SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1999
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)
51-0323571
(I.R.S. Employer Identification Number)
8000 Towers Crescent Drive
Vienna, VA
(Address of Principal Executive Offices)
22182
(Zip Code)
Registrant's telephone number, including area code: (703) 848-8600
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 November 1, 1999 was 9,889,657 and 28,670,465,
respectively.
<PAGE>
EXPLANATORY NOTE
Subsequent to filing a registration statement on Form S-3 with the
Securities and Exchange Commission ("SEC") on February 24, 2000 and amendments
thereto, which included the audited financial statements of MicroStrategy
Incorporated (the "Company") 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.
Accordingly, the Company has determined to restate its financial statements for
the years ended December 31, 1999, 1998 and 1997 and its quarterly financial
statements for 1999, 1998 and 1997, including the three and nine month periods
ended September 30, 1999 and 1998.
This Form 10-Q/A includes in Item 1 of Part I such restated financial
statements and related notes thereto for the three and nine month periods ended
September 30, 1999 and 1998, and other information relating to such restated
financial statements. Except for Items 1 and 2 of Part I, Item 2 of Part II and
Exhibit 27.1, no other information included in the original report on Form 10-Q
is amended by this Form 10-Q/A.
For current information regarding risks, uncertainties and other factors
that may affect the Company's future performance, please see "Risk Factors"
included in Item 2 of Part I of the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2000.
<PAGE>
MICROSTRATEGY INCORPORATED
FORM 10-Q/A
TABLE OF CONTENTS
Page
----
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets, September 30, 1999 (unaudited
and restated) and December 31, 1998 (restated).............. 1
Consolidated Statements of Operations and Comprehensive
Income, For the Three Months Ended September 30, 1999 and
1998 (unaudited and restated)............................... 2
Consolidated Statements of Operations and Comprehensive
Income, For the Nine Months Ended September 30, 1999 and
1998 (unaudited and restated) .............................. 3
Consolidated Statements of Cash Flows, For the Nine Months
Ended September 30, 1999 and 1998 (unaudited and restated).. 4
Notes to Consolidated Financial Statements (unaudited and
restated)................................................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 24
Part II. OTHER INFORMATION............................................. 25
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MICROSTRATEGY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
(unaudited (restated)
and restated)
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents........................ $ 22,380 $ 27,491
Short-term investments........................... 21,404 --
Accounts receivable, net......................... 30,302 25,377
Prepaid expenses and other current assets........ 8,763 7,173
------ ------
Total current assets........................... 82,849 60,041
Property and equipment, net....................... 29,253 13,773
Deposits and other assets......................... 2,606 2,757
------ ------
Total assets................................... $114,708 $ 76,571
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses............ $ 14,499 $ 11,464
Accrued compensation and employee benefits....... 7,593 7,356
Deferred revenue and advance payments............ 20,557 12,302
Dividend notes payable........................... -- 5,000
------ ------
Total current liabilities...................... 42,649 36,122
Deferred revenue and advance payments............. 3,284 746
Deferred tax liabilities, net..................... 1,928 1,928
------ ------
Total liabilities.............................. 47,861 38,796
------ ------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, par value $0.001 per share,
5,000,000 shares authorized, no shares
issued or outstanding.......................... -- --
Common Stock, par value $0.001 per share,
50,000,000 shares authorized, no shares
issued or outstanding.......................... -- --
Class A Common Stock, par value $0.001 per share,
100,000,000 shares authorized, 9,387,915 shares
issued and outstanding at September 30, 1999;
5,052,110 shares issued and outstanding at
December 31, 1998.............................. 9 5
Class B Common Stock, par value $0.001 per share,
100,000,000 shares authorized, 29,055,465 shares
issued and outstanding at September 30, 1999;
30,633,114 shares issued and outstanding at
December 31, 1998.............................. 29 31
Additional paid-in capital....................... 87,853 42,219
Accumulated other comprehensive income........... 710 894
Deferred compensation............................ (963) (1,164)
Accumulated deficit.............................. (20,791) (4,210)
------- ------
Total stockholders' equity..................... 66,847 37,775
------- ------
Total liabilities and stockholders' equity..... $114,708 $ 76,571
======== ========
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
1
<PAGE>
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
For the Three Months Ended September 30, 1999 and 1998
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------
1999 1998
---- ----
(unaudited and restated)
Revenues:
<S> <C> <C>
Product licenses................................... $ 18,159 $ 15,879
Product support.................................... 17,150 10,081
------ ------
Total revenues.................................. 35,309 25,960
Cost of revenues:
Product licenses................................... 844 586
Product support.................................... 9,023 4,658
------ ------
Total cost of revenues.......................... 9,867 5,244
------ ------
Gross margin......................................... 25,442 20,716
------ ------
Operating expenses:
Sales and marketing................................ 24,324 12,926
Research and development........................... 8,082 3,218
General and administrative......................... 6,243 2,941
------ ------
Total operating expenses........................ 38,649 19,085
------ ------
(Loss) income from operations........................ (13,207) 1,631
Interest income...................................... 594 551
Interest expense..................................... -- (120)
Other expense, net................................... (6) (7)
------ ------
(Loss) income before income taxes.................... (12,619) 2,055
Provision for income taxes........................... 155 --
------ ------
Net (loss) income ................................... $(12,774) $ 2,055
======== ========
Other comprehensive income:
Foreign currency translation adjustment............ 534 332
Unrealized gain on investments, net of tax......... 3 --
------ ------
Comprehensive (loss) income.......................... $(12,237) $ 2,387
======== ========
Basic net (loss) income per share.................... $ (0.33) $ 0.06
======== ========
Weighted average shares outstanding used in
computing basic net (loss) income per share........ 38,361,338 35,543,737
========== ==========
Diluted net (loss) income per share.................. $ (0.33) $ 0.05
======== ========
Weighted average shares outstanding used in
computing diluted net (loss) income per share...... 38,361,338 40,881,728
========== ==========
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
2
<PAGE>
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
For the Nine Months Ended September 30, 1999 and 1998
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
1999 1998
---- ----
(unaudited and restated)
Revenues:
<S> <C> <C>
Product licenses................................... $ 59,754 $ 42,962
Product support.................................... 45,342 23,296
------- ------
Total revenues.................................. 105,096 66,258
------- ------
Cost of revenues:
Product licenses................................... 1,927 1,676
Product support.................................... 23,538 11,934
------ ------
Total cost of revenues.......................... 25,465 13,610
------ ------
Gross margin......................................... 79,631 52,648
------ ------
Operating expenses:
Sales and marketing................................ 62,243 35,759
Research and development........................... 19,231 8,086
General and administrative......................... 15,792 8,104
------ -----
Total operating expenses........................ 97,266 51,949
------ ------
(Loss) income from operations........................ (17,635) 699
Interest income...................................... 1,769 682
Interest expense..................................... (143) (621)
Other expense, net................................... 26 (31)
------ ------
(Loss) income before income taxes.................... (15,983) 729
Provision for income taxes........................... 598 --
------ ------
Net (loss) income.................................... $(16,581) $ 729
======== =======
Other comprehensive (loss) income:
Foreign currency translation adjustment............ (70) 395
Unrealized loss on investments, net of tax......... (71) --
------ ------
Comprehensive (loss) income.......................... $(16,722) $ 1,124
======== =======
Basic net (loss) income per share.................... $ (0.44) $ 0.02
======== =======
Weighted average shares outstanding used in
computing basic net (loss) income per share........ 37,710,230 32,771,485
========== ==========
Diluted net (loss) income per share.................. $ (0.44) $ 0.02
======== =======
Weighted average shares outstanding used in
computing diluted net (loss) income per share...... 37,710,230 37,936,672
========== ==========
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
3
<PAGE>
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1999 and 1998
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
1999 1998
---- ----
(unaudited and restated)
Operating activities:
<S> <C> <C>
Net (loss) income..................................... $(16,581) $ 729
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Depreciation and amortization......................... 4,902 2,045
Provision for doubtful accounts....................... 1,039 150
Amortization of deferred compensation................. 201 163
Changes in operating assets and liabilities:
Accounts receivable................................... (6,045) (9,142)
Prepaid expenses and other current assets............. (1,670) (938)
Accounts payable and accrued expenses, compensation
and benefits........................................ 3,691 (545)
Deferred revenue...................................... 10,914 1,500
Deposits and other assets............................. (377) (48)
------ ------
Net cash used in operating activities.............. (3,926) (6,086)
Investing activities:
Acquisition of property and equipment................. (20,078) (6,144)
Purchase of short-term investments.................... (24,492) --
Maturities of short-term investments.................. 3,000 --
------ ------
Net cash used in investing activities.............. (41,570) (6,144)
Financing activities:
Proceeds from sale of Class A Common Stock and
exercise of stock options, net of offering costs.... 45,624 48,797
Repayments on short-term line of credit, net.......... -- (4,508)
Payments of dividend notes payable.................... (5,000) (2,500)
Proceeds from issuance of notes payable............... -- 862
Principal payments on notes payable................... -- (4,211)
------ ------
Net cash provided by financing activities.......... 40,624 38,440
Effect of foreign exchange rate changes on cash and
cash equivalents...................................... (239) 152
------ ------
Net (decrease) increase in cash and cash equivalents.... (5,111) 26,362
Cash and cash equivalents, beginning of year............ 27,491 3,506
------ ------
Cash and cash equivalents, end of period................ $ 22,380 $ 29,868
======== ========
Supplemental disclosure of noncash investing and
financing activities:
Unrealized loss on investments........................ $ 114 $ --
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest................ $ 87 $ 576
======== ========
Cash paid during the year for income taxes............ $ 2,113 $ 1,330
======== ========
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
4
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited and restated)
(1) Basis of Presentation
The consolidated balance sheet of MicroStrategy Incorporated as of
September 30, 1999, the related consolidated statements of operations for the
three and nine month periods ended September 30, 1999 and 1998, and the
consolidated statements of cash flows for the nine month periods ended September
30, 1999 and 1998 are unaudited. In the opinion of management, all adjustments
(consisting of normal recurring items) necessary for a fair presentation of such
financial statements have been included. Interim results are not necessarily
indicative of results for a full year.
The consolidated financial statements and notes are presented as required
by Form 10-Q and do not contain certain information included in the Company's
annual financial statements and notes. These financial statements should be read
in conjunction with the Company's audited financial statements and the notes
thereto for the year ended December 31, 1998 filed with the Securities and
Exchange Commission on April 13, 2000 as part of the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
(2) Restatement of Financial Statements
Subsequent to the filing of a registration statement on Form S-3 with the
SEC which included the Company's audited financial statements for the years
ended December 31, 1999, 1998 and 1997, the Company became aware that its
reported revenues and operating result with respect to 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. Additionally, these revisions include the
effects of changes in the reporting periods when revenue from certain contracts
is recognized. In the course of reviewing its revenue recognition on various
transactions, the Company became aware that, in certain instances, the Company
had recorded revenue on certain contracts in one reporting period where customer
signature and delivery had been completed, but where the contract may not have
been fully executed by the Company in that reporting period. The Company
subsequently reviewed license agreements executed near the end of the quarters
ended September 30, 1999 and 1998 and the years ended December 31, 1999, 1998
and 1997 and determined that revisions to its reported revenues were necessary.
The total effect of all revisions to revenue was to reduce revenues by $19.2
million and $1.1 million for the quarters ended September 30, 1999 and 1998 and
by $30.9 million and $4.4 million for the nine months ended September 30, 1999
and 1998.
The Company also made certain revisions to its balance sheet as of
September 30, 1999. We reduced fixed assets by approximately $5.3 million, net
of the decrease in depreciation, in order to record software received for resale
and software acquired for internal use in barter transactions at the book value
of our assets surrendered in the exchange. Approximately $5.0 million of the
reduction in fixed assets is a reduction in revenue, as restated. Of this
amount, no revenue will be recorded unless this software is resold.
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/A have been restated as follows (in thousands):
5
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
As As
Reported Restated Reported Restated
-------- -------- -------- --------
Statements of Operations Data
Revenue:
<S> <C> <C> <C> <C>
Product licenses................. $ 38,219 $ 18,159 $ 16,949 $ 15,879
Product support.................. 16,336 17,150 10,065 10,081
Income (loss) from operations...... 5,531 (13,207) 2,685 1,631
Provision for income taxes......... 2,325 155 1,181 --
Net income (loss).................. 3,794 (12,774) 1,928 2,055
Net income (loss) per share:
Basic............................ $ 0.10 $ (0.33) $ 0.05 $ 0.06
Diluted.......................... $ 0.09 $ (0.33) $ 0.05 $ 0.05
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
As As
Reported Restated Reported Restated
-------- -------- -------- --------
Statements of Operations Data
Revenue:
<S> <C> <C> <C> <C>
Product licenses................. $ 92,400 $ 59,754 $ 47,476 $ 42,962
Product support.................. 43,577 45,342 23,223 23,296
Income (loss) from operations...... 12,645 (17,635) 5,140 699
Provision for income taxes......... 5,433 598 1,758 --
Net income (loss).................. 8,864 (16,581) 3,412 729
Net income (loss) per share:
Basic............................ $ 0.24 $ (0.44) $ 0.10 $ 0.02
Diluted.......................... $ 0.21 $ (0.44) $ 0.09 $ 0.02
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
As As
Reported Restated Reported Restated
-------- -------- -------- --------
Balance Sheet Data
<S> <C> <C> <C> <C>
Accounts receivable, net........... $ 54,587 $ 30,302 $ 33,054 $ 25,377
Prepaid expenses and other current
assets........................... 5,004 8,763 2,914 7,173
Long-term accounts receivable...... -- -- 2,700 --
Accounts payable and accrued
expenses......................... 15,890 14,499 11,904 11,464
Deferred revenue and advance payments
(current and non-current)........ 11,296 23,841 11,478 13,048
Deferred tax liabilities, net...... 671 1,928 671 1,928
Deferred compensation.............. (1,755) (963) (2,098) (1,164)
Retained earnings (deficit)........ 14,093 (20,791) 5,229 (4,210)
</TABLE>
(3) Public Offering
On February 10, 1999, the Company sold to the public 1,585,000 shares of
Class A Common Stock for approximately $40,100,000, net of expenses. In
addition, certain holders of Class B Common Stock converted 415,000 shares of
Class B Common Stock to Class A Common Stock in connection with their sale of
such shares in the public offering.
6
<PAGE>
(4) Cash, Cash Equivalents and Short-Term Investments
Cash equivalents include high quality money market instruments, commercial
paper, U.S. agency notes and corporate notes. The Company considers all highly
liquid investments with an original maturity of three months or less when
purchased to be cash equivalents.
Short-term investments are comprised of readily marketable debt securities
with original maturities of more than three months when purchased. Where the
original maturity is more than one year, the securities are classified as
short-term investments if the Company's intention is to convert them to cash
within one year. All short-term investments are available-for-sale and are
stated at fair value with unrealized gains and losses included as a component of
stockholders' equity.
(5) Use of Estimates
The preparation of the consolidated financial statements, in conformity
with generally accepted accounting principles, requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
(6) Income Taxes
Prior to the Company's initial public offering in June 1998, the Company
had elected to be treated for federal and state income tax purposes as a
Subchapter S corporation. Under Subchapter S, the taxable income or loss is
reported by the stockholders and, accordingly, no federal or state income taxes
had been provided in the financial statements prior to consummation of the
initial public offering.
(7) Commitments
In September 1999, the Company entered into a commitment to purchase $16.0
million of computer equipment, software, consulting services and marketing over
the twelve month period ending September 2000.
(8) Net (Loss) Income Per Share
Basic net (loss) income 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) income 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) income per share calculation when dilutive. Potential common shares
consisting of common stock issuable upon exercise of outstanding common stock
options and warrants are computed using the treasury stock method. The Company's
net (loss) income per share calculation for basic and diluted is based on the
weighted average common shares outstanding. Reconciliations of the basic net
(loss) income per share and diluted net (loss) income per share computations for
the three and nine month periods ended September 30, 1999 and 1998 are as
follows:
7
<PAGE>
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
(in thousands, except share and per share data)
<S> <C> <C> <C> <C>
Net (loss) income........... $(12,774) $ 2,055 $(16,581) $ 729
Basic net (loss) income per
share:
Weighted average common
shares outstanding...... 38,361,338 35,543,737 37,710,230 32,771,485
========== ========== ========== ==========
Basic net (loss) income per
share .................... $ (0.33) $ 0.06 $ (0.44) $ 0.02
========= ======== ========= =======
Diluted net (loss) income per
share:
Weighted average common
shares outstanding...... 38,361,338 35,543,737 37,710,230 32,771,485
Dilutive impact of common
shares issuable upon
exercise of stock options
and warrants............ -- 5,337,991 -- 5,165,187
========= ========= ========= =========
Weighted average common
shares assuming
dilution................ 38,361,338 40,881,728 37,710,230 37,936,672
========== ========== ========== ==========
Diluted net (loss) income per
share....................... $ (0.33) $ 0.05 $ (0.44) $ 0.02
======== ======= ======== =======
</TABLE>
Employee stock options of 6,195,369 and warrants of 57,000 for the three
and nine month periods ended September 30, 1999 have been excluded from the net
loss per share calculation because their effect would be anti-dilutive. During
the three and nine month periods ended September 30, 1998, there were no stock
options excluded from the net income per share calculation because none were
anti-dilutive.
(9) Segment Information
The following table presents a summary of operations by geographic region,
including eliminations of all significant intercompany transactions:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
(in thousands)
Revenue:
<S> <C> <C> <C> <C>
Domestic.................. $ 24,873 $ 19,516 $ 79,837 $ 50,425
Europe.................... 10,436 6,444 25,259 15,833
-------- -------- -------- --------
Total revenue............ $ 35,309 $ 25,960 $105,096 $ 66,258
======== ======== ======== ========
Operating (loss) income:
Domestic.................. $(15,323) $ 514 $(22,322) $ 442
Europe.................... 2,116 1,117 4,687 257
-------- -------- -------- --------
Total operating (loss)
income................ $(13,207) $ 1,631 $(17,635) $ 699
======== ======== ======== ========
Identifiable assets:
Domestic................. $ 92,691 $ 54,898 $ 92,691 $ 54,898
Europe................... 22,017 14,565 22,017 14,565
-------- -------- -------- --------
Total assets............ $114,708 $ 69,463 $114,708 $ 69,463
======== ======== ======== ========
</TABLE>
Transfers of $2,404,000 and $1,626,000 for the three month periods ended
September 30, 1999 and 1998, respectively, and of $5,512,000 and $4,064,000 for
the nine month periods ended September 30, 1999 and 1998, respectively, from
foreign to domestic operations have been excluded from the above table and
eliminated in the consolidated financial statements.
8
<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. Our product line enables both proactive and interactive
delivery of information from large-scale databases, providing Global 2000
enterprises a platform for developing solutions that deliver insight and
intelligence to their enterprise, supply-chain and customers.
Our 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, our platform delivers critical
business information beyond corporate boundaries to customers, partners and
supply chain constituencies through a broad range of pull and push technology
such as the Internet, e-mail, telephones, pagers and other wireless
communications devices. Our platform is used in the development of e-business
solutions that are personalized and proactive, and that reach millions of users.
We also offer a comprehensive set of consulting, education and support services
for our customers and partners.
Our revenues historically have been derived from two principal sources,
fees for product licenses and fees for maintenance, technical support, education
and consulting services, which we refer to collectively as product support and
other services. We recognize revenue in accordance with Statement of Position
(''SOP'') 97-2, ''Software Revenue Recognition,'' as amended by SOP 98-4,
''Deferral of the Effective Date of a Provision of SOP 97-2'' and SOP 98-9,
''Modification of SOP 97-2, Software Revenue Recognition,'' and SOP 81-1,
''Accounting for Performance of Construction-Type and Certain Production-Type
Contracts,'' as applicable.
Product license revenues are generally recognized upon the execution of a
contract and shipment of the related software product if no significant
obligations remain outstanding on our part and the resulting receivable is
deemed collectible by management.
Technical support revenues are derived from customer support agreements
generally entered into in connection with initial product license sales and
subsequent renewals. Fees for our technical support services are displayed as
deferred revenue when paid by the customer and recognized ratably over the term
of the maintenance and support agreement, which is typically one year. We also
record as deferred revenue the fair value of implicit maintenance arrangements
when resellers or other customers that sell our software to end users offer
these end users the right to receive the then current version of our software at
the time of resale. Certain of these agreements extend over several years. Fees
for our education and consulting services are typically recognized at the time
the services are performed.
Revenues recognized from multiple-element software arrangements are
allocated to each element of the arrangement based on the relative fair values
of the elements, such as software products, upgrades, enhancements, technical
support, installation or education. The determination of fair value of each
element is based on objective evidence based on historical sales of the
individual element by us to other customers. If such evidence of fair value for
each element of the arrangement does not exist, all revenue from the arrangement
is deferred until such time that evidence of fair value does exist or until all
elements of the arrangement are delivered.
Customers at times require consulting and implementation services which
include evaluating their business needs, identifying resources necessary to meet
their needs and installing the solution to fulfill their needs. When the
software license arrangement requires the Company to provide significant
consulting services to produce, customize or modify software or when the
customer considers these services essential to the functionality of the software
product, both the product license revenue and product support and other services
revenue are recognized in accordance with the provisions of SOP 81-1. The
Company recognizes revenue from these arrangements using the percentage of
completion method and, therefore, both product license and product support and
other services revenue are recognized as work progresses. If the software
license arrangement obligates the Company to the delivery of unspecified future
products, then revenue is recognized on the subscription basis, ratably over the
term of the contract.
Beginning initially in the fourth quarter of 1998 and continuing through
the third quarter of 1999, we began to sell our products and services to
customers for large scale e-commerce applications. In contrast to earlier
periods in which our typical customer transaction involved a stand-alone
software license and maintenance, these transactions typically involve multiple
software products and services for use by very large numbers of end users across
web, wireless and voice communications channels, and often incorporate elements
from our Strategy.com network. These multiple element
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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.
This quarterly report on Form 10-Q/A contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words ''believes,'' ''anticipates,'' ''plans,'' ''expects,'' and
similar expressions are intended to identify forward-looking statements. There
are a number of factors that could cause actual results to differ materially
from those indicated by such forward- looking statements.
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 Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
Restated(1) Restated(1)
Consolidated Statements of
Operations Data:
Revenues:
<S> <C> <C> <C> <C>
Product licenses................ 51.4% 61.2% 56.9% 64.8%
Product support................. 48.6 38.8 43.1 35.2
----- ----- ----- -----
Total revenues................. 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenues:
Product licenses................ 2.4 2.3 1.8 2.5
Product support................. 25.5 17.9 22.4 18.0
----- ----- ----- -----
Total cost of revenues......... 27.9 20.2 24.2 20.5
----- ----- ----- -----
Gross margin...................... 72.1 79.8 75.8 79.5
----- ----- ----- -----
Operating expenses:
Sales and marketing............. 68.9 49.8 59.2 54.0
Research and development........ 22.9 12.4 18.3 12.2
General and administrative...... 17.7 11.3 15.0 12.2
----- ----- ----- -----
Total operating expenses....... 109.5 73.5 92.5 78.4
----- ----- ----- -----
(Loss) income from operations..... (37.4) 6.3 (16.7) 1.1
Interest income (expense), net.... 1.7 1.6 1.5 0.1
Other expense, net................ -- -- -- (0.1)
Provision for income taxes........ 0.4 0.0 0.6 0.0
----- ----- ----- -----
Net (loss) income................. (36.1)% 7.9% (15.8)% 1.1%
===== ===== ====== =====
</TABLE>
______________________
(1) See Note 2 of the Notes to Consolidated Financial Statements regarding
restatement of 1999, 1998 and 1997 financial statements.
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Comparison of Three Months Ended September 30, 1999 and 1998
Revenues
Total revenues increased to $35.3 million for the three months ended
September 30, 1999 from $26.0 million for the three months ended September 30,
1998, representing an increase of 36.0%. Total revenues consist of revenues
derived from sales of software product licenses and product support. There can
be no assurance that total revenues will continue to increase at the rates
experienced in prior periods.
Product License Revenues. Product license revenues increased to $18.2
million for the three months ended September 30, 1999 from $15.9 million for the
three months ended September 30, 1998, representing an increase of 14.4%. The
increase in product license revenues was due to growing market acceptance of our
software products and continued expansion of our sales and marketing
organization. Product license revenues constituted 51.4% and 61.2% of total
revenues for the three months ended September 30, 1999 and 1998, respectively.
Product Support Revenues. Product support revenues increased to $17.2
million for the three months ended September 30, 1999 from $10.1 million for the
three months ended September 30, 1998, representing an increase of 70.1%.
Product support revenues constituted 48.6% and 38.8% of total revenues for the
three months ended September 30, 1999 and 1998, respectively. The increase in
product support revenues was primarily due to the increase in product licenses
sold, in conjunction with several large consulting projects during the quarter,
as well as an increase in large-scale e-commerce applications which require
significant implementation and other consulting work. As a result of the above
mentioned trends, we expect product support revenues to fluctuate on a period to
period basis and vary significantly from the percentage of total revenues
achieved in prior quarters.
International Revenues. International revenues were $10.4 million and $6.4
million for the three months ended September 30, 1999 and 1998, respectively,
representing approximately 29.6% and 24.8% of total revenues, respectively. We
opened sales offices in Australia, Canada and Italy in 1998 and in Austria,
France, the Netherlands, Germany, United Kingdom and Spain prior to 1998.
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 was $0.8 million and $0.6 million for the three months
ended September 30, 1999 and 1998, representing 4.6% and 3.7% of total product
license revenues, respectively. The decrease in total cost of product license
revenues as a percentage of total product license revenues was due to economies
of scale realized by producing larger volumes of product materials and decreased
materials costs due to an increase in the percentage of customers reproducing
product documentation at their sites. We anticipate that the cost of product
license revenues will continue to increase as product license revenues increase,
but decrease as a percentage of product license revenues. However, in the event
that we enter into any royalty arrangements with strategic partners in the
future, cost of product license revenues as a percentage of total product
license revenues may increase.
Cost of Product Support Revenues. Cost of product support revenues consists
of the costs of providing technical support, education and consulting services
to customers and partners. Cost of product support revenues was $9.0 million and
$4.7 million during the three months ended September 30, 1999 and 1998,
representing 52.6% and 46.2% of total product support revenues, respectively.
The increase in cost of product support revenues was primarily due to the
increase in product licenses sold and, thus, an increase in the number of
personnel providing consulting, education, and technical support to customers.
The total cost of product support revenues increased as a percentage of product
support revenues due to the increased use of third parties to perform consulting
services and an increase in consulting services at lower margins. We expect to
continue to increase the number of customer education and implementation
consultants in the future, as well as technical support personnel. To the extent
that our product support revenues do not increase at anticipated rates, the
hiring of additional consultants and technical support personnel could increase
the cost of product support revenues as a percentage of product support
revenues.
Sales and Marketing Expenses. Sales and marketing expenses include
personnel costs, commissions, office facilities, travel, promotional events such
as trade shows, seminars and technical conferences, advertising and public
relations programs. Sales and marketing expenses were $24.3 million and $12.9
million for the three months ended September 30,
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1999 and 1998, representing 68.9% and 49.8% of total revenues,
respectively. The increase in sales and marketing expenses was primarily the
result of increased staffing levels in the sales force, increased commissions
earned and increased promotional activities, trade show participation and
general marketing efforts. We believe that it is critically important to gain
market share among high-end customers. We have invested and will continue to
substantially increase our investment in sales and marketing in order to create
better market awareness of the value-added potential of our product suite and to
seek to acquire market share.
Research and Development Expenses. Research and development expenses
consist primarily of salaries and benefits of software engineering personnel,
depreciation of equipment and expendable equipment purchases. Research and
development expenses were $8.1 million and $3.2 million for the three months
ended September 30, 1999 and 1998, representing 22.9% and 12.4% of total
revenues, respectively. The increase in research and development expenses was
primarily due to additional hiring of research and development personnel and
continued development of new products and product releases. We expect that
research and development expenses will continue to increase as we continue to
invest in developing new products, applications and product enhancements. During
1998 and for the nine months ended September 30, 1999, no costs were capitalized
as the establishment of technological feasibility and general release of such
software had substantially coincided.
General and Administrative Expenses. General and administrative expenses
include the 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 were $6.2 million and
$2.9 million for the three months ended September 30, 1999 and 1998,
representing 17.7% and 11.3% of total revenues, respectively. The increase in
general and administrative expenses was primarily the result of increased staff
levels and related costs associated with the growth of our business during these
periods. We expect that general and administrative expenses will continue to
increase in the foreseeable future.
Provision for Income Taxes. We recorded income tax expense of $0.2 million
for the three months ended September 30, 1999, related to taxes payable in
certain foreign jurisdictions where we expect to be profitable in 1999. No tax
expense was recorded in 1998. Prior to the initial public offering, we had
elected to be treated as a Subchapter S corporation for federal and state income
tax purposes. Under Subchapter S, our income was allocated to our individual
stockholders rather than to us. Accordingly, no federal or state income taxes
have been provided for in the financial statements, prior to June 1998, when we
converted to a C corporation.
Comparison of Nine Months Ended September 30, 1999 and 1998
Revenues
Total revenues increased to $105.1 million for the nine months ended
September 30, 1999 from $66.3 million for the nine months ended September 30,
1998, representing an increase of 58.6%.
Product License Revenues. Product license revenues increased to $59.8
million for the nine months ended September 30, 1999 from $43.0 million for the
nine months ended September 30, 1998, representing an increase of 39.1%. The
significant increase in product license revenues was due to growing market
acceptance of our software products and continued expansion of our sales and
marketing organization. Product license revenues constituted 56.9% and 64.8% of
total revenues for the nine months ended September 30, 1999 and 1998,
respectively.
Product Support Revenues. Product support revenues increased to $45.3
million for the nine months ended September 30, 1999 from $23.3 million for the
nine months ended September 30, 1998, representing an increase of 94.6%. Product
support revenues constituted 43.1% and 35.2% of total revenues for the nine
months ended September 30, 1999 and 1998, respectively. The increase in product
support revenues was primarily due to the increase in product licenses sold.
International Revenues. International revenues were $25.3 million and $15.8
million for the nine months ended September 30, 1999 and 1998, representing
approximately 24.0% and 23.9% of total revenues, respectively.
Costs and Expenses
Cost of Product License Revenues. Cost of product license revenues was $1.9
million and $1.7 million for the nine months ended September 30, 1999 and 1998,
representing 3.2% and 3.9% of total product license revenues, respectively.
12
<PAGE>
The decrease in total cost of product license revenues as a percentage of
total 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 licenses at their
sites.
Cost of Product Support Revenues. Cost of product support revenues was
$23.5 million and $11.9 million for the nine months ended September 30, 1999 and
1998, representing 51.9% and 51.2% of total product support revenues,
respectively. The increase in cost of product support revenues in 1999 was
primarily due to the increase in product licenses sold and, thus, an increase in
the number of personnel providing consulting, education, and technical support
to customers.
Sales and Marketing Expenses. Sales and marketing expenses were $62.2
million and $35.8 million for the nine months ended September 30, 1999 and 1998,
representing 59.2% and 54.0% of total revenues, respectively. The increase in
sales and marketing expenses was primarily the result of increased staffing
levels in the sales force, increased commissions earned and increased
promotional activities, trade show participation and general marketing efforts.
Research and Development Expenses. Research and development expenses were
$19.2 million and $8.1 million for the nine months ended September 30, 1999 and
1998, representing 18.3% and 12.2% of total revenues, respectively. The increase
in research and development expenses was primarily due to additional hiring of
research and development personnel and continued development of new products and
product enhancements.
General and Administrative Expenses. General and administrative expenses
were $15.8 million and $8.1 million for the nine months ended September 30, 1999
and 1998, representing 15.0% and 12.2% of total revenues, respectively. The
increase in general and administrative expenses was primarily the result of
increased staff levels and related costs associated with the growth of our
business during these periods.
Provision for Income Taxes. The Company's effective tax rate was 38.0% for
the nine months ended September 30, 1999. For the nine months ended September
30, 1999 we recorded income tax expense of $0.6 million, related to taxes
payable in certain foreign jurisdictions where we expect to be profitable in
1999. No tax expense was recorded in 1998.
Liquidity and Capital Resources
From inception until the 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. We raised $48.2 million, net of
expenses, from our initial public offering. On February 10, 1999, we raised an
additional $40.1 million, net of expenses, from the sale of 1,585,000 shares of
Class A Common Stock. As a result, on September 30, 1999 and December 31, 1998,
we had $43.8 million and $27.5 million of cash, cash equivalents, and short-term
investments, respectively.
Cash used in operations was $3.9 million and $6.1 million for the nine
months ended September 30, 1999 and 1998, respectively. The decrease in cash
used in operations during the nine months ended September 30, 1999 compared to
the same period in 1998 was primarily attributable to an increase in net income.
Cash used in investing activities was $41.6 and $6.1 million for the nine
months ended September 30, 1999 and 1998, respectively. The increase in cash
used in investing activities during the nine months ended September 30, 1999
compared to the same period in 1998 reflected purchases of short-term
investments and capital expenditures related to the acquisition of computer and
office equipment required to support expansion of our operations and building of
infrastructure to support Strategy.com, which is a personal intelligence network
that delivers personalized information via Internet, telephone and wireless
devices. We expect to continue to aggressively invest in capital expenditures to
support the growth of the Company.
Our financing activities provided cash of $40.6 million and $38.4 million
for the nine months ended September 30, 1999 and 1998, respectively. The
principal source of cash from financing activities during the nine months ended
September 30, 1999 was from the additional sale of 1,585,000 shares of Class A
Common Stock in which we raised $40.1 million, net of expenses. Prior to the
sale of Class A Common Stock and the initial public offering, our principal
source of cash from financing activities was net borrowings from commercial
lending institutions. During December 1996, we entered into a loan agreement
with a commercial bank. In July 1998, we repaid all net borrowings under the
business loan. On March 26, 1999, we signed a $25.0 million revolving line of
credit. Borrowings under the revolving line of credit will bear interest at a
variable rate equal to LIBOR plus 1.0% to 1.75%, depending upon the ratio of
funded debt to earnings. As of September
13
<PAGE>
30, 1999, no amounts were outstanding under the Revolving Line; however,
borrowing capacity was reduced by $2.8 million of outstanding letters of credit.
In addition, as a result of the restatement to our 1997, 1998 and 1999 financial
statements as discussed in Note 2 of the Notes to Consolidated Financial
Statements, we would not have been in compliance with all of the covenants
contained in the line of credit agreement, therefore we would not have had the
right to borrow amounts under the agreement.
We declared a $10 million dividend to our shareholders prior to the initial
public offering. The dividend was paid in the form of notes prior to the
termination of our S corporation election, which occurred immediately prior to
the consummation of the initial public offering. As of September 30, 1999, the
entire $10.0 million of the dividend notes had been repaid.
Also in September 1999, we entered into a commitment to purchase $16.0
million of computer equipment, software, consulting services and marketing over
the twelve month period ending September 2000.
In November 1999, we signed a three year master lease agreement to lease
computer equipment. The lease bears interest at a rate equal to interest on U.S.
treasury notes with equivalent terms as in the lease plus 1.5%. We anticipate
that we will lease up to $20,000,000 in computer equipment over the term of the
agreement. Future draw downs and interest rates under the lease agreement are
subject to our credit worthiness. If the lessor deems our credit unworthy, we
may not be able to lease equipment under the agreement.
As of September 30, 1999, if our ability to borrow under the line of credit
had been restricted as discussed above, additional external financing through
credit facilities, sale of additional equity or other financing facilities would
be necessary to support our planned investment of significant resources to
continue to grow the business and to increase the MicroStrategy brand awareness.
There are no assurances that such financing facilities would be available on
acceptable terms; however, we believe that our existing cash and cash generated
internally by operations would meet our working capital requirements for at
least the next 12 months with more modest growth in MicroStrategy and minimal
brand awareness expenditures.
Risk Factors
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains a number of forward-looking statements. These statements are
based on expectations as of November 15, 1999 and actual results could differ
significantly. As of November 15, 1999, the following factors, among others,
could cause actual results to differ from these statements.
For information as of the date of the filing of this Form 10-Q/A regarding
risks, uncertainties and other factors that may affect our future performance,
please see "Risk Factors" included in Item 2 of Part I of our Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 2000.
Limited Operating History; Uncertainty of Future Operating Results
We began shipping MicroStrategy Agent, the first product in our current
product family, in 1994, and we introduced many of our other products in 1995.
Our limited operating history makes predicting future operating results
difficult, if not impossible. In addition, we have been operating with net
losses, losses from operations and negative cash flows. Although our revenues
have grown in recent periods, we cannot be certain that we will sustain or
increase our revenues or improve our operating results in the future.
Quarterly Operating Results May Fluctuate Significantly
For a number of reasons, including those described below, our operating
results, revenues and expenses may vary significantly from quarter to quarter.
Fluctuations in Quarterly Operating Results. Our quarterly operating
results may fluctuate as a result of:
. the size and timing of significant orders;
14
<PAGE>
. 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;
. delays or deferrals of customer implementation; and
. changes in foreign currency exchange rates.
Fluctuations in Revenues. In the past, we have typically recognized much of
the revenue for any quarter in the last two to four weeks of that quarter. As a
result, even minor delays in booking orders near the end of a quarter can
adversely affect that quarter's revenues, particularly when large orders are
involved. Accordingly, product license revenues for any quarter depend largely
on orders booked and shipped in that quarter. Product license revenues also
fluctuate because the market for our products is evolving rapidly and because
sales cycles, which may last many months, vary widely from customer to customer.
Sales cycles are affected by many factors over which we have little or no
control, including:
. customers' budgetary constraints;
. the timing of budget cycles;
. concerns about the introduction of new products by us or our competitors;
and
. potential downturns in the economy, which may reduce demand for
management information systems.
Product support revenues depend largely on technical support revenues from
existing customers and will vary with those customers' technical support needs.
Seasonal factors may also affect our revenues. For example, the pace of new
sales tends to slow in the summer and sales in the fourth quarter of 1999 and
first quarter of 2000 may be impacted by year 2000 issues. See "Year 2000
Issues; Potential Impact on Customers".
Limited Ability to Adjust Expenses. Because we plan to expand our business,
we expect our operating costs and expenses to increase substantially. Operating
costs and expenses we expect to increase include those associated with expanding
our technical support, research and development and sales and marketing
organizations. We also expect to devote substantial resources to expanding our
indirect sales channels and international operations. We base our operating
expense budgets on expected revenue trends. We may not be able to reduce the
operating costs and expenses associated with our expansion (or even the rate at
which those operating costs and expenses grow) in the short term. As a result,
variations in the timing and amounts of revenue could materially adversely
affect our quarterly operating results.
15
<PAGE>
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 likely 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 price of our Class A Common Stock may fall.
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 $23.8 million as of September 30, 1999. The timing
and ultimate recognition of our deferred revenue depends on our performance of
various service obligations. Because of the possibility of customer changes in
development schedules, delays in implementation and development efforts and the
need to satisfactorily perform product support services, deferred revenue at any
particular date may not be representative of actual revenue for any succeeding
period.
Sales May Be Delayed or Lost Due to Long Sales and Implementation Cycles for Our
Products
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 first contact for
customers to place orders while they seek internal approval for, among other
things, the necessary capital expenditures. During this long sales cycle,
certain 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. It
is also possible that our customers will divert technology expenditures in the
last quarter of 1999 to fund Year 2000 compliance plans or will restrict their
purchases of new software in order to dedicate information technology staff to
the implementation of year 2000 remedial measures. See ''Year 2000 Issues;
Potential Impact on Customers.''
Even after an order is placed, the time it takes to deploy our products
(the implementation cycle) varies widely from one customer to the next. The
implementation cycle can sometimes last several months, depending on the
customer's data warehousing and other requirements, 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.
These and other events affecting the sales and implementation cycles for
our products could materially adversely affect our business, operating results
or financial condition.
Increased Competition May Lead to Lower Prices, Reduced Gross Margins and Loss
of Market Share
The markets for e-business, e-commerce, customer relationship management
(CRM), 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 Personal Intelligence Network.
Our most direct competitors provide:
. E-business products (business to business and business to consumer);
. CRM (customer relationship management) products;
. E-commerce transaction systems (business to business and business to
consumer);
. Business intelligence products;
. Internet and wireless information networks and portals;
. Vertical Internet portals and information networks; and
. Wireless communications and wireless access protocol (WAP) enabled
products.
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Each of these market segments are discussed more fully below.
E-Business Products. In the e-business market, BroadVision, E.piphany,
Vignette, Net.Perceptions, Broadbase, Art Technology Group (ATG), Engage, and
Personify all provide products that compete directly or indirectly with our
Intelligent E-Business product line. Many of these companies provide
alternatives to our technology for adding intelligence and personalization to
e-commerce applications. One example is the use of customer information (e.g.,
past purchases, click stream, explicit preferences, or actions in a peer group)
as the basis for driving a personalized e-commerce experience that targets
customers with offers and interactions to which they are likely to respond.
CRM (customer relationship management) products. Companies that deliver CRM
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, Netscape (recently
acquired by American Online), BroadVision, Open Market, InterWorld, and Oracle
could provide competition to MicroStrategy. These products have the potential to
extend their capabilities to use customer information as the basis for
generating targeted, personalized product offers, which compete our 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 (typically tens to hundreds of thousands of users
and/or terabyte-sized databases), Information Advantage (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. The 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.
Internet and wireless information networks and portals. Web portals and
information networks such as Microsoft Network (MSN), Yahoo, Excite, and America
Online, offer an array of information (e.g., Finance, Sports, News, Weather)
that is similar to information provided by Strategy.com. Strategy.com seeks to
differentiate itself by 1) providing a greater level of personalization, 2)
allowing users to receive the precise information they want across the broadest
range of information delivery devices (e.g., via email, wireless phone, pager,
WAP, fax, personal digital assistants such as the Palm VII, and voice via
telephone), and 3) partnering with financial institutions, device manufacturers,
Internet companies, communication carriers and media companies, dot com's, and
wireless companies, to embed Strategy.com information services as an ingredient
in their own offerings. One or more of these companies, however, could expand
their offerings and reduce our differentiation in these three areas.
Vertical Internet Portals and Information Networks. Expedia, Weather.com,
CNBC.com, ABC.com, ESPN.com, Microsoft Investor, StockBoss, Microsoft CarPoint,
InfoBeat, Internet Travel Network and others have developed custom applications
and products to commercialize, analyze and deliver specific information over the
Internet. These systems are usually tailored to one application, such as
providing news, sports, or weather, but in the aggregate, they offer
applications similar to those provided by Strategy.com and any one of these
companies could expand their offering to more closely compete with
MicroStrategy.
Wireless Communications and WAP-enabled Products. Wireless communications
providers, such as AT&T, Sprint, MCI WorldCom, Nextel Communications, British
Telecom, Deutsche Telecom, PageNet, Nokia, Ericcson, 3COM, and Palm Pilot 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 to
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
17
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future competitors or that the competitive pressures we face will not
materially adversely affect 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 future indirect channel partners may establish
cooperative relationships with our current or future competitors. Such
relationships may limit our ability to sell our products through certain
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 have a material adverse
effect on our margins and on our ability to obtain maintenance revenues for new
and existing product licenses on favorable terms.
Continued Growth Will Increase Demands on Resources
We have been expanding rapidly and we expect to continue expanding our
operations. The total number of our employees grew from 59 on January 1, 1995 to
1,450 on September 30, 1999, and we expect our number of employees to continue
to increase. We have placed significant demands on our administrative,
operational, financial, and personnel resources and expect to continue doing so.
In particular, we expect the current and planned growth of our international
operations to lead to increased financial and administrative demands. 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
greatly expand our support organization to further develop indirect distribution
channels in different and broader markets and to accommodate growth in our
installed customer base. Failure to effectively manage our expansion could have
a material adverse effect on our business, operating results and financial
condition.
Need to Recruit Additional Skilled Personnel; Dependence on Key Personnel
Our future success depends on our continuing ability to attract, train,
assimilate and retain highly qualified personnel. Competition for these
personnel is intense. We may not be able to retain our current key employees or
attract, train, assimilate or retain other highly qualified 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 President and
Chief Executive Officer, and Sanju K. Bansal, our Executive Vice President and
Chief Operating Officer. Losing the services of one or more of these individuals
or other key personnel could materially adversely affect our business, operating
results and financial condition.
Dependence on New Versions, New Products and Rapid Technological Change
The market for our products is characterized by rapid technological change,
frequent new product introductions and enhancements, uncertain product life
cycles, changing customer demands and evolving industry standards. The
introduction of products embodying new technologies and the emergence of new
industry standards can quickly make existing products obsolete and unmarketable.
The emergence of new standards in related fields may also adversely affect
existing products. This could happen, for example, if new Web protocols emerged
that were incompatible with deployment of our MicroStrategy applications over
the Web. Although our business intelligence solutions allow the core database
component to reside on nearly all enterprise server hardware and operating
system combinations (Mainframe, AS/400, Unix, Windows NT and Windows), our
application server component runs at present only on the Windows NT operating
system. Therefore, our ability to increase sales may depend on the continued
acceptance of the Windows NT 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.
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 timely develop new products that achieve market acceptance, maintain
technological competitiveness and meet an expanding range of customer
requirements. Business intelligence applications, however, 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. Moreover, only a few of our customers to date have
deployed our products in environments that involve terabytes of data and
thousands of active users. As deployment in these complex environments becomes
more widespread, unexpected delays or other difficulties may arise. As a result,
lengthy delays in the general availability of new releases or significant
problems
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in installing or implementing new releases could arise that will have a
material adverse effect on our business, operating results and financial
condition. 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, evolving industry standards or customer
requirements. Nor can we be sure that we will not have difficulties that could
delay or prevent the successful development, introduction or marketing of these
enhancements. Finally, we cannot be sure that our new products and product
enhancements will achieve market acceptance.
Government Regulation and Other Legal Uncertainties
We are not directly regulated by any governmental agency, although we are
subject to the laws that generally apply to businesses. Certain U.S. and foreign
laws restricting the use of consumers' personal information may also apply to
us. Due to increasing use of the Internet and the dramatically increased access
to personal information made possible by technologies like ours, laws and
regulations may be adopted in the U.S. and abroad to limit access to personal
information over the Internet and other public data networks in ways that
adversely affect our business. The European Union Directive on Data Protection,
a comprehensive administrative and regulatory program controlling many aspects
of personal data collection and distribution, was required to be implemented by
its member nations in October 1998. This Directive limits the ability of
companies to collect, store and exchange personal data with other entities. In
response to consumer pressures, the U.S. Congress and various state legislatures
are considering legislation that would apply to us in areas such as privacy
protection. Because the United States 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. The U.S. Department of Commerce
is currently negotiating with the European Commission to develop a set of ''safe
harbor'' principles under which U.S. companies could operate freely under the
European Union Directive. However, there can be no assurance that such a ''safe
harbor'' will be agreed upon, or that, if agreed upon, will permit us or our
customers to make such uses of consumer data as they currently make.
Although existing laws govern such issues as personal privacy over the
Internet or other public data networks, it is unclear whether they apply to us.
Most of these laws were adopted before the widespread use and commercialization
of the Internet and other public data networks. As a result, these laws do not
address the unique issues presented by these media.
Any new law or regulation or any expanded governmental enforcement of
existing regulations may limit our growth or increase our legal exposure, which
could have a material adverse effect on our business, financial condition and
results of operations.
Dependence on Growth of Market for Decision Support Software
All of our revenues have come from sales of decision support software and
related maintenance, consulting and training services. We expect these sales to
account for substantially all of our revenues for the foreseeable future.
Although demand for decision support software has grown in recent years, the
market for decision support software applications is still emerging. Resistance
from consumer and privacy groups to increased commercial collection and use of
data on spending 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 that, even if it does grow, businesses will adopt our
solutions. We have spent, and intend to keep spending, considerable resources to
educate potential customers about decision support software generally 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.
Control by Existing Stockholders; Anti-Takeover Effect of Two Classes of Common
Stock
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 September 30, 1999, holders of our Class B Common Stock
owned or controlled 29,055,465 shares of Class B Common Stock, or 96.9% of our
voting power. Michael J. Saylor, our Chairman, President and Chief Executive
Officer, through his sole ownership and control of Alcantara LLC, controlled
22,424,662 shares of Class B Common Stock and 50,000 shares of Class A Common
Stock, or 74.8% of our voting power as of September 30, 1999. Accordingly, Mr.
Saylor will be able to control MicroStrategy through his ability to determine
the outcome of elections of our directors, amend our Certificate of
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Incorporation and Bylaws and take certain other actions requiring the vote or
consent of stockholders, including mergers, going private transactions and other
extraordinary transactions and 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 prospects 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.
Reliance on Channel Partners
In addition to our direct sales force, we rely on 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 nine months ended September 30, 1999 and for 1998, 1997 and
1996, channel partners accounted directly or indirectly for 38.5%, 33.6%, 27.0%
and 9.0% of our total revenues, respectively. Our channel partners generally
offer customers the products of several different companies, including some
products that compete with ours. Although we believe that direct sales will
continue to account for a majority of product license revenues, we intend to
increase the level of indirect sales activities. However, there can be no
assurance that our efforts to continue to expand indirect sales 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 recruiting and
maintaining successful relationships with those strategic partners.
Risks Associated with Intellectual Property
We regard our software products as proprietary, and we rely on a
combination of statutory and common law copyright, trademark and trade secret
laws, customer licensing agreements, employee and third-party nondisclosure
agreements and other methods to protect our proprietary rights. However, these
laws and contractual provisions provide only limited protection. We have no
patents or registered trademarks (other than MicroStrategy and QuickStrike) and
no registered copyrights (other than the EISToolkit 2.0 reference manual).
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.
As the number of software products in our target markets increases and the
functionality of these products further overlap, software developers may become
increasingly subject to infringement claims. Someone may even claim that our
technology infringes their proprietary rights. Any such claims, whether with or
without merit, can 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 product infringement against us and our inability to
license the infringed or similar technology could adversely affect our business.
Difficulties Associated with International Operations and Expansion
International sales accounted for 24.0%, 26.1%, 27.1%, and 11.1% of our
total revenue for the nine months ended September 30, 1999 and for the years
ended December 31, 1998, 1997, and 1996, respectively. We plan to continue
expanding our international operations and to enter new international markets.
This will require significant management attention and financial resources and
could adversely affect our business, operating results or 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. Nor can we be sure that we will be able to maintain
or increase international market demand for our products.
There are certain risks inherent in our international business activities.
In addition to the currency fluctuations described below, these include:
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. 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; and
. the burden of complying with a wide variety of foreign laws.
These factors may have a material adverse effect on our future
international sales and, consequently, our results of operations.
Currency Fluctuations
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 our local
currency. Our foreign currency translation gains and losses have so far been
immaterial. However, future fluctuations in exchange rates between the U.S.
Dollar and foreign currencies may materially adversely affect our business,
results of operations and financial condition, particularly our operating
margins. We cannot accurately predict the impact of future exchange rate
fluctuations on our results of operations. To date, we have not hedged the risks
associated with these fluctuations. Although we may do so in the future, we
cannot be sure that any hedging techniques we may implement will be successful
or that our business, results of operations, financial condition and cash flows
will not be materially adversely affected by exchange rate fluctuations.
Possible Consequences of Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the European
Union set fixed conversion rates between their existing sovereign currencies and
the euro and adopted the euro as their legal currency. We have assessed the
impact of these events on our company. In particular, we have considered:
. the technical challenges of adapting our systems to accommodate euro-
denominated transactions;
. the competitive impact of cross-border price transparency, which may
make it more difficult for businesses to charge different prices for the
same products in different countries;
. the impact on currency exchange costs and currency exchange rate risk;
and
. the impact on existing contracts.
Based on our assessment, we do not believe the euro conversion will have a
material impact on our business; however, there can be no assurance that the
adoption of the euro will not have an adverse effect on our business, financial
condition, or results of operations.
Risk of Software Defects; Potential Product Liability for Software Defects
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 certain
of our new
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products after their introduction. While we have not experienced material
adverse effects from any such errors to date, 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 limitation of liability 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.
Year 2000 Issues; Potential Impact on Customers
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. These date code fields
will need to accept four-digit entries in order for 20th century dates to be
distinguished from 21st century dates. As a result, before the end of this year,
computer systems and software used by many companies may need to be upgraded to
comply with these year 2000 requirements.
We have developed and largely implemented a year 2000 readiness plan for
the current versions of most of our products. Accordingly, we believe that the
current versions of most of our products are year 2000 compliant when configured
and used properly, provided that the underlying operating system of the host
machine, the data to be accessed and any other software used with or in the host
machine or our products are also year 2000 compliant.
We began testing our own material internal information technology, or IT,
systems (including both our own software products and third-party software and
hardware technology) and our non-IT systems (such as our security system,
building equipment, and embedded microcontrollers) for year 2000 compliance
beginning in the first quarter of 1999. We have completed the majority of the
testing of our mission critical systems with only minor issues encountered and
repaired as of September 30, 1999. To the extent that we are not able to test
technology provided by third-party vendors, we are asking them to assure us that
their systems are year 2000 compliant.
Although we are not currently aware of any material operational issues or
costs associated with preparing our material internal IT and non-IT systems for
the year 2000, we may experience material unanticipated problems and costs
caused by undetected errors or defects in the technology used in these systems.
While we cannot be sure that all our non-material systems will be year 2000
compliant by 2000, we believe that failure of such systems will not have a
material adverse affect on our business, financial condition or results of
operations. We are currently developing a contingency plan to provide for the
remote possibility that our material systems will not achieve timely year 2000
compliance.
We have funded most of our past year 2000 compliance activities from cash
flows and have not allocated additional funds to making our products or internal
systems year 2000 compliant. During 1999, we plan to spend approximately
$100,000 on preparing our internal systems for the year 2000. We do not expect
to receive much outside assistance in completing our internal year 2000 effort.
Apart from current versions of our products and our internal systems, we
have identified four potential year 2000 problem areas.
First, we have not yet determined whether certain third-party software
incorporated in one of our products is year 2000 compliant. Although we are not
currently aware of any material year 2000 issues with these third-party software
products, undetected errors or defects, if they exist, may cause material
unanticipated problems and costs.
Second, some of our customers may be using a version of our software that
is not year 2000 compliant. While we have tried to make sure that all our
customers are using year 2000 compliant versions of our software, we cannot be
certain that they have installed these versions.
Third, not all platforms or versions of the operating systems that our
products currently support are year 2000 compliant.
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Fourth, certain customers have elected to operate systems in a two-digit
year date environment, which is not year 2000 compliant.
We do not currently have much information on the year 2000 compliance
status of our customers. If our current or future customers do not become year
2000 compliant, or if they divert technology expenditures or information
technology personnel (especially those that were reserved for enterprise
decision support software) to address year 2000 compliance problems, our
business, results of operations, financial condition or cash flows could be
materially adversely affected. In addition, certain customers may delay the
purchase of software in the fourth quarter of 1999 and the first quarter of 2000
to focus their resources on ensuring that their existing information technology
infrastructure is year 2000 compliant.
Since we are in the business of selling software, our risk of lawsuits
relating to year 2000 issues with our products is likely to be greater than that
of companies in some other industries. Because computer systems may incorporate
components from different manufacturers, it may be difficult to determine which
component in a computer system may cause a year 2000 problem.
As a result, we may be subjected to year 2000-related lawsuits whether or
not our products and services are year 2000 compliant. We cannot be certain at
this time what the outcomes or impact of any such lawsuits may be.
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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 for speculative or trading purposes. 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 September 30, 1999, the fair market
value of the portfolio would decline by an immaterial amount. We have the
ability to hold our fixed income investments until maturity, and therefore we do
not expect our operating results or cash flows to be materially affected by a
sudden change in market interest rates on our investment portfolio.
Foreign Currency Risk
We face exposure to adverse movements in foreign currency exchange rates.
Our international revenues and expenses are denominated in foreign currencies,
principally the British Pound Sterling and the German Deutsche Mark. The
functional currency of each of our foreign subsidiaries is the local currency.
Our international business is subject to risks typical of an international
business, including, but not limited to differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility. Based on our
overall currency rate exposure at September 30, 1999, a 10% change in foreign
exchange rates would have had an immaterial effect on our financial position,
results of operations and cash flows. To date, we have not hedged the risks
associated with foreign exchange exposure. Although we may do so in the future,
we cannot be sure that any hedging techniques we may implement will be
successful or that our business, results of operations, financial condition and
cash flows will not be materially adversely affected by exchange rate
fluctuations. To date, our foreign currency gains and losses have been
immaterial.
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Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
The Company sold 4,440,000 shares of its Class A Common Stock on June 16,
1998 pursuant to a Registration Statement on Form S-1 (Registration No.
333-49899), which was declared effective by the Securities and Exchange
Commission on June 10, 1998. Certain stockholders of the Company sold an
aggregate of 160,000 shares of Class A Common Stock pursuant to such
registration statement. The managing underwriters of the initial public offering
were Merrill Lynch & Co., Hambrecht & Quist, and Friedman, Billings, Ramsey &
Co., Inc. The aggregate gross proceeds raised in the initial public offering
from the sale of Class A Common Stock by the Company and the selling
shareholders were $53.3 million and $1.9 million, respectively. The Company's
total expenses in connection with the initial public offering were approximately
$5.1 million, of which $3.7 million was for underwriting discounts and
commissions and approximately $1.4 million was for other expenses. The Company's
net proceeds from the initial public offering were approximately $48.2 million.
From the effective date through September 30, 1999, the Company used $13.6
million of such net proceeds to repay all net borrowings under the business
loan. In addition, the Company used $10.0 million of such net proceeds to repay
all of the borrowings under the Company's $10.0 million dividend notes which
were issued to certain shareholders of the Company prior to the consummation of
the initial public offering. Approximately $9.5 million of the $10.0 million
dividend payment was paid to certain officers, directors and 10% shareholders of
the Company. As of September 30, 1999 the Company had used all proceeds from the
initial public offering for general corporate purposes to support the growth of
the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
3.1* Form of Amended and Restated Certificate of Incorporation of the
Company
3.2* Form of Restated Bylaws of the Company
4.1* Form of Certificate of Class A Common Stock of the Company
27.1 Financial Data Schedule
* Incorporated by reference from the Company's Registration Statement on Form
S-1 (Registration No. 333-49899).
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B. Reports on Form 8-K
None
All other items are omitted because they are not applicable or the answers
are none.
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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/ Mark S. Lynch
----------------------------------------
Mark S. Lynch
Chief Financial Officer
Date: May 25, 2000
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INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
3.1* Form of Amended and Restated Certificate of Incorporation of the
Company
3.2* Form of Restated Bylaws of the Company
4.1* Form of Certificate of Class A Common Stock of the Company
27.1 Financial Data Schedule
* Incorporated by reference from the Company's Registration Statement
on Form S-1 (Registration No. 333-49899).
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