particular. However, we cannot be sure that
these expenditures will help our products achieve any additional market
acceptance. If the market fails to grow or grows more slowly than we
currently expect, our business, operating results and financial condition
would be materially adversely affected.
Because of the rights of our two classes of common stock, and because we are
controlled by our existing stockholders, these stockholders could transfer
control of MicroStrategy to a third party without anyone else's approval or
prevent a third party from acquiring MicroStrategy
We have two classes of common stock: Class A common stock and Class B
common stock. Holders of our Class A common stock generally have the same
rights as holders of our Class B common stock, except that holders of Class A
common stock have one vote per share while holders of Class B common stock
have ten votes per share. As of August 1, 2000, holders of our Class B common
stock owned or controlled 55,164,115 shares of Class B common stock, or
95.7% of the total voting power. Michael J. Saylor, our chairman, president
and chief executive officer, controlled 43,549,324 shares of Class B common
stock, or 75.6% of the total voting power, as of August 1, 2000. Accordingly,
Mr. Saylor is able to control MicroStrategy through his ability to determine
the outcome of elections of our directors, amend our certificate of
incorporation and bylaws and take other actions requiring the vote or consent
of stockholders, including mergers, going private transactions and other
extraordinary transactions and their terms.
Our certificate of incorporation allows holders of Class B common stock,
almost all of whom are employees of our company or related parties, to
transfer shares of Class B common stock, subject to the approval of a
majority of the holders of outstanding Class B common stock. Mr. Saylor or a
group of stockholders possessing a majority of the outstanding Class B common
stock could, without seeking anyone else's approval, transfer voting control
of MicroStrategy to a third party. Such a transfer of control could have a
material adverse effect on our business, operating results and financial
condition. Mr. Saylor will also be able to prevent a change of control of
MicroStrategy, regardless of whether holders of Class A common stock might
otherwise receive a premium for their shares over the then-current market
price.
The conversion of the Series A preferred shares could result in substantial
numbers of additional shares being issued if our market price declines during
periods in which the conversion price of the Series A preferred shares may
adjust
As of August 1, 2000, the Series A preferred shares are convertible at a
conversion price equal to $33.3854 per share. This conversion price may be
adjusted if the preferred stock remains outstanding on June 19, 2001 and on
each subsequent anniversary of such date, or upon the occurrence of various
events, including the failure to maintain the effectiveness of the
registration statement to which this prospectus relates, based on the market
price of our Class A common stock if such adjustment would result in a lower
conversion price. As a result, the lower the price of our
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Class A common stock at these intervals, the greater the number of shares the
holder will receive upon conversion after any such adjustment. For example, the
number of shares of Class A common stock that we would be required to issue upon
conversion of all 12,500 Series A preferred shares, excluding shares issued
as accrued dividends, would increase from approximately 3,744,152 shares,
based on the applicable conversion price of $33.3854 per share as of August
1, 2000, to approximately:
. 4,992,212 shares if the applicable conversion price decreased 25%;
. 7,488,303 shares if the applicable conversion price decreased 50%; or
. 14,976,516 shares if the applicable conversion price decreased 75%.
To the extent the Series A preferred shares are converted or dividends on
the Series A preferred shares are paid in shares of Class A common stock
rather than cash, a significant number of shares of Class A common stock may
be sold into the market, which could decrease the price of our Class A common
stock and encourage short sales. Short sales could place further downward
pressure on the price of our Class A common stock. In that case, we could be
required to issue an increasingly greater number of shares of our Class A
common stock upon future conversions of the Series A preferred shares as a
result of the annual and other adjustments described above, sales of which
could further depress the price of our Class A common stock.
The conversion of and the payment of dividends in shares of Class A
common stock in lieu of cash on the Series A preferred shares may result in
substantial dilution to the interests of other holders of our Class A common
stock. No selling stockholder may convert its Series A preferred shares if
upon such conversion the selling stockholder together with its affiliates
would have acquired a number of shares of Class A common stock during the
60-day period ending on the date of conversion which, when added to the
number of shares of Class A common stock held at the beginning of such 60-day
period, would exceed 9.99% of our then outstanding Class A common stock,
excluding for purposes of such determination shares of Class A common stock
issuable upon conversion of Series A preferred shares which have not been
converted. Nevertheless, a selling stockholder may still sell a substantial
number of shares in the market. By periodically selling shares into the
market, an individual selling stockholder could eventually sell more than
9.99% of our outstanding Class A common stock while never holding more than
9.99% at any specific time.
We may be required to pay substantial penalties to the holders of the Series
A preferred shares if specific events occur
In accordance with the terms of the agreements relating to the issuance of
the Series A preferred shares, we are required to pay substantial penalties
to a holder of the Series A preferred shares under specified circumstances,
including, among others:
. nonpayment of dividends on the Series A preferred shares in a timely
manner;
. failure to deliver shares of our Class A common stock upon conversion
of the Series A preferred shares after a proper request
. nonpayment of the redemption price at maturity of the Series A
preferred shares
. failure to hold a meeting of our stockholders on or before July 31,
2001 to approve the issuance of the shares of Class A common stock
issuable upon conversion of and in lieu of cash dividends on the
Series A preferred shares; or
. failure of a registration statement relating to the shares of Class A
common stock issuable upon conversion of and in lieu of cash dividends
on the Series A preferred shares to be declared effective by the SEC
on or before December 15, 2000, or after such registration statement
is declared effective, the unavailability of
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such registration statement to cover the resale of such shares for more
than brief intervals.
Such penalties are generally paid in the form of interest payments,
subject to any restrictions imposed by applicable law, on the amount that a
holder of Series A preferred shares was entitled to receive on the date of
determination. In the third quarter of 2000, we incurred $577,500 in
penalties as a result of a 14 day delay in the filing of a registration
statement registering the shares of Class A common stock issuable upon
conversion of and in lieu of dividends on the Series A preferred shares.
We rely on our strategic channel partners and if we are unable to develop or
maintain successful relationships with them, our business, operating results
and financial condition will suffer
In addition to our direct sales force, we rely on strategic channel
partners, such as original equipment manufacturers, system integrators and
value-added resellers, to license and support our products in the United
States and internationally. In particular, for the three months ended June
30, 2000 and the years ended December 31, 1999, 1998 and 1997, channel
partners accounted for, directly or indirectly, approximately 40.3%, 39.2%,
33.6% and 27.0% of our total revenues, respectively. Our channel partners
generally offer customers the products of several different companies,
including some products that compete with ours. Although we believe that
direct sales will continue to account for a majority of product license
revenues, we intend to increase the level of indirect sales activities
through our strategic channel partners. However, there can be no assurance
that our efforts to continue to expand indirect sales in this manner will be
successful. We cannot be sure that we will attract strategic partners who
will market our products effectively and who will be qualified to provide
timely and cost-effective customer support and service. Our ability to
achieve revenue growth in the future will depend in part on our success in
developing and maintaining successful relationships with those strategic
partners. If we are unable to develop or maintain our relationships with
these strategic partners, our business, operating results and financial
condition will suffer.
We rely on our network affiliates to market our Strategy.com network to their
customers and if we are unable to enter into arrangements with a sufficient
number of affiliates, or if our affiliates are unable to interest their
customers in our services, our business will suffer
We rely on our network affiliates to market our Strategy.com network to
their customers. We cannot be sure that we will attract affiliates who will
market our services effectively. Our ability to achieve revenue growth in the
future will depend in part on our success in recruiting and maintaining
successful relationships with affiliates. If we are unable to recruit
affiliates or maintain our relationships with them, our business, operating
results and financial condition will suffer.
Third party providers of information and services for our Strategy.com
network may fail to provide us such information and services or may also
provide such information and services to our competitors
We rely on third parties to provide information and services for our
Strategy.com network. For example, we rely on Ameritrade to provide users of
our Strategy.com network with stock quote information and expect to rely upon
a third party to execute trades in securities when this capability is added
to our network. If one or more of these providers were to stop working with
us, we would have to rely on other parties to provide the information and
services we need. We cannot predict whether other parties would be willing to
do so on reasonable terms. Furthermore, we do not have long-term agreements
with our providers of information and services and we cannot restrict them
from providing similar information and services to our competitors. As a
result, our competitors may be able to duplicate some of the information and
services that we provide and may, therefore, find it easier to enter the
market for personal intelligence and compete with us.
We rely upon our network affiliates to deliver services we offer through our
Strategy.com network and if they have difficulty in doing so, we could be
exposed to liability and our reputation could suffer
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We depend upon our affiliates to deliver services to subscribers of our
Strategy.com network. If our affiliates fail to deliver reliable services, we
could face liability claims from our subscribers and our reputation could be
damaged. In addition, we will be dependent on the performance of the systems
deployed and maintained by these parties, whom we will not control. We expect
to include contractual provisions limiting our liability to the subscriber
for failures and delays, but we cannot be sure that these limits will be
enforceable or will be sufficient to shield us from liability. We will seek
to obtain liability insurance to cover problems of this sort, but we cannot
guarantee that insurance will be available or that the amounts of our
coverage will be sufficient to cover all potential claims.
Our network affiliates will rely on us to maintain the infrastructure of the
Strategy.com network and any problems with that infrastructure could expose
us to liability from our affiliates and their customers
Our network affiliates depend on us to maintain the software and hardware
infrastructure of our Strategy.com network. If this infrastructure fails or
our affiliates or their customers otherwise experience difficulties or delays
in accessing the network, we could face liability claims from them. We expect
to include contractual provisions limiting our liability to our affiliates
for system failures and delays, but we cannot be sure that these limits will
be enforceable or will be sufficient to shield us from liability. We will
seek to obtain liability insurance to cover problems of this sort, but we
cannot guarantee that insurance will be available or that the amounts of our
coverage will be sufficient to cover all potential claims.
We are vulnerable to system failures, which could cause interruptions or
disruptions in our service
The hardware infrastructure on which the Strategy.com system operates is
located at the Exodus Communications data center in Northern Virginia. We
cannot assure you that we will be able to manage this relationship
successfully to mitigate any risks associated with having our hardware
infrastructure maintained by Exodus. Unexpected events such as natural
disasters, power losses and vandalism could damage our systems.
Telecommunications failures, computer viruses, electronic break-ins or other
similar disruptive problems could adversely affect the operation of our
systems. Our insurance policies may not adequately compensate us for any
losses that may occur due to any damages or interruptions in our systems.
Accordingly, we could be required to make capital expenditures in the event
of damage. We do not currently have a formal disaster recovery plan.
Periodically, we experience unscheduled system downtime that results in our
web site being inaccessible to subscribers. Although we have not suffered
material losses during these downtimes to date, if these problems persist in
the future, users, network affiliates and advertisers could lose confidence
in our services.
System capacity constraints may diminish our ability to generate revenues
from Strategy.com
A substantial increase in the use of the products and services offered by
Strategy.com could strain the capacity of our systems, which could lead to
slower response time or system failures. System failures or slowdowns could
adversely affect the speed and responsiveness of our Strategy.com network.
These would diminish the experience for our subscribers and affect our
reputation. The ability of our systems to manage a significantly increased
volume of transactions in a production environment is unknown. As a result,
we face risks related to our ability to scale up to our expected transaction
levels while maintaining satisfactory performance. If our transaction volume
increases significantly, we may need to purchase additional servers and
networking equipment to maintain adequate data transmission speeds. The
availability of these products and related services may be limited or their
cost may be significant.
We have only limited protection for our proprietary rights in our software,
which makes it difficult to prevent third parties from infringing upon our
rights
We regard our software products as proprietary and we rely on a
combination of federal and international copyright, state and federal
trademark and service mark and state and common law trade secret laws,
customer
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licensing agreements, employee and third-party nondisclosure
agreements and other methods to protect our proprietary rights. However,
these laws and contractual provisions provide only limited protection. We
have no patents, and no registered trademarks other than MicroStrategy(R), DSS
Agent(R) and QuickStrike(R). Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy or otherwise obtain and use
our products or technology. Policing such unauthorized use is difficult, and
we cannot be certain that we can prevent it, particularly in countries where
the laws may not protect our proprietary rights as fully as in the United
States.
Our products may be susceptible to claims by other companies that our
products infringe upon their proprietary rights, which could adversely affect
our business, operating results and financial condition
As the number of software products in our target markets increases and
the functionality of these products further overlaps, we may become
increasingly subject to claims by a third party that our technology infringes
such party's proprietary rights. Regardless of their merit, any such claims
could be time consuming and expensive to defend, may divert management's
attention and resources, could cause product shipment delays and could
require us to enter into costly royalty or licensing agreements. If
successful, a claim of infringement against us and our inability to license
the infringed or similar technology could have a material adverse effect on
our business, operating results and financial condition.
Expanding our international operations will be difficult and our failure to
do so successfully or in a cost-effective manner would have a material
adverse effect on our business, operating results and financial condition
International sales accounted for 22.3%, 24.0%, 26.1% and 27.1% of our
total revenues for the six months ended June 30, 2000 and the years ended
December 31, 1999, 1998 and 1997, respectively. We plan to continue expanding
our international operations and to enter new international markets. This
will require significant management attention and financial resources and
could adversely affect our business, operating results and financial
condition. In order to expand international sales successfully, we must set
up additional foreign operations, hire additional personnel and recruit
additional international resellers and distributors. We cannot be sure that
we will be able to do so in a timely manner, and our failure to do so may
limit our international sales growth.
There are certain risks inherent in our international business activities
including:
. changes in foreign currency exchange rates;
. unexpected changes in regulatory requirements;
. tariffs and other trade barriers;
. costs of localizing products for foreign countries;
. lack of acceptance of localized products in foreign countries;
. longer accounts receivable payment cycles;
. difficulties in managing international operations;
. tax issues, including restrictions on repatriating earnings;
. weaker intellectual property protection in other countries; and
. the burden of complying with a wide variety of foreign laws.
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These factors may have a material adverse effect on our future
international sales and, consequently, our business, operating results and
financial condition.
The nature of our products makes them particularly vulnerable to undetected
errors, or bugs, which could cause problems with how the products perform and
which could in turn reduce demand for our products, reduce our revenue and
lead to product liability claims against us
Software products as complex as ours may contain errors or defects,
especially when first or subsequent versions are released. Although we test
our products extensively, we have in the past discovered software errors in
new products after their introduction. We cannot be certain that, despite
testing by us and by our current and potential customers, errors will not be
found in new products or releases after commercial shipments begin. This
could result in lost revenue or delays in market acceptance, which could have
a material adverse effect upon our business, operating results and financial
condition.
Our license agreements with customers typically contain provisions
designed to limit our exposure to product liability claims. It is possible,
however, that these provisions may not be effective under the laws of certain
domestic or international jurisdictions. Although there have been no product
liability claims against us to date, our license and support of products may
involve the risk of these claims. A successful product liability claim
against us could have a material adverse effect on our business, operating
results and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about our market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. We are exposed to the impact of
interest rate changes and foreign currency fluctuations.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates
primarily to our cash equivalents and short-term investments. We do not use
derivative financial instruments. We invest our excess cash in short-term,
fixed income financial instruments. These fixed rate investments are subject
to interest rate risk and may fall in value if market interest rates
increase. If market interest rates were to increase immediately and uniformly
by 10% from the levels at June 30, 2000, the fair market value of the
portfolio would decline by an immaterial amount. We have the ability to hold
our fixed income investments until maturity and, therefore, we do not expect
our operating results or cash flows to be materially affected by a sudden
change in market interest rates on our investment portfolio.
Foreign Currency Risk
We face exposure to adverse movements in foreign currency exchange rates.
Our international revenues and expenses are denominated in foreign
currencies, principally the British pound sterling and the German deutsche
mark. The functional currency of each of our foreign subsidiaries is the
local currency. Our international business is subject to risks typical of an
international business, including but not limited to, differing tax
structures, other regulations and restrictions, and foreign exchange rate
volatility. Based on our overall currency rate exposure at June 30, 2000, a
10% change in foreign exchange rates would have had an immaterial effect on
our financial position, results of operations and cash flows. To date, we
have not hedged the risks associated with foreign exchange exposure. Although
we may do so in the future, we cannot be sure that any hedging techniques we
may implement will be successful or that our business, operating results,
financial condition and cash flows will not be materially adversely affected
by exchange rate fluctuations. To date, our foreign currency gains and losses
have been immaterial.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Legal Proceedings
Actions Arising under Federal Securities Laws. From March through May
2000, 25 class action complaints were filed in federal courts in various
jurisdictions alleging that we and certain of our officers and directors
violated section 10(b) of the Exchange Act, Rule 10b-5 promulgated
thereunder, and section 20(a) and section 20A of the Exchange Act. The
Company's outside auditor, PricewaterhouseCoopers LLP, was also named in two
of the suits. The complaints contained varying allegations, including that we
made materially false and misleading statements with respect to our 1999,
1998 and 1997 financial results in our filings with the SEC, analysts'
reports, press releases and media reports. In June 2000, these putative class
action lawsuits were consolidated in the United States District Court for the
Eastern District of Virginia. On July 7, 2000, the lead plaintiffs filed an
amended class action complaint naming us, certain of our officers and
directors, and PricewaterhouseCoopers LLP as defendants. The amended class
action complaint alleges claims under section 10(b), section 20(a) and
section 20A of the Exchange Act. The amended class action complaint does not
specify the amount of damages sought. On July 17, 2000, we filed a motion to
dismiss all counts of the amended complaint. No ruling has yet been made with
respect to that motion. We intend to defend this matter vigorously.
Delaware Derivative Litigation. In June 2000, purported holders of our
common stock filed a shareholder derivative lawsuit in the Delaware Court of
Chancery seeking recovery for various alleged breaches of fiduciary duties by
certain of our directors and officers relating to our restatement of
financial results. We have not answered or otherwise responded to the
derivative complaint.
SEC Investigation. In March 2000, we were notified that the SEC had
issued a formal order of private investigation in connection with matters
relating to our restatement of our financial results. The SEC has requested
that we provide them with certain documents concerning the revision of our
financial results and financial reporting documents. The SEC indicated that
its inquiry should not be construed as an indication by the SEC or its staff
that any violation of law has occurred, nor as an adverse reflection upon any
person, entity or security. We are cooperating with the SEC in connection
with this investigation and its outcome cannot yet be determined.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Charter Amendment
On June 19, 2000, the Company filed a Certificate of Amendment to the
Amended and Restated Certificate of Incorporation with the Secretary of State
of the State of Delaware providing for (a) an increase in the number of
authorized shares of Class A common stock, par value $0.001 per share, from
100,000,000 shares to 330,000,000 shares and (b) an increase in the number of
authorized shares of Class B common stock, par value $0.001 per share, from
100,000,000 shares to 165,000,000 shares.
Consulting Services Transaction
On June 7, 2000, the Company entered into a Consulting Services Agreement
with Claudio Remon, the controlling stockholder of DSS Consulting, S.A., a
company organized under the laws of Argentina (the "Consulting Agreement").
In consideration of consulting services rendered to the Company, the Company
issued to Mr. Remon 57,143 shares of the Company's Class A common stock, par
value $0.001 per share. The issuance of such shares to Mr. Remon was exempt
from the registration requirements of the Securities Act of 1933, as amended,
pursuant to Regulation S promulgated thereunder. The Company anticipates that
it will issue additional shares of its Class A common stock to Mr. Remon
under the terms of the Consulting Services Agreement as additional consulting
services are performed by Mr. Remon.
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Sale of Series A Convertible Preferred Stock
On June 19, 2000, the Company issued and sold 12,500 shares of our
unregistered Series A convertible preferred stock to four institutional
investors in a private offering for an aggregate purchase price of
$125,000,000. The holders of shares of Series A convertible preferred stock
have the right to convert these shares at any time into Class A common stock.
Based on the applicable conversion price of $33.3854 per share as of August
1, 2000, the number of shares of Class A common stock that we would be
required to issue upon conversion of all 12,500 shares of Series A
convertible preferred stock, excluding shares issued as accrued dividends,
would be approximately 3,744,152 shares. The conversion price may be adjusted
if the Series A convertible preferred stock remains outstanding on June 19,
2001 and on each subsequent anniversary of such date, or upon the occurrence
of various events, based on the market price of the Company's Class A common
stock if such adjustment would result in a lower conversion price. In
addition, these shares of Series A convertible preferred stock are redeemable
or convertible into shares of the Company's Class A common stock at the
election of the Company beginning on June 19, 2002, subject to extension in
some circumstances.
The issuance and sale of the securities in the above transaction was
made in reliance on the exemption from registration under the Securities Act
of 1933, as amended (the "Securities Act") provided by Section 4(2)
thereunder. No underwriters were involved in the foregoing sale of
securities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on June 19, 2000. The
following proposals were adopted by the vote specified below.
<TABLE>
<CAPTION>
Against/ Broker
Proposal For Withheld Abstain Non-Votes
-------- --- -------- ------- ---------
1. Election of Directors:
<S> <C> <C> <C> <C>
Michael J. Saylor 542,983,690 100,166 --- ---
Sanju K. Bansal 542,983,740 100,116 --- ---
Frank A. Ingari 542,972,540 111,316 --- ---
Jonathan J. Ledecky 542,983,740 100,116 --- ---
John W. Sidgmore 542,983,740 100,116 --- ---
Ralph S. Terkowitz 542,983,740 100,116 --- ---
2. Approval of an amendment to the
Company's 1997 Director Option
Plan increasing the maximum
number of shares of Class A
common stock available under the
plan from 400,000 shares to
600,000 shares 539,663,614 3,397,495 22,746 1
3. Approval of an amendment to the
Company's 1999 Stock Option Plan
to increase the maximum number of
shares of Class A common stock
available under the plan from
5,000,000 shares to 11,000,000
shares 538,550,802 4,514,365 18,689 ---
4. Approval of an amendment to the
Company's Amended and Restated
Certificate of Incorporation
providing for (a) an increase
in the number of authorized
shares of Class A common stock,
par value $0.001 per share,
from 100,000,000 shares to
330,000,000 shares and (b) an
increase in the number of
authorized shares of Class B
common stock, par value $0.001
per share, from 100,000,000
shares to 165,000,000 shares 538,003,703 5,064,563 15,590 ---
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5. Ratification of Pricewaterhouse
Coopers LLP as independent
auditors 542,946,603 121,562 15,690 1
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
3.1 Amended and Restated Certificate of Incorporation of the Company (Filed
as Exhibit 3.1 to the Company's Registration Statement on Form S-1
(Registration No. 333-49899) and incorporated by reference herein)
3.2 Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of the Company
3.3 Certificate of Designations, Preferences and Rights of the Series A
Convertible Preferred Stock (Filed as Exhibit 3.1 to the Company's
Current Report on Form 8-K (File No. 000-24435) filed on June 19, 2000
and incorporated by reference herein)
3.4 Restated Bylaws of the Company (Filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (Registration No. 333- 49899) and
incorporated by reference herein)
4.1 Form of Certificate of Class A Common Stock of the Company (Filed as
Exhibit 4.1 to the Company's Registration Statement on Form S-1
Registration No. 333-49899) and incorporated by reference herein)
10.1 First Modification Agreement, dated May 15, 2000, among Bank of America,
N.A., MicroStrategy Incorporated, Michael J. Saylor and Alcantara LLC
(Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2000 (File No. 000-24435) and
incorporated by reference herein)
10.2 Registration Rights Agreement, dated as of June 17, 2000, by and among
MicroStrategy Incorporated and each of the signatories thereto (Filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K (File No.
000-24435) filed on June 19, 2000 and incorporated by reference herein)
10.3 Amendment No. 1 to the 1999 Stock Option Plan of the Company
10.4 Pledge and Security Agreement, dated June 29, 2000, by MicroStrategy
Incorporated in favor of Bank of America N.A. (Filed as Exhibit 10.1 to
the Company's Registration Statement on Form S-3 (Registration No.
333-42994) and incorporated by reference herein)
10.5 Letter Agreement, dated June 29, 2000, from Bank of America N.A. (Filed
as Exhibit 10.2 to the
38
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Company's Registration Statement on Form S-3 Registration No.
333-42994) and incorporated by reference herein)
27.1 Financial Data Schedule
39
<PAGE>
B. Reports on Form 8-K
On June 19, 2000, the Company filed a Current Report on Form 8-K, dated
June 19, 2000, announcing the issuance of 12,500 shares of its Series A
convertible preferred stock in a private placement to institutional
investors.
All other items are omitted because they are not applicable or the
answers are none.
40
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Microstrategy Incorporated
By: /s/ Michael J. Saylor
--------------------------
Michael J. Saylor
President and Chief Executive
Officer
By: /s/ ERIC BROWN
----------------------
Eric Brown
Chief Financial Officer
Date: August 14, 2000
<PAGE>
EXHIBIT INDEX
3.1 Amended and Restated Certificate of Incorporation of the Company (Filed
as Exhibit 3.1 to the Company's Registration Statement on Form S-1
(Registration No. 333-49899) and incorporated by reference herein)
3.2 Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of the Company
3.3 Certificate of Designations, Preferences and Rights of the Series A
Convertible Preferred Stock (Filed as Exhibit 3.1 to the Company's
Current Report on Form 8-K (File No. 000-24435) filed on June 19, 2000
and incorporated by reference herein)
3.4 Restated Bylaws of the Company (Filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (Registration No. 333- 49899) and
incorporated by reference herein)
4.1 Form of Certificate of Class A Common Stock of the Company (Filed as
Exhibit 4.1 to the Company's Registration Statement on Form S-1
(Registration No. 333-49899) and incorporated by reference herein)
10.1 First Modification Agreement, dated May 15, 2000, among Bank of America,
N.A., MicroStrategy Incorporated, Michael J. Saylor and Alcantara LLC
(Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2000 (File No. 000-24435) and
incorporated by reference herein)
10.2 Registration Rights Agreement, dated as of June 17, 2000, by and among
MicroStrategy Incorporated and each of the signatories thereto (Filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K (File No.
000-24435) filed on June 19, 2000 and incorporated by reference herein)
10.3 Amendment No. 1 to the 1999 Stock Option Plan of the Company
10.4 Pledge and Security Agreement, dated June 29, 2000, by MicroStrategy
Incorporated in favor of Bank of America N.A. (Filed as Exhibit 10.1 to
the Company's Registration Statement on Form S-3 (Registration No.
333-42994) and incorporated by reference herein)
10.5 Letter Agreement, dated June 29, 2000, from Bank of America N.A. (Filed
as Exhibit 10.2 to the Company's Registration Statement on Form S-3
(Registration No. 333-42994) and incorporated by reference herein)
27.1 Financial Data Schedule
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