<PAGE>
As filed with the Securities and Exchange Commission on March 6, 2000
Registration No. 333-31042
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MICROSTRATEGY INCORPORATED
(Exact name of registrant as specified in its charter)
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Delaware 7372 51-0323571
(State or other
jurisdiction of
(Primary Standard Industrial Classification Code Number)
(I.R.S. Employer
Identification Number)
incorporation
or organization)
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8000 Towers Crescent Drive
Vienna, Virginia 22182
(703) 848-8600
(Address including Zip Code, and Telephone Number, including Area Code,
of Registrant's Principal Executive Offices)
-------------
Michael J. Saylor
President and Chief Executive Officer
MICROSTRATEGY INCORPORATED
8000 Towers Crescent Drive
Vienna, Virginia 22182
(703) 848-8600
(Name, Address including Zip Code and Telephone
Number, including Area Code, of Agent for Service)
-------------
Copies to:
THOMAS S. WARD, ESQ. DAVID C. CHAPIN, ESQ.
HALE AND DORR LLP CHRISTOPHER J. AUSTIN, ESQ.
60 State Street ROPES & GRAY
Boston, Massachusetts 02109 One International Place
Telephone: (617) 526-6000 Boston, MA 02110
Telecopy: (617) 526-5000 Telephone: (617) 951-7000
Telecopy: (617) 951-7050
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date hereof.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell nor does it seek an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion. Dated March 6, 2000.
6,500,000 Shares
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+[MICROSTRATEGY INCORPORATED LOGO] +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Class A Common Stock
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MicroStrategy Incorporated is offering 4,000,000 shares of the Class A Common
Stock to be sold in the offering. The selling stockholders identified in this
prospectus are offering an additional 2,500,000 shares. MicroStrategy will not
receive any of the proceeds from the sale of the shares being sold by the
selling stockholders.
The Class A Common Stock is quoted on the Nasdaq National Market under the
symbol "MSTR". The last reported sale price of the Class A Common Stock on
March 2, 2000, was $180.06 per share.
See "Risk Factors" beginning on page 5 to read about factors you should
consider before buying shares of our Class A Common Stock.
-----------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial price to public........................................ $ $
Underwriting discount.......................................... $ $
Proceeds, before expenses, to MicroStrategy.................... $ $
Proceeds, before expenses, to the selling stockholders......... $ $
</TABLE>
To the extent that the underwriters sell more than 6,500,000 shares of Class
A Common Stock, the underwriters have the option to purchase up to an
additional 600,000 shares from MicroStrategy and up to an additional 375,000
shares from the selling stockholders at the initial price to public less the
underwriting discount.
-----------
The underwriters expect to deliver the shares against payment in New York,
New York on , 2000.
Goldman, Sachs & Co.
Friedman Billings Ramsey
Merrill Lynch & Co.
Chase H&Q
FAC/Equities
-----------
Prospectus dated , 2000.
<PAGE>
SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully.
Overview
MicroStrategy is a leading worldwide provider of intelligent e-business
software and related services that enable the transaction of one-to-one
electronic business through web, wireless and voice communication channels.
MicroStrategy's product line enables both proactive and interactive delivery of
information from large-scale databases and provides the largest 2000
enterprises in the world and leading Internet businesses with a software
platform to develop solutions that deliver insight and intelligence to their
enterprises, customers and supply-chain partners. In July 1999, MicroStrategy
launched a personal intelligence network called Strategy.com, which leverages
MicroStrategy's software platform to deliver personalized, requested
information to consumers.
The growth of the intelligent e-business software market has been driven by:
. the need to create a personalized one-to-one customer experience;
. the increase in transactional data capture;
. the need to integrate online and traditional operations; and
. the emergence of wireless Internet and text-to-speech and voice-
recognition technologies.
In addition, the Internet has dramatically expanded the demand for
information by allowing users worldwide to quickly and cost-effectively access
and receive information. This speed and ease of information access is creating
numerous new e-business opportunities. International Data Corporation, or IDC,
predicts that worldwide spending on Internet business infrastructure will
increase from $211 billion in 1998 to $1.5 trillion in 2003. In addition, IDC
predicts that the value of wireless Internet transactions will increase from
$4.3 billion in 1998 to more than $38.0 billion by 2003.
Our software platform enables users to query and analyze the most detailed,
transaction-level databases, turning data into business intelligence. In
addition to supporting internal enterprise users, the platform delivers
critical business information beyond corporate boundaries to customers,
partners and supply chain constituencies through a broad range of communication
channels such as the Internet, e-mail, telephones and wireless communications
devices. Our platform is designed for developing e-business solutions that are
personalized and proactive, and that reach millions of users. We also offer
comprehensive consulting, education and technical support services for our
customers and partners.
MicroStrategy has over 900 customers across such diverse industries as
telecommunications, retail, finance, insurance, healthcare, pharmaceuticals and
consumer packaged goods. Representative MicroStrategy customers include
American Express, Blockbuster Entertainment, Earthlink, Eckerd Corporation, GE
Capital, General Motors, Kmart, MCI WorldCom, Nielsen Media Research, Merck-
Medco, Network Solutions, Ralston Purina, The SABRE Group, US Postal Service,
and Visa International.
Strategy.com is MicroStrategy's personal intelligence network, a new form of
media that brings speed to transactions by actively delivering highly
personalized, relevant and timely information to individuals through a wide
variety of delivery methods, including e-mail, telephone and wireless
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<PAGE>
devices. The Strategy.com network leverages the MicroStrategy software platform
and is organized around a suite of information channels. The network currently
operates a finance channel and plans to launch additional channels on subjects
such as weather, news, politics, arts, traffic, travel and entertainment.
Strategy.com syndicates its channels through other companies that serve as
network affiliates and network associates, which we refer to collectively as
affiliates. Affiliates offer the Strategy.com channels and services on a co-
branded basis directly to their customers and in turn share with Strategy.com a
percentage of the revenues they generate. Strategy.com also provides
application maintenance, development, customer billing and support services for
these channels, enabling affiliates to focus on their core businesses.
Strategy.com has established over 75 network affiliate agreements with leading
Internet companies, communication carriers, media companies and financial
institutions and now has over 250,000 subscribers for its Strategy.com Finance
channel.
We market our MicroStrategy and Strategy.com products and services primarily
through our direct sales force, with sales offices in major cities throughout
the United States, Canada, Europe and South America. We have also entered into
relationships with more than 225 systems integrators, application development
and platform partners including Arthur Andersen, Exchange Applications, HNC
Software, IBM, KPMG Peat Marwick, NCR and Oracle.
Our president, chief executive officer and chairman, Michael J. Saylor,
founded MicroStrategy in 1989. We are incorporated in Delaware, and our
worldwide headquarters are located at 8000 Towers Crescent Drive, Vienna,
Virginia 22182. Our telephone number is (703) 848-8600, and our web sites are
www.microstrategy.com and www.strategy.com. The information on our web sites is
not part of this prospectus.
Recent Developments
In February 2000, we made a series of announcements regarding Strategy.com,
reflecting recent developments in its operations since its launch in July 1999.
Specifically, we announced that:
. Strategy.com Finance, the first channel of the Strategy.com network, now
has over 250,000 subscribers for its service;
. two additional channels, Strategy.com Weather and Strategy.com News,
which are both currently operating on a test basis, are expected to be
commercially available in the second quarter of 2000; and
. we have recently entered into an agreement with Nextel to power wireless
brokerage services.
As a result of the continued development of the Strategy.com business we
have also announced that:
. Strategy.com will become a separate operating subsidiary of
MicroStrategy;
. Nicholas Weir has been named president and chief operating officer of
Strategy.com and Eric Brown has been named chief financial officer and
chief administrative officer;
. MicroStrategy intends to accelerate the pace of investment in
Strategy.com, with at least $100 million to be invested to further
develop, market and operate Strategy.com over the next 12 months; and
. we are currently evaluating financial opportunities for Strategy.com,
which may include undertaking an initial public offering of its stock
within the next 18 months.
We expect that the increased investments we are making as we continue to
develop and build our Strategy.com network will result in increased operating
expenses to MicroStrategy, causing us to become unprofitable in 2000. We also
intend to continue making significant investments in Strategy.com after 2000
and therefore believe we will continue to be unprofitable for the forseeable
future.
2
<PAGE>
The Offering
<TABLE>
<C> <S>
Class A common stock offered by:
MicroStrategy................................... 4,000,000 shares
Selling stockholders............................ 2,500,000 shares
Total offering.............................. 6,500,000 shares
Common stock to be outstanding after the offering.. 29,560,506 shares of Class
A common stock
53,430,115 shares of Class
B common stock
Use of Proceeds.................................... We intend to use the net
proceeds of the offering
for working capital and
general corporate purposes
and to support the
development, marketing and
operation of Strategy.com,
as well as for possible
acquisitions or
investments. We will not
receive any of the
proceeds from the sale of
shares by the selling
stockholders.
Nasdaq National Market Symbol...................... MSTR
</TABLE>
Unless we specifically state otherwise, the information in this prospectus
does not take into account the issuance of up to 975,000 shares of Class A
common stock which the underwriters have the option to purchase solely to cover
over-allotments. If the underwriters exercise their over-allotment option in
full, 30,535,506 shares of Class A common stock and 53,055,115 shares of Class
B common stock will be outstanding after the offering.
All share numbers in this prospectus reflect our two-for-one stock split,
effected as a stock dividend, in January 2000. The number of shares to be
outstanding after this offering is based upon shares outstanding as of March 1,
2000, and does not include:
. 11,964,502 shares of Class A common stock issuable upon the exercise of
currently outstanding stock options; and
. 5,190,118 shares reserved for issuance under our stock plans and
employee stock purchase plan.
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. Holders of Class A common stock and Class B common stock
generally vote together as a single class on all matters presented to the
stockholders for their vote or approval, except as may be required by Delaware
law. Class B common stock may be converted into Class A common stock at any
time on a one-for-one basis. The Class A common stock and the Class B common
stock are referred to together as the common stock. Following this offering,
owners of our Class B common stock will own 53,430,115 shares of Class B common
stock, or 94.8% of the combined voting power of our common stock.
3
<PAGE>
Summary Consolidated Financial Data
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1995 1996 1997(1) 1998(1) 1999
------ ------- ------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Revenues......................... $9,777 $22,603 $53,557 $106,430 $205,329
Income (loss) from operations.... 77 (2,290) 372 9,326 18,319
Net income (loss)................ 48 (2,375) 121 6,178 12,620
Basic net income (loss) per
share(2)........................ $ 0.00 $ (0.04) $ 0.00 $ 0.09 $ 0.16
Weighted average shares used in
computing basic net income
(loss) per share(2)............. 57,793 58,988 58,988 66,986 77,028
Diluted net income (loss) per
share(2)........................ $ 0.00 $ (0.04) $ 0.00 $ 0.08 $ 0.15
Weighted average shares used in
computing diluted net income
(loss) per share(2)............. 57,793 58,988 64,725 77,203 85,881
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
1999
--------------------
As
Actual Adjusted(3)
-------- -----------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................................. $ 25,941 $715,571
Working capital............................................ 77,191 765,721
Total assets............................................... 182,555 872,185
Total stockholders' equity................................. 134,039 822,569
</TABLE>
- --------
(1) Before completing our initial public offering on June 16, 1998, we were an
S corporation. As an S corporation, we were not liable for corporate income
taxes. On a pro forma basis, if we had been a taxpaying entity, we would
have recorded an income tax provision of approximately $489 and a net loss
of approximately $368 for the year ended December 31, 1997, an income tax
provision of approximately $3,649 and net income of $5,971 for the year
ended December 31, 1998. Pro forma basic and diluted loss per share would
have been $0.01 for the year ended December 31, 1997 and pro forma basic
and diluted income per share would have been $0.09 and $0.08, respectively,
for the year ended December 31, 1998.
(2) Share and per share amounts for all periods presented have been restated to
reflect the two-for-one stock split which occurred in January 2000.
(3) As adjusted to reflect our sale of 4,000 shares of Class A common stock
offered with this prospectus at an assumed public offering price of $180.06
per share, after deducting the underwriting discount and the estimated
offering expenses that we will pay.
4
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RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations.
If any of the events described in the following risks actually occur, our
business, financial condition, or results of operations could be materially
adversely affected. In such case, the trading price of our Class A common stock
could decline and you may lose all or part of your investment.
Our quarterly operating results, revenues and expenses may fluctuate
significantly, which could have an adverse effect on the market price of our
stock
For a number of reasons, including those described below, our operating
results, revenues and expenses may vary significantly from quarter to quarter.
These fluctuations could have an adverse effect on the market price of our
Class A common stock.
Fluctuations in Quarterly Operating Results. Our quarterly operating results
may fluctuate as a result of:
. the size and timing of significant orders;
. 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;
. changes in foreign currency exchange rates; and
. seasonal factors such as a lower pace of new sales in the summer.
Limited Ability to Adjust Expenses. Because we plan to expand our business,
we expect our operating expenses to increase substantially. In particular,
during 2000 we expect to increase significantly the costs associated with
developing, marketing and operating our Strategy.com network and 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. In the short term we may not be
able to reduce the actual operating expenses associated with our expansion.
Based on the above factors, we believe that quarter-to-quarter comparisons
of our operating results are not a good indication of our future performance.
It is possible that in one or more future quarters, our operating results may
be below the expectations of public market analysts and investors. In that
event, the price of our Class A common stock may fall.
5
<PAGE>
We have recently introduced Strategy.com and it is uncertain whether it will
achieve widespread acceptance.
We have implemented the finance channel of our Strategy.com network, and our
weather and news channels have been introduced on a test basis. We plan on
introducing sports and traffic channels as part of our suite of information
channels, but they are still in development. While we expect to implement these
channels on a commercial basis by the end of 2000, we may encounter delays or
difficulties in this commercial introduction. We expect that a portion of our
future revenue will depend on fees from subscribers for the use of the
Strategy.com network service, from products and services offered through this
network, and from royalties from affiliates who bundle our Strategy.com network
with their own product and service offerings. We have not, to date, generated
any significant revenue from our Strategy.com network and may not be able to do
so in the future. If this service, or the products and services offered through
it, fail to achieve widespread customer acceptance, our business, financial
condition and results of operations may be materially adversely affected. In
addition, revenue from Strategy.com would be adversely affected if our
affiliates do not perceive that the integration of our Strategy.com network
with their product and service offerings will increase demand for their
products and services or will otherwise be able to generate a sufficient return
on their investment in the use of our network.
We intend to make significant expenditures in developing our Strategy.com
network, which will result in us incurring operating losses
We plan to substantially increase the amounts we will expend on our
Strategy.com network compared to the expenses we have incurred to date. We
intend to invest at least $100 million over the next twelve months to develop
and market Strategy.com. This will result in operating losses and will cause us
to become unprofitable in 2000. We also intend to continue making significant
investments in Strategy.com after 2000 and therefore believe we will continue
to be unprofitable for the foreseeable future.
We may lose sales, or sales may be delayed, due to the long sales and
implementation cycles for our products, which would reduce our revenues
To date, our customers have typically invested substantial time, money and
other resources and involved many people in the decision to license our
software products. As a result, we may wait nine months or more after the first
contact with a customer for that customer to place an order while they seek
internal approval for the purchase of our products. During this long sales
cycle, events may occur that affect the size or timing of the order or even
cause it to be canceled. For example, our competitors may introduce new
products, or the customer's own budget and purchasing priorities may change.
Even after an order is placed, the time it takes to deploy our products
varies widely from one customer to the next. Implementing our product can
sometimes last several months, depending on the customer's needs and may begin
only with a pilot program. It may be difficult to deploy our products if the
customer has complicated deployment requirements, which typically involve
integrating databases, hardware and software from different vendors. If a
customer hires a third party to deploy our products, we cannot be sure that our
products will be deployed successfully.
We face intense competition, which may lead to lower prices for our products,
reduced gross margins, loss of market share and reduced revenue
The markets for e-business infrastructure software, customer relationship
management software, web portals, business intelligence and Internet-based and
wireless information networks are intensely
6
<PAGE>
competitive and subject to rapidly changing technology. In addition, many of
our competitors in these markets are offering, or may soon offer, products and
services that may compete with our products and our Strategy.com network.
Our most direct competitors provide:
. e-business products, including business to business products;
. customer relationship management products;
. e-commerce transaction products, such as business-to-consumer products;
. business intelligence products;
. Internet and wireless information networks and portals;
. vertical Internet portals and information networks; and
. wireless communications and wireless application protocol enabled
products.
Each of these markets is discussed more fully below.
E-business Infrastructure Software. In the e-business infrastructure
software market, BroadVision, E.piphany, Vignette, Net Perceptions, Broadbase,
Art Technology Group, Doubleclick, Engage Technologies 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. For example, customer information, such as past purchases,
clickstream data and stated preferences, can be used to create a personalized
e-commerce experience that targets customers with offers and interactions to
which they are more likely to respond.
Customer Relationship Management Products. Companies that deliver customer
relationship management products alone or in conjunction with e-commerce
applications, such as BroadVision, E.piphany, Vignette and Siebel, compete with
our intelligent e-business products.
E-commerce Transaction Systems. E-commerce transaction systems, such as
those provided by Microsoft, IBM, America Online's Netscape division,
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 would compete with 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 numbering tens of thousands to hundreds
of thousands of users and/or terabyte-sized databases, the Information
Advantage unit of Sterling Software, which recently announced that it was being
acquired by Computer Associates, competes with us. In the desktop analysis and
reporting category, we face competition from companies such as Business
Objects, Cognos and Brio Technology and also from companies such as Oracle,
Microsoft and IBM with products that are generally bundled with or designed to
work with their own databases.
Web Portals and Information Networks. Web portals and information networks
such as Microsoft Network, Yahoo, Lycos, Excite, America Online and
InfoSpace.com, offer an array of information, including finance, sports, news
and weather, that is similar to information provided by Strategy.com.
Vertical Internet Portals and Information Networks. Expedia, Weather.com,
CNBC.com, ABC.com, ESPN.com, Microsoft Investor, StockBoss, Microsoft CarPoint,
InfoBeat, Internet Travel Network and others have developed custom applications
and products to commercialize, analyze and deliver specific information over
the Internet. These systems are usually tailored to one application,
7
<PAGE>
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
Strategy.com.
Wireless Communications and Wireless Application Protocol Enabled
Products. Providers of wireless communications and devices such as AT&T,
Sprint, MCI WorldCom, Nextel Communications, British Telecom, Deutsche Telekom,
PageNet, Nokia, Ericsson, Aether Systems, 3Com and Palm offer a variety of
mobile phones and wireless devices over which Strategy.com delivers
information. These companies may develop in-house information services or
partner with other companies to deliver information that is competitive to that
offered by Strategy.com.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing or other resources, and greater name
recognition than we do. In addition, many of our competitors have strong
relationships with current and potential customers and extensive knowledge of
the e-business industry. As a result, they may be able to respond more quickly
to new or emerging technologies and changes in customer requirements, or 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 future competitors or that the
competitive pressures we face will not have a material adverse affect on our
business, operating results and financial condition.
Current and future competitors may also make strategic acquisitions or
establish cooperative relationships among themselves or with others. By doing
so, they may increase their ability to meet the needs of our potential
customers. Our current or prospective indirect channel partners may establish
cooperative relationships with competitors. Such relationships may limit our
ability to sell our products through specific distribution channels.
Accordingly, it is possible that new competitors or alliances among current and
future competitors may emerge and rapidly gain significant market share. These
developments could have a material adverse effect on our business, operating
results and financial condition.
Our business is expanding, and our failure to manage this expansion
effectively, as well as the strain on our resources, could have a material
adverse effect on our business, operating results and financial condition
We have been expanding rapidly and we expect to continue expanding our
operations. Our total number of employees has grown from 59 on December 31,
1994 to 1,662 on December 31, 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. For example, expanded facilities will complicate operations, managing
relationships with new foreign partners will mean additional administrative
burdens, and managing foreign currency risks will require expanded treasury
functions. We may also need to expand our support organization to develop our
indirect distribution channels in new and expanded markets and to accommodate
growth in our installed customer base. Failure to manage our expansion
effectively could have a material adverse effect on our business, operating
results and financial condition.
In addition, the development of our Strategy.com network could divert the
time and attention of our senior management from our other business. Michael J.
Saylor, our president and chief executive officer, currently is responsible for
the strategic planning and direction of both our MicroStrategy software
platform and Strategy.com network businesses. If Mr. Saylor does not
effectively manage his time and attention between our businesses, it could
materially adversely affect our business, operating results and financial
condition.
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If we are unable to recruit or retain skilled personnel, or if we lose the
services of any of our key management personnel, our business, operating
results and financial condition would be materially adversely affected
Our future success depends on our continuing ability to attract, train,
assimilate and retain highly skilled personnel. Competition for these employees
is intense. We may not be able to retain our current key employees or attract,
train, assimilate or retain other highly skilled personnel in the future. Our
future success also depends in large part on the continued service of key
management personnel, particularly Michael J. Saylor, our president and chief
executive officer, and Sanju K. Bansal, our executive vice president and chief
operating officer. If we lose the services of one or both of these individuals
or other key personnel, or if we are unable to attract, train, integrate and
retain the highly skilled personnel we need, our business, operating results
and financial condition could be materially adversely affected.
Our inability to develop and release product enhancements and new products to
respond to rapid technological change in a timely and cost-effective manner
would have a material adverse effect on our business, operating results and
financial condition
The market for our products is characterized by rapid technological change,
frequent new product introductions and enhancements, changing customer demands
and evolving industry standards. The introduction of products embodying new
technologies can quickly make existing products obsolete and unmarketable. We
believe that our future success depends largely on three factors:
. our ability to continue to support a number of popular operating systems
and databases;
. our ability to maintain and improve our current product line; and
. our ability to rapidly develop new products that achieve market
acceptance, maintain technological competitiveness and meet an expanding
range of customer requirements.
Business intelligence applications are inherently complex, and it can take a
long time to develop and test major new products and product enhancements. In
addition, customers may delay their purchasing decisions because they
anticipate that new or enhanced versions of our products will soon become
available. We cannot be sure that we will succeed in developing and marketing,
on a timely and cost-effective basis, product enhancements or new products that
respond to technological change, introductions of new competitive products or
customer requirements, nor can we be sure that our new products and product
enhancements will achieve market acceptance.
The emergence of new industry standards may adversely affect our ability to
market our existing products
The emergence of new industry standards in related fields may adversely
affect the demand for our existing products. This could happen, for example, if
new web standards and technologies emerged that were incompatible with customer
deployments of our MicroStrategy applications. Although the core database
component of our business intelligence solutions is compatible with nearly all
enterprise server hardware and operating system combinations, such as OS/390,
AS/400, Unix and Windows, our application server component runs only on the
Windows operating system. Therefore, our ability to increase sales currently
depends on the continued acceptance of the Windows operating system. We cannot
market our current business intelligence applications to potential customers
who use Unix operating systems as their application server. We would have to
invest substantial resources to develop a Unix product, and we cannot be sure
that we could introduce such a product on a timely or cost effective basis, if
at all.
9
<PAGE>
The legal environment regarding collection and use of personal information is
uncertain, and new laws or government regulations could have a material adverse
effect on our business, operating results and financial condition
Although some existing laws govern the collection and use of personal
information obtained through the Internet or other public data networks, it is
unclear whether they apply to us and our products. Most of these laws were
adopted before the widespread use and commercialization of the Internet and
other public data networks. As a result, the laws do not address the unique
issues presented by these media.
Due to increasing use of the Internet and the dramatically increased access
to personal information made possible by technologies like ours, the U.S.
federal and various state and foreign governments have recently proposed
limitations on the collection and use of personal information of users of the
Internet and other public data networks.
Although we attempt to obtain permission from users prior to collecting or
processing their personal data, new laws or regulations governing personal
privacy may change the ways in which we and our customers and affiliates may
gather this personal information. There may be significant costs and delays
involved with adapting our products to any change in regulations.
Our business, and in particular our Strategy.com network, depends upon our
receiving detailed personal information about subscribers in order to provide
them with the services they select. Privacy concerns may cause some potential
subscribers to forego subscribing to our service. If new laws or regulations
prohibit us from using information in the ways that we currently do, or if
users opt out of making their personal preferences and information available to
us and our affiliates, the utility of our products will decrease, which could
have a material adverse effect on our business, financial condition and results
of operations. If personal information is misused by us, our customers or our
network affiliates, our legal liability may be increased and our growth may be
limited.
The Federal Trade Commission recently has launched investigations of the
data collection practices of various Internet companies. In addition, numerous
individuals and privacy groups have filed lawsuits or administrative complaints
against other companies asserting that they were harmed by the misuse of their
personal information. If comparable legal proceedings were commenced against
us, regardless of the merits of the claim, we could be required to spend
significant amounts on legal defense and our senior management's time and
attention could be diverted from our business. In addition, demand for our
products could be reduced if companies are not permitted to use clickstream
data derived from their web sites. This could materially and adversely affect
our business, financial condition and results of operations.
In addition, in Europe, the European Union Directive on Data Protection, a
comprehensive administrative and regulatory program, currently limits the
ability of companies to collect, store and exchange personal data with other
entities. Because the U.S. may not currently provide a level of data protection
sufficient to meet the guidelines under the European Union Directive, U.S.
companies could be prohibited from obtaining personal data from or exchanging
such data with companies in Europe.
Our business may suffer if either the Internet infrastructure or the wireless
communication infrastructure is unable to effectively support the growth in
demand placed upon it
Our Strategy.com network and our other products depend increasingly upon the
web infrastructure and wireless communications networks to collect information
and deliver information to customers. We cannot assure you that either system
will continue to effectively support the capacity,
10
<PAGE>
speed, and security demands placed upon them as they continue to experience
increased numbers of users, frequency of use and increased requirements for
data transmission by users. Even if the necessary infrastructure or
technologies are developed, we may incur considerable costs to adapt our
solutions accordingly. Furthermore, the web has experienced a variety of
outages and other delays due to damage to portions of its infrastructure or
attacks by hackers. These outages and delays could impact the web sites using
our products or hosting our Strategy.com network and could materially affect
our business and results of operations.
If the market for business intelligence software fails to grow as we expect, or
if businesses fail to adopt our products, our business, operating results and
financial condition would be materially adversely affected
Nearly all of our revenues to date have come from sales of business
intelligence software and related technical support, consulting and education
services. We expect these sales to account for a large portion of our revenues
for the foreseeable future. Although demand for business intelligence software
has grown in recent years, the market for business intelligence software
applications is still emerging. Resistance from consumer and privacy groups to
increased commercial collection and use of data on spending patterns and other
personal behavior may impair the further growth of this market, as may other
developments. We cannot be sure that this market will continue to grow or that,
even if it does grow, that businesses will adopt our solutions. We have spent,
and intend to keep spending, considerable resources to educate potential
customers about business intelligence software 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.
Because of the rights of our two classes of common stock, and because we are
controlled by our existing stockholders, these stockholders could transfer
control of MicroStrategy to a third party without anyone else's approval or
prevent a third party from acquiring MicroStrategy
We have two classes of common stock: Class A common stock and Class B common
stock. Holders of our Class A common stock generally have the same rights as
holders of our Class B common stock, except that holders of Class A common
stock have one vote per share while holders of Class B common stock have ten
votes per share. As of March 1, 2000, holders of our Class B common stock owned
or controlled 55,466,929 shares of Class B common stock, or 94.8% of our voting
power. Michael J. Saylor, our chairman, president and chief executive officer,
controlled 43,549,324 shares of Class B common stock, or 75.3% of our voting
power, as of March 1, 2000. Accordingly, Mr. Saylor is able to control
MicroStrategy through his ability to determine the outcome of elections of our
directors, amend our certificate of incorporation and bylaws and take other
actions requiring the vote or consent of stockholders, including mergers, going
private transactions and other extraordinary transactions and their terms.
Our certificate of incorporation allows holders of Class B common stock,
almost all of whom are employees of our company or related parties, to transfer
shares of Class B common stock, subject to the approval of a majority of the
holders of outstanding Class B common stock. Mr. Saylor or a group of
stockholders possessing a majority of the outstanding Class B common stock
could, without seeking anyone else's approval, transfer voting control of
MicroStrategy to a third party. Such a transfer of control could have a
material adverse effect on our business, operating results and financial
condition. Mr. Saylor will also be able to prevent a change of control of
MicroStrategy, regardless of whether holders of Class A common stock might
otherwise receive a premium for their shares over the then-current market
price.
11
<PAGE>
We rely on our strategic channel partners, and if we are unable to develop or
maintain successful relationships with them, our business, operating results
and financial condition will suffer
In addition to our direct sales force, we rely on strategic channel
partners, such as original equipment manufacturers, system integrators and
value-added resellers, to license and support our products in the United States
and internationally. In particular, for the years ended December 31, 1999,
1998, 1997 and 1996, channel partners accounted directly or indirectly for
49.4%, 35.0%, 27.5% 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 through our strategic
channel partners. However, there can be no assurance that our efforts to
continue to expand indirect sales in this manner will be successful. We cannot
be sure that we will attract strategic partners who will market our products
effectively and who will be qualified to provide timely and cost-effective
customer support and service. Our ability to achieve revenue growth in the
future will depend in part on our success in developing and maintaining
successful relationships with those strategic partners. If we are unable to
develop or maintain our relationships with these strategic partners, our
business, operating results and financial condition will suffer.
We rely on our network affiliates to market our Strategy.com network to their
customers, and if we are unable to enter into arrangements with a sufficient
number of affiliates, or if our affiliates are unable to interest their
customers in our services, our business will suffer
We rely on our network affiliates to market our Strategy.com network to
their customers. We cannot be sure that we will attract affiliates who will
market our services effectively. Our ability to achieve revenue growth in the
future will depend in part on our success in recruiting and maintaining
successful relationships with affiliates. If we are unable to recruit
affiliates or maintain our relationships with them, our business, operating
results and financial condition will suffer.
Third party providers of information, services and networks for our
Strategy.com network may fail to provide such information and services or may
also provide such information and services to our competitors
We rely on third parties to provide information and services for our
Strategy.com network. For example, we rely on Ameritrade to provide users of
our Strategy.com network with stock quote information and expect to rely upon a
third party to execute trades in securities when this capability is added to
our network. If one or more of these providers were to stop working with us, we
would have to rely on other parties to provide the information and services we
need. We cannot predict whether other parties would be willing to do so on
reasonable terms. Furthermore, we do not have long-term agreements with our
providers of information and services and we cannot restrict them from
providing similar information and services to our competitors. As a result, our
competitors may be able to duplicate some of the information and services that
we provide and may, therefore, find it easier to enter the market for personal
intelligence and compete with us.
We rely upon our network affiliates to deliver services we offer through our
Strategy.com network, and if they have difficulty in doing so, we could be
exposed to liability and our reputation could suffer
We depend upon our affiliates to deliver services to subscribers to our
Strategy.com network. If our affiliates fail to deliver reliable services, we
could face liability claims from our subscribers and our reputation could be
damaged. In addition, we will be dependent on the performance of the
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<PAGE>
systems deployed and maintained by these parties, whom we will not control. We
expect to include contractual provisions limiting our liability to the
subscriber for failures and delays, but we cannot be sure that these limits
will be enforceable or will be sufficient to shield us from liability. We will
seek to obtain liability insurance to cover problems of this sort, but we
cannot guarantee that insurance will be available or that the amounts of our
coverage will be sufficient to cover all potential claims.
Our network affiliates will rely on us to maintain the infrastructure of the
Strategy.com network, and any problems with that infrastructure could expose us
to liability from our affiliates and their customers
Our network affiliates depend on us to maintain the software and hardware
infrastructure of our Strategy.com network. If this infrastructure fails or our
affiliates or their customers otherwise experience difficulties or delays in
accessing the network, we could face liability claims from them. We expect to
include contractual provisions limiting our liability to our affiliates for
system failures and delays, but we cannot be sure that these limits will be
enforceable or will be sufficient to shield us from liability. We will seek to
obtain liability insurance to cover problems of this sort, but we cannot
guarantee that insurance will be available or that the amounts of our coverage
will be sufficient to cover all potential claims.
We are vulnerable to system failures which could cause interruptions or
disruptions in our service
The hardware infrastructure on which the Strategy.com system operates is
located at the Exodus Communications data center in northern Virginia. We
cannot assure you that we will be able to manage this relationship successfully
to mitigate any risks associated with having our hardware infrastructure
maintained by Exodus. Unexpected events such as natural disasters, power losses
and vandalism could damage our systems. Telecommunications failures, computer
viruses, electronic break-ins or other similar disruptive problems could
adversely affect the operation of our systems. Our insurance policies may not
adequately compensate us for any losses that may occur due to any damages or
interruptions in our systems. Accordingly, we could be required to make capital
expenditures in the event of damage. We do not currently have a formal disaster
recovery plan. Periodically, we experience unscheduled system downtime that
results in our web site being inaccessible to subscribers. Although we have not
suffered material losses during these downtimes to date, if these problems
persist in the future, users, network affiliates and advertisers could lose
confidence in our services.
System capacity constraints may diminish our ability to generate revenues from
Strategy.com
A substantial increase in the use of the products and services offered by
Strategy.com could strain the capacity of our systems, which could lead to
slower response time or system failures. System failures or slowdowns could
adversely affect the speed and responsiveness of our Strategy.com network.
These would diminish the experience for our subscribers and affect our
reputation. The ability of our systems to manage a significantly increased
volume of transactions in a production environment is unknown. As a result, we
face risks related to our ability to scale up to our expected transaction
levels while maintaining satisfactory performance. If our transaction volume
increases significantly, we may need to purchase additional servers and
networking equipment to maintain adequate data transmission speeds. The
availability of these products and related services may be limited or their
cost may be significant.
We have only limited protection for our proprietary rights in our software,
which makes it difficult to prevent third parties from infringing our rights
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
13
<PAGE>
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, no registered trademarks, other than
MicroStrategy, DSS Agent and QuickStrike and no material registered copyrights.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain and use our products or technology.
Policing such unauthorized use is difficult, and we cannot be certain that we
can prevent it, particularly in countries where the laws may not protect our
proprietary rights as fully as in the United States.
Our products may be susceptible to claims by other companies that our products
infringe upon their proprietary rights, which could adversely affect our
business, operating results and financial condition
As the number of software products in our target markets increases and the
functionality of these products further overlaps, we may become increasingly
subject to claims by a third party that our technology infringes such party's
proprietary rights. Regardless of their merit, any such claims could be time
consuming and expensive to defend, may divert management's attention and
resources, could cause product shipment delays and could require us to enter
into costly royalty or licensing agreements. If successful, a claim of
infringement against us and our inability to license the infringed or similar
technology could have a material adverse affect on our business, operating
results and financial condition.
Expanding our international operations will be difficult, and our failure to do
so successfully or in a cost-effective manner would have a material adverse
effect on our business, operating results and financial condition
International sales accounted for 11.1%, 26.7%, 23.6% and 18.0% of our total
revenues for the years ended December 31, 1996, 1997, 1998 and 1999,
respectively. We plan to continue expanding our international operations and to
enter new international markets. This will require significant management
attention and financial resources and could adversely affect our business,
operating results and financial condition. In order to expand international
sales successfully, we must set up additional foreign operations, hire
additional personnel and recruit additional international resellers and
distributors. We cannot be sure that we will be able to do so in a timely
manner, and our failure to do so may limit our international sales growth.
There are certain risks inherent in our international business activities
including:
. changes in foreign currency exchange rates;
. unexpected changes in regulatory requirements;
. tariffs and other trade barriers;
. costs of localizing products for foreign countries;
. lack of acceptance of localized products in foreign countries;
. longer accounts receivable payment cycles;
. difficulties in managing international operations;
. tax issues, including restrictions on repatriating earnings;
. weaker intellectual property protection in other countries; and
. the burden of complying with a wide variety of foreign laws.
These factors may have a material adverse effect on our future international
sales and, consequently, our business, results of operations and financial
condition.
14
<PAGE>
The nature of our products makes them particularly vulnerable to undetected
errors, or bugs, which could cause problems with how the products perform, and
which could in turn reduce demand for our products, reduce our revenue and lead
to product liability claims against us
Software products as complex as ours may contain errors or defects,
especially when first or subsequent versions are released. Although we test our
products extensively, we have in the past discovered software errors in new
products after their introduction. We cannot be certain that, despite testing
by us and by our current and potential customers, errors will not be found in
new products or releases after commercial shipments begin. This could result in
lost revenue or delays in market acceptance, which could have a material
adverse effect upon our business, operating results and financial condition.
Our license agreements with customers typically contain provisions designed
to limit our exposure to product liability claims. It is possible, however,
that these provisions may not be effective under the laws of certain domestic
or international jurisdictions. Although there have been no product liability
claims against us to date, our license and support of products may involve the
risk of these claims. A successful product liability claim against us could
have a material adverse effect on our business, operating results and financial
condition.
15
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve substantial
risks and uncertainties. You can identify these statements by forward-looking
words such as "anticipate," "believe," "could," "estimate," "expect," "intend,"
"may," "should," "will" and "would" or similar words. You should read
statements that contain these words carefully because they discuss our future
expectations, contain projections of our future results of operations or of our
financial position or state other "forward-looking" information. We believe
that it is important to communicate our future expectations to our investors.
However, there may be events in the future that we are not able to accurately
predict or control. The factors listed above in the section captioned "Risk
Factors," as well as any cautionary language in this prospectus, provide
examples of risks, uncertainties and events that may cause our actual results
to differ materially from the expectations we describe in our forward-looking
statements. Before you invest in our Class A common stock, you should be aware
that the occurrence of the events described in these risk factors and elsewhere
in this prospectus could have a material adverse effect on our business,
results of operations and financial position.
16
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from the sale of shares of Class A common
stock in this offering will be approximately $689 million assuming a public
offering price of $180.06 per share and after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by us. If the
over-allotment option is exercised in full, we estimate that such net proceeds
will be approximately $792 million. We will not receive any of the proceeds
from the sale of Class A common stock by the selling stockholders.
We expect to use the net proceeds for anticipated working capital, capital
expenditures and general corporate purposes, including at least $100 million
over the next twelve months for the development, marketing and operation of
Strategy.com. Although we may use a portion of the net proceeds to acquire
businesses, products or technologies that are complementary to our business, we
have no specific acquisitions planned. Pending such uses, we plan to invest the
net proceeds in investment grade, interest-bearing securities.
PRICE RANGE OF CLASS A COMMON STOCK
The Class A common stock began trading on the Nasdaq National Market under
the symbol "MSTR" on June 11, 1998. The following table sets forth the high and
low sales prices for the Class A common stock as reported on the Nasdaq
National Market. All data have been restated to give effect to a two-for-one
stock split effective January 2000.
<TABLE>
<CAPTION>
1998 High Low
- ---- ------- ------
<S> <C> <C>
Second Quarter (beginning June 11).............................. $ 14.25 $10.38
Third Quarter................................................... 22.25 12.06
Fourth Quarter.................................................. 16.94 10.38
<CAPTION>
1999
- ----
<S> <C> <C>
First Quarter................................................... 16.44 9.31
Second Quarter.................................................. 18.94 7.75
Third Quarter................................................... 28.03 13.22
Fourth Quarter.................................................. 115.66 28.81
<CAPTION>
2000
- ----
<S> <C> <C>
First Quarter (through March 2, 2000)........................... $181.75 $98.00
</TABLE>
On March 2, 2000, the last reported sale price for the Class A common stock
was $180.06 per share. As of March 2, 2000, there were approximately 307
holders of record of the Class A common stock.
DIVIDEND POLICY
We have never paid or declared any cash dividends on our Class A common
stock or other securities and do not anticipate paying cash dividends in the
foreseeable future. We currently intend to retain all future earnings, if any,
for use in the operation of our business.
17
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999 on
an actual basis and as adjusted to reflect:
. the conversion of 2,086,814 shares of Class B common stock into Class A
common stock by some of the selling stockholders in connection with
their sale of shares in this offering;
. the issuance and sale of 4,000,000 shares of Class A common stock
offered by us in this offering at an assumed public offering price of
$180.06 per share; and
. the application of the estimated net proceeds we expect to receive from
this offering.
The outstanding share information excludes:
. 12,817,816 shares of common stock issuable on exercise of outstanding
options as of December 31, 1999, of which options to purchase 2,127,913
shares were then exercisable; and
. 5,667,172 shares of common stock reserved for future issuance under our
stock option plans and employee stock purchase plan.
<TABLE>
<CAPTION>
As of December
31, 1999
------------------
As
Actual Adjusted
-------- --------
(in thousands,
except per share
data)
<S> <C> <C>
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000 authorized; no
shares issued and outstanding............................ $ -- $ --
Class A common stock, $0.001 par value; 100,000 shares
authorized, 22,384 shares issued and outstanding, actual;
28,471 shares issued and outstanding, as adjusted........ 22 28
Class B common stock, $0.001 par value; 100,000 shares
authorized, 55,867 shares issued and outstanding, actual;
53,780 shares issued and outstanding, as adjusted........ 56 54
Additional paid-in capital................................. 117,556 806,082
Accumulated other comprehensive income..................... 197 197
Deferred compensation...................................... (1,641) (1,641)
Retained earnings.......................................... 17,849 17,849
-------- --------
Total stockholders' equity............................... 134,039 822,569
-------- --------
Total capitalization................................... $134,039 $822,569
======== ========
</TABLE>
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SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with our
consolidated financial statements and the related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
included elsewhere in this prospectus. Our selected consolidated balance sheet
data and related consolidated statements of operations data as of December 31,
1994, 1995, 1996, 1997, 1998 and 1999 and for each of the six years in the
period ended December 31, 1999, have been derived from our audited financial
statements included in this prospectus.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1994 1995 1996 1997(1) 1998(1) 1999
------ ------ ------- ------- ------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenues
Product licenses.......... $ 622 $4,077 $15,873 $36,601 $72,721 $143,193
Product support........... 4,358 5,700 6,730 16,956 33,709 62,136
------ ------ ------- ------- ------- --------
Total revenues............ 4,980 9,777 22,603 53,557 106,430 205,329
Costs and expenses:
Cost of revenues.......... 2,057 2,458 5,257 11,116 19,781 37,076
Sales and marketing....... 771 2,992 13,054 30,468 53,408 93,788
Research and development.. 200 1,855 2,840 5,049 12,106 28,680
General and
administrative........... 1,955 2,395 3,742 6,552 11,809 24,666
In process research and
development.............. -- -- -- -- -- 2,800
------ ------ ------- ------- ------- --------
Total costs and expenses.. 4,983 9,700 24,893 53,185 97,104 187,010
------ ------ ------- ------- ------- --------
Income (loss) from
operations................ (3) 77 (2,290) 372 9,326 18,319
Interest income (expense),
net....................... (34) (40) (105) (239) 308 2,030
Other income (expense),
net....................... (24) 11 20 (12) (14) 6
------ ------ ------- ------- ------- --------
Income (loss) before
taxes..................... (61) 48 (2,375) 121 9,620 20,355
Provision for income
taxes..................... -- -- -- -- 3,442 7,735
------ ------ ------- ------- ------- --------
Net income (loss).......... $ (61) $ 48 $(2,375) $ 121 $ 6,178 $ 12,620
====== ====== ======= ======= ======= ========
Basic net income (loss) per
share(2).................. $ 0.00 $ 0.00 $ (0.04) $ 0.00 $ 0.09 $ 0.16
Weighted average shares
used in computing basic
net income (loss) per
share(2).................. 55,976 57,793 58,988 58,988 66,986 77,028
Diluted net income (loss)
per share(2).............. $ 0.00 $ 0.00 $ (0.04) $ 0.00 $ 0.08 $ 0.15
Weighted average shares
used in computing diluted
net income (loss) per
share(2).................. 55,976 57,793 58,988 64,725 77,203 85,881
<CAPTION>
As of December 31,
---------------------------------------------------
1994 1995 1996 1997 1998 1999
------ ------ ------- ------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.. $ 249 $ 643 $ 1,686 $ 3,506 $27,491 $ 25,941
Working capital (deficit).. 848 1,343 (2,237) (5,991) 28,467 77,191
Total assets............... 3,209 5,838 13,004 30,065 82,689 182,555
Notes payable, long term
portion................... 193 600 460 2,428 -- --
Total stockholders' equity
(deficit)................. 1,446 1,546 (793) (427) 46,280 134,039
</TABLE>
- --------
(1) On June 11, 1998, we elected to terminate our treatment as a Subchapter S
corporation for federal and state income tax purposes. Under Subchapter S,
our income was allocated and taxable 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 consummation of the
initial public offering. Since June 11, 1998 we have accounted for income
taxes as a Subchapter C corporation and have adopted SFAS No. 109,
"Accounting for Income Taxes." On a pro forma basis, had we been a tax-
paying entity, we would have recorded an income tax provision of
approximately $3,649 and $489 and net income (loss) of approximately $5,971
and $(368) for the years ended December 31, 1998 and 1997, respectively.
Pro forma basic and diluted loss per share would have been $0.01 for the
year ended December 31, 1997 and pro forma basic and diluted income per
share would have been $0.09 and $0.08, respectively, for the year ended
December 31, 1998.
(2) Share and per share amounts for all periods presented have been restated to
reflect the two-for-one stock split which occurred in January 2000.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our
consolidated financial statements and related notes included in this
prospectus.
Overview
MicroStrategy is a leading worldwide provider of intelligent e-business
software and related services. MicroStrategy's product line enables both
proactive and interactive delivery of information from large-scale databases
and provides the largest 2000 enterprises in the world and leading Internet
businesses a platform to develop solutions that deliver insight and
intelligence to their enterprises, customers and supply-chain partners.
Our software platform enables users to query and analyze the most detailed,
transaction-level databases, turning data into business intelligence. In
addition to supporting internal enterprise users, the platform delivers
critical business information beyond corporate boundaries to customers,
partners and supply chain constituencies through a broad range of communication
channels such as the Internet, e-mail, telephones and wireless communications
devices. Our platform is ideal for developing e-business solutions that are
personalized and proactive, and that reach millions of users. We also offer a
comprehensive set of consulting, education and technical support services for
our customers and partners.
In July 1999, we launched a new business unit called Strategy.com.
Strategy.com is MicroStrategy's personal intelligence network, a new form of
media that brings speed to transactions by actively delivering highly
personalized, relevant and timely information to individuals through a wide
variety of delivery methods, including e-mail, telephone and wireless devices.
The Strategy.com network leverages the MicroStrategy software platform and is
organized around a suite of information channels. The network currently
operates a finance channel and plans to launch additional channels on subjects
such as weather, news, politics, arts, traffic, travel and entertainment.
Strategy.com syndicates its channels through other companies that serve as
network affiliates and network associates, which we refer to collectively as
affiliates. Affiliates offer the Strategy.com channels and services on a co-
branded basis directly to their customers and in turn share with Strategy.com a
percentage of revenues they generate. Strategy.com also provides application
maintenance, development, customer billing and support services for these
channels, enabling affiliates to focus on their core businesses. Strategy.com
has established over 75 network affiliate agreements with leading Internet
companies, communications carriers, media companies and financial institutions
and now has over 250,000 subscribers for its Strategy.com finance channel.
Since 1995, we have significantly increased our sales and marketing, service
and support, research and development and general and administrative staff.
Although our revenues have significantly increased in each of the last twelve
quarters, we experienced fluctuating operating margins during 1997, 1998 and
1999 primarily as a result of increases in staff levels. We expect to continue
to increase staffing levels and incur additional associated costs in future
periods. In addition, we intend to substantially increase our investment in
Strategy.com, including an investment of at least $100 million in 2000. We
therefore expect to become unprofitable in 2000.
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. We
recognized revenue in accordance with Statement of Position 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." Product license revenues are generally recognized upon
the execution of a contract and shipment of
20
<PAGE>
the related software product, provided that 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
recorded as deferred revenue when billed to the customer and recognized ratably
over the term of the maintenance and support agreement, which is typically one
year. Fees for our education and consulting services are 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 fair
values of the elements, such as software products, upgrades, enhancements,
technical support, installation or education. The determination of fair value
is based on objective evidence which is specific to us. 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.
The sales cycle for our products may span nine months or more. Historically,
we have recognized a substantial portion of our revenues in the last month of a
quarter, with these revenues frequently concentrated in the last two weeks of a
quarter. Even minor delays in booking orders may have a significant adverse
impact on revenues for a particular quarter. To the extent that delays are
incurred in connection with orders of significant size, the impact will be
correspondingly greater. Moreover, we currently operate with virtually no order
backlog because our software products typically are shipped shortly after
orders are received. Product license revenues in any quarter are substantially
dependent on orders booked and shipped in that quarter. As a result of these
and other factors, our quarterly results have varied significantly in the past
and are likely to fluctuate significantly in the future. Accordingly, we
believe that quarter-to-quarter comparisons of our results of operations are
not necessarily indicative of the results to be expected for any future period.
We license our software through our direct sales force and increasingly
through, or in conjunction with, value-added resellers, system integrators and
original equipment manufacturers. Channel partners accounted for, directly or
indirectly, approximately, 27.5%, 35.0% and 49.4% of our revenues for the years
ended December 31, 1997, 1998 and 1999, respectively. Although we believe that
direct sales will continue to account for a majority of product license
revenues, we intend to increase the level of indirect sales activities.
However, there can be no assurance that our efforts to continue to expand
indirect sales will be successful. We also intend to continue to expand our
international operations and have committed, and continue to commit,
significant management time and financial resources to developing direct and
indirect international sales and support channels.
21
<PAGE>
Results of Operations
The following table sets forth for the periods indicated the percentage of
total revenues represented by certain items reflected in our consolidated
statements of operations:
<TABLE>
<CAPTION>
Years ended December
31,
------------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Revenues:
Product licenses..................................... 68.3% 68.3% 69.7%
Product support...................................... 31.7 31.7 30.3
----- ----- -----
Total revenues..................................... 100.0 100.0 100.0
Cost of revenues:
Product licenses..................................... 3.1 2.1 1.3
Product support...................................... 17.7 16.5 16.8
----- ----- -----
Total cost of revenues............................. 20.8 18.6 18.1
----- ----- -----
Gross margin........................................... 79.2 81.4 81.9
Operating expenses:
Sales and marketing.................................. 56.9 50.2 45.6
Research and development............................. 9.4 11.4 14.0
General and administrative........................... 12.2 11.1 12.0
In process reseach and development................... -- -- 1.4
----- ----- -----
Total operating expenses........................... 78.5 72.7 73.0
----- ----- -----
Income (loss) from operations.......................... 0.7 8.7 8.9
Interest income........................................ 0.2 1.0 1.1
Interest expense....................................... 0.7 0.7 0.1
Other income, net...................................... -- -- --
Provision for income taxes............................. -- 3.2 3.8
----- ----- -----
Net income (loss)...................................... 0.2% 5.8% 6.1%
===== ===== =====
</TABLE>
Comparison of 1997, 1998 and 1999
Revenues. Total revenues consist of revenues derived from sales of product
licenses and product support, including technical support, education and
consulting services. Total revenues increased from $53.6 million in 1997 to
$106.4 million in 1998 and to $205.3 million in 1999, resulting in a revenue
growth rate of 137.0% in 1997, 98.7% in 1998 and 92.9% in 1999. There can be no
assurance that total revenues will continue to increase at the rates
experienced in prior periods.
We launched the Strategy.com finance channel and plan to launch additional
information channels in the future. We expect to begin earning subscription,
advertising, transaction and other fees from our Strategy.com service by the
end of 2000.
Product License Revenues. Product license revenues increased from $36.6
million in 1997 to $72.7 million in 1998 and to $143.2 million in 1999,
resulting in a growth rate of 130.6% in 1997, 98.7% in 1998 and 96.9% in 1999.
The increase in product license revenues was due to continued demand for our
core products, new product offerings supporting intelligent e-business
solutions and increasing market demand for intelligent e-business solutions. As
a result, we are attracting new customers and our existing customer base is
purchasing additional licenses and new products to support their e-business
solutions. There can be no assurance, however, that we will be able to maintain
or continue to increase market acceptance for our family of products.
Product Support Revenues. Product support revenues increased from $17.0
million in 1997 to $33.7 million in 1998 and to $62.1 million in 1999,
resulting in a growth rate of 151.9% in 1997, 98.8% in 1998 and 84.3% in 1999.
The increase in product support revenues was primarily due to
22
<PAGE>
the increase in product licenses sold. We expect product support revenues as a
percentage of total revenues to fluctuate on a period-to-period basis, but
generally not to vary significantly from the percentage of total revenues
achieved in prior years. An element of our sales and marketing strategy is to
use third-party implementation services to enable us to more rapidly penetrate
our target market. In addition, we plan to use our consultants more
aggressively to help sell our products and services, assist with development of
Strategy.com channels and other research and development projects. To the
extent that such efforts are successful, our product support revenues could
decline as a percentage of total revenues.
International Revenues. International revenues increased from $14.2 million
in 1997 to $25.1 million in 1998 and to $37.0 million in 1999, resulting in a
growth rate of 468.0% in 1997, 76.8% in 1998 and 47.4% in 1999. The increase in
revenues is due to the expansion of our international operations, new product
offerings and growing international market acceptance of our software products.
We opened sales offices in Brazil in 1999, in Australia, Canada and Italy in
1998 and in Austria, France, the Netherlands, Germany, United Kingdom and Spain
prior to 1998. We anticipate that international revenues will continue to
account for a significant amount of total revenues and management expects to
continue to commit significant time and financial resources to the maintenance
and ongoing development of direct and indirect international sales and support
channels. We may not be able to maintain or continue to increase international
market acceptance for our family of products.
Costs and Expenses
Cost of Product License Revenues. Cost of product license revenues consists
primarily of the costs of product manuals, media, amortization of capitalized
software expenses and royalties paid to third party software vendors. Cost of
product license revenues increased from $1.6 million in 1997 to $2.2 million in
1998 and to $2.6 million in 1999. As a percentage of product license revenues,
however, cost of product license revenues decreased from 4.5% in 1997 to 3.1%
in 1998 and to 1.8% in 1999. The decrease in cost of product license revenues
as a percentage of product license revenues was due to economies of scale
realized by producing larger volumes of product materials and decreased
materials costs due to an increase in the percentage of customers reproducing
product documentation at their sites. We anticipate that the costs 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 increased from $9.5
million in 1997 to $17.5 million in 1998 and to $34.5 million in 1999. As a
percentage of product support revenues, cost of product support revenues was
55.9% in 1997, 52.0% in 1998 and 55.5% in 1999. 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. Despite the increase in
personnel and other costs for 1998, the total cost of product support revenues
decreased as a percentage of revenues during 1998 compared to 1997 primarily
due to the increase in technical support revenues which typically do not
require proportionate increases in the costs required to perform associated
technical support services. This trend continued in 1999; however, the
improvements in margin due to increasing technical support revenues were offset
by the increasing use of third parties to perform consulting services.
We expect to continue to increase the number of customer education and
implementation consultants and technical support personnel in the future. To
the extent that our product support
23
<PAGE>
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. In addition, to
the extent that we cannot hire adequate numbers of support personnel to meet
demand, we may need to rely more heavily on third parties to perform consulting
services, further increasing cost of product support as a percentage of product
support revenues.
Sales and Marketing Expenses. Sales and marketing expenses include personnel
costs, commissions, office facilities, travel, advertising, public relations
programs and promotional events, such as trade shows, seminars and technical
conferences. Sales and marketing expenses increased from $30.5 million in 1997
to $53.4 million in 1998 and to $93.8 million in 1999. As a percentage of total
revenues, however, sales and marketing expenses decreased from 56.9% in 1997,
to 50.2% in 1998 and to 45.6% in 1999. The increase in sales and marketing
expenses was primarily the result of increased staffing levels in the sales
force, increased commissions earned, increased promotional activities,
advertising, increased marketing efforts for Strategy.com and general marketing
efforts. In addition, we began a national advertising campaign during the
fourth quarter of 1999, which we plan to continue in 2000. We have invested and
will continue to substantially increase our investment in sales and marketing
over the next twelve months in order to create better market awareness of the
value-added potential of our product suite and to seek to acquire market share.
In addition, we intend to invest heavily over the next twelve months to market
Strategy.com.
Research and Development Expenses. Research and development expenses consist
primarily of salaries and benefits of software engineering personnel,
depreciation of equipment and other costs. Research and development expenses
increased from $5.0 million in 1997 to $12.1 million in 1998 and to $28.7
million in 1999. As a percentage of total revenues, research and development
expenses increased from 9.4% in 1997, to 11.4% in 1998 and to 14.0% in 1999.
The increase in research and development expenses was primarily due to
additional hiring of research and development personnel to continue development
of Strategy.com channels, new products, and product releases and e-commerce
technology. We intend to substantially increase our investment over the next
twelve months to develop sports, traffic and other channels as part of our
suite of information channels of our Strategy.com network. In addition, we
expect that research and development expenses will continue to increase as we
continue to invest in developing new products, applications and product
enhancements for our existing platform business.
In 1997, in accordance with Statement of Financial Accounting Standards No.
86, we capitalized research and development costs due to the significant
increase in product development activities associated with the version 5.0
release of our software product line. As a result, we capitalized approximately
$1.9 million of research and development costs during 1997. During 1998 and
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 personnel and other costs of our finance, human resources, information
systems, administrative and executive departments as well as outside
professional fees. General and administrative expenses increased from $6.6
million in 1997 to $11.8 million in 1998 and to $24.7 million in 1999. As a
percentage of total revenues, general and administrative expenses remained
relatively consistent at 12.2% in 1997, 11.1% in 1998 and 12.0% in 1999. 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. Although we expect that general and
administrative expenses will continue to increase in the foreseeable future,
such expenses are not expected to significantly vary as a percentage of total
revenues in the future.
In-process Research and Development. In December 1999, we purchased the
intellectual property and other intangible assets relating to NCR's Teracube
project in exchange for 566,372
24
<PAGE>
shares of Class A common stock. We will develop the Teracube assets as a
business intelligence and e-business platform for datawarehouses using NCR's
Teradata database. The acquisition was accounted for under the purchase method
of accounting. As a result of this transaction, we recorded a one-time, non-
cash charge of $2.8 million for in-process research and development during
1999.
In estimating the fair value of the in-process research and development
acquired, we considered, among other factors, the stage of development of
Teracube at the time of acquisition, the percentage of the final product
attributable to core technology already developed or under development by us
and the projected incremental cash flows from the projects when completed and
any associated risks. Associated risks include the inherent difficulties and
uncertainties in completing Teracube and, thereby, achieving technological
feasibility and risks related to the impact of potential changes in future
technology.
We intend to incur expenses of approximately $900,000 over the next year in
order to complete the project. The project was approximately 85% complete at
the time of the acquisition and approximately 70% of the final product will be
attributable to core technology already developed or under development by NCR.
We used a discount rate of 35% when estimating the net present value of the
projected incremental cash flows. Remaining development efforts are focused on
completing development of certain sub-products of Teracube that will maximize
efficiencies in operation of our business intelligence and e-business products
and make it compliant with industry standards. Completion of these projects
will be necessary before revenues are produced. We expect to begin to benefit
from the purchased in-process research and development by the end of 2000. If
these projects are not successfully developed, we may not realize the value
assigned to the in-process research and development projects. In addition, the
value of the other acquired intangible assets may also become impaired.
Amortization of Goodwill and Other Intangible Assets. During each of 1998
and 1999, we recorded amortization expense of $81,000 related to intangible
assets acquired in 1998 in connection with the purchase of the non-controlling
interest's shares in foreign subsidiaries.
During 1999, we capitalized intangible assets of $13.6 million and
established work force of $1.3 million related to the acquisition of
intellectual property and intangible assets of NCR's Teracube project discussed
above, which we will amortize on a straight-line basis over 5 years and 10
years, respectively. In 1999, we recorded amortization expense of $50,000
relating to these intangible assets.
We will record goodwill and other intangible assets amortization expense of
$2.9 million each year beginning 2000 through 2004 and the remaining $1.2
million over the subsequent thirteen years.
Deferred Compensation Expense. During 1998, we granted options to purchase
3,753,380 shares of Class A common stock, of which options to purchase
1,071,670 shares of Class A common stock were granted at exercise prices below
fair market value. We will amortize $1.4 million of compensation expense
related to these options ratably over the five-year vesting period. In
addition, we issued warrants to purchase 100,000 shares of Class A common stock
at $11.75 per share. We will amortize $934,000 of compensation expense related
to these warrants ratably over the five-year vesting period. In 1998 and 1999,
compensation expense was $186,000 and $457,000, respectively. We will record
additional compensation expense of $457,000 in each year beginning 2000 through
2002, and $271,000 in 2003.
Provision for Income Taxes. Our effective tax rate was 38.0% for 1999. In
1998, we recorded income tax expense of $3.4 million. Prior to our initial
public offering, we had elected to be treated as a Subchapter S corporation for
federal and state income tax purposes. Under Subchapter S, our income was
allocated to our individual stockholders rather than to us. Accordingly, no
federal or state income taxes have been provided for in the financial
statements, prior to June 1998, when we converted to a C corporation. Had we
been a tax paying entity all year, we would have recorded income tax expense of
$3.6 million, a 38.0% effective tax rate.
25
<PAGE>
Quarterly Results of Operations
The following tables set forth the unaudited consolidated statements of
operations data for the eight quarters ended December 31, 1999, as well as such
data expressed as a percentage of total revenues for the periods indicated.
This data has been derived from unaudited interim consolidated financial
statements that, in our opinion, have been prepared on a basis consistent with
the consolidated financial statements included in this prospectus. We believe
that these statements include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of such information
when read in conjunction with the consolidated financial statements and notes
thereto. The operating results for any quarter are not necessarily indicative
of results for any future period. See "Risk Factors--Our quarterly operating
results, revenues and expenses may fluctuate significantly, which could have an
adverse affect on the market price of our stock".
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- -------- --------- -------- --------- -------- --------- --------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenues:
Product licenses....... $14,282 $16,245 $16,949 $25,245 $23,124 $31,057 $38,219 $50,793
Product support........ 5,613 7,545 10,065 10,486 12,660 14,581 16,336 18,559
------- ------- ------- ------- ------- ------- ------- -------
Total revenues........ 19,895 23,790 27,014 35,731 35,784 45,638 54,555 69,352
Cost of revenues:
Product licenses....... 538 552 586 570 520 563 844 670
Product support........ 3,163 4,113 4,658 5,601 6,609 7,906 9,056 10,908
------- ------- ------- ------- ------- ------- ------- -------
Total cost of
revenues............... 3,701 4,665 5,244 6,171 7,129 8,469 9,900 11,578
------- ------- ------- ------- ------- ------- ------- -------
Gross margin............ 16,194 19,125 21,770 29,560 28,655 37,169 44,655 57,774
Operating expenses:
Sales and marketing.... 10,828 12,005 12,926 17,649 16,774 21,145 24,376 31,493
Research and
development............ 2,092 2,776 3,218 4,020 5,060 6,088 8,433 9,099
General and
administrative......... 2,563 2,600 2,941 3,705 4,280 5,363 6,315 8,708
In process research and
development........... -- -- -- -- -- -- -- 2,800
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 15,483 17,381 19,085 25,374 26,114 32,596 39,124 52,100
Income from operations.. 711 1,744 2,685 4,186 2,541 4,573 5,531 5,674
Interest income......... 47 84 551 346 504 671 594 405
Interest expense........ 237 264 120 99 92 51 -- 1
Other income (expense),
net.................... 21 (45) (7) 17 46 (14) (6) (20)
Provision for income
taxes.................. -- 577 1,181 1,684 1,140 1,968 2,325 2,302
------- ------- ------- ------- ------- ------- ------- -------
Net income ............. $ 542 $ 942 $ 1,928 $ 2,766 $ 1,859 $ 3,211 $ 3,794 $ 3,756
======= ======= ======= ======= ======= ======= ======= =======
<CAPTION>
Three Months Ended
------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Percent of Total
Revenues:
Product licenses....... 71.8% 68.3% 62.7% 70.7% 64.6% 68.1% 70.1% 73.2%
Product support........ 28.2 31.7 37.3 29.3 35.4 31.9 29.9 26.8
------- ------- ------- ------- ------- ------- ------- -------
Total revenues........ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenues:
Product licenses....... 2.7 2.3 2.2 1.6 1.4 1.2 1.5 1.0
Product support........ 15.9 17.3 17.2 15.7 18.5 17.3 16.6 15.7
------- ------- ------- ------- ------- ------- ------- -------
Total cost of
revenues............... 18.6 19.6 19.4 17.3 19.9 18.5 18.1 16.7
------- ------- ------- ------- ------- ------- ------- -------
Gross margin............ 81.4 80.4 80.6 82.7 80.1 81.5 81.9 83.3
Operating expenses:
Sales and marketing.... 54.4 50.5 47.8 49.4 46.9 46.3 44.7 45.4
Research and
development............ 10.5 11.7 11.9 11.2 14.1 13.3 15.5 13.1
General and
administrative......... 12.9 10.9 10.9 10.4 12.0 11.8 11.6 12.6
In process research and
development........... -- -- -- -- -- -- -- 4.0
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 77.8 73.1 70.6 71.0 73.0 71.4 71.8 75.1
Income from operations.. 3.6 7.3 10.0 11.7 7.1 10.1 10.1 8.2
Interest income......... 0.2 0.4 2.0 1.0 1.4 1.3 1.1 0.6
Interest expense........ 1.2 1.1 0.4 0.3 0.2 -- -- --
Other income (expense),
net.................... 0.1 (0.2) -- -- 0.1 -- -- --
Provision for income
taxes.................. -- 2.4 4.4 4.7 3.2 4.3 4.3 3.4
------- ------- ------- ------- ------- ------- ------- -------
Net income ............. 2.7% 4.0% 7.2% 7.7% 5.2% 7.1% 6.9% 5.4%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
26
<PAGE>
Liquidity and Capital Resources
From inception until our initial public offering, we primarily financed our
operations and met our capital expenditure requirements through cash flows from
operations and short- and long-term borrowings. On June 16, 1998, we raised
$48.7 million, net of offering costs, from our initial public offering, and we
raised an additional $40.1 million, net of offering costs on February 10, 1999
from a public offering of 3,170,000 shares of Class A common stock. As a
result, on December 31, 1999 and December 31, 1998, we had $45.6 million and
$27.5 million of cash, cash equivalents, and short-term investments,
respectively.
Cash used in operations was $2.5 million and $1.2 million for 1998 and 1999,
respectively. The decrease in cash used in operations from 1998 to 1999 was
primarily attributable to an increase in net income. As discussed in the
overview, we intend to invest at least $100.0 million over the next twelve
months to market, develop and operate Strategy.com. Because of this anticipated
ongoing investment, we expect to use significant cash in operations.
Cash used in investing activities was $9.3 million and $52.2 million for
1998 and 1999, respectively. The increase in cash used in investing activities
from 1998 to 1999 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. As of December 31, 1999 we had $11.2 million in
commitments for computer software and equipment. Additionally, in November
1999, we signed a three-year master lease agreement to lease up to $40.0
million of computer equipment. The lease bears interest at a rate equal to
interest on U.S. treasury notes, with a duration equivalent to the term of the
underlying lease, plus 1.5%. We plan to utilize this lease to obtain the
equipment under this lease to support our growth. In 1999, we leased $5.3
million of equipment under this agreement.
Our financing activities provided cash of $35.7 million and $52.5 million
for 1998 and 1999, respectively. The principal source of cash from financing
activities during 1999 was from the sale of 3,170,000 shares of Class A common
stock in which we raised $40.1 million, net of expenses. In March 1999, we
entered into a line of credit agreement with a commercial bank which provides
for a $25.0 million unsecured revolving line of credit for general working
capital purposes. Borrowings under the 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. The line of credit agreement includes a 0.2% unused
line of credit fee and expires on May 31, 2001. As of December 31, 1999, no
amounts were outstanding under the line of credit.
We declared a $10.0 million dividend to our shareholders prior to our
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 our initial public offering. As of December 31, 1999,
the entire $10.0 million of the dividend notes had been repaid.
We believe that the proceeds generated by the sale of Class A common stock
offered in our February 1999 public offering and this offering, the available
borrowings under the revolving line of credit, computer equipment leasing
facility and the cash generated internally by operations will satisfy our
working capital requirements for at least the next twelve months.
27
<PAGE>
Recent Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, which delays the effective date of SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
will be effective for our fiscal year 2001. This statement establishes
accounting and reporting standards requiring that every derivative instrument,
including certain derivative instruments imbedded in other contracts, be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement also requires that changes in the derivative's fair
value be recognized in earnings unless specific hedge accounting criteria are
met. We believe the adoption of SFAS's No. 133 and 137 will not have a material
effect on the financial statements.
28
<PAGE>
BUSINESS
Overview
MicroStrategy is a leading worldwide provider of intelligent e-business
software and related services that enable the transaction of one-to-one
electronic business through web, wireless and voice communication channels.
MicroStrategy's product line enables both proactive and interactive delivery of
information from large-scale databases and provides the largest 2000
enterprises in the world and leading Internet businesses with a software
platform to develop solutions that deliver insight and intelligence to their
enterprises, customers and supply-chain partners.
Our software platform enables users to query and analyze the most detailed,
transaction-level databases, turning data into business intelligence. In
addition to supporting internal enterprise users, the platform delivers
critical business information beyond corporate boundaries to customers,
partners and supply-chain constituencies through a broad range of communication
channels such as the Internet, e-mail, telephones and wireless communication
devices. Our platform is designed for developing e-business solutions that are
personalized and proactive, and that reach millions of users. We offer a
comprehensive set of consulting, education and technical support services for
our customers and partners.
In July 1999, we launched a new business unit called Strategy.com.
Strategy.com is our personal intelligence network, a new form of media that
brings speed to transactions by actively delivering highly personalized,
relevant and timely information to individuals through a wide variety of
delivery methods, including e-mail, telephone and wireless devices. The
Strategy.com network leverages the MicroStrategy software platform and is
organized around a suite of information channels. The network currently
operates a finance channel and plans to launch additional channels on subjects
such as weather, news, politics, arts, traffic, travel and entertainment.
Strategy.com syndicates its channels through other companies that serve as
network affiliates and network associates, which we refer to collectively as
affiliates. Affiliates offer the Strategy.com channels and services on a co-
branded basis directly to their customers and in turn share with Strategy.com a
percentage of the revenues they generate. Strategy.com also provides
application maintenance, development, customer billing and support services for
those channels, enabling network affiliates and associates to focus on their
core business. Strategy.com has established over 75 network affiliate
agreements with Internet companies, communication carriers, media companies and
financial institutions and now has over 250,000 subscribers for its
Strategy.com Finance channel.
Industry Background
The emergence and widespread acceptance of the Internet as a medium of
communication and commerce has dramatically changed the way businesses interact
with each other and with their customers. According to IDC, worldwide spending
on Internet business infrastructure will increase from $211 billion in 1998 to
$1.5 trillion in 2003, a compound annual growth rate of approximately 48%. The
Internet provides opportunities for businesses to establish new revenue
streams, create new distribution channels and reduce costs. For example,
companies are using Internet-based systems to facilitate business operations,
including sales automation, supply-chain management, marketing, customer
service and human resource management. Consumers are also becoming increasingly
sophisticated in their use of the Internet, relying on the Internet not only to
make online purchases, but to perform price comparisons, analyze
recommendations from like-minded individuals and educate themselves about
relevant products and offerings. The integration of the Internet into business
processes and increased consumer sophistication create opportunities for
companies to use intelligent e-business systems as part of a more dynamic
business model. Factors increasing demand for these systems include:
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Increased Electronic Capture of Transaction and Customer Information. The
rapid growth in the electronic capture of business transactions and the
increased availability of related profile data on the parties or products
involved in each transaction are providing businesses with a rich data
foundation for one-to-one customer interactions. Powerful data analysis tools
are required to sift through massive amounts of data to uncover information
regarding customer interactions, in turn enabling organizations to provide
superior service and products to customers.
Need to Create a Personalized, One-to-One Customer Experience While
Maintaining Privacy. Many companies are initiating one-to-one marketing
strategies that establish personalized relationships with each customer based
on their individual needs and preferences, and earn customer loyalty by
providing superior service, security and convenience. In order to successfully
acquire, retain and upgrade customers, organizations need to understand their
profiles, their transaction history, their past responses to marketing
campaigns, and their interactions with customer service. Retrieving information
from widely dispersed and complex data sources and providing a holistic view of
the customer can be challenging. At the same time, while businesses have the
opportunity to collect a variety of information that could improve targeting,
customers are increasingly concerned about the potential for loss or abuse of
their privacy.
Need to Integrate Online and Traditional Operations. While there are
substantial benefits to conducting business electronically, companies need to
ensure that their online operations work in concert with their traditional
bricks and mortar operations. Companies are seeking to ensure that an order
placed online can be reliably fulfilled according to the expectations of the
customer and to develop and maintain consistent interactions with customers
across different channels. Maintaining the integrity of, and enhancing, the
customer experience is crucial to fostering customer loyalty.
Emergence of Wireless Internet and Voice Technologies. Information can be
more valuable if there is untethered, ubiquitous access to the information. The
recent development of the wireless application protocol and improvements in
text-to-speech and voice-recognition technologies have created a uniform
technology platform for delivering Internet-based information and services to
digital mobile phones and other wireless devices. According to IDC, the total
value of wireless Internet transactions will increase from $4.3 billion in 1998
to more than $38.0 billion by 2003, a compound annual growth rate of
approximately 55%. This development is expected to generate new business
opportunities for corporations by providing an additional channel for existing
services and creating opportunities to provide new services that can be
delivered any place and at any time to anyone that has access to a wireless
device. For instance, customers of an online brokerage company will have the
capability not only to get stock portfolio updates and alerts over their
phones, but will also be able to immediately act on that information and buy or
sell securities through a wireless device.
The MicroStrategy Solution
MicroStrategy offers a comprehensive suite of software products and services
that enable businesses to develop and deploy intelligent e-business systems.
MicroStrategy's solution enables organizations seeking a strong, personalized
relationship with their customers to better understand customer interactions
and actively deliver personalized information to customers through the
Internet, e-mail, telephones or wireless devices. The following diagram
describes the key elements of our solution:
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[Graphic depicts sequential use of MicroStrategy's products, starting with a
customer establishing a data warehouse, designing interactions, personalizing
for each customer, reaching each customer where appropriate and facilitating
transactions.]
Optimized Support for Large Data Volumes and All Major Relational
Database/Hardware Combinations. The MicroStrategy platform supports systems
with very large data volumes and is specifically designed to support all major
relational database platforms commonly used for intelligent e-business systems.
Important features of our solution in this area include:
. structured query language optimization drivers that improve performance
of each major database;
. ability to support very large user populations;
. designed to maximize up-time, even in high volume applications; and
. ability to work with many languages for international applications.
Extremely Powerful Analytics to Customer- and Transaction-Levels of
Detail. We believe that the MicroStrategy platform incorporates the most
sophisticated analysis engine available today, capable of answering highly
detailed business questions. The MicroStrategy platform offers support for
information beyond the summary level to include information at the customer
transaction and interaction level. This capability is critical to a wide range
of applications, including highly targeted direct marketing, e-commerce site
personalization, customer and product affinity analysis, call detail analysis,
fraud detection, credit analysis forecasting and trend metrics and campaign
management. The MicroStrategy platform allows the creation of highly
sophisticated systems that take maximum advantage of the detail available in a
company's databases.
Powerful Personalization Engine. The MicroStrategy platform includes a
customer transaction-level personalization engine. The underlying architecture
is designed to generate personalization parameters based on data gathered by an
organization from a variety of sources, including past customers' transactions,
customer clickstream information, stated user preferences and demographic
information. In addition, the MicroStrategy personalization engine is able to
determine when and under what circumstances a person automatically is provided
with a set of information.
Interactive Broadcast Engine for Delivery and Response Using Internet,
E-mail, Wireless or Voice Media. Our technology offers a high performance
personalized broadcast engine for delivering periodic- and alert-based
information to people via Internet, e-mail, wireless devices and traditional
telephone via text-to-speech conversion. The broadcast engine includes drivers
for all major device
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types used in both domestic and international markets enabling the delivery of
information to users when and where it is needed. In addition, users can
respond to a message delivered by the MicroStrategy broadcast engine. For
example, a store manager can be alerted via a personal digital assistant that
an item is out of stock and order additional inventory using this device.
Strategy
MicroStrategy's objective is to become the leading provider of intelligent
e-business software and related services to the largest 2000 enterprises in the
world and leading Internet businesses. The key elements of our strategy to
achieve this objective are as follows:
Marketing Strategy--Increase Brand Awareness. Our marketing strategy focuses
on communicating the possibilities for value creation through the use of our
intelligent e-business platform. We focus primarily upon the largest 2000
enterprises in the world and leading Internet related businesses. In January
2000, MicroStrategy launched an aggressive branding campaign through
traditional television and print media to expand awareness of the MicroStrategy
brand. We believe that by creating greater awareness of the company and the
value of our intelligent e-business solutions, we will generate not only
greater brand awareness for MicroStrategy, but also a larger group of potential
customers by helping them understand the advantages of intelligent e-business.
Technology Strategy--Provide a Scalable, Sophisticated and Maintainable
Intelligent E-Business Platform. We have designed our platform to be highly
scalable, sophisticated, reliable and easy to maintain. Our technology strategy
is focused on expanding our support for large customer oriented information
stores, enhancing our analysis and segmentation capabilities, strengthening our
personalization technology, enhancing our broadcasting functionality to the
broadest set of consumer devices and providing a platform that can be easily
integrated with e-commerce transaction engines. As part of this strategy, we
are developing technology that further differentiates our product offerings by
increasing functionality along the key dimensions of:
. personalization--the quality and sophistication of a one-to-one user
experience;
. content flexibility--the range of content, both structured and
unstructured, that can be efficiently utilized;
. media channel and interface flexibility--the range of media
channels, interface options, and display features supported;
. capacity--the volume of information that can be efficiently analyzed
and utilized;
. concurrency--the number of users which can be supported
simultaneously;
. sophistication--the range of analytical methods available to the
application designer;
. performance--the response time of the system;
. database flexibility--the range of data sources, data warehouses,
and online transaction processing databases which the software is
capable of efficiently querying without modification;
. robustness--the reliability and availability of the software in
mission critical environments; and
. deployability--the ease with which applications can be deployed,
modified, upgraded and tuned.
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Sales Strategy--Increase Market Share Among World's 2000 Largest Companies,
Leading Internet Businesses and High-Volume Data Providers. Our sales strategy
focuses on building our direct sales capabilities and relationships with
indirect channel partners in order to increase market share among the world's
2000 largest companies, leading online enterprises, and high-volume data
providers, both domestically and abroad. We also seek to increase sales to our
installed base of customers by offering a range of software and services
utilizing our core intelligent e-business platform. In order to improve
customer satisfaction and to generate additional sales to current and
prospective customers, we are also expanding our active consulting practice to
enable existing customers to fully utilize the capabilities of their existing
product implementations and to ensure that current customers have access to our
field engineering and telephone support. Finally, we are expanding our
education program to enhance our potential customers' and channel partners'
understanding of the power of intelligent e-business applications.
Products
We offer a comprehensive suite of intelligent e-business software, known as
MicroStrategy 6, that is designed to enable businesses to turn information into
strategic insight, transform customer interactions into relationships and make
more effective business decisions.
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The following diagram illustrates the MicroStrategy 6 platform:
[A graphic depiction of MicroStrategy products, including MicroStrategy
Intelligence Server, MicroStrategy Architect, MicroStrategy Agent,
MicroStrategy Web, MicroStrategy InfoCenter, MicroStrategy Broadcaster,
MicroStrategy Telecaster, MicroStrategy Administrator and listing the database
products that supply data to the software.]
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MicroStrategy Intelligence Server. MicroStrategy Intelligence Server is the
foundation for all of our intelligent e-business products. It performs
sophisticated analysis on information captured from multiple data sources. With
the ability to support millions of users, MicroStrategy Intelligence Server has
the capacity to power the most complex intelligent e-business solutions.
We believe that MicroStrategy Intelligence Server is the most sophisticated
analysis engine available today, capable of answering highly detailed business
questions. Its robust relational analysis technology enables organizations to
conduct large-scale product affinity and product profitability analyses,
research customer preferences through sales, contribution, and pricing
analysis, and compare present and historical customer retention data with
forecasting and trend metrics. MicroStrategy Intelligence Server generates
highly optimized queries through its very large database drivers, enabling high
throughput and fast response times.
MicroStrategy Intelligence Server is designed to be fault tolerant to ensure
system availability and guarantee high performance. Through an enterprise
management console, MicroStrategy Intelligence Server provides a sophisticated
array of enterprise management tools, such as caching and query prioritization
to streamline performance and batch job scheduling, which helps to maintain
disparate and diverse user communities. Administrators can automate the dynamic
adjustments of system and user governing settings, such as user thresholds and
database thread priorities, in order to smooth the database workload and ensure
the high performance that large user communities require.
MicroStrategy Web. MicroStrategy Web provides easy-to-use, interactive,
sophisticated analysis which extends the information access and analysis
capabilities of MicroStrategy Intelligence Server to any user with a web
browser. Using the MicroStrategy Web infrastructure, corporations can rapidly
implement systems that allow local and remote users to develop and access
sophisticated reports containing information from their relational databases.
MicroStrategy Web provides a graphical user interface designed to boost end-
user efficiency. Users gain access to an array of options for data exploration
and analysis, such as spreadsheet grids and a wide variety of graphs. A
flexible architecture enables businesses to implement a standardized structure
for analysis and ensure consistent work practices. Through MicroStrategy Web's
reporting capabilities, users receive key elements of a report in easily
understood, plain English messages. MicroStrategy Web also allows users to
dynamically analyze data with higher levels of detail to view the underlying
information or to create and save new analyses. In addition, MicroStrategy
Web's security plug-ins enable businesses to limit access to sensitive
information.
MicroStrategy Web includes an application protocol interface that allows
businesses to customize, integrate and embed MicroStrategy Web functionality
into other applications. For example, a data syndicate for healthcare
information could utilize MicroStrategy Web with a customized interface to sell
access to this information to HMOs, hospitals and pharmacies.
MicroStrategy Broadcaster. MicroStrategy Broadcaster is a powerful content
generation and information broadcast server designed to actively deliver
personalized information to millions of recipients via the Internet, e-mail,
telephone and wireless devices. MicroStrategy Broadcaster delivers targeted
information to individuals on an event-triggered or scheduled basis through the
consumer communication device that is most convenient. It provides both an
engine to implement targeted information messaging to acquire and retain
customers and a platform for distributing information throughout the corporate
enterprise and to customers, suppliers, and other constituencies.
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MicroStrategy Agent. MicroStrategy Agent provides an advanced environment
for rapid application development and sophisticated analysis. It provides an
object-oriented view of business data--converting a company's business data
into a virtual library of valuable information, enabling users to develop
sophisticated business metrics, filtering criteria and pre-defined report
templates. Applications developed within MicroStrategy Agent are easily
deployed throughout the MicroStrategy architecture bringing integrated query
and reporting capabilities, powerful analytics and decision support workflow to
analysts, quantitative users and end users throughout the enterprise and
beyond.
These applications provide better understanding of a business or customer
base through analyses such as customer profiling, clickstream analysis and
sales and inventory analyses.
MicroStrategy InfoCenter. MicroStrategy InfoCenter is a web-based interface
that can be used with existing web applications to provide targeted product
offerings over many devices. Through MicroStrategy InfoCenter, users subscribe
to information services by providing personal information and preferences,
ensuring that users receive personalized, appropriate product offerings and
information. Its integration with MicroStrategy Broadcaster and MicroStrategy
Telecaster is designed to allow the delivery of the appropriate offering via
the appropriate medium at the appropriate time.
MicroStrategy InfoCenter can be used by companies to create one-to-one
marketing campaigns, learn more about their customers and increase customer
click-through and sales. MicroStrategy InfoCenter also can be used within an
enterprise by customer relationship managers to view reports on their customer
base, analyze their campaigns and take action upon them.
MicroStrategy Telecaster. MicroStrategy Telecaster is an intelligent voice
broadcast server that enables organizations to deliver fully personalized
information services to employees, partners, suppliers or customers over any
telephone or voice mail system.
MicroStrategy Telecaster notifies end-users of relevant news based on
schedules or exception criteria such as a close of market portfolio update or
an inventory reorder point. When a user picks up the call, information is
presented in natural language and structured in a fully interactive and
individually tailored format. MicroStrategy Telecaster not only creates a
personal message, but also generates the appropriate menu of response options
on a one-to-one basis. Users can then select the appropriate option by simply
pressing a button on the phone keypad.
MicroStrategy Telecaster is designed to enable voice-based interaction via
two-way electronic devices. MicroStrategy Telecaster can process user input,
such as the selection of an alternate flight, or the number of shares that
should be traded, to communicate in real-time with any external database,
transaction or e-commerce system and call centers and telephone applications.
MicroStrategy Telecaster's combination of analysis, broadcast,
personalization and interaction capabilities facilitates its use in a variety
of intelligent e-business applications, including:
. reminder services, such as drug refills;
. event based notification services, such as flight delays and bank
account notifications;
. personal intelligence, such as financial, news, weather, traffic and
sports information; and
. sales force automation and internal reporting services, such as sales
reports.
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MicroStrategy Administrator. MicroStrategy Administrator enables
administrators to efficiently maintain large-scale data warehouse applications
supporting millions of users. Project migration utilities help administrators
develop, test and deploy systems. Performance analysis enables administrators
to monitor and tune systems for maximum performance and availability.
MicroStrategy Architect. MicroStrategy Architect is a development
environment for intelligent e-business applications. Software developers can
use this product to design powerful enterprise and e-business intelligence
systems rapidly. MicroStrategy Architect is highly automated and is based on an
open, flexible architecture, which greatly reduces the cost and time required
to implement and maintain systems.
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Consulting, Education and Customer Support
The following diagram illustrates our services and customer support
capabilities:
[A graphic depiction of MicroStrategy training offerings, including courses
offered at "Microstrategy University" as well as a description of support
services that are available.]
MicroStrategy Consulting--Intelligent E-Business Management and Technical
Consulting. MicroStrategy Consulting facilitates the development of high-end
applications for our customers. Our consultants design and implement scalable,
high performance applications that run against multi-terabyte databases for
companies throughout the world. MicroStrategy Consulting's mission is to
provide services that ensure customer success and return on investment through
full use of our advanced technology.
MicroStrategy Education--Intelligent E-Business Education
Programs. MicroStrategy Education provides our customers with a thorough
understanding of our products and the implementation of intelligent e-business
systems through quality instruction and hands-on experience. With nearly ten
years of experience training a diverse customer base, we have developed a
comprehensive set of education programs designed to help customers get up to
speed quickly on intelligent e-business technologies. Representative courses
from our training curriculum include:
.Introduction to Intelligent E-Business;
.MicroStrategy Fast Track for Developers;
.MicroStrategy Server Platforms: Administration;
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.MicroStrategy Broadcaster: Intelligence Everywhere;
.E-Business: Methodology and Architecture;
.MicroStrategy InfoCenter: Personal Information Gateway; and
.MicroStrategy Telecaster: Personalized Voice Broadcast Server.
MicroStrategy Support--Hotline, Knowledge Base and Field Engineering
Services. MicroStrategy technical support provides support services designed to
help customers extract the highest return on investment from our products.
MicroStrategy technical support offers a variety of support options geared to
resolve technical issues quickly and efficiently whenever they arise.
Customer Case Studies
The following case studies illustrate the application and implementation of
our products and related services by several of our customers.
GE Capital Fleet Services. GE Capital Fleet Services, one of the world's
leading vehicle fleet management companies, uses MicroStrategy's intelligent e-
business platform to deliver innovative customer services as part of an overall
e-business strategy. The company deployed MicroStrategy Web to give its
customers desktop access to specific fleet information. MicroStrategy Web
allows GE Capital Fleet Services and its customers to extract valuable
information from its data warehouse. Customers use the tool to compare service
histories of different car models, identify drivers who are most accident-prone
or review the fleet's monthly mileage.
Additionally, with MicroStrategy Broadcaster, customers receive proactive
vehicle maintenance reminders. MicroStrategy Broadcaster automatically sends
personalized maintenance reminders directly to vehicle drivers via e-mail,
telephone or wireless device. According to GE Capital Fleet Services, the
innovative vehicle fleet management services made possible by the MicroStrategy
intelligent business platform are saving the company millions of dollars in
printing and postage costs and are creating stronger customer relationships.
First Union. First Union is the nation's sixth largest financial
institution, with more than $230 billion in assets under management. The
company uses MicroStrategy's intelligent e-business platform to manage
relationships with more than 16 million customers. First Union runs
MicroStrategy Web against a 27-terabyte data warehouse, one of the largest in
the banking industry, to retrieve valuable insights. MicroStrategy Web enables
authorized First Union users to quickly and easily obtain a comprehensive view
of customer relationships, analyze their current and potential profitability
and improve business relationships with them. The tool allows authorized users
to analyze critical customer information and create detailed product and
marketing reports quickly. For example, authorized users can quickly identify
how many customers have a high balance checking account and who would likely be
interested in asset management services. These sales leads are then
automatically sent to First Union's sales and services organizations for
direct, personalized marketing efforts.
NBCi. NBC Interactive, known as NBCi, is a leading Internet integrated media
company. NBCi uses MicroStrategy's intelligent e-business platform to conduct
advanced clickstream analysis of daily traffic to its Snap and XOOM.com web
sites. The resulting insight helps site managers improve their services and
deliver a more personal online experience for users. In addition, MicroStrategy
Web enables Snap and XOOM.com product, channel and marketing managers to
identify user preference and demographic information with the click of a mouse.
NBCi also uses MicroStrategy Broadcaster to send managers regular information
updates via e-mail.
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With these tools, NBCi is able to identify the most popular content on its
sites, as well as areas that may need additional support. Detailed customer
information also supports Snap and XOOM.com efforts to attract advertisers who
want to reach specific demographic markets.
Strategy.com
In July 1999, we launched a new business unit called Strategy.com.
Strategy.com is our personal intelligence network, a new form of media that
brings speed to transactions by actively delivering highly personalized,
relevant and timely information to individuals through a wide variety of
delivery methods, including e-mail, telephone and wireless devices. The
Strategy.com network leverages the MicroStrategy software platform and is
organized around a suite of information channels. The network currently
operates a finance channel and plans to launch additional channels on subjects
such as weather, news, politics, arts, traffic, travel and entertainment.
Strategy.com syndicates its channels through other companies that serve as
network affiliates and network associates, which we refer to collectively as
affiliates. Affiliates offer the Strategy.com channels and services on a co-
branded basis directly to their customers and in turn share with Strategy.com a
percentage of the revenues they generate. Strategy.com also provides
application maintenance, development, customer billing and support services for
those channels, enabling network affiliates and associates to focus on their
core businesses. Strategy.com has established over 75 network affiliate
agreements with leading Internet companies, communications carriers, media
companies and financial institutions and now has over 250,000 subscribers for
its Strategy.com Finance channel. The key attributes of the Strategy.com
network are as follows:
Personal Intelligence Agent. Strategy.com functions as a personal
intelligence agent that operates on the user's behalf and is based on a set of
permissions and requirements specified by the user. Strategy.com goes beyond
sending scheduled information updates by allowing users to choose to be
notified immediately upon the occurrence of a predefined event. These
capabilities enable consumers to receive tailored, pertinent and timely
information. As the Strategy.com network expands, we intend to develop
Strategy.com's software agents to act, with permission, proactively on the
user's behalf. For example, in the future the user may be able to specify
conditions under which Strategy.com could transfer assets from one financial
institution to another, based on relative interest rates. We believe that this
capability will provide significant value to consumers.
Diverse Delivery Methods. We deliver Strategy.com services to devices in
three general categories -- web, wireless and voice. A major component of
Strategy.com's technology strategy is to take advantage of the capabilities of
the wireless application protocol and the improvements in text-to-speech and
voice-recognition technologies to create a robust and content-rich wireless
Internet portal. Strategy.com believes it can exploit its position as one of
the first to market in this area to facilitate e-commerce transactions and
expand its network and base of subscribers. In the future, Strategy.com will
give users the ability to buy or sell stock, purchase merchandise and make
reservations after receiving information on their wireless and other devices,
eliminating the need to use a computer or speak with someone on the telephone.
Our goal is to allow users to move beyond the desktop and allow us to
significantly broaden our reach by interacting with consumers throughout the
day via the most convenient means available.
Unique Personalization. Unlike traditional television, radio and cable
networks which send the same content to all audience members and which require
users to initiate the use of a dedicated device, Strategy.com allows
individuals to subscribe to the selected programs and services that interest
them and to receive richer, more detailed information via the delivery
mechanism of their choice. Subscribers will be able to access personalized
updates on a range of subjects using their wireless devices.
Content. Strategy.com's network is organized around content-specific
channels. Its initial channels are:
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. Strategy.com Finance: As the first channel of the Strategy.com network,
Strategy.com Finance provides consumers with personalized portfolio and
market reports via the device of their choice. Strategy.com Finance
provides users with a variety of information, from intra-day stock
movement alerts to a personalized portfolio analysis sent via Excel
spreadsheets. In the future, Strategy.com will also allow users to
conduct trades and other financial transactions through the Internet or
using their wireless devices after receiving Strategy.com Finance
alerts.
. Strategy.com Weather: Strategy.com Weather is currently operating on a
test basis and is expected to be commercially available in the second
quarter of 2000. Strategy.com delivers personalized weather reports,
forecasts and alerts for over 55,000 locations across the globe.
Strategy.com will offer subscribers features such as severe weather
alerts, beach and boating reports and weekly forecasts, along with the
convenience of receiving personalized weather information.
. Strategy.com News: Strategy.com News is currently operating on a test
basis and is expected to be commercially available in the second quarter
of 2000. Strategy.com will deliver breaking news, news alerts and local
and global updates. Strategy.com News utilizes data from numerous
content providers and covers over 20,000 stories a day. Subscribers will
have the ability to easily personalize Strategy.com News so they only
receive stories about the issues and locations that are of importance to
them.
Strategy.com has entered into agreements with leading content and data
providers, including the following:
Media General Financial Services Weather Labs
Standard & Poor's Briefing.com
Zacks AFP
National Weather Service Comtex
SportsTicker Metro Networks
We also have agreements with smaller local and specialized providers to
supply content for our channels. We expect to focus our efforts on content
providers that can provide comprehensive coverage and that feature content that
has the potential for targeting e-commerce opportunities.
We have established over 75 network affiliate agreements with Internet
companies, communication carriers, media companies and financial institutions
such as Ameritrade, Belo, Metrocall, Nasdaq, Phillips International, Primark,
The Wall Street Journal, Earthlink, WashingtonPost.com and USA Today.com to
market our services directly to consumers. By offering Strategy.com services to
their customers, network affiliates seek to differentiate their core product
offerings, increase customer loyalty and create new revenue streams. The
affiliates provide the marketing and sales support for the service and
Strategy.com focuses on providing the technical infrastructure, including the
management of the software, hardware, billing and customer support processes
and the development and deployment of channels and content to users. Larger
Strategy.com affiliates have the ability to create co-branded web pages and
commission customized features, services and content using Strategy.com data.
Strategy.com also offers an associates program in which smaller businesses and
individuals can create co-branded web pages offering Strategy.com services to
their users.
Our vision for Strategy.com is to be the leading provider of personalized
intelligence to consumers. We believe that strengthening affiliate
relationships and strategic alliances with leading content providers is
critical to attracting and expanding our subscriber base. We also intend to
engage in aggressive brand-building in order to attain a leadership position.
We believe that Strategy.com capitalizes on both our powerful software
technology and the emerging development of wireless Internet information
delivery. We plan to invest at least $100 million in the next twelve months to
build the Strategy.com personal intelligence network and increase brand
awareness.
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Customers
MicroStrategy has over 900 customers across such diverse industries as
retail, telecommunications, banking and finance, pharmaceuticals and
healthcare, technology and consumer packaged goods. A representative list of
the firms that purchased over $250,000 of our products and services since
January 1, 1997 is as follows:
Banking & Finance Telecommunications Consumer Packaged Goods
American Express* Ameritech Beverage Data Network
AT&T Wireless Services Brown & Williamson
Ameritrade*
Banco Santander Bell Atlantic* Estee Lauder
Bank of America Bell South* Hallmark
CIBC Cable & Wireless Ralston Purina
Fannie Mae Concert Management S.C. Johnson Wax
First Data Corporation Services*
First Union MCI WorldCom Technology
Corporation* Pacific Bell* Belo Interactive*
First USA Bank Sprint* Earthlink*
Freddie Mac*
Exchange Applications*
GE Capital* Pharmaceutical & Gateway
Nationwide Insurance* Healthcare IBM Corporation*
Royal Bank of Canada Cardinal Health Lexis Nexis
Glaxo Wellcome* Network Solutions
USAA
Visa International Ingenix* Nielsen Media Research
MedPartners NCR*
Retail Merck/Medco* Perot Systems
Asda Stores Premier Snap
B & Q Smithkline Beecham Tandem Computers*
Best Buy* Warner Lambert* WashingtonPost.com
Comet
Western Digital*
Elder Beerman Grocery & Pharmacy
Fox Entertainment Group American Stores* Manufacturing & Industrial
Kmart* Associated Food Stores Allied Signal
Kohl's Department CVS Pharmacy DuPont
Stores Eckerd Corporation* General Motors
Littlewoods Food Lion Lexmark*
Liz Claiborne* Harris Teeter Michelin*
Marks & Spencer* Marsh Supermarkets Monsanto
ShopKo*
Samsung*
The Limited Government/Public Shaw Industries
Victoria's Secret Services Unisys
Woolworth's Housing and Urban
Development*
Travel & Entertainment Ohio Department of
Blockbuster Education
Entertainment* US Air Force
Continental Airlines US Postal Service*
The SABRE Group
Starwood Hotels &
Resorts
Universal Studios*
* Indicates customers that purchased more than $1,000,000 in products and
services since January 1, 1997.
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Sales and Marketing
Direct Sales Organization. We market our software and services primarily
through our direct sales force. As of December 31, 1999, we had domestic sales
offices in a number of cities, including Atlanta, Boston, Chicago, Cincinnati,
Dallas, Denver, Detroit, Kansas City, Los Angeles, Minneapolis, New York, San
Francisco, Seattle, Tampa and Washington, D.C., and international sales offices
located in Amsterdam, Barcelona, Madrid, Cologne, London, Paris, Sao Paolo,
Vienna, Milan and Toronto. We are represented by distributors in countries in
which we do not have sales offices, including Australia, Brazil, Chile,
Colombia, the Czech Republic, Finland, Greece, Ireland, New Zealand, Singapore,
South Africa, South Korea and Sweden.
Indirect Sales Channels. We have entered into relationships with more than
225 system integration, application development and platform partners whose
products and services are used in conjunction with our own. Agreements with
these partners generally provide them with non-exclusive rights to market our
products and services and allow access to our marketing materials, product
training and direct sales force for field level assistance. In addition, we
offer our partners product discounts. Favorable product recommendations from
the leading system integration, application developers and platform partners to
potential customers facilitates the sale of our products. We believe that such
indirect sales channels allow us to leverage sales and service resources,
marketing and industry specific expertise to expand our user base and increase
our market coverage.
Value-Added Resellers. Value-added resellers who resell MicroStrategy
software bundled with their own software applications and/or syndicated data
products include:
<TABLE>
<CAPTION>
<S> <C> <C>
Accrue Software IDX Systems Prime Response
Acxiom M&I Data Services Radiant Systems
Beverage Data
Network Net Perceptions Radius Retail
Exchange
Applications Net.Genesis Retek Information Systems
Fair Issac and
Company Plum Tree Systems Consulting Company
HNC Software
</TABLE>
System Integrators. We have also entered into agreements to provide
training, support, marketing and sales assistance to a number of system
integrators, including:
American Management Computer Sciences Nex Genix
Systems Corporation Perot Systems
Answer Think Consulting Deloitte & Touche Corporation
Group Ernst & Young Questra Corporation
Arthur Andersen Etensity Sapient Corporation
AutoMate Incorporated Greenbrier & Russel Silicon Graphics
BeggsHeidt Enterprise KPMG Peat Marwick Tessera Enterprise
Consulting Modis Solutions Systems
BizIntel Technology NCR Whitman-Hart
Braun Technology Group Xpedior
CACI
Platform Partners. Our platform partners consist of firms which co-sell and
co-market complementary technology to the same target customer base. These
platform partners include IBM, Compaq, NCR, Sequent, ICL, Data General,
Informatica, Oracle, Informix, EDS and Deloitte & Touche.
Research and Product Development
We have made substantial investments in research and product development. We
believe that our future performance will depend in large part on our ability to
maintain and enhance our current
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product line, develop new products that achieve market acceptance, maintain
technological competitiveness and meet an expanding range of customer
requirements. As of December 31, 1999, our research and product development
staff consisted of 338 employees. Our total expenses for research and
development for the years 1999, 1998 and 1997 were $28.7 million, $12.1 million
and $5.0 million (excluding $1.9 million of capitalized software costs),
respectively.
Competition
The markets for e-business, e-commerce, customer relationship management,
portals, business intelligence and Internet-based and wireless-based
information networks are intensely competitive and subject to rapidly changing
technology. In addition, many of our competitors in these markets are offering,
or may soon offer, products and services that may compete with our products and
our Strategy.com network.
Our most direct competitors provide:
. e-business products;
. customer relationship management products;
. e-commerce transaction systems;
. business intelligence products;
. Internet and wireless information networks and portals;
. vertical Internet portals and information networks; and
. wireless communications and wireless access protocol enabled products.
Each of these market segments are discussed more fully below.
E-business Infrastructure Software. In the e-business infrastructure market,
BroadVision, E.piphany, Vignette, Net Perceptions, Broadbase, Art Technology
Group, Engage Technologies, Doubleclick and Personify all provide products that
compete directly or indirectly with our software platform. Many of these
companies provide alternatives to our technology for adding intelligence and
personalization to e-commerce applications. For example customer information,
such as past purchases, clickstream data and stated preferences, can be used to
create a personalized e-commerce experience that targets customers with offers
and interactions to which they are more likely to respond.
Customer Relationship Management Products. Companies that deliver customer
relationship management products alone or in conjunction with e-commerce
applications, such as BroadVision, E.piphany, Vignette, and Siebel, compete
with our software platform.
E-Commerce Transaction Systems. Products that support e-commerce
transactions, such as those provided by Microsoft, IBM, American Online's
Netscape division, BroadVision, Open Market, InterWorld, and Oracle could
compete with 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 with our e-business products.
Business Intelligence Products. In the business intelligence market, we
compete with providers of software used to enable businesses to analyze and
optimize their operations. In the enterprise category, which is generally
focused on large deployments, Information Advantage, which was recently
acquired by Sterling Software, competes with us. In the desktop analysis and
reporting category, we face competition from companies such as Business
Objects, Cognos, and Brio Technology. 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.
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<PAGE>
Web Portals and Information Networks. Web portals and information networks,
such as Microsoft Network, Yahoo, Lycos, Excite, America Online and
InfoSpace.com, offer an array of information that is similar to information
provided by Strategy.com. Strategy.com seeks to differentiate itself by:
. providing a greater level of personalization;
. allowing users to receive the precise information they want across the
broadest range of information delivery devices through email, wireless
phone, pager, wireless access protocol enabled products, fax, personal
digital assistants and the telephone; and
. partnering with financial institutions, device manufacturers, Internet
companies, communication carriers, media companies and wireless
companies, to embed Strategy.com information services as an ingredient
in their own offerings.
One or more of these companies, however, could expand their offerings and
reduce our differentiation in these three areas.
Vertical Internet Portals and Information Networks. Expedia, Weather.com,
CNBC.com, ABC.com, ESPN.com, Microsoft Investor, StockBoss, Microsoft CarPoint,
InfoBeat, Internet Travel Network and others have developed custom applications
and products to commercialize, analyze and deliver specific information over
the Internet. These systems are usually tailored to one application, such as
providing news, sports, or weather, but in the aggregate, they offer
applications similar to those provided by Strategy.com. Any one of these
companies could expand their offering to more closely compete with
Strategy.com.
Wireless Communications and Wireless Access Protocol Enabled
Products. Wireless communications providers, such as AT&T, Sprint, MCI
WorldCom, Nextel Communications, British Telecom, Deutsche Telekom, PageNet,
Nokia, Ericsson, Aether Systems, 3COM and Palm offer a variety of mobile phones
and wireless devices over which Strategy.com delivers information. These
companies may develop in-house information services or partner with other
companies to deliver information that is competitive to that offered by
Strategy.com.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing or other resources, and greater name
recognition that 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.
Current and future competitors may also make strategic acquisitions or
establish cooperative relationships among themselves or with others. By doing
so, they may increase their ability to meet the needs of our potential
customers. Our current or prospective indirect channel partners may establish
cooperative relationships with our current or future competitors. These
relationships may limit our ability to sell our products through specific
distribution channels. Accordingly, it is possible that new competitors or
alliances among current and future competitors may emerge and rapidly gain
significant market share. These developments could harm our ability to obtain
maintenance revenues for new and existing product licenses on favorable terms.
Intellectual Property and Licenses
We rely primarily on a combination of copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary technology. For example, we require
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<PAGE>
software licensees to enter into license agreements that impose certain
restrictions on licensees' use of the software. In addition, we have made
efforts to avoid disclosure of our trade secrets, including but not limited to,
requiring those persons with access to our proprietary technology and
information to enter into confidentiality agreements with us and restricting
access to our source code. We have no patents. Despite our efforts to protect
our proprietary rights, unauthorized parties may attempt to copy aspects of our
products or to obtain and use information that we regard as proprietary.
Policing unauthorized use of our products is difficult, and while we are unable
to determine the extent to which piracy of our software products exists,
software piracy can be expected to be a persistent problem. In addition, the
laws of some foreign countries do not protect our proprietary rights to as
great an extent as do the laws of the United States. There can be no assurance
that our means of protecting our proprietary rights will be adequate or that
our competitors will not independently develop similar technology.
Generally, our products are licensed through named-user licenses, under
which only one identified user may access the product for each named-user
license fee paid. A user is an individual to whom a licensee has assigned an
identification number for purposes of tracking use of a product and who is
under an obligation to the licensee to protect any of our confidential
information. Under our standard software license agreement, we have the ability
to request certified statements of records regarding identification numbers in
particular, and use of the products in general, once per year, and have the
right to audit use of the products at least once per year. Copying of products
and documentation is limited to the number of users for whom license fees have
been paid.
There can be no assurance that third parties will not claim infringement by
us with respect to current or future products. We expect that software product
developers will increasingly be subject to infringement claims as the number of
products and competitors in our industry segment grows and the functionality of
products in different industry segments overlaps. Any such claims, with or
without merit, could be time-consuming, result in costly litigation, cause
product shipment delays or require us to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to us or at all, which could have a material
adverse effect upon our business, operating results and financial condition.
Employees
As of December 31, 1999, we had a total of 1,662 employees, of whom 1,397
were based in the United States and 265 were based internationally. Of the
total, 579 were engaged in sales and marketing, 338 in product development, 486
in professional services and 259 in finance, administration and corporate
operations. None of our employees is represented by a labor union. We have not
experienced any work stoppages and consider our relations with our employees to
be good.
We believe that effective recruiting, education, and nurturing of human
resources is critical to our success and have traditionally made substantial
investments in these areas in order to differentiate ourselves from our
competition, increase employee loyalty and create a culture conducive to
creativity, cooperation and continuous improvement. These measures include:
Professional Education. All newly hired professionals complete a
professional orientation course that ranges from 4 to 8 weeks long, presented
by "MicroStrategy University," our in-house education function. The curriculum
consists of lectures, problem sets and independent and group projects, covering
data, our products, competitors and customers. Certain lectures also deal with
general business practices, ethics and teamwork. At the end of this training,
students must pass a number of oral and written examinations in order to begin
their assignments. Following this introductory course, veteran employees
normally complete at least two weeks of continuing professional development
each year. Course content for MicroStrategy University is created by the most
experienced members of the professional staff, who generally have an annual
obligation to
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<PAGE>
create expert content based upon the best practices they have most recently
observed in the field. This expert content is then used to upgrade and
revitalize our education, consulting, support, technology and marketing
operations.
Company Days. Each quarter, we invite most of the employee base together for
knowledge transfer within functions, across functions and across geographic
boundaries. These events are generally built around a set of company-wide
meetings and breakout sessions, but they also have particular cultural themes.
These events include:
. the "Company Retreat," which allows employees to network with colleagues
in an informal setting and which traditionally has consisted of a
company-sponsored cruise;
. ""University Week," which focuses on continuing professional development
along with the creation and codification of industry-best practices;
. ""Friends and Family Weekend," during which we sponsor a weekend-long
open house and host immediate and extended family, as well as
significant others of employees; and
. ""MicroStrategy World," where our business partners and customers are
encouraged to mix with the employee base in order to exchange
information and strengthen the firm's ties to the marketplace.
We believe that our "Company Day" events are long-term investments which
will, over time, result in superior productivity, morale, and loyalty among the
employee base, and we expect to continue to engage in these activities in the
future.
Facilities
Our principal offices currently occupy over 284,000 square feet in Vienna,
Virginia pursuant to multiple leases, the majority of which expire between June
2003 and February 2010. In addition, we also lease sales offices domestically
and internationally in a variety of locations, including Atlanta, Bedminster,
Boston, Chicago, Cincinnati, Dallas, Detroit, Los Angeles, Minneapolis, New
York, San Francisco, Seattle, Washington, D.C., Amsterdam, Barcelona, Cologne,
London, Madrid, Milan, Paris and Vienna. We believe that suitable additional or
alternative space will be available in the future on commercially reasonable
terms as needed.
Legal Proceedings
From time to time, we may be involved in litigation that arises in the
normal course of our business operations. Currently, we are not a party to any
litigation that we believe could reasonably be expected to have a material
adverse effect on our business or results of operation.
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<PAGE>
MANAGEMENT
Executive Officers and Directors
Our executive officers and directors and their ages and positions as of
January 31, 2000 are as follows:
<TABLE>
<CAPTION>
Name Age Title
- ---- --- -----
<S> <C> <C>
Michael J. Saylor....... 35 President, Chief Executive Officer and
Chairman of the Board of Directors
Sanju K. Bansal......... 34 Executive Vice President, Chief Operating Officer and
Director
Jonathan F. Klein....... 32 Vice President, Law and General Counsel
Mark S. Lynch........... 36 Vice President, Finance and Chief Financial Officer
Joseph P. Payne......... 35 Vice President, Marketing and Chief Marketing Officer
Stephen S. Trundle...... 31 Vice President, Technology and Chief Technology Officer
Frank A. Ingari(1)(2)... 50 Director
Jonathan J. Ledecky..... 42 Director
Ralph S. 49 Director
Terkowitz(1)(2)........
John W. Sidgmore(3)..... 48 Director
</TABLE>
- --------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Mr. Sidgmore was elected as a director on February 16, 2000.
Set forth below is certain information regarding the professional experience
for each of the above-named persons.
Michael J. Saylor has served as president, chief executive officer and
chairman of the board of directors since founding MicroStrategy in November
1989. Prior to that, Mr. Saylor was employed by E.I. du Pont de Nemours &
Company as a Venture Manager from 1988 to 1989 and by Federal Group, Inc. as a
consultant from 1987 to 1988. Mr. Saylor received an S.B. in Aeronautics and
Astronautics and an S.B. in Science, Technology and Society from the
Massachusetts Institute of Technology.
Sanju K. Bansal has served as executive vice president and chief operating
officer since 1993 and was previously vice president, consulting since joining
MicroStrategy in 1990. He has been a member of the board of directors of
MicroStrategy since September 1997. Prior to joining MicroStrategy, Mr. Bansal
was a consultant at Booz Allen & Hamilton, a worldwide technical and management
consulting firm, from 1987 to 1990. Mr. Bansal received an S.B. in Electrical
Engineering from the Massachusetts Institute of Technology and an M.S. in
Computer Science from The Johns Hopkins University.
Jonathan F. Klein has served as vice president, law and general counsel
since November 1998 and as corporate counsel from June 1997 to November 1998.
Prior to that, Mr. Klein was an appellate litigator with the United States
Department of Justice. Mr. Klein received a B.A. in Economics from Amherst
College and a J.D. from Harvard Law School.
Mark S. Lynch has served as vice president, finance and chief financial
officer since September 1997. Prior to that, Mr. Lynch was chief financial
officer for WorldCorp and World Airways from 1996
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<PAGE>
to 1997, and before that was vice president, finance for Intelidata, an
electronic commerce firm, from 1991 to 1996. Mr. Lynch has also held several
senior accounting positions with KPMG Peat Marwick and Clark Construction
Group. Mr. Lynch is a certified public accountant and received a B.S. in
Accounting from Penn State and an M.B.A. from George Washington University.
Joseph P. Payne has served as vice president of marketing, and
chief marketing officer since April 1999. From 1996 to 1999, Mr. Payne held
several executive-level positions at InteliData Technologies, including
president and CEO of its Telecommunications Division. Prior to that, Mr. Payne
served as vice president, marketing of Royal Crown Company from 1994 to 1996.
Before that, Mr. Payne was a brand manager at the Coca-Cola Company from 1991
to 1994. Mr. Payne received an A.B. in Public Policy from Duke University and
an MBA from the Fuqua School of Business at Duke University.
Stephen S. Trundle has served as vice president, technology and chief
technology officer since July 1997 and as director, technology from 1994 to
1997. From 1992 to 1994, Mr. Trundle served as a consultant and then a senior
consultant with MicroStrategy. Prior to that, Mr. Trundle worked for Bath Iron
Works on the Aegis Destroyer program from 1991 to 1992. Mr. Trundle received an
A.B. in Engineering and an A.B. in Government from Dartmouth College.
Frank A. Ingari has been a member of the board of directors of MicroStrategy
since October 1997. Mr. Ingari is founder and chief executive officer of
Wheelhouse Corporation, an eMarketing services firm formed in April of 1999.
Between 1997 and April 1999, Mr. Ingari founded Growth Ally, L.L.C., a
consulting firm specializing in assisting private technology companies in
accelerating their growth and served as its chief executive officer. Mr. Ingari
was chairman and CEO of Shiva Corporation from 1993 to 1997. Prior to joining
Shiva Corporation, Mr. Ingari was vice president, marketing at Lotus
Development Corporation. Mr. Ingari received a B.A. in Creative Writing and
U.S. Foreign Relations from Cornell University.
Jonathan J. Ledecky has been a member of the board of directors of
MicroStrategy since June 1998. Mr. Ledecky is currently vice chairman of
Lincoln Holdings LLC, which owns the Washington Capitals, the Washington
Wizards and the Washington Mystics sports teams. Mr. Ledecky founded U.S.
Office Products Company in October 1994 and served as its chairman of the board
and chief executive officer from inception through November 1997 and thereafter
as a director until May 1998. In February 1997, Mr. Ledecky founded Building
One Services Corp., now Encompass Services Corporation, and served as its
chairman until February 2000 and chief executive officer until June 1999. Mr.
Ledecky is also a director of publicly traded Aztec Technology Partners,
UniCapital Corporation, U.S.A. Floral Products, School Specialty, Inc.,
OneMain.com and WorkFlow Management.
Ralph S. Terkowitz has been a member of the board of directors of
MicroStrategy since September 1997. Mr. Terkowitz is vice president, technology
for the Washington Post Company, a position he held since 1992. Until February
1996, Mr. Terkowitz was chief executive officer, president and publisher of
Digital Ink, an Internet publishing venture that launched, among other
ventures, WashingtonPost.com and PoliticsNow. In 1998 he was co-CEO of
HireSystems and instrumental in the formation of BrassRing.com, Mr. Terkowitz
is a director of ICSA, BigStep and OutTask. Mr. Terkowitz received an A.B. in
Chemistry from Cornell University an M.S. in Chemical Physics from the
University of California, Berkeley.
John W. Sidgmore has been a member of the board of directors of MicroStrategy
since February 2000. Mr. Sidgmore was the president and chief executive officer
of UUNET Technologies, Inc., a provider of worldwide Internet services, from
June 1994 until November of 1998 and has served as chairman since November of
1998. Since December 1996, Mr. Sidgmore has served as the chief operating
officer and vice chairman of WorldCom Inc., now MCI WorldCom, a provider of
long distance, Internet and telecommunication services. Prior to joining UUNET,
Mr. Sidgmore was president and CEO of Intelicom Solutions, now CSC Intelicom, a
telecommunications software company. Mr. Sidgmore is also a member of the board
of directors of MCI WorldCom and ADC Telecommunications, Inc.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our Class A and Class B common stock as of January 31, 2000 by (1)
each person who owns beneficially more than 5% of the outstanding shares of our
common stock, (2) each of our directors and the five most highly compensated
executive officers, and (3) all of our directors and executive officers as a
group.
The number of shares of Class A and Class B common stock deemed outstanding
prior to this offering includes:
. 22,651,210 shares of Class A common stock outstanding as of January 31,
2000;
. 55,516,929 shares of Class B common stock outstanding as of January 31,
2000; and
. shares issuable pursuant to options held by each person included in this
table which may be exercised within 60 days after January 31, 2000, as
set forth below.
The number of shares of common stock deemed outstanding after this offering
includes the shares of Class A common stock that are being offered for sale by
us in this offering. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission, and includes voting and
investment power with respect to shares. Unless otherwise indicated below, to
our knowledge, all persons named in the table have sole voting and investment
power with respect to their shares of common stock, except to the extent
authority is shared by spouses under applicable law. Unless otherwise
indicated, the address of each person owning more than 5% of the outstanding
shares of common stock is c/o MicroStrategy, 8000 Towers Crescent Drive,
Vienna, Virginia 22182.
<TABLE>
<CAPTION>
Shares
Beneficially Owned Shares
Prior to Shares to Beneficially Owned
the Offering be sold After the Offering
------------------ --------- ------------------
Name and Address of Beneficial
Owner Number Percent Number Percent
- ------------------------------ ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C>
Michael J. Saylor(1).......... 43,549,324 55.7% 1,660,000 41,889,324 52.3%
Sanju K. Bansal(2)............ 8,698,958 11.1% 426,814 8,272,144 10.3%
Jonathan F. Klein(3).......... 42,321 * -- 42,321 *
Mark S. Lynch(4).............. 26,634 * 25,000 1,634 *
Joseph P. Payne(5)............ 2,380 * -- 2,380 *
Stephen S. Trundle(6)......... 567,946 * 60,000 507,946 *
Frank A. Ingari(7)............ 27,000 * 9,000 18,000 *
Jonathan J. Ledecky(8)........ 20,000 * 18,000 2,000 *
Ralph S. Terkowitz(9)......... 20,000 * 18,000 2,000 *
John W. Sidgmore(10).......... -- * -- -- *
All executive officers and
directors as a group (10
persons)(11)................. 52,954,563 67.6% 2,216,814 50,737,749 63.2%
NCR........................... 566,372 * 283,186 283,186 *
</TABLE>
- --------
* Less than 1% of the outstanding common stock.
(1) Prior to giving effect to the offering, Mr. Saylor's holdings of common
stock consist of 43,149,324 shares of Class B common stock held
beneficially by Mr. Saylor as a result of his beneficial ownership in
Alcantara LLC and 400,000 shares of Class B common stock held in trust
(78.4% of the Class B common stock outstanding). After giving effect to
the offering, Mr. Saylor's holdings of common stock will consist of
41,489,324 shares of Class B common stock held beneficially by Mr. Saylor
as a result of his beneficial ownership in Alcantara LLC and 400,000
shares of Class B common stock held in trust (78.4% of the Class B common
stock then outstanding). Mr. Saylor has granted the underwriters the right
to purchase up to 287,500 shares pursuant to the underwriters' over-
allotment option. If the underwriters purchase all 287,500 of such shares,
Mr. Saylor's holdings of common stock will consist of 41,204,824 shares of
Class B
50
<PAGE>
common stock held beneficially by Mr. Saylor as a result of his beneficial
ownership in Alcantara LLC and 400,000 shares of Class B common stock held
in trust (78.4% of the Class B common stock then outstanding).
(2) Prior to giving effect to the offering, Mr. Bansal's holdings of common
stock consist of 8,223,958 shares of Class B common stock held
beneficially by Mr. Bansal as a result of his beneficial ownership in
Shangri-La LLC, 439,046 shares of Class B common stock held in trust and
16,954 shares of Class B common stock held in his own name (15.6% of the
Class B common stock outstanding) and 19,000 shares of Class A common
stock held in his own name. After giving effect to the offering, Mr.
Bansal's holdings of common stock will consist of 7,797,144 shares of
Class B common stock held beneficially by Mr. Bansal as a result of his
beneficial ownership in Shangri-La LLC, 439,046 shares of Class B common
stock held in trust and 16,954 shares of Class B common stock held in his
own name (15.4% of the Class B common stock then outstanding) and 19,000
shares of Class A common stock held in his own name. Mr. Bansal has
granted the underwriters the right to purchase up to 87,500 shares
pursuant to the underwriters' over-allotment option. If the underwriters
purchase all 87,500 of such shares, Mr. Bansal's holdings of common stock
will consist of 7,709,644 shares of Class B common stock held beneficially
by Mr. Bansal as a result of his beneficial ownership in Shangri-La LLC,
439,046 shares of Class B common stock held in trust and 16,954 shares of
Class B common stock held in his own name (15.4% of the Class B common
stock then outstanding) and 19,000 shares of Class A common stock held in
his own name.
(3) Prior to giving effect to the offering, Mr. Klein's holdings of common
stock consist of 42,221 shares of Class A common stock and options
exercisable within 60 days after January 31, 2000 for 100 shares of Class
A common stock.
(4) Prior to giving effect to the offering, Mr. Lynch's holdings of common
stock consist of 26,634 shares of Class A common stock.
(5) Prior to giving effect to the offering, Mr. Payne's holdings of common
stock consist of 2,380 shares of Class A common stock.
(6) Prior to giving effect to the offering, Mr. Trundle's holdings of common
stock consist of 100,000 shares of Class B common stock (0.2% of the Class
B common stock outstanding) 306,346 shares of Class A common stock, of
which 30,470 shares are held by his spouse, and options exercisable within
60 days after January 31, 2000 for 161,600 shares of Class A common stock.
Mr. and Mrs. Trundle are selling 55,000 and 5,000 shares of Class A common
stock in this offering, respectively. After giving effect to the offering,
Mr. Trundle's holdings of common stock will consist of 100,000 shares of
Class B common stock (0.2% of the Class B common stock then outstanding),
246,346 shares of Class A common stock, of which 25,470 shares are held by
his spouse, and options exercisable within 60 days after January 31, 2000
for 161,600 shares of Class A common stock.
(7) Prior to giving effect to the offering, Mr. Ingari's holdings of common
stock consist of 20,000 shares of Class A common stock and options
exercisable for 7,000 shares of Class A common stock. After giving effect
to the offering, Mr Ingari's holdings of common stock will consist of
11,000 shares of Class A common stock and options exercisable for 7,000
shares of Class A common stock.
(8) Prior to giving effect to the offering, Mr. Ledecky's holdings of common
stock consist of 2,000 shares of Class A common stock and options
exercisable for 18,000 shares of Class A common stock. After giving effect
to the offering, Mr. Ledecky's holdings of common stock will consist of
options exercisable for 2,000 shares of Class A common stock.
(9) Prior to giving effect to the offering, Mr. Terkowitz's holdings of common
stock consist of 2,000 shares of Class A common stock and options
exercisable within 60 days after January 31, 2000 for 18,000 shares of
Class A common stock, all beneficially held by Mr. Terkowitz as a result
of his beneficial ownership in Chiabatta LLC. After giving effect to the
offering, Mr. Terkowitz's
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<PAGE>
holdings of common stock will consist of options exercisable within 60 days
after January 31, 2000 for 2,000 shares of Class A common stock
beneficially held by Mr. Terkowitz as a result of his beneficial ownership
in Chiabatta LLC.
(10) Mr. Sidgmore was elected as a director on February 16, 2000.
(11) Prior to giving effect to the offering, all executive officers' and
directors' holdings as a group consist of 52,329,282 shares of Class B
common stock (94.3% of the Class B common stock outstanding), 420,581
shares of Class A common stock and options exercisable within 60 days
after January 31, 2000 for 204,700 shares of Class A common stock. After
giving effect to the offering, all executive officers and directors
holdings as a group will consist of 50,242,468 shares of Class B common
stock (94.0% of the Class B common stock outstanding), 322,581 shares of
Class A common stock, and options exercisable within 60 days after
January 31, 2000 for 172,700 shares of Class A common stock.
52
<PAGE>
UNDERWRITING
MicroStrategy, the selling stockholders and the underwriters for the
offering named below have entered into an underwriting agreement with respect
to the shares being offered. Subject to certain conditions, each underwriter
has severally agreed to purchase the number of shares indicated in the
following table. Goldman, Sachs & Co., Friedman, Billings, Ramsey & Co., Inc.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Chase Securities Inc. and
FAC/Equities, a division of First Albany Corporation, are the representatives
of the underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Goldman, Sachs & Co. .................................................
Friedman, Billings, Ramsey & Co., Inc. ...............................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................................
Chase Securities Inc. ................................................
FAC/Equities, a division of First Albany Corporation..................
---------
Total............................................................... 6,500,000
=========
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional 600,000
shares from MicroStrategy and up to an additional 375,000 shares from the
selling stockholders to cover such sales. They may exercise that option for 30
days. If any shares are purchased pursuant to this option, the underwriters
will severally purchase shares in approximately the same proportion as set
forth in the table above.
The following tables show the per share and total underwriting discounts and
commissions to be paid to the underwriters by MicroStrategy and the selling
stockholders. Such amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase 975,000 additional shares.
<TABLE>
<CAPTION>
Paid by
MicroStrategy
-----------------
No Full
Exercise Exercise
-------- --------
<S> <C> <C>
Per Share.................................................. $ $
Total...................................................... $ $
</TABLE>
<TABLE>
<CAPTION>
Paid by Selling
Stockholders
-----------------
No Full
Exercise Exercise
-------- --------
<S> <C> <C>
Per Share.................................................. $ $
Total...................................................... $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial price to public set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial price to public. Any such securities
dealers may resell any shares purchased from the underwriters to certain other
brokers or dealers at a discount of up to $ per share from the initial price
to public. If all the shares are not sold at the initial price to public, the
representatives may change the offering price and the other selling terms.
MicroStrategy, its directors, its executive officers, some of its other
employees or their affiliates and the selling stockholders, who beneficially
held in the aggregate as of February 22, 2000
53
<PAGE>
55,905,630 shares of common stock and options to purchase common stock, have
agreed with the underwriters not to dispose of or hedge any of MicroStrategy's
common stock or securities convertible into or exchangeable for shares of
common stock through the date 90 days after the date of this prospectus, except
(1) for shares to be sold pursuant to this prospectus, (2) with the prior
written consent of the representatives or (3) as described in the following
sentence. The representatives have agreed to allow during the 90 day lock-up
period the sale of up to 498,462 shares or up to 0.9% of the shares of common
stock beneficially held by the individuals subject to lock-up agreements and
their affiliates.
In connection with the offering, the underwriters may purchase and sell
shares of Class A common stock in the open market. These transactions may
include short sales, stabilizing transactions and purchases to cover positions
created by short sales. Short sales involve the sale by the underwriters of a
greater number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the Class A common stock. As a result, the price of
the Class A common stock may be higher than the price that otherwise might
exist in the open market. If these activities are commenced, they may be
discontinued by the underwriters at any time. These transactions may be
effected on the Nasdaq National Market, in the over-the-counter market or
otherwise.
As permitted by Rule 103 under the Securities Exchange Act of 1934, certain
underwriters and selling group members that are market makers, or passive
market makers, in the Class A common stock may make bids for or purchases of
Class A common stock in the Nasdaq National Market until a stabilizing bid has
been made. Rule 103 generally provides that:
. a passive market maker's net daily purchases of the common stock may not
exceed 30% of its average daily trading volume in such securities for the
two full consecutive calendar months, or any 60 consecutive days ending
within the 10 days, immediately preceding the filing date of the
registration statement of which this prospectus forms a part;
. a passive market maker may not effect transactions or display bids for
common stock at a price that exceeds the highest independent bid for the
common stock by persons who are not passive market makers; and
. bids made by passive market makers must be identified as such.
MicroStrategy estimates that the total expenses of the offerings, excluding
underwriting discounts and commissions, will be approximately $1,100,000.
MicroStrategy has agreed to pay for all the expenses of the selling
stockholders.
MicroStrategy and the selling stockholders have agreed to indemnify the
several underwriters against certain liabilities, including liabilities under
the Securities Act of 1933.
54
<PAGE>
LEGAL MATTERS
The validity of the shares of Class A common stock we are offering will be
passed upon for us by Hale and Dorr LLP, Boston, Massachusetts. Legal matters
in connection with this offering will be passed upon for the underwriters by
Ropes & Gray, Boston, Massachusetts.
EXPERTS
Our financial statements as of December 31, 1999 and 1998 and for the three
years in the period ended December 31, 1999 included in this prospectus, have
been included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of the firm as experts in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
public reference facilities of the SEC located at 450 Fifth Street, N.W.,
Washington D.C. 20549. You may obtain information on the operation of the
SEC's public reference facilities by calling the SEC at 1-800-SEC-0330. You
can also access copies of such material electronically on the SEC's home page
on the world wide web at http://www.sec.gov. Reports, proxy statements and
other information concerning us are also available for inspection at the
National Association of Securities Dealers, Inc. at 1735 K Street N.W.,
Washington, D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to incorporate into this prospectus information we file
with them in other documents. This means that we can disclose important
information to you by referring to other documents that contain that
information. The information incorporated by reference is considered to be
part of this prospectus, and information that we file with the SEC in the
future and incorporate by reference will automatically update and may
supersede the information contained in this prospectus. We incorporate by
reference the documents listed below and any future filings we make with the
SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, prior to the sale of all the shares covered by this prospectus.
The following documents that we have filed with the SEC are incorporated
herein by reference:
(1) Our Annual Report on Form 10-K for the year ended December 31, 1998;
(2) Our Quarterly Report on Form 10-Q for the quarter ended March 31, 1999;
(3) Our Quarterly Report on Form 10-Q for the quarter ended June 30, 1999;
(4) Our Quarterly Report on Form 10-Q for the quarter ended September 30,
1999;
(5) Our Current Report on Form 8-K dated June 2, 1999;
(6) Our Current Report on Form 8-K dated January 7, 2000;
(7) All of our filings pursuant to the Securities Exchange Act of 1934 after
the date of filing the initial registration statement and prior to
effectiveness of the registration statement; and
(8) The description of our common stock contained in our Registration
Statement on Form 8-A, including any amendments or reports filed for the
purpose of updating such description.
You may request a copy of these documents, at no cost, by writing to:
MicroStrategy Incorporated
8000 Towers Crescent Drive
Vienna, VA 22128
Attention: Investor Relations
Telephone: (703) 848-8600
55
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998.............. F-3
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997...................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1999, 1998 and 1997................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997...................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
MicroStrategy Incorporated:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows present fairly, in all material respects, the financial position of
MicroStrategy Incorporated and its subsidiaries (the Company) as of December
31, 1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States that require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
McLean, Virginia
January 26, 2000, except for Note 14, for
which the date is February 24, 2000
F-2
<PAGE>
MICROSTRATEGY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
-------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 25,941 $27,491
Short-term investments..................................... 19,627 --
Accounts receivable, net................................... 61,149 33,054
Prepaid expenses and other current assets.................. 15,782 2,198
Deferred tax assets, net................................... -- 716
-------- -------
Total current assets....................................... 122,499 63,459
-------- -------
Property and equipment, net................................. 39,400 13,773
Long-term accounts receivable............................... -- 2,700
Goodwill and other intangible assets, net of accumulated
amortization of $212 and $81, respectively................. 15,760 987
Deposits and other assets................................... 1,559 1,770
Deferred tax assets, net.................................... 3,337 --
-------- -------
Total assets............................................... $182,555 $82,689
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses...................... $ 14,388 $11,904
Accrued compensation and employee benefits................. 14,912 7,356
Deferred revenue........................................... 13,574 10,732
Deferred tax liabilities, net.............................. 2,434 --
Dividend notes payable..................................... -- 5,000
-------- -------
Total current liabilities.................................. 45,308 34,992
Deferred revenue............................................ 3,208 746
Deferred tax liabilities, net............................... -- 671
-------- -------
Total liabilities.......................................... 48,516 36,409
-------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $0.001 per share, 5,000 shares
authorized;
no shares issued or outstanding........................... -- --
Class A common stock, par value $0.001 per share, 100,000
shares
authorized; 22,384 and 10,104 shares issued and
outstanding, respectively................................. 22 11
Class B common stock, par value $0.001 per share, 100,000
shares
authorized; 55,867 and 61,266 shares issued and
outstanding, respectively................................. 56 61
Additional paid-in capital.................................. 117,556 42,183
Deferred compensation....................................... (1,641) (2,098)
Accumulated other comprehensive income...................... 197 894
Retained earnings........................................... 17,849 5,229
-------- -------
Total stockholders' equity................................. 134,039 46,280
-------- -------
Total liabilities and stockholders' equity................. $182,555 $82,689
======== =======
</TABLE>
See Note 11(a) for effect of stock split.
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-3
<PAGE>
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Revenues:
Product licenses................................ $143,193 $ 72,721 $36,601
Product support................................. 62,136 33,709 16,956
-------- -------- -------
Total revenues................................ 205,329 106,430 53,557
-------- -------- -------
Cost of revenues:
Product licenses................................ 2,597 2,246 1,641
Product support................................. 34,479 17,535 9,475
-------- -------- -------
Total cost of revenues........................ 37,076 19,781 11,116
-------- -------- -------
Gross margin...................................... 168,253 86,649 42,441
Operating expenses:
Sales and marketing............................. 93,788 53,408 30,468
Research and development........................ 28,680 12,106 5,049
General and administrative...................... 24,666 11,809 6,552
In-process research and development............. 2,800 -- --
-------- -------- -------
Total operating expenses...................... 149,934 77,323 42,069
-------- -------- -------
Income from operations............................ 18,319 9,326 372
Interest income................................... 2,174 1,028 94
Interest expense.................................. 144 720 333
Other income (expense), net....................... 6 (14) (12)
-------- -------- -------
Income before income taxes........................ 20,355 9,620 121
Provision for income taxes........................ 7,735 3,442 --
-------- -------- -------
Net income........................................ $ 12,620 $ 6,178 $ 121
======== ======== =======
Basic net income per share........................ $ 0.16 $ 0.09 $ 0.00
======== ======== =======
Weighted average shares used in computing basic
net income per share............................. 77,028 66,986 58,988
======== ======== =======
Diluted net income per share...................... $ 0.15 $ 0.08 $ 0.00
======== ======== =======
Weighted average shares used in computing diluted
net income per share............................. 85,881 77,203 64,725
======== ======== =======
Pro forma information:
Pro forma net income (loss)....................... $ 5,971 $ (368)
======== =======
Pro forma basic net income (loss) per share....... $ 0.09 $ (0.01)
======== =======
Pro forma diluted net income (loss) per share..... $ 0.08 $ (0.01)
======== =======
</TABLE>
See Note 11(a) for effect of stock split.
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-4
<PAGE>
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Accumulated Other
Class A Class B Comprehensive
Common Stock Common Stock Common Stock Income (Loss)
--------------- ------------- -------------- ----------------------- Notes
Unrealized Foreign Receivable
Additional Loss on Currency Retained Deferred From
Paid- Short-term Translation Earnings Compen- Stock-
Shares Amount Shares Amount Shares Amount in Capital Investments Adjustment (Deficit) sation holders
------- ------ ------ ------ ------ ------ ---------- ----------- ----------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1996............ 62,886 $63 -- -- -- -- $ 181 -- -- $ (755) -- $(87)
======= === ====== === ====== === ======== ==== ==== ======= ======= ====
Net income...... -- -- -- -- -- -- -- -- -- 121 -- --
Foreign currency
translation
adjustment...... -- -- -- -- -- -- -- -- 158 -- -- --
Comprehensive
income.......... -- -- -- -- -- -- -- -- -- -- -- --
Proceeds from
payments on
notes
receivable...... -- -- -- -- -- -- -- -- -- -- -- 87
Retirement of
treasury stock.. (3,898) (4) -- -- -- -- (191) -- -- -- -- --
------- --- ------ --- ------ --- -------- ---- ---- ------- ------- ----
Balance at
December 31,
1997............ 58,988 $59 -- -- -- -- $ (10) -- 158 (634) -- --
======= === ====== === ====== === ======== ==== ==== ======= ======= ====
Net income...... -- -- -- -- -- -- -- -- -- 6,178 -- --
Foreign currency
translation
adjustment...... -- -- -- -- -- -- -- -- 736 -- -- --
Comprehensive
income.......... -- -- -- -- -- -- -- -- -- -- -- --
Issuance of
common stock in
exchange for
minority
interest of
Company's
foreign
subsidiaries.... 2,803 3 -- -- -- -- 1,065 -- -- -- -- --
Issuance of
stock options
below fair
value........... -- -- -- -- -- -- 1,350 -- -- -- (1,350) --
Declaration of
dividend........ -- -- -- -- -- -- (10,000) -- -- -- -- --
Conversion of
common stock to
Class B common
stock........... (61,791) (62) -- -- 61,791 62 -- -- -- -- -- --
S-Corporation to
C-Corporation
conversion...... -- -- -- -- -- -- 315 -- -- (315) -- --
Issuance of
Class A common
stock in
connection with
initial public
offering, net of
offering costs.. -- -- 8,880 9 -- -- 48,180 -- -- -- -- --
Issuance of
Class A common
stock under
stock option
plan............ -- -- 699 1 -- -- 349 -- -- -- -- --
Conversion of
Class B to Class
A common stock.. -- -- 525 1 (525) (1) -- -- -- -- -- --
Issuance of
warrants........ -- -- -- -- -- -- 934 -- -- -- (934) --
Amortization of
deferred stock
compensation.... -- -- -- -- -- -- -- -- -- -- 186 --
------- --- ------ --- ------ --- -------- ---- ---- ------- ------- ----
Balance at
December 31,
1998............ -- -- 10,104 $11 61,266 $61 $ 42.183 -- 894 5,229 (2,098) --
======= === ====== === ====== === ======== ==== ==== ======= ======= ====
Net income...... -- -- -- -- -- -- -- -- -- 12,620 -- --
Unrealized loss
on short-term
investments, net
of income taxes
of $49.......... -- -- -- -- -- -- -- (79) -- -- -- --
Foreign currency
translation
adjustment...... -- -- -- -- -- -- -- (618) -- -- --
Comprehensive
income.......... -- -- -- -- -- -- -- -- -- -- -- --
Issuance of
Class A common
stock in
connection with
offering, net of
offering costs.. -- -- 3,170 3 -- -- 40,046 -- -- -- -- --
Conversion of
Class B to Class
A common stock.. -- -- 5,399 5 (5,399) (5) -- -- -- -- -- --
Issuance of
Class A common
stock under
stock option and
purchase plans.. -- -- 3,145 3 -- -- 7,018 -- -- -- -- --
Issuance of
Class A common
stock related to
purchase of
NCR's Teracube
assets ......... -- -- 566 -- -- -- 17,873 -- -- -- -- --
Issuance of
warrants........ -- -- -- -- -- -- 139 -- -- -- -- --
Amortization of
deferred stock
compensation.... -- -- -- -- -- -- -- -- -- -- 457 --
Tax benefits
related to stock
option and
purchase plans.. -- -- -- -- -- -- 10,297 -- -- -- -- --
------- --- ------ --- ------ --- -------- ---- ---- ------- ------- ----
Balance at
December 31,
1999............ -- $-- 22,384 $22 55,867 $56 $117,556 $(79) $276 $17,849 $(1,641) --
======= === ====== === ====== === ======== ==== ==== ======= ======= ====
<CAPTION>
Treasury Stock
-----------------
Shares Amount Total
-------- -------- ---------
<S> <C> <C> <C>
Balance at
December 31,
1996............ 3,898 $ (195) $ (793)
======== ======== =========
Net income...... -- -- 121
Foreign currency
translation
adjustment...... -- -- 158
---------
Comprehensive
income.......... -- -- 279
Proceeds from
payments on
notes
receivable...... -- -- 87
Retirement of
treasury stock.. (3,898) 195 --
-------- -------- ---------
Balance at
December 31,
1997............ -- -- (427)
======== ======== =========
Net income...... -- -- 6,178
Foreign currency
translation
adjustment...... -- -- 736
---------
Comprehensive
income.......... -- -- 6,914
Issuance of
common stock in
exchange for
minority
interest of
Company's
foreign
subsidiaries.... -- -- 1,068
Issuance of
stock options
below fair
value........... -- -- --
Declaration of
dividend........ -- -- (10,000)
Conversion of
common stock to
Class B common
stock........... -- -- --
S-Corporation to
C-Corporation
conversion...... -- -- --
Issuance of
Class A common
stock in
connection with
initial public
offering, net of
offering costs.. -- -- 48,189
Issuance of
Class A common
stock under
stock option
plan............ -- -- 350
Conversion of
Class B to Class
A common stock.. -- -- --
Issuance of
warrants........ -- -- --
Amortization of
deferred stock
compensation.... -- -- 186
-------- -------- ---------
Balance at
December 31,
1998............ -- -- 46,280
======== ======== =========
Net income...... -- -- 12,620
Unrealized loss
on short-term
investments, net
of income taxes
of $49.......... -- -- (79)
Foreign currency
translation
adjustment...... -- -- (618)
---------
Comprehensive
income.......... -- -- 11,923
Issuance of
Class A common
stock in
connection with
offering, net of
offering costs.. -- -- 40,049
Conversion of
Class B to Class
A common stock.. -- -- --
Issuance of
Class A common
stock under
stock option and
purchase plans.. -- -- 7,021
Issuance of
Class A common
stock related to
purchase of
NCR's Teracube
assets ......... -- -- 17,873
Issuance of
warrants........ -- -- 139
Amortization of
deferred stock
compensation.... -- -- 457
Tax benefits
related to stock
option and
purchase plans.. -- -- 10,297
-------- -------- ---------
Balance at
December 31,
1999............ -- -- $134,039
======== ======== =========
</TABLE>
See Note 11(a) for effect of stock split.
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-5
<PAGE>
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Operating activities:
Net income....................................... $ 12,620 $ 6,178 $ 121
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization.................... 7,743 3,250 1,243
Provision for doubtful accounts.................. 1,877 815 312
Acquired in-process research and development..... 2,800 -- --
Deferred income taxes............................ (858) (45) --
Amortization of deferred compensation............ 457 163 --
Changes in operating assets and liabilities, net
of effect of foreign exchange rate changes:
Accounts receivable.............................. (30,487) (17,525) (8,235)
Prepaid expenses and other current assets........ (13,686) (711) (1,051)
Long-term accounts receivable.................... 2,700 (2,700) --
Deposits and other assets........................ (424) (188) 102
Accounts payable and accrued expenses,
compensation and benefits....................... 10,715 5,948 8,951
Deferred revenue................................. 5,336 2,267 3,512
-------- -------- -------
Net cash (used in) provided by operating
activities...................................... (1,207) (2,548) 4,955
-------- -------- -------
Investing activities:
Purchases of property and equipment.............. (32,733) (9,295) (5,954)
Purchases of short-term investments.............. (31,492) -- --
Sales of short-term investments.................. 10,000 -- --
Maturities of short-term investments............. 2,000 -- --
Increase in capitalized software................. -- -- (1,928)
-------- -------- -------
Net cash used in investing activities............ (52,225) (9,295) (7,882)
-------- -------- -------
Financing activities:
Proceeds from sale of Class A common stock and
exercise of stock options,
net of offering costs........................... 47,197 48,539 --
Stock option income tax benefit.................. 10,297 -- --
Borrowings on short-term line of credit, net..... -- -- 1,750
Repayments on short-term line of credit, net..... -- (4,508) --
Payments of dividend notes payable............... (5,000) (5,000) --
Proceeds from issuance of notes payable.......... -- 862 3,264
Principal payments on notes payable.............. -- (4,190) (521)
Proceeds from payments on stockholders' notes
receivable...................................... -- -- 87
-------- -------- -------
Net cash provided by financing activities........ 52,494 35,703 4,580
-------- -------- -------
Effect of foreign exchange rate changes on cash.. (612) 125 167
-------- -------- -------
Net (decrease) increase in cash and cash
equivalents...................................... (1,550) 23,985 1,820
Cash and cash equivalents, beginning of year...... 27,491 3,506 1,686
-------- -------- -------
Cash and cash equivalents, end of year............ $ 25,941 $ 27,491 $ 3,506
======== ======== =======
Supplemental disclosure of noncash investing and
financing activities:
Retirement of treasury stock..................... $ -- $ -- $ 195
======== ======== =======
Issuance of common stock in exchange for minority
interest of Company's foreign subsidiaries...... $ -- $ 1,065 $ --
======== ======== =======
Issuance of Class A common stock related to
purchase of NCR's Teracube assets............... $ 17,873 $ -- $ --
======== ======== =======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest........... $ 87 $ 714 $ 290
======== ======== =======
Cash paid during the year for income taxes....... $ 2,113 $ 2,996 $ --
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-6
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization
MicroStrategy provides intelligent e-business software and related services
that enable the transaction of one-to-one electronic business through web,
wireless and voice communication channels. MicroStrategy's product line enables
both proactive and interactive delivery of information from large-scale
databases and provides Internet businesses with a software platform to develop
solutions that deliver insight and intelligence to their enterprises, customers
and supply-chain partners. In July 1999, MicroStrategy launched a personal
intelligence network called Strategy.com, which leverages MicroStrategy's
software platform to deliver personalized, requested information to consumers.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(b) Use of Estimates
The preparation of the consolidated financial statements, in conformity with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(c) Reclassification
Certain amounts in prior years' consolidated financial statements have been
reclassified to conform to the current year presentation.
(d) Cash, Cash Equivalents and Short-Term Investments
Cash equivalents include high quality money market instruments and
commercial paper. The Company considers all highly liquid investments with an
original maturity of three months or less when purchased to be cash
equivalents.
Short-term investments are comprised of readily marketable debt securities
with original maturities of more than three months when purchased and other
short-term investments. Where the original maturity is more than one year, the
marketable debt securities are classified as short-term investments if the
Company's intention is to convert them to cash within one year. All short-term
marketable debt securities are available-for-sale and are stated at fair value
with unrealized gains and losses included in accumulated other comprehensive
income in stockholders' equity.
(e) Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, as follows: 3 years for computer equipment and
software and 5 to 10 years for furniture and equipment. Leasehold improvements
are amortized using the straight-line method over the shorter of the estimated
useful lives of the assets or the terms of the leases. Depreciation and
amortization expense related to property and equipment was $7.0 million, $2.6
million and $1.1 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
F-7
<PAGE>
(f) Goodwill and Other Intangible Assets
The Company continually evaluates the carrying value of goodwill and other
intangible assets. Any impairments would be recognized in the period when the
expected future operating cash flows derived from such intangible assets is
less than their carrying value. No event has been identified that would
indicate an impairment of the value of the Company's goodwill and other
intangible assets in the consolidated financial statements.
(g) Software Development Costs
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed," software development costs are expensed as incurred until
technological feasibility has been established, at which time such costs are
capitalized until the product is available for general release to customers.
The Company defines the establishment of technological feasibility as the
completion of all planning, designing, coding and testing activities that are
necessary to establish products that meet design specifications including
functions, features and technical performance requirements. Under the Company's
definition, establishing technological feasibility is considered complete only
after the majority of customer testing and customer feedback has been
incorporated into product functionality. Software development costs capitalized
include direct labor costs and fringe labor overhead costs attributed to
programmers, software engineers, quality control and field certifiers working
on products after they reach technological feasibility but before they are
generally available to customers for sale. Capitalized costs are amortized over
the estimated product life using the greater of the straight-line method or the
ratio of current product revenues to total projected future revenues. Software
development costs, net of accumulated amortization, are $647,000 and $1.2
million at December 31, 1999 and 1998, respectively, and are included in
deposits and other assets on the balance sheet. Amortization expense related to
software development costs was $600,000, $584,000 and $98,000 for the years
ended December 31, 1999, 1998 and 1997, respectively. During 1999 and 1998, no
costs were capitalized as the establishment of technological feasibility and
general release of such software had substantially coincided.
(h) Revenue Recognition
Product license revenue is derived from software licensing fees. Product
support revenue consists of revenue derived from technical support services,
customer and partner education and consulting. The Company's revenue
recognition policies are in accordance with Statement of Position 97-2,
"Software Revenue Recognition," which was adopted by the Company effective
January 1, 1998. There was no material change to the Company's accounting for
revenues as a result of the adoption of SOP 97-2.
Product license revenues are generally recognized upon the execution of a
contract and shipment of the related software product, provided that no
significant obligations remain outstanding on the part of the Company 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
technical support plans are recorded as deferred revenue when billed to the
customer and recognized ratably over the term of the maintenance and support
agreement, which is typically one year. Fees for education and consulting
services are 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 fair values of the elements, such as
software products, upgrades, enhancements, technical support, installation, or
education. The determination of fair value is based on objective evidence which
is specific to the Company. 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.
F-8
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In December 1998, the American Institute of Certified Public Accountants
issued SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition with
Respect to Certain Transactions." SOP 98-9 will be effective for the Company's
fiscal year 2000. The adoption of this statement is not expected to have a
material impact on the Company's operating results, financial position or cash
flows.
(i) Advertising Costs
Advertising production costs are expensed the first time the advertisement
takes place. Media placement costs are expensed in the month the advertising
appears. Advertising costs were $1.6 million, $134,000 and $93,000 for the
years ended December 31, 1999, 1998 and 1997, respectively. Additionally, as of
December 31, 1999, prepaid advertising costs were $3.5 million.
(j) Year 2000 Costs
The Company expenses costs for Year 2000 issues as incurred.
(k) Income Taxes
Prior to the initial public offering, the Company had elected to be treated
as a Subchapter S corporation for federal and state income tax purposes. Under
Subchapter S, the taxable income or loss was reported by the stockholders and,
accordingly, no federal or state income taxes have been provided for in the
financial statements prior to the Initial Public Offering.
In connection with the initial public offering, the Company converted to a
Subchapter C corporation and, accordingly, is no longer treated as a Subchapter
S corporation for tax purposes. The Company is now subject to federal and state
income taxes and recognizes deferred taxes in accordance with SFAS No. 109,
"Accounting For Income Taxes," which the Company adopted upon consummation of
the initial public offering. This statement provides for a liability approach
under which deferred income taxes are provided based upon enacted tax laws and
rates applicable to the periods in which the taxes become payable. The adoption
of SFAS No. 109 did not have a material impact on the Company's operating
results. The Company has provided a valuation allowance on the deferred tax
assets relating to certain foreign operations as management has determined it
more likely than not that this amount will not be realized.
The consolidated statements of operations include pro forma information to
reflect income taxes as if the Company had been a Subchapter C corporation for
the years ended December 31, 1998 and 1997.
(l) Basic and Diluted Net Income Per Share
Basic net income per share is computed on the basis of the weighted average
number of common shares outstanding. Diluted net income per share is computed
on the basis of the weighted average number of common shares outstanding,
assuming conversion of dilutive common stock equivalent shares from common
stock options and warrants.
(m) Foreign Currency Translation
The assets and liabilities of non-U.S. operations are translated into U.S.
dollars at exchange rates in effect as of each balance sheet date. Revenue and
expense accounts of these operations are translated at average exchange rates
prevailing during the period the transactions occur. Accordingly, translation
gains and losses are included in accumulated other comprehensive income in
stockholders' equity. Net foreign currency transaction gains and losses are
included in determining net income and were less than $10,000 per year for each
year presented.
F-9
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(n) Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash, cash equivalents, short-term
investments and accounts receivable. The Company places its cash equivalents
and short-term investments with high credit-quality financial institutions and
invests its excess cash primarily in money market instruments. The Company has
established guidelines relative to credit ratings and maturities that seek to
maintain safety and liquidity. The Company sells products and services to
various companies across several industries throughout the world in the
ordinary course of business. The Company routinely assesses the financial
strength of its customers and maintains allowances for anticipated losses. For
the year ended December 31, 1999, one customer accounted for 12.4% of net
accounts receivable. For the years ended December 31, 1998 and 1997, no one
customer accounted for 10% or more of net accounts receivable.
(o) Fair Value of Financial Instruments
The Company's financial instruments, which consist of cash, cash
equivalents, short-term investment, accounts receivable and accounts payable,
approximate fair value.
(p) Stock-based Compensation
The Company accounts for stock-based compensation under SFAS No. 123,
"Accounting for Stock-Based Compensation." As permitted by SFAS No. 123, the
Company has elected to continue following the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and to adopt only the disclosure provisions of SFAS No. 123.
(q) Recent Accounting Standards
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
which delays the effective date of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which will be effective for the Company's
fiscal year 2001. This statement establishes accounting and reporting standards
requiring that every derivative instrument, including certain derivative
instruments imbedded in other contracts, be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement also
requires that changes in the derivative's fair value be recognized in earnings
unless specific hedge accounting criteria are met. The Company believes the
adoption of SFAS No. 133 and SFAS No. 137 will not have a material effect on
the financial statements.
(3) Public Offerings
On February 10, 1999, the Company sold to the public 3,170,000 shares of
Class A common stock for approximately $40.1 million, net of offering costs. In
addition, certain holders of Class B common stock converted 830,000 shares of
Class B common stock to Class A common stock in connection with their sale of
such shares in the public offering. Class B common stock shares are convertible
to Class A common stock shares on a one-to-one basis at the election of the
shareholder.
On June 16, 1998, the Company issued 8,880,000 shares of Class A common
stock in an initial public offering, raising $48.7 million, net of offering
costs. In addition, certain stockholders of Class B common stock converted
320,000 shares of Class B common stock to Class A common stock in connection
with their sale of such shares in the initial public offering.
The holders of Class A common stock generally have rights identical to those
of holders of Class B common stock, except that holders of Class A common stock
are entitled to one vote per share while holders of Class B common stock are
entitled to ten votes per share on all matters submitted to a vote of
stockholders.
F-10
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(4) Acquisitions
(a) Purchase of NCR's Teracube Assets
In December 1999, the Company purchased the intellectual property and other
intangible assets relating to NCR's Teracube project in exchange for 566,372
shares of Class A common stock. The Company will develop the Teracube assets as
a business intelligence platform for datawarehouses using NCR's Teradata
database. The acquisition was accounted for under the purchase method of
accounting. As a result of this transaction, the Company recorded a one-time,
non-cash charge of $2.8 million for in-process research and development during
the year ended December 31, 1999.
In estimating the fair value of the in-process research and development
acquired, the Company considered, among other factors, the stage of development
of Teracube at the time of acquisition, the percentage of the final product
that is attributable to core technology already developed or under development
by the Company and the projected incremental cash flows from the projects when
completed and any associated risks. Associated risks include the inherent
difficulties and uncertainties in completing Teracube and, thereby, achieving
technological feasibility and risks related to the impact of potential changes
in future technology.
The Company intends to incur approximately $900,000 over the next year in
order to complete the project. The project was approximately 85% complete at
the time of the acquisition and approximately 70% of the final product will be
attributable to core technology already developed or under development by NCR.
The Company used a discount rate of 35% when estimating the net present value
of the projected incremental cash flows. Remaining development efforts are
focused on completing development of certain sub-products of Teracube that will
maximize efficiencies in operation of the Company's business intelligence and
e-business products and make it compliant with industry standards. Completion
of these projects will be necessary before revenues are produced. The Company
expects to begin to benefit from the purchased in-process research and
development by the end of 2000. If these projects are not successfully
developed, the Company may not realize the value assigned to the in-process
research and development projects. In addition, the value of the other acquired
intangible assets may also become impaired.
During the year ended December 31, 1999, the Company recorded intangible
assets of $13.6 million and established work force of $1.3 million related to
the acquisition of intellectual property and intangible assets of NCR's
Teracube project discussed above, which will be amortized on a straight-line
basis over 5 and 10 years, respectively. During the year ended December 31,
1999, the Company recorded amortization expense of $50,000 relating to these
intangible assets.
(b) Purchase of Minority Interest in Foreign Subsidiaries and Related
Intangibles
Effective January 1, 1998, the Company issued a total of 2,803,282 shares of
Class B common stock to certain existing stockholders in exchange for their
approximate 21% minority interest in certain of the Company's foreign
subsidiaries. The transaction and the valuation of the percentage interests
held by each of the minority interest stockholders for purposes of determining
the number of shares of common stock to be issued to each of them were reviewed
and approved by the disinterested members of the Board of Directors. The
Company accounted for the transaction under the purchase method of accounting.
The 2,269,324 shares issued to the majority stockholder of the Company in
exchange for his shares in the foreign subsidiaries' minority interest
(representing 17% interest of the foreign subsidiaries) was an exchange between
entities under common control and was therefore accounted for at historical
cost. The historical cost for the majority stockholder's investment in the
minority interest was approximately $58,000. The shares issued to the other
F-11
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
minority interest stockholder (representing 4% interest of the foreign
subsidiaries) were recorded at fair value. Accordingly, the Company recorded
$1.1 million for acquired intangible assets representing the excess of the fair
market value of 533,958 of the shares issued in exchange for the non-
controlling interests' shares in the foreign subsidiaries. The Company has
allocated the following amounts to the identifiable intangible assets and is
amortizing those assets on a straight-line basis over the following estimated
useful lives (in thousands):
<TABLE>
<S> <C> <C>
Distribution channels....................................... $ 478 15 years
Trade name.................................................. 239 20 years
Customer list............................................... 267 10 years
Assembled work force........................................ 66 10 years
Goodwill.................................................... 18 5 years
------
$1,068
======
</TABLE>
During the years ended December 31, 1999 and 1998, the Company recorded
amortization expense of $81,000 relating to these intangible assets.
(5) Short-term Investments
The following available-for-sale securities are included in short-term
investments as of December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
Gross
Amortized Unrealized
Cost Losses Fair Value
--------- ---------- ----------
<S> <C> <C> <C>
U.S. agency notes.......................... $14,000 $ (78) $13,922
Corporate notes............................ 5,505 (50) 5,455
------- ----- -------
$19,505 $(128) $19,377
======= ===== =======
</TABLE>
The following is a summary of contractual maturities of the Company's
investment in debt securities as of December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
Amortized Cost Fair Value
-------------- ----------
<S> <C> <C>
Within one year.................................. $11,000 $10,960
After one year, within five years................ 8,505 8,417
------- -------
$19,505 $19,377
======= =======
</TABLE>
There were no short-term investments as of December 31, 1998.
(6) Accounts Receivable
Accounts receivable, net of allowances, consist of the following, as of
December 31, (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Billed................................................... $53,830 $27,976
Unbilled................................................. 10,648 6,663
------- -------
64,478 34,639
Less allowance for doubtful accounts..................... (3,329) (1,585)
------- -------
$61,149 $33,054
======= =======
</TABLE>
F-12
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(7) Property and Equipment
Property and equipment consists of the following, as of December 31, (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Computer equipment and software........................... $ 37,451 $14,967
Furniture and equipment................................... 9,595 2,850
Leasehold improvements.................................... 3,647 697
-------- -------
50,693 18,514
Less: accumulated depreciation and amortization........... (11,293) (4,741)
-------- -------
$ 39,400 $13,773
======== =======
</TABLE>
(8) Bank Borrowings
In March 1999, the Company entered into a line of credit agreement with a
commercial bank, which provides for an unsecured revolving line of credit for
general working capital purposes, up to $25.0 million, not to exceed 3.5 times
earnings before taxes, depreciation and amortization for the prior four
quarters. The borrowings under the line of credit bear interest at a variable
rate equal to LIBOR plus 1.0% to 1.75%, depending upon the ratio of funded
debt to earnings. The line of credit agreement includes a 0.2% unused line of
credit fee and expires on May 31, 2001. This line of credit agreement replaced
the previous loan agreement, which provided for a $5.0 million revolving line
of credit. In July 1998, the Company repaid all net borrowings under the
previous loan agreement. As of December 31, 1999 and 1998, there were no
outstanding amounts under the line of credit.
(9) Income Taxes
Prior to the initial public offering, the Company was an S Corporation, and
accordingly, the Company was not liable for corporate income taxes. However,
effective June 12, 1998, the Company is a tax-paying entity.
U.S. and international components of income before income taxes were, for
the years ended December 31, (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
U.S............................................... $23,156 $13,689 $ 3,562
International..................................... (2,801) (4,069) (3,441)
------- ------- -------
Total........................................... $20,355 $ 9,620 $ 121
======= ======= =======
</TABLE>
The tax provision consists of the following, for the years ended December
31, (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Current:
Federal.................................................. $ 4,903 $ 2,930
State.................................................... 996 557
Foreign.................................................. 746 --
------- -------
6,645 3,487
Deferred:
Federal.................................................. 3,780 38
State.................................................... 259 140
Foreign.................................................. (2,313) (1,654)
------- -------
1,726 (1,476)
------- -------
(Decrease) increase in valuation allowance................. (636) 1,431
------- -------
Total provision........................................ $ 7,735 $ 3,442
======= =======
</TABLE>
F-13
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The provision for income taxes differs from the amount computed by applying
the federal statutory income tax rate to the Company's income before taxes as
follows, for the years ended December 31, (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Income tax expense at federal statutory rate............... $ 7,124 $ 3,271
Goodwill amortization and other non-deductibles............ 263 147
Foreign sales corporation.................................. (304) (203)
State income tax, net of federal tax benefit............... 647 367
Adjustment for tax method change........................... 1,016 --
Change in foreign enacted tax rate......................... 182 --
S Corporation income....................................... -- (240)
Loss on foreign subsidiary................................. -- (231)
Research and development tax credit........................ (1,036) (350)
Utilization of foreign net operating losses................ -- (263)
Change in valuation allowance.............................. (636) 1,431
International rate differential............................ (382) (290)
Other...................................................... 861 (197)
------- -------
$ 7,735 $ 3,442
======= =======
Significant components of the Company's deferred tax assets and liabilities
are as follows, as of December 31, (in thousands):
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Deferred tax assets, net:
Allowances and reserves.................................... $ 1,826 $ 1,561
Accrued compensation....................................... 1,214 848
Net operating loss carryforwards........................... 5,823 3,162
Cash to accrual conversion................................. 1,892 --
Amortization............................................... 229 --
Acquired in-process research and development............... 1,064 --
Research and development tax credit carry forward.......... 1,690 264
------- -------
13,738 5,835
Valuation allowance........................................ (1,688) (2,324)
------- -------
Deferred tax assets, net of valuation allowance............ 12,050 3,511
------- -------
Deferred tax liabilities:
Prepaid assets............................................. 3,257 489
Depreciation............................................... 2,311 424
Capitalized software....................................... 208 1,071
Capitalized internal software.............................. 1,651 --
Amortization............................................... 7 --
Unbilled receivables....................................... 2,217 --
Cash to accrual conversion................................. 1,496 1,482
------- -------
Total deferred tax liabilities............................. 11,147 3,466
------- -------
Total net deferred tax asset............................... $ 903 $ 45
======= =======
</TABLE>
F-14
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company recorded a net $636,000 decrease in the valuation allowance for
the year ended December 31, 1999 related to foreign net operating losses which,
in the Company's opinion, will be realizable in future periods. The Company has
foreign net operating loss carryforwards of $13.0 million of which $88,000,
$1.65 million and $213,000 will expire in 2002, 2003 and 2004, respectively.
The remaining foreign net operating losses of $11.0 million can be carried
forward indefinitely. The Company has domestic net operating loss carryforwards
of $912,000, primarily related to the deductions associated with the
disqualified disposition of incentive stock options, which expire in 2019. The
Company has research and development tax credit carryforwards of $1.7 million
expiring in 2018 and 2019.
For the year ended December 31, 1999 the Company recorded a total tax
provision of $7.7 million. Upon the revocation of the Company's federal S
corporation election in June 1998, the Company accounts for income taxes in
accordance with SFAS No. 109, "Accounting for Income Taxes." As of December 31,
1999 management has concluded that no valuation allowance is required on the
domestic deferred tax assets and certain of its foreign deferred tax assets
based on its assessment that current and expected future levels of taxable
income are sufficient to realize these deferred tax assets. Had the Company
been taxable as a regular C corporation throughout the 1998 tax period, it
would have recorded a tax provision of $3.6 million.
Had the Company been taxable as a regular C corporation as of December 31,
1997, the Company would have recorded a tax provision of $489,000, a net
deferred tax liability of $442,000 and a valuation allowance of $1.8 million
primarily against the net operating loss carryforwards generated in certain
foreign jurisdictions. As of December 31, 1997 management would have concluded
that no valuation allowance was required on the domestic deferred tax assets
and certain of its foreign deferred tax assets based on its assessment that
current and expected future levels of taxable income are sufficient to realize
these deferred tax assets.
The tax benefit associated with the exercise of non-qualified stock options
and the disqualifying disposition of stock acquired under the stock option and
stock purchase plan reduced estimated taxes currently payable by $6 million and
increased both taxes currently receivable and deferred tax assets by $2 million
each in 1999.
(10) Commitments and Contingencies
The Company leases office space and computer and other equipment under
operating lease agreements expiring at various dates through 2011. In addition
to base rent, the Company is responsible for certain taxes, utilities, and
maintenance costs. Some of these leases contain renewal options and some
contain purchase options. Future minimum lease payments under noncancellable
operating leases with initial terms of one year or more consist of the
following (in thousands):
<TABLE>
<S> <C>
2000................................................................ $ 19,714
2001................................................................ 18,761
2002................................................................ 15,514
2003................................................................ 11,311
2004................................................................ 9,528
Thereafter.......................................................... 34,946
--------
$109,774
========
</TABLE>
Total rental expense for the years ended December 31, 1999, 1998 and 1997
was approximately $12.8 million, $4.0 million and $1.6 million, respectively.
F-15
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of December 31, 1999, the Company had $11.2 million in commitments for
computer software and equipment and $5.0 million in marketing agreements.
In November 1999, the Company signed a three-year master lease agreement to
lease up to $40.0 million of computer equipment. The lease contains a purchase
option and bears interest at a rate equal to interest on U.S. treasury notes
with equivalent terms as in the lease, plus 1.5%. As of December 31, 1999, the
Company leased approximately $5.3 million under this agreement.
In January 2000, the Company entered into an agreement to lease
approximately 146,000 square feet of office space in McLean, Virginia. Total
commitments under the lease, which expires in 2011, are approximately $51.6
million and are included in the schedule above.
The Company is involved in legal proceedings through the normal course of
business; however, the ultimate resolution of these proceedings cannot be
predicted with certainty. Management believes that any unfavorable outcome
related to these proceedings will not have a material effect on the Company's
financial position or results of operations.
(11) Stockholders' Equity
(a) Stock Split
In January 2000, the Company's Board of Directors approved a two-for-one
split of the Company's common stock effective in the form of a stock dividend.
The stock dividend was distributed on January 26, 2000 to shareholders of
record as of January 20, 2000. Stockholders' equity has been restated to give
retroactive recognition to the split for all periods presented by reclassifying
the par value of the additional shares arising from the split from paid-in
capital to common stock. All references to share and per share amounts for all
periods presented have been restated to reflect this stock split.
(b) Net Income Per Share
Reconciliations of the basic net income per share and diluted net income per
share computations for the years ended December 31, are as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Basic net income per share:
Weighted average common shares outstanding......... 77,028 66,986 58,988
Net income......................................... $12,620 $6,178 $ 121
======= ====== ======
Basic net income per share....................... $ 0.16 $ 0.09 $ 0.00
======= ====== ======
Diluted net income per share:
Weighted average common shares outstanding......... 77,028 66,986 58,988
Diluted impact of common shares issuable on
exercise of stock options and warrants............ 8,853 10,217 5,737
Weighted average common shares outstanding assuming
dilution.......................................... 85,881 77,203 64,725
Net income......................................... $12,620 $6,178 $ 121
======= ====== ======
Diluted net income per share....................... $ 0.15 $ 0.08 $ 0.00
======= ====== ======
</TABLE>
F-16
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Common stock equivalents are included in the computation of diluted net
income per share using the treasury stock method. During 1999 and 1998, stock
options granted by the Company to purchase 1,783,754 and 1,912,270 shares,
respectively, were not included in the computation because the effect was anti-
dilutive.
Immediately prior to the initial public offering, all outstanding shares of
common stock were changed and converted into shares of Class A common stock and
exchanged for an identical number of shares of Class B common stock.
(c) Stock Plans
In February 1996, the Company adopted the 1996 Stock Plan in order to
provide an incentive to eligible employees and officers of the Company. A total
of 16,000,000 shares of common stock are reserved under the 1996 Stock Plan, as
amended. As of December 31, 1999, options to purchase 15,341,838 shares have
been granted.
In March 1997, the Company adopted the 1997 Stock Option Plan for French
Employees, which provides for the granting of options to employees of
MicroStrategy France SARL, the Company's French subsidiary. A total of 600,000
shares of common stock are reserved under the French Stock Plan. As of December
31, 1999, options to purchase 251,500 shares have been granted.
In September 1997, the Company adopted the 1997 Director Stock Option Plan,
which provides for grants of nonqualified stock options to non-employee
directors of the Company. A total of 400,000 shares of common stock are
reserved under the Director Stock Plan. As of December 31, 1999, options to
purchase 320,000 shares have been granted.
In April 1999, the Company adopted the 1999 Stock Option Plan, which
provides for grants of stock options to eligible employees and officers of the
Company. A total of 5,000,000 shares of common stock are reserved under the
1999 Stock Plan. As of December 31, 1999, options to purchase 3,262,964 shares
have been granted.
Shares of Class A common stock will be issued upon exercise of any of the
stock options granted under the stock plans. Stock options granted to date
generally vest ratably over five years from the date of grant and expire ten
years after grant. The stock option exercise price of options under the
Company's stock option plans may not be less than the determined fair market
value at the date of grant.
F-17
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the status of the Company's stock option plans are presented
(in thousands, except per share data):
<TABLE>
<CAPTION>
Price per Share Options Exercisable
--------------------- ------------------------
Weighted
Weighted Number of Average
Shares Range Average Shares Exercise Price
------ ------------ -------- --------- --------------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1996 4,919 $0.25-0.63 $ 0.42
Granted............... 5,321 0.75-2.00 1.22
Exercised............. -- -- --
Cancelled............. (416) 0.25-1.25 0.55
------
Balance, December 31,
1997 9,824 0.25-2.00 0.85 913 $0.41
Granted............... 3,753 2.00-21.25 7.14
Exercised............. (700) 0.25-2.00 0.53
Cancelled............. (726) 0.25-19.13 1.98
------
Balance, December 31,
1998 12,151 0.25-21.25 2.73 2,292 1.04
Granted............... 5,245 7.75-115.66 28.42
Exercised............. (2,513) 0.25-20.00 1.26
Cancelled............. (2,065) 0.25-48.31 4.38
------
Balance, December 31,
1999 12,818 $0.25-115.66 $13.07 2,128 $4.11
======
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable at
Options Outstanding at December 31, 1999 December 31, 1999
------------------------------------------------------------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number of Contractual Life Average Number of Average
Exercise Prices Shares (Years) Exercise Price Shares Exercise Price
--------------- --------- ---------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$0.25-
0.75 2,468 6.2 $ 0.47 987 $ 0.45
1.00-
1.25 2,376 7.4 1.22 545 1.22
1.50-
10.00 2,928 8.1 5.03 352 4.60
10.21-
14.00 1,764 9.0 12.14 131 11.66
14.03-
38.50 1,860 9.1 20.18 73 18.04
41.31-
115.66 1,422 9.5 63.12 40 79.67
------ -----
12,818 8.0 $13.07 2,128 $ 4.11
====== =====
</TABLE>
During 1998, the Company adopted the 1998 Employee Stock Purchase Plan and
reserved 800,000 shares, subject to annual increases. As of December 31, 1999,
a total of 1,000,000 shares of common stock were reserved. The Purchase Plan
became effective upon the completion of the Company's initial public offering.
The Purchase Plan permits eligible employees to purchase common stock, through
payroll deductions of up to 10%, not to exceed $15,000 per year, of the
employee's compensation, at a price equal to 85% of the fair market value of
the common stock at either the beginning or the end of each offering period,
whichever is lower. As of December 31, 1999, 531,640 shares have been issued
under the plan.
F-18
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
If compensation expense had been recorded based on the fair value at the
grant dates for awards under the stock option and purchase plans, the Company's
net income would have been adjusted to the pro forma amounts presented below,
for the years ended December 31, (thousands, except share and per share data):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ ------
<S> <C> <C> <C>
Net income (loss)
As reported........................................ $12,620 $6,178 $ 121
Pro forma.......................................... $ 4,005 $3,204 $ (258)
Basic net income per share, as reported.............. $ 0.16 $ 0.09 $ 0.00
Diluted net income per share, as reported............ $ 0.15 $ 0.08 $ 0.00
Pro forma basic net income (loss) per share.......... $ 0.05 $ 0.05 $(0.00)
Pro forma diluted net income (loss) per share........ $ 0.05 $ 0.04 $(0.00)
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
option grants under the Company's stock option plans issued during 1999, 1998
and 1997, respectively: volatility factors of 95%, 80% and 60%, weighted-
average expected life of 5 years, 5 years, and 2.5 years, risk-free interest
rates of 6%, 5% and 6%, and no dividend yields.
The following assumptions were used for shares issued during 1999 and 1998,
respectively, under the Employee Stock Purchase Plan: volatility factors of 96%
and 80%, weighted-average expected life of 6 months, risk-free interest rate of
5% and no dividend yield.
The weighted average fair value of grants made during 1999, 1998 and 1997
are $21.44, $9.52 and $1.04, respectively.
During the year ended December 31, 1998, the Company granted options to
purchase 3,753,380 shares of Class A common stock, of which options to purchase
1,071,670 shares of Class A common stock were granted at exercise prices below
fair market value. The Company will amortize $1.4 million of compensation
expense related to these options ratably over the five year vesting period. For
the years ended December 31, 1999 and 1998, the Company recorded compensation
expense of $270,000 and $186,000, respectively. The Company will record
compensation expense of $270,000 in each of the years ending December 31, 2000,
2001 and 2002 and $84,000 in 2003.
(d) Distribution to S Corporation Stockholders
The Company declared a $10.0 million dividend to the existing shareholders
of the S corporation in the form of short-term one-year notes prior to the
termination of the Company's S corporation election, which occurred immediately
prior to the initial public offering. The notes issued to the existing
stockholders by the Company bear interest at the applicable federal rate for
short-term obligations. As of December 31, 1999, the entire $10.0 million of
the dividend notes had been repaid.
(e) Stock Warrants
In December 1998, the Company issued warrants to purchase 100,000 shares of
Class A common stock at $11.75 per share. The Company will amortize $934,000 of
compensation expense related to these warrants ratably over the five-year
vesting period. The fair value of the warrants was estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions: volatility factor of 80%, weighted average expected life of 5
years, risk-free interest rate
F-19
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of 5% and no dividend yield. For the year ended December 31, 1999, the Company
recorded compensation expense of $187,000. The Company will record compensation
expense of $187,000 in each of the years ending December 31, 2000, 2001, 2002
and 2003.
(12) Employee Benefit Plan
The Company sponsors a plan to provide retirement and incidental benefits
for its employees, known as the MicroStrategy 401(k) plan (the "Plan").
Participants may make voluntary contributions to the Plan of up to 20% of their
compensation not to exceed the Federally determined maximum allowable
contribution. The Plan permits for discretionary company contributions;
however, no contributions were made for the years ended December 31, 1999, 1998
and 1997.
(13) Segment Information
The Company adopted the provisions of SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information," during 1998. SFAS No. 131
requires certain disclosures about operating segments, products and services,
geographic areas, and major customers. The method for determining what
information to report is based on the way that management organizes the
operating segments within the Company for making operational decisions and
assessments of financial performance. The Company's chief operating decision
maker is considered to be the Company's Chief Executive Officer ("CEO"). The
CEO reviews financial information presented on a consolidated basis accompanied
by disaggregated information about revenues by geographic region and for
purposes of making operating decisions and assessing financial performance.
The Company has two operating segments, MicroStrategy Platform and
Strategy.com. MicroStrategy Platform provides scalable, sophisticated and
maintainable solutions that enable businesses to develop and deploy intelligent
e-business systems. Revenues are derived from sales of product licenses and
product support, including technical support, education and consulting
services. Strategy.com delivers personalized information to consumers through
its personal intelligence network via the web, wireless applications protocol-
enabled devices, e-mail, mobile phone, fax, pager and regular telephone.
Strategy.com syndicates its channels through network affiliates and offers them
to consumers directly through its website. Revenues are expected to be derived
from subscription, advertising fees and transaction fees. The Company began
operating its business as two segments in the latter part of 1999. Prior years'
segment information has been restated to reflect the operations of
Strategy.com.
The accounting policies of both segments are the same as those described in
the summary of significant accounting policies. Certain corporate support costs
are allocated to Strategy.com based on factors such as headcount, gross asset
value and the specific level of activity directly related to such costs.
F-20
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following summary discloses certain financial information regarding the
Company's operating segments (in thousands):
<TABLE>
<CAPTION>
MicroStrategy
Platform Strategy.com Consolidated
------------- ------------- ------------
<S> <C> <C> <C>
Year ended December 31, 1999
Total revenues................... $205,329 $ -- $205,329
Gross margin..................... 168,253 -- 168,253
Depreciation and amortization.... 6,743 1,000 7,743
Operating expenses............... 140,698 9,236 149,934
Income (loss) from operations.... 27,555 (9,236) 18,319
Total assets..................... 174,337 8,218 182,555
Year ended December 31, 1998
Total revenues................... $106,430 $ -- $106,430
Gross margin..................... 86,649 -- 86,649
Depreciation and amortization.... 3,242 8 3,250
Operating expenses............... 76,982 341 77,323
Income (loss) from operations.... 9,667 (341) 9,326
Total assets..................... 82,594 95 82,689
Year ended December 31, 1997
Total revenues................... $ 53,557 $ -- $ 53,557
Gross margin..................... 42,441 -- 42,441
Depreciation and amortization.... 1,243 -- 1,243
Operating expenses............... 42,069 -- 42,069
Income from operations........... 372 -- 372
Total assets..................... 30,065 -- 30,065
The following summary discloses total revenues and long-lived assets,
excluding long-term deferred tax assets, relating to the Company's geographic
regions (in thousands):
<CAPTION>
Domestic International Consolidated
------------- ------------- ------------
<S> <C> <C> <C>
Year ended December 31, 1999
Total revenues................... $168,337 $36,992 $205,329
Long-lived assets................ 54,691 2,028 56,719
Year ended December 31, 1998
Total revenues................... $ 81,307 25,123 $106,430
Long-lived assets................ 16,476 2,754 19,230
Year ended December 31, 1997
Total revenues................... $ 39,310 $14,247 $ 53,557
Long-lived assets................ 7,097 1,942 9,039
</TABLE>
Transfers of $8.3 million, $6.6 million, and $4.4 million for the years
ended December 31, 1999, 1998 and 1997, respectively, from international to
domestic operations have been excluded from the above table and eliminated in
the consolidated financial statements.
For the years ended December 31, 1999, 1998 and 1997, no one customer
accounted for 10% or more of consolidated total revenues.
F-21
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(14) Subsequent Events
On February 24, 2000, the Company filed a registration statement to sell
4,000,000 shares of Class A common stock. In addition the Company registered an
additional 2,500,000 shares to be sold by certain stockholders under the same
registration statement. The ultimate amount of net proceeds will be dependent
on the closing price of the Company's common stock on the day of closing.
F-22
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely
on any unauthorized information or representations. This prospectus is an
offer to sell only the shares offered hereby, but only under circumstances and
in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 5
Special Note Regarding Forward-looking Statements........................ 16
Use of Proceeds.......................................................... 17
Price Range of Class A Common Stock...................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Selected Financial Data.................................................. 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 29
Management............................................................... 48
Principal and Selling Stockholders....................................... 50
Underwriters............................................................. 53
Legal Matters............................................................ 55
Experts.................................................................. 55
Where You Can Find More Information...................................... 55
Incorporation of Certain Documents by Reference.......................... 55
Consolidated Financial Statements........................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
6,500,000 Shares
MicroStrategy Incorporated
Class A Common Stock
-----------
[LOGO]
-----------
Goldman, Sachs & Co.
Friedman Billings Ramsey
Merrill Lynch & Co.
Chase H&Q
FAC/Equities
Representatives of the Underwriters
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the Registrant in connection with the sale of
common stock being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fees and the Nasdaq National Market listing
fee.
<TABLE>
<S> <C>
SEC registration fee.......................................... $ 292,182
NASD filing fee............................................... 30,500
Nasdaq National Market listing fee............................ 17,500
Printing and engraving expenses............................... 250,000
Legal fees and expenses....................................... 275,000
Accounting fees and expenses.................................. 150,000
Blue Sky fees and expenses (including legal fees)............. 5,000
Transfer agent and registrar fees and expenses................ 5,000
Miscellaneous................................................. 74,818
----------
Total....................................................... $1,100,000
==========
</TABLE>
The Company will bear all expenses shown above.
Item 14. Indemnification of Directors and Officers.
The Registrant's Certificate of Incorporation (the "Certificate") provides
that, except to the extent prohibited by the Delaware General Corporation Law
(the "DGCL"), the Registrant's directors shall not be personally liable to the
Registrant or its stockholders for monetary damages for any breach of fiduciary
duty as directors of the Registrant. Under the DGCL, the directors have a
fiduciary duty to the Registrant which is not eliminated by this provision of
the Certificate and, in appropriate circumstances, equitable remedies such as
injunctive or other forms of nonmonetary relief will remain available. In
addition, each director will continue to be subject to liability under the DGCL
for breach of the director's duty of loyalty to the Registrant, for acts or
omissions which are found by a court of competent jurisdiction to be not in
good faith or involving intentional misconduct, for knowing violations of law,
for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
prohibited by the DGCL. This provision also does not affect the directors'
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws. The Registrant has obtained liability
insurance for its officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this
provision shall not eliminate or limit the liability of a director: (1) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (2) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (3) arising under Section
174 of the DGCL including for an unlawful payment of dividend or unlawful stock
purchase or redemption, or (4) for any transaction from which the director
derived an improper personal benefit. The DGCL provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's by-laws, any agreement, a vote of stockholders or otherwise. The
Certificate eliminates the personal liability of directors to the fullest
extent permitted by the DGCL and, together with the Registrant's By-Laws (the
"By-Laws"), provides that the Registrant shall fully indemnify any person who
was or is a party or is threatened to be made a party to any threatened,
pending or completed
II-1
<PAGE>
action, suit or proceeding (whether civil, criminal, administrative or
investigative) by reason of the fact that such person is or was a director or
officer of the Registrant, or is or was serving at the request of the
Registrant as a director or officer of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise, against expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding. Reference is made to the Registrant's Certificate of
Incorporation and By-Laws filed as Exhibits 3.1 and 3.2 hereto, respectively.
The Underwriting Agreement provides that the Underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of the Company against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Act"). Reference is made to the
form of Underwriting Agreement to be filed as Exhibit 1.1 hereto.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Certificate. The Registrant is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement
3.1** Certificate of Incorporation of the Registrant, as amended
3.2** By-Laws of the Registrant
4.1** Specimen Class A common stock certificate
5.1* Opinion of Hale and Dorr LLP
21.1* Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
23.2* Consent of Hale and Dorr LLP (included in Exhibit 5.1)
24.1+ Powers of Attorney
</TABLE>
- --------
+ Previously filed.
* To be filed by amendment.
** Filed as the identically numbered exhibit with the Registrant's Registration
Statement on Form S-1 (Registration No. 333-49899) and incorporated by
reference herein.
(b) Financial Statement Schedules:
None
II-2
<PAGE>
Item 17. Undertakings.
The undersigned registrant hereby undertakes to provide to the Underwriter
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the registrant pursuant to the Delaware General
Corporation Law, the Certificate of the registrant, the Underwriting Agreement,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered
hereunder, the registrant will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) For purpose of determining any liability under the Act, the information
omitted from the form of prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4),
or 497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For purpose of determining any liability under the Act, each post-
effective amendment that contains a form of prospectus shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Act, each filing of the registrant's annual
report pursuant to section 13(a) or section 15(d) of the Securities Exchange
Act of 1934 (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Securities Exchange Act of 1934)
that is incorporated by reference in the registration statement shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Washington, D.C., on this 6th day of
March, 2000.
MICROSTRATEGY INCORPORATED
/s/ Mark S. Lynch
By: _________________________________
Mark S. Lynch
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* President, Chief Executive Officer and March 6, 2000
__________________ Director (Principal Executive Officer)
Michael J. Saylor
/s/ Mark S. Chief Financial Officer (Principal Financial March 6, 2000
Lynch and Accounting Officer)
__________________
Mark S. Lynch
* Director March 6, 2000
__________________
Sanju K. Bansal
* Director March 6, 2000
__________________
Frank A. Ingari
* Director March 6, 2000
__________________
Jonathan J.
Ledecky
* Director March 6, 2000
__________________
Ralph S. Terkowitz
* Director March 6, 2000
__________________
John W. Sidgmore
</TABLE>
/s/ Mark S. Lynch
By: ______________
Attorney-in-fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement
3.1** Certificate of Incorporation of the Registrant, as amended
3.2** By-Laws of the Registrant
4.1** Specimen Class A common stock certificate
5.1* Opinion of Hale and Dorr LLP
21.1* Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
23.2* Consent of Hale and Dorr LLP (included in Exhibit 5.1)
24.1+ Powers of Attorney
</TABLE>
- --------
+ Previously filed.
* To be filed by amendment.
** Filed as the identically numbered exhibit with the Registrant's Registration
Statement on Form S-1 (Registration No. 333-49899) and incorporated by
reference herein.
(b) Financial Statement Schedules:
None
<PAGE>
Exhibit 1.1
Draft of March 3, 2000
MicroStrategy Incorporated
Class A Common Stock (Par Value $.001 Per Share)
Underwriting Agreement
----------------------
March....., 2000
Goldman, Sachs & Co.,
Friedman, Billings, Ramsey &Co., Inc.
Merrill Lynch, Pierce, Fenner & Smith, Incorporated
Chase Securities Inc.
FAC Equities, a division of First Albany Corp.
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004
Ladies and Gentlemen:
MicroStrategy Incorporated, a Delaware corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate
of 4,000,000 shares and, at the election of the Underwriters, to 600,000
additional shares of Class A Common Stock, par value $.001 per share, ("Stock")
of the Company and the stockholders of the Company named in Schedule II hereto
(the "Selling Stockholders") propose, subject to the terms and conditions stated
herein, to sell to the Underwriters an aggregate of 2,500,000 shares and, at the
election of the Underwriters, up to 375,000 additional shares of Stock. The
aggregate of 6,500,000 shares to be sold by the Company and the Selling
Stockholders is herein called the "Firm Shares" and the aggregate of 975,000
additional shares to be sold by the Company and the Selling Stockholders is
herein called the "Optional Shares". The Firm Shares and the Optional Shares
that the Underwriters elect to purchase pursuant to Section 2 hereof are herein
collectively called the "Shares".
1. (a) The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(i) A registration statement on Form S-3 (File No. 333-....) (the "Initial
Registration Statement") in respect of the Shares has been filed with the
Securities and Exchange Commission (the "Commission"); the Initial
Registration Statement and any post-effective amendment thereto, each in
the form heretofore delivered to you, and, excluding exhibits thereto but
including all documents incorporated by reference in the prospectus
contained therein, to you for each of the other Underwriters, have been
declared effective by the Commission in such form; other than a
registration statement, if any, increasing the size of the offering (a
"Rule 462(b) Registration Statement"), filed pursuant to Rule 462(b) under
the Securities Act of 1933, as amended (the "Act"), which became effective
upon filing, no other
<PAGE>
document with respect to the Initial Registration Statement or document
incorporated by reference therein has heretofore been filed with the
Commission; and no stop order suspending the effectiveness of the Initial
Registration Statement, any post-effective amendment thereto or the Rule
462(b) Registration Statement, if any, has been issued and no proceeding
for that purpose has been initiated or threatened by the Commission (any
preliminary prospectus included in the Initial Registration Statement or
filed with the Commission pursuant to Rule 424(a) of the rules and
regulations of the Commission under the Act is hereinafter called a
"Preliminary Prospectus"; the various parts of the Initial Registration
Statement and the Rule 462(b) Registration Statement, if any, including all
exhibits thereto and including (i) the information contained in the form of
final prospectus filed with the Commission pursuant to Rule 424(b) under
the Act in accordance with Section 5(a) hereof and deemed by virtue of Rule
430A under the Act to be part of the Initial Registration Statement at the
time it was declared effective and (ii) the documents incorporated by
reference in the prospectus contained in the Initial Registration Statement
at the time such part of the Initial Registration Statement became
effective, each as amended at the time such part of the Initial
Registration Statement became effective or such part of the Rule 462(b)
Registration Statement, if any, became or hereafter becomes effective, are
hereinafter collectively called the "Registration Statement"; such final
prospectus, in the form first filed pursuant to Rule 424(b) under the Act,
is hereinafter called the "Prospectus"; any reference herein to any
Preliminary Prospectus or the Prospectus shall be deemed to refer to and
include the documents incorporated by reference therein pursuant to Item 12
of Form S-3 under the Act, as of the date of such Preliminary Prospectus or
Prospectus, as the case may be; any reference to any amendment or
supplement to any Preliminary Prospectus or the Prospectus shall be deemed
to refer to and include any documents filed after the date of such
Preliminary Prospectus or Prospectus, as the case may be, under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
incorporated by reference in such Preliminary Prospectus or Prospectus, as
the case may be; and any reference to any amendment to the Registration
Statement shall be deemed to refer to and include any annual report of the
Company filed pursuant to Section 13(a) or 15(d) of the Exchange Act after
the effective date of the Initial Registration Statement that is
incorporated by reference in the Registration Statement;
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material
respects to the requirements of the Act and the rules and regulations of
the Commission thereunder, and did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter through
Goldman, Sachs & Co. expressly for use therein or by a Selling Stockholder
expressly for use in the preparation of the answers therein to Item 7 of
Form S-3;
(iii) The documents incorporated by reference in the Prospectus, when they
became effective or were filed with the Commission, as the case may be,
conformed in all material respects to the requirements of the Act or the
Exchange Act, as applicable, and the rules and regulations of the
Commission thereunder, and none of such documents contained an untrue
statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading; and any further documents so filed
2
<PAGE>
and incorporated by reference in the Prospectus or any further amendment or
supplement thereto, when such documents become effective or are filed with
the Commission, as the case may be, will conform in all material respects
to the requirements of the Act or the Exchange Act, as applicable, and the
rules and regulations of the Commission thereunder and will not contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through Goldman, Sachs & Co. expressly for use therein;
(iv) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of
the Act and the rules and regulations of the Commission thereunder and do
not and will not, as of the applicable effective date as to the
Registration Statement and any amendment thereto and as of the applicable
filing date as to the Prospectus and any amendment or supplement thereto,
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that this representation and
warranty shall not apply to any statements or omissions made in reliance
upon and in conformity with information furnished in writing to the Company
by an Underwriter through Goldman, Sachs & Co. expressly for use therein or
by a Selling Stockholder expressly for use in the preparation of the
answers therein to Item 7 of Form S-3;
(v) Neither the Company nor any of its subsidiaries has sustained since the
date of the latest audited financial statements included or incorporated by
reference in the Prospectus any material loss or interference with its
business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or contemplated in the
Prospectus; and, since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has not been
any change in the capital stock (other than pursuant to the grant or
exercise of options pursuant to option plans or the employee stock purchase
plan, each as described in the Prospectus) or long-term debt of the Company
or any of its subsidiaries or any material adverse change, or any
development involving a prospective material adverse change, in or
affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries, otherwise than as set forth or contemplated in the
Prospectus;
(vi) The Company and its subsidiaries do not own any real property and have
good and marketable title to all personal property owned by them, free and
clear of all liens, encumbrances and defects except such as are described
in the Prospectus or such as do not materially affect the value of such
property and do not interfere with the use made and proposed to be made of
such property by the Company and its subsidiaries; and any real property
and buildings held under lease by the Company and its subsidiaries are held
by them under valid, subsisting and enforceable leases with such exceptions
as are not material and do not interfere with the use made and proposed to
be made of such property and buildings by the Company and its subsidiaries;
(vii) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware with
power and authority (corporate and other) to own its properties and conduct
its business as described in the Prospectus, and has
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been duly qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each other jurisdiction
in which it owns or leases properties or conducts any business so as to
require such qualification, except where the failure to be so qualified
would not be reasonably likely to have a material adverse effect on the
business, financial condition, prospects or results of operations of the
Company and its subsidiaries, as a whole (a "Material Adverse Effect"); and
each subsidiary of the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation;
(viii) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company
have been duly and validly authorized and issued, are fully paid and non-
assessable and conform to the description of the Stock incorporated by
reference in the Prospectus; and all of the issued shares of capital stock
of each subsidiary of the Company have been duly and validly authorized and
issued, are fully paid and non-assessable and (except for directors'
qualifiying shares and except as set forth in the Prospectus) are owned
directly or indirectly by the Company, free and clear of all liens,
encumbrances, equities or claims;
(ix) The unissued Shares to be issued and sold by the Company to the
Underwriters hereunder have been duly and validly authorized and, when
issued and delivered against payment therefor as provided herein, will be
duly and validly issued and fully paid and non-assessable and will conform
to the description of the Stock incorporated by reference in the
Prospectus;
(x) The issue and sale of the Shares to be sold by the Company and the
compliance by the Company with all of the provisions of this Agreement and
the consummation of the transactions herein contemplated will not conflict
with or result in a breach or violation of any of the terms or provisions
of, or constitute a default under, any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which the Company or any
of its subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets of the
Company or any of its subsidiaries is subject, other than breaches or
defaults that would not be reasonably likely to have a Material Adverse
Effect, nor will such action result in any violation of the provisions of
the Certificate of Incorporation or By-laws of the Company or any statute
or any order, rule or regulation of any court or governmental agency or
body having jurisdiction over the Company or any of its subsidiaries or any
of their properties; and no consent, approval, authorization, order,
registration or qualification of or with any such court or governmental
agency or body is required for the issue and sale of the Shares or the
consummation by the Company of the transactions contemplated by this
Agreement, except the registration under the Act of the Shares and such
consents, approvals, authorizations, registrations or qualifications as may
be required under state securities or Blue Sky laws in connection with the
purchase and distribution of the Shares by the Underwriters;
(xi) Neither the Company nor any of its subsidiaries is (1) in violation of
its Certificate of Incorporation or By-laws or (2) in default in the
performance or observance of any obligation, agreement, covenant or
condition contained in any indenture, mortgage, deed of trust, loan
agreement, lease or other agreement or instrument to which it is a party or
by which it or any of its properties may be bound, except in the case of
clause (2), for such defaults as are not reasonably likely to have a
Material Adverse Effect;
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(xii) The statements set forth in the Prospectus under the caption
"Underwriting", insofar as they purport to describe the provisions of the
laws and documents referred to therein, are accurate, complete and fair,
and the description of the Stock of the Company incorporated by reference
in the Prospectus is accurate, complete and fair in all material respects;
(xiii) Other than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of its
subsidiaries is a party or of which any property of the Company or any of
its subsidiaries is the subject which, if determined adversely to the
Company or any of its subsidiaries, would individually or in the aggregate
be reasonably likely to have a Material Adverse Effect; and, to the best of
the Company's knowledge, no such proceedings are threatened or contemplated
by governmental authorities or threatened by others;
(xiv) Other than as set forth in the Prospectus, the Company and its
subsidiaries have sufficient interests in all patents, trademarks, service
marks, trade names, copyrights, trade secrets, information, proprietary
rights and processes ("Intellectual Property") necessary for the operation
of the business of the Company and its subsidiaries as described in the
Prospectus and have taken all steps reasonably necessary to secure
assignments of such Intellectual Property from its employees and
contractors; to the knowledge of the Company none of the technology
employed by the Company or its subsidiaries has been obtained or is being
used by the Company or its subsidiaries in violation of any contractual or
fiduciary obligation binding on the Company, its subsidiaries or any of
their respective directors or executive officers or to the Company's
knowledge, any of their respective employees or consultants; and the
Company and its subsidiaries have taken and will maintain reasonable
measures to prevent the unauthorized dissemination or publication of its
confidential information.
To the Company's knowledge, neither the Company nor any of its subsidiaries
have interfered with, infringed upon, misappropriated, or otherwise come
into conflict with any Intellectual Property rights of third parties, and
the Company and its subsidiaries have not received any charge, complaint,
claim, demand, or notice alleging any such interference, infringement,
misappropriation, or violation (including any claim that the Company or any
of its subsidiaries must license or refrain from using any intellectual
property rights of any third party) which, if the subject of any
unfavorable decision, ruling or finding would, individually or in the
aggregate, be reasonably likely to have a Material Adverse Effect;
To the Company's knowledge, neither the Registration Statement nor the
Prospectus (A) contains any untrue statement of material fact with respect
to trademarks, trade names patents, mask works, copyrights, licenses, trade
secrets or other intellectual property rights owned by the Company or any
of its subsidiaries or (B) omits to state any material fact relating to
trademarks, trade names, patents, mask works, copyrights, licenses, trade
secrets or other intellectual property rights owned by the Company or any
of its subsidiaries or any allegation that is necessary to make the
statement in the Registration Statement or the Prospectus not misleading as
to any such intellectual property rights owned by the Company or any of its
subsidiaries.
To the Company's knowledge, there are no legal or governmental proceedings
pending relating to trademarks, trade names, patent rights, mask works,
copy rights, licenses, trade secrets or other intellectual property rights
of the Company or any of its subsidiaries other than the prosecution by the
Company and it subsidiaries of their patent applications before the
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United States Patent Office and appropriate foreign government agencies,
and no proceedings are threatened or contemplated by governmental
authorities or others relating to trademarks, trade names, patent rights,
mask works, copyrights, licenses or other intellectual property rights of
the Company or its subsidiaries.
(xv) The Company is not and, after giving effect to the offering and sale
of the Shares, will not be an "investment company", as such term is defined
in the Investment Company Act of 1940, as amended (the "Investment Company
Act");
(xvi) Neither the Company nor any of its affiliates does business with the
government of Cuba or with any person or affiliate located in Cuba within
the meaning of Section 517.075, Florida Statutes;
(xvii) PricewaterhouseCoopers LLP, who have certified certain financial
statements of the Company and its subsidiaries, are independent public
accountants as required by the Act and the rules and regulations of the
Commission thereunder;
(xviii) The Company maintains insurance of the types and in the amounts
generally deemed adequate for its business, including, but not limited to,
insurance covering real and personal property owned or leased by the
Company against theft, damage, destruction, acts of vandalism and all other
risks customarily insured against, all of which insurance is in full force
and effect;
(xix) The Company has reviewed its operations and that of its subsidiaries
and any third parties with which the Company or any of its subsidiaries has
a material relationship to evaluate the extent to which the business or
operations of the Company or any of its subsidiaries has been or will be
affected by the Year 2000 Problem. As a result of such review, the Company
has no reason to believe, and does not believe, that the Year 2000 Problem
has had or will have a Material Adverse Effect or has resulted or will
result in any material loss or interference with the Company's business or
operations. The "Year 2000 Problem" as used herein means any significant
risk that computer hardware or software used in the receipt, transmission,
processing, manipulation, storage, retrieval, retransmission or other
utilization of data or in the operation of mechanical or electrical systems
of any kind is not functioning or will not function, in the case of dates
or time periods occurring after December 31, 1999, at least as effectively
as in the case of dates or time periods occurring prior to January 1, 2000;
(xx) There are no contracts, other documents or other agreements required
to be described in the Registration Statement or to be filed as exhibits to
the Registration Statement by the Act or by the rules and regulations
thereunder which have not been described or filed as required; the
contracts so described in the Prospectus are in full force and effect on
the date hereof; and neither the Company nor, to the best of the Company's
knowledge, any other party is in breach of or default in any material
respect under any of such contracts;
(xxi) The Company has not been advised, and has no reason to believe, that
it is not conducting business in compliance with all applicable laws, rules
and regulations of the jurisdictions in which it is conducting business,
including, without limitation, all applicable local, state and federal
environmental laws and regulations, except where failure to be so in
compliance would not have a Material Adverse Effect;
(xxii) The Company has filed all reports it has been required to file under
the Exchange Act; such reports when filed conformed in all material
respects to the requirements of the Exchange
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Act; and none of such reports contained an untrue statement of material
fact or omitted to state a material fact required to be stated therein to
make the statements therein, in light of the circumstances under which they
were made, nor misleading; and
(xxiii) The Common Stock is registered pursuant to Section 12(g) of the
Exchange Act, and is listed on NASDAQ (as defined below), and the Company
has taken no action designed to, or likely to have the effect of,
terminating the registration of the Common Stock under the Exchange Act or
delisting the Common Stock from NASDAQ, nor has the Company received any
notification that the Commission or NASDAQ is contemplating terminating
such registration or listing.
(b) Each of the Selling Stockholders severally represents and warrants to,
and agrees with, each of the Underwriters and the Company that:
(i) All consents, approvals, authorizations and orders necessary for the
execution and delivery by such Selling Stockholder of this Agreement and
the Power of Attorney and the Custody Agreement hereinafter referred to,
and for the sale and delivery of the Shares to be sold by such Selling
Stockholder hereunder, have been obtained; and such Selling Stockholder has
full right, power and authority to enter into this Agreement, the Power-of-
Attorney and the Custody Agreement and to sell, assign, transfer and
deliver the Shares to be sold by such Selling Stockholder hereunder;
(ii) The sale of the Shares to be sold by such Selling Stockholder
hereunder and the compliance by such Selling Stockholder with all of the
provisions of this Agreement, the Power of Attorney and the Custody
Agreement and the consummation of the transactions herein and therein
contemplated will not conflict with or result in a breach or violation of
any of the terms or provisions of, or constitute a default under, any
statute, indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which such Selling Stockholder is a party or by
which such Selling Stockholder is bound or to which any of the property or
assets of such Selling Stockholder is subject, nor will such action result
in any violation of the provisions of the Certificate of Incorporation or
By-laws of such Selling Stockholder if such Selling Stockholder is a
corporation, the Partnership Agreement of such Selling Stockholder if such
Selling Stockholder is a partnership, the Limited Liability Company
Agreement of such Selling Stockholder if such Selling Stockholder is a
Limited Liability Company, or any statute or any order, rule or regulation
of any court or governmental agency or body having jurisdiction over such
Selling Stockholder or the property of such Selling Stockholder;
(iii) Such Selling Stockholder has, and immediately prior to each Time of
Delivery (as defined in Section 4 hereof) such Selling Stockholder will
have, good and valid title to the Shares to be sold by such Selling
Stockholder hereunder, free and clear of all liens, encumbrances, equities
or claims; and, upon delivery of such Shares and payment therefor pursuant
hereto, good and valid title to such Shares, free and clear of all liens,
encumbrances, equities or claims, will pass to the several Underwriters;
(iv) Such Selling Stockholder has entered into a binding agreement with you
and satisfactory to you agreeing not to offer, sell contract to sell or
otherwise dispose of securities of the Company that are substantially
similar to the Shares, except as provided thereunder, without your prior
written consent;
(v) Such Selling Stockholder has not taken and will not take, directly or
indirectly, any action which is designed to or which has constituted or
which might reasonably be expected to
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cause or result in stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Shares;
(vi) To the extent that any statements or omissions made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto are made in reliance upon and in conformity
with written information furnished to the Company by such Selling
Stockholder expressly for use therein, such Preliminary Prospectus and the
Registration Statement did, and the Prospectus and any further amendments
or supplements to the Registration Statement and the Prospectus, when they
become effective or are filed with the Commission, as the case may be, will
conform in all material respects to the requirements of the Act and the
rules and regulations of the Commission thereunder and will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading;
(vii) In order to document the Underwriters' compliance with the reporting
and withholding provisions of the Tax Equity and Fiscal Responsibility Act
of 1982 with respect to the transactions herein contemplated, such Selling
Stockholder will deliver to you prior to or at the First Time of Delivery
(as hereinafter defined) a properly completed and executed United States
Treasury Department Form W-9 (or other applicable form or statement
specified by Treasury Department regulations in lieu thereof);
(viii) Certificates in negotiable form representing all of the Shares to be
sold by such Selling Stockholder hereunder have been placed in custody
under a Custody Agreement, in the form heretofore furnished to you (the
"Custody Agreement"), duly executed and delivered by such Selling
Stockholder to American Stock Transfer and Trust Company as custodian (the
"Custodian"), and such Selling Stockholder has duly executed and delivered
a Power of Attorney, in the form heretofore furnished to you (the "Power of
Attorney"), appointing the persons indicated in Schedule II hereto, and
each of them, as such Selling Stockholder's attorneys-in-fact (the
"Attorneys-in-Fact") with authority to execute and deliver this Agreement
on behalf of such Selling Stockholder, to determine the purchase price to
be paid by the Underwriters to the Selling Stockholders as provided in
Section 2 hereof, to authorize the delivery of the Shares to be sold by
such Selling Stockholder hereunder and otherwise to act on behalf of such
Selling Stockholder in connection with the transactions contemplated by
this Agreement and the Custody Agreement; and
(ix) The Shares represented by the certificates held in custody for such
Selling Stockholder under the Custody Agreement are subject to the
interests of the Underwriters hereunder; the arrangements made by such
Selling Stockholder for such custody, and the appointment by such Selling
Stockholder of the Attorneys-in-Fact by the Power of Attorney, are to that
extent irrevocable; the obligations of the Selling Stockholders hereunder
shall not be terminated by operation of law, whether by the death or
incapacity of any individual Selling Stockholder or, in the case of an
estate or trust, by the death or incapacity of any executor or trustee or
the termination of such estate or trust, or in the case of a partnership or
corporation, by the dissolution of such partnership or corporation, or by
the occurrence of any other event; if any individual Selling Stockholder or
any such executor or trustee should die or become incapacitated, or if any
such estate or trust should be terminated, or if any such partnership or
corporation should be dissolved, or if any other such event should occur,
before the delivery of the Shares hereunder, certificates representing the
Shares shall be delivered by or on behalf of the Selling Stockholders in
accordance with the terms and conditions of this Agreement and of the
Custody Agreements; and actions taken by the Attorneys-in-Fact pursuant to
the Powers
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of Attorney shall be as valid as if such death, incapacity, termination,
dissolution or other event had not occurred, regardless of whether or not
the Custodian, the Attorneys-in-Fact, or any of them, shall have received
notice of such death, incapacity, termination, dissolution or other event.
2. Subject to the terms and conditions herein set forth, (a) the Company
and each of the Selling Stockholders agree, severally and not jointly, to sell
to each of the Underwriters, and each of the Underwriters agrees, severally and
not jointly, to purchase from the Company and each of the Selling Stockholders,
at a purchase price per share of $.............., the number of Firm Shares (to
be adjusted by you so as to eliminate fractional shares) determined by
multiplying the aggregate number of Shares to be sold by the Company and each of
the Selling Stockholders as set forth opposite their respective names in
Schedule II hereto by a fraction, the numerator of which is the aggregate number
of Firm Shares to be purchased by such Underwriter as set forth opposite the
name of such Underwriter in Schedule I hereto and the denominator of which is
the aggregate number of Firm Shares to be purchased by all of the Underwriters
from the Company and all of the Selling Stockholders hereunder and (b) in the
event and to the extent that the Underwriters shall exercise the election to
purchase Optional Shares as provided below, the Company and each of the Selling
Stockholders agree, severally and not jointly, to sell to each of the
Underwriters, and each of the Underwriters agrees, severally and not jointly, to
purchase from the Company and each of the Selling Stockholders, at the purchase
price per share set forth in clause (a) of this Section 2, that portion of the
number of Optional Shares as to which such election shall have been exercised
(to be adjusted by you so as to eliminate fractional shares) determined by
multiplying such number of Optional Shares by a fraction the numerator of which
is the maximum number of Optional Shares which such Underwriter is entitled to
purchase as set forth opposite the name of such Underwriter in Schedule I hereto
and the denominator of which is the maximum number of Optional Shares that all
of the Underwriters are entitled to purchase hereunder.
The Company and the Selling Stockholders, as and to the extent indicated in
Schedule II hereto, hereby grant, severally and not jointly to the Underwriters
the right to purchase at their election up to 975,000 Optional Shares, at the
purchase price per share set forth in the paragraph above, for the sole purpose
of covering sales of shares in excess of the number of Firm Shares. Any such
election to purchase Optional Shares shall be made in proportion to the maximum
number of Optional Shares to be sold by the Company and each Selling Stockholder
as set forth in Schedule II hereto. Any such election to purchase Optional
Shares may be exercised only by written notice from you to the Company, given
within a period of 30 calendar days after the date of this Agreement and setting
forth the aggregate number of Optional Shares to be purchased and the date on
which such Optional Shares are to be delivered, as determined by you but in no
event earlier than the First Time of Delivery (as defined in Section 4 hereof)
or, unless you and the Company and the attorneys-in-fact otherwise agree in
writing, earlier than two or later than ten business days after the date of such
notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior
notice to the Company and the Selling Stockholders shall be delivered by or on
behalf of the Company and the Selling Stockholders to Goldman, Sachs & Co.,
through the facilities of the Depository Trust Company ("DTC"), for the account
of such Underwriter,
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against payment by or on behalf of such Underwriter of the purchase price
therefor by wire transfer of Federal (same-day) funds to the account specified
by the Company and the Custodian to Goldman, Sachs & Co. at least forty-eight
hours in advance. The Company will cause the certificates representing the
Shares to be made available for checking and packaging at least twenty-four
hours prior to the Time of Delivery (as defined below) with respect thereto at
the office of DTC or its designated custodian (the "Designated Office"). The
time and date of such delivery and payment shall be, with respect to the Firm
Shares, 9:30 a.m., New York time, on ............., 2000 or such other time and
date as Goldman, Sachs & Co. and the Company and may agree upon in writing, and,
with respect to the Optional Shares, 9:30 a.m., New York time, on the date
specified by Goldman, Sachs & Co. in the written notice given by Goldman, Sachs
& Co. of the Underwriters' election to purchase such Optional Shares, or such
other time and date as Goldman, Sachs & Co. and the Company may agree upon in
writing. Such time and date for delivery of the Firm Shares is herein called the
"First Time of Delivery", such time and date for delivery of the Optional
Shares, if not the First Time of Delivery, is herein called the "Second Time of
Delivery", and each such time and date for delivery is herein called a "Time of
Delivery".
(b) The documents to be delivered at each Time of Delivery by or on behalf
of the parties hereto pursuant to Section 7 hereof, including the cross receipt
for the Shares and any additional documents requested by the Underwriters
pursuant to Section 7(l) hereof, will be delivered at the offices of Hale and
Dorr LLP, 60 State Street, Boston, Massachusetts 02109 (the "Closing Location"),
and the Shares will be delivered at the Designated Office, all at such Time of
Delivery. A meeting will be held at the Closing Location at 4:00p.m., New York
City time, on the New York Business Day next preceding such Time of Delivery, at
which meeting the final drafts of the documents to be delivered pursuant to the
preceding sentence will be available for review by the parties hereto. For the
purposes of this Section 4, "New York Business Day" shall mean each Monday,
Tuesday, Wednesday, Thursday and Friday which is not a day on which banking
institutions in New York are generally authorized or obligated by law or
executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file such
Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier
time as may be required by Rule 430A(a)(3) under the Act; to make no
further amendment or any supplement to the Registration Statement or
Prospectus prior to the last Time of Delivery which shall be disapproved by
you promptly after reasonable notice thereof; to advise you, promptly after
it receives notice thereof, of the time when any amendment to the
Registration Statement has been filed or becomes effective or any
supplement to the Prospectus or any amended Prospectus has been filed and
to furnish you with copies thereof; to file promptly all reports and any
definitive proxy or information statements required to be filed by the
Company with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act subsequent to the date of the Prospectus and for so
long as the delivery of a prospectus is required in connection with the
offering or sale of the Shares; to advise you, promptly after it receives
notice thereof, of the issuance by the Commission of any stop order or of
any order preventing or suspending the use of any Preliminary Prospectus or
prospectus, of the suspension of the qualification of the Shares for
offering or sale in any jurisdiction, of the initiation or threatening of
any proceeding for any such purpose, or of any request by the Commission
for the amending or supplementing of the Registration Statement or
Prospectus or for additional information; and, in the event of the issuance
of any stop order or of any order
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preventing or suspending the use of any Preliminary Prospectus or
prospectus or suspending any such qualification, promptly to use its best
efforts to obtain the withdrawal of such order;
(b) Promptly from time to time to take such action as you may reasonably
request to qualify the Shares for offering and sale under the securities
laws of such jurisdictions as you may request and to comply with such laws
so as to permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the distribution
of the Shares, provided that in connection therewith the Company shall not
be required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction;
(c) Prior to 10:00 A.M., New York City time, on the New York Business Day
next succeeding the date of this Agreement and from time to time, to
furnish the Underwriters with copies of the Prospectus in New York City in
such quantities as you may reasonably request, and, if the delivery of a
prospectus is required at any time prior to the expiration of nine months
after the time of issue of the Prospectus in connection with the offering
or sale of the Shares and if at such time any events shall have occurred as
a result of which the Prospectus as then amended or supplemented would
include an untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made when such Prospectus
is delivered, not misleading, or, if for any other reason it shall be
necessary during such period to amend or supplement the Prospectus or to
file under the Exchange Act any document incorporated by reference in the
Prospectus in order to comply with the Act or the Exchange Act, to notify
you and upon your request to file such document and to prepare and furnish
without charge to each Underwriter and to any dealer in securities as many
copies as you may from time to time reasonably request of an amended
Prospectus or a supplement to the Prospectus which will correct such
statement or omission or effect such compliance, and in case any
Underwriter is required to deliver a prospectus in connection with sales of
any of the Shares at any time nine months or more after the time of issue
of the Prospectus, upon your request but at the expense of such
Underwriter, to prepare and deliver to such Underwriter as many copies as
you may request of an amended or supplemented Prospectus complying with
Section 10(a)(3) of the Act;
(d) To make generally available to its security holders as soon as
practicable, but in any event not later than eighteen months after the
effective date of the Registration Statement (as defined in Rule 158(c)
under the Act), an earnings statement of the Company and its subsidiaries
(which need not be audited) complying with Section 11(a) of the Act and the
rules and regulations thereunder (including, at the option of the Company,
Rule 158);
(e) During the period beginning from the date hereof and continuing to
and including the date 90 days after the date of the Prospectus, not to
offer, sell, contract to sell or otherwise dispose of, except as provided
hereunder, any securities of the Company that are substantially similar to
the Shares, including but not limited to any securities that are
convertible into or exchangeable for, or that represent the right to
receive, Stock or any such substantially similar securities (other than
pursuant to employee stock option plans existing on, or upon the conversion
or exchange of convertible or exchangeable securities outstanding as of,
the date of this Agreement), without your prior written consent, except
that the Company may issue such securities in exchange for all of the
equity or substantially all of the assets of a company in connection with a
merger or acquisition, provided that prior to any such issuance the
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recipients of such securities shall have agreed with Goldman, Sachs & Co.
in writing to be bound by this provision for the remainder of the 90 day
period;
(f) To furnish to its stockholders as soon as practicable after the end
of each fiscal year an annual report (including a balance sheet and
statements of income, stockholders' equity and cash flows of the Company
and its consolidated subsidiaries certified by independent public
accountants) and, as soon as practicable after the end of each of the first
three quarters of each fiscal year (beginning with the fiscal quarter
ending after the effective date of the Registration Statement), to make
available to its stockholders consolidated summary financial information of
the Company and its subsidiaries for such quarter in reasonable detail;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to
deliver to you (i) as soon as they are available, copies of any reports and
financial statements furnished to or filed with the Commission or any
national securities exchange on which any class of securities of the
Company is listed; and (ii) such additional information concerning the
business and financial condition of the Company as you may from time to
time reasonably request (such financial statements to be on a consolidated
basis to the extent the accounts of the Company and its subsidiaries are
consolidated in reports furnished to its stockholders generally or to the
Commission);
(h) To use the net proceeds received by it from the sale of the Shares
pursuant to this Agreement in the manner specified in the Prospectus under
the caption "Use of Proceeds";
(i) To use its best efforts to list for quotation the Shares on the
National Association of Securities Dealers Automated Quotations National
Market System ("NASDAQ"); and
(j) If the Company elects to rely upon Rule 462(b), the Company shall file
a Rule 462(b) Registration Statement with the Commission in compliance with
Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the date of this
Agreement, and the Company shall at the time of filing either pay to the
Commission the filing fee for the Rule 462(b) Registration Statement or
give irrevocable instructions for the payment of such fee pursuant to Rule
111(b) under the Act.
6. The Company and each of the Selling Stockholders covenant and agree
with one another and with the several Underwriters that (a) the Company will pay
or cause to be paid the following: (i) the fees, disbursements and expenses of
the Company's counsel and accountants in connection with the registration of the
Shares under the Act and all other expenses in connection with the preparation,
printing and filing of the Registration Statement, any Preliminary Prospectus
and the Prospectus and amendments and supplements thereto and the mailing and
delivering of copies thereof to the Underwriters and dealers; (ii) the cost of
printing or producing any Agreement among Underwriters, this Agreement, the Blue
Sky Memorandum, closing documents (including any compilations thereof) and any
other documents in connection with the offering, purchase, sale and delivery of
the Shares; (iii) all expenses in connection with the qualification of the
Shares for offering and sale under state securities laws as provided in Section
5(b) hereof, including the fees and disbursements of counsel for the
Underwriters in connection with such qualification and in connection with the
Blue Sky survey; (iv) all fees and expenses in connection with listing the
Shares on the NASDAQ; (v) the filing fees incident to, and the fees and
disbursements of counsel for the Underwriters in connection with, securing any
required review by the National Association of Securities Dealers, Inc. of the
terms of the sale of the Shares; (vi) the cost of preparing stock
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certificates; (vii) the cost and charges of any transfer agent or registrar and
(viii) all other costs and expenses incident to the performance of its
obligations hereunder which are not otherwise specifically provided for in this
Section; and (b) such Selling Stockholder will pay or cause to be paid all costs
and expenses incident to the performance of such Selling Stockholder's
obligations hereunder which are not otherwise specifically provided for in this
Section, including (i) any fees and expenses of counsel for such Selling
Stockholder, (ii) such Selling Stockholder's pro rata share of the fees and
expenses of the Attorneys-in-Fact and the Custodian, and (iii) all expenses and
taxes incident to the sale and delivery of the Shares to be sold by such Selling
Stockholder to the Underwriters hereunder. [In connection with clause (b) of the
preceding sentence, Goldman, Sachs & Co. agrees to pay New York State stock
transfer tax, and the Selling Stockholder agrees to reimburse Goldman, Sachs &
Co. for associated carrying costs if such tax payment is not rebated on the day
of payment and for any portion of such tax payment not rebated.] It is
understood, however, that the Company shall bear, and the Selling Stockholders
shall not be required to pay or to reimburse the Company for, the cost of any
other matters not directly relating to the sale and purchase of the Shares
pursuant to this Agreement, and that, except as provided in this Section, and
Sections 8 and 11 hereof, the Underwriters will pay all of their own costs and
expenses, including the fees of their counsel, stock transfer taxes on resale of
any of the Shares by them, and any advertising expenses connected with any
offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company and of the Selling Stockholders herein are, at and as of such Time
of Delivery, true and correct, the condition that the Company and the Selling
Stockholders shall have performed all of its and their obligations hereunder
theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant to
Rule 424(b) within the applicable time period prescribed for such filing by
the rules and regulations under the Act and in accordance with Section 5(a)
hereof; if the Company has elected to rely upon Rule 462(b), the Rule
462(b) Registration Statement shall have become effective by 10:00 P.M.,
Washington, D.C. time, on the date of this Agreement; no stop order
suspending the effectiveness of the Registration Statement or any part
thereof shall have been issued and no proceeding for that purpose shall
have been initiated or threatened by the Commission; and all requests for
additional information on the part of the Commission shall have been
complied with to your reasonable satisfaction;
(b) Ropes & Gray, counsel for the Underwriters, shall have furnished to you
such written opinion or opinions dated such Time of Delivery, with respect
to the matters covered in paragraphs (i), (ii), (vii), (xii) and the last
unnumbered paragraph of Section 7(c), as well as such other related matters
as you may reasonably request, and such counsel shall have received such
papers and information as they may reasonably request to enable them to
pass upon such matters;
(c) Hale and Dorr LLP, counsel for the Company, shall have furnished to you
their written opinion (a draft of such opinion is attached as Annex II(b)
hereto), dated such Time of Delivery, in form and substance satisfactory to
you, to the effect that:
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
power and authority (corporate and other) to own its properties and conduct
its business as described in the Prospectus;
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(ii) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company
(including the Shares being delivered at such Time of Delivery) have been
duly and validly authorized and issued and are fully paid and non-
assessable; and the Shares conform to the description of the Stock
incorporated by reference in the Prospectus;
(iii) The Company has been duly qualified as a foreign corporation for the
transaction of business and is in good standing under the laws of each
other jurisdiction in which it owns or leases properties or conducts any
business so as to require such qualification, except where the failure to
so qualify would not have a Material Adverse Effect (such counsel being
entitled to rely in respect of the opinion in this clause upon opinions of
local counsel and in respect of matters of fact upon certificates of
officers of the Company, provided that such counsel shall state that they
believe that both you and they are justified in relying upon such opinions
and certificates);
(iv) Each subsidiary of the Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation; and all of the issued shares of capital
stock of each such subsidiary have been duly and validly authorized and
issued, are fully paid and non-assessable, and (except for directors'
qualifying shares) are owned directly or indirectly by the Company, free
and clear of all liens, encumbrances, equities or claims (such counsel
being entitled to rely in respect of the opinion in this clause upon
opinions of local counsel and in respect of matters of fact upon
certificates of officers of the Company or its subsidiaries, provided that
such counsel shall state that they believe that both you and they are
justified in relying upon such opinions and certificates);
(v) To such counsel's knowledge and other than as set forth in the
Prospectus, there are no legal or governmental proceedings pending to which
the Company or any of its subsidiaries is a party or of which any property
of the Company or any of its subsidiaries is the subject which, if
determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate be reasonably likely to have a Material
Adverse Effect; and, to such counsel's knowledge, no such proceedings are
threatened by governmental authorities or others;
(vi) This Agreement has been duly authorized, executed and delivered by the
Company;
(vii) The issue and sale of the Shares being delivered at such Time of
Delivery to be sold by the Company and the compliance by the Company with
all of the provisions of this Agreement and the consummation of the
transactions herein contemplated will not conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan agreement or
other agreement or instrument that is filed as an exhibit to the
Registration Statement, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or By-laws of the Company or
any statute or any order, rule or regulation known to such counsel of any
court or governmental agency or body having jurisdiction over the Company
or any of its subsidiaries or any of their properties;
(viii) No consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or body is
required for the issue and sale of the Shares or the consummation by the
Company of the transactions contemplated by this Agreement, except the
registration under the Act of the Shares, and such consents, approvals,
authorizations, registrations or qualifications as may be required under
state securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters;
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(ix) The statements set forth in the Prospectus under the caption
"Underwriting", insofar as they purport to describe the provisions of the
laws and documents referred to therein, are accurate, complete and fair,
and the description of the Stock of the Company incorporated by reference
in the Prospectus is accurate, complete and fair in all material respects;
(x) The Company is not an "investment company", as such term is defined in
the Investment Company Act; and
(xi) The Registration Statement and the Prospectus and any further
amendments and supplements thereto made by the Company prior to such Time
of Delivery (other than the financial statements and related schedules
therein, and the other financial data included in the Prospectus, as to
which such counsel need express no opinion), comply, and when they became
effective or were filed with the Commission complied, as to form in all
material respects with the requirements of the Act or the Exchange Act, as
applicable and the rules and regulations thereunder;
Such counsel shall also include in its opinion a statement to the fact
that although they do not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or the Prospectus, except for those referred to in the opinion in
subsection (xi) of this Section 7(c), nothing has come to their attention
that has caused them to believe that, as of its effective date, the
Registration Statement or any further amendment thereto made by the Company
prior to such Time of Delivery (other than the financial statements and
related schedules therein, and the other financial data included in the
Prospectus, as to which such counsel need express no opinion) contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading, or that, as of its date, the Prospectus or any further
amendment or supplement thereto made by the Company prior to such Time of
Delivery (other than the financial statements and related schedules
therein, and the other financial data included in the Prospectus, as to
which such counsel need express no opinion) contains an untrue statement of
a material fact or omits to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; and they do not know of any amendment to the
Registration Statement required to be filed or of any contracts or other
documents of a character required to be filed as an exhibit to the
Registration Statement or required to be described in the Registration
Statement or the Prospectus that are not filed or described as required.
(d) The respective counsel for each of the Selling Stockholders, as
indicated in Schedule II hereto, each shall have furnished to you their
written opinion with respect to each of the Selling Stockholders for whom
they are acting as counsel (a draft of each such opinion is attached as
Annex II(c) hereto), dated such Time of Delivery, in form and substance
satisfactory to you, to the effect that:
(i) A Power-of-Attorney and a Custody Agreement have been duly executed and
delivered by such Selling Stockholder and constitute valid and binding
agreements of such Selling Stockholder in accordance with their terms;
(ii) This Agreement has been duly executed and delivered by or on behalf of
such Selling Stockholder; and the sale of the Shares to be sold by such
Selling Stockholder hereunder and the compliance by such Selling
Stockholder with all of the provisions of this Agreement, the Power-of-
Attorney and the Custody Agreement and the consummation of the transactions
herein and therein contemplated will not conflict with or result in a
breach or violation of any
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terms or provisions of, or constitute a default under, any statute,
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument known to such counsel to which such Selling Stockholder is a
party or by which such Selling Stockholder is bound or to which any of the
property or assets of such Selling Stockholder is subject, nor will such
action result in any violation of the provisions of the Certificate of
Incorporation or By-laws of such Selling Stockholder if such Selling
Stockholder is a corporation, the Limited Liability Company Agreement of
such Selling Stockholder if such Selling Stockholder is a limited liability
company, the Partnership Agreement of such Selling Stockholder if such
Selling Stockholder is a partnership or any order, rule or regulation known
to such counsel of any court or governmental agency or body having
jurisdiction over such Selling Stockholder or the property of such Selling
Stockholder;
(iii) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the
transactions contemplated by this Agreement in connection with the Shares
to be sold by such Selling Stockholder hereunder, except such as have been
obtained under the Act and such as may be required under state securities
or Blue Sky laws in connection with the purchase and distribution of such
Shares by the Underwriters;
(iv) Immediately prior to such Time of Delivery, such Selling Stockholder
had good and valid title to the Shares to be sold at such Time of Delivery
by such Selling Stockholder under this Agreement, free and clear of all
liens, encumbrances, equities or claims, and full right, power and
authority to sell, assign, transfer and deliver the Shares to be sold by
such Selling Stockholder hereunder; and
(v) Good and valid title to such Shares, free and clear of all liens,
encumbrances, equities or claims, has been transferred to each of the
several Underwriters who have purchased such Shares in good faith and
without notice of any such lien, encumbrance, equity or claim or any other
adverse claim within the meaning of the Uniform Commercial Code.
In rendering the opinion in paragraph (iv), such counsel may rely upon a
certificate of such Selling Stockholder in respect of matters of fact as to
ownership of, and liens, encumbrances, equities or claims on, the Shares sold by
such Selling Stockholder, provided that such counsel shall state that they
believe that both you and they are justified in relying upon such certificate
[and that copies thereof shall be provided to you together with such counsel's
opinion];
(e) On the date of the Prospectus at a time prior to the execution of this
Agreement, at 9:30 a.m., New York City time, on the effective date of any
post-effective amendment to the Registration Statement filed subsequent to
the date of this Agreement and also at each Time of Delivery,
PricewaterhouseCoopers LLP shall have furnished to you a letter or letters,
dated the respective dates of delivery thereof, in form and substance
satisfactory to you, to the effect set forth in Annex I hereto (the
executed copy of the letter delivered prior to the execution of this
Agreement is attached as Annex I(a) hereto and a draft of the form of
letter to be delivered on the effective date of any post-effective
amendment to the Registration Statement and as of each Time of Delivery is
attached as Annex I(b) hereto);
(f) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements
included or incorporated by reference in the Prospectus any loss or
interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, otherwise than as set forth
or contemplated in the Prospectus, and (ii) since the respective dates as
of which information is given in the
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Prospectus there shall not have been any change in the capital stock or
long-term debt of the Company or any of its subsidiaries or any change, or
any development involving a prospective change, in or affecting the general
affairs, management, business, properties, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries, taken as a whole, otherwise than as set forth or contemplated
in the Prospectus, the effect of which, in any such case described in
clause (i) or (ii), is in the judgment of the Representatives so material
and adverse as to make it impracticable or inadvisable to proceed with the
public offering or the delivery of the Shares being delivered at such Time
of Delivery on the terms and in the manner contemplated in the Prospectus;
(g) On or after the date hereof (i) no downgrading shall have occurred in
the rating accorded the Company's debt securities by any "nationally
recognized statistical rating organization", as that term is defined by the
Commission for purposes of Rule 436(g)(2) under the Act, and (ii) no such
organization shall have publicly announced that it has under surveillance
or review, with possible negative implications, its rating of any of the
Company's debt securities;
(h) On or after the date hereof there shall not have occurred any of the
following: (i) a suspension or material limitation in trading in securities
generally on NASDAQ; (ii) a suspension or material limitation in trading in
the Company's securities on NASDAQ; (iii) a general moratorium on
commercial banking activities declared by either Federal or New York State
authorities; or (iv) the outbreak or escalation of hostilities involving
the United States or the declaration by the United States of a national
emergency or war, if the effect of any such event specified in this clause
(iv) in the judgment of the Representatives makes it impracticable or
inadvisable to proceed with the public offering or the delivery of the
Shares being delivered at such Time of Delivery on the terms and in the
manner contemplated in the Prospectus;
(i) The Shares to be sold at such Time of Delivery shall have been duly
listed for quotation on NASDAQ;
(j) The Company has obtained and delivered to the Underwriters executed
copies of an agreement from the stockholders [and optionholders] listed on
Annex III hereto, substantially to the effect set forth in Subsection
1(b)(iv) hereof in form and substance satisfactory to you;
(k) The Company shall have complied with the provisions of Section 5(c)
hereof with respect to the furnishing of prospectuses on the New York
Business Day next succeeding the date of this Agreement; and
(l) The Company and the Selling Stockholders shall have furnished or caused
to be furnished to you at such Time of Delivery certificates of officers of
the Company and of the Selling Stockholders, respectively, satisfactory to
you as to the accuracy of the representations and warranties of the Company
and the Selling Stockholders, respectively, herein at and as of such Time
of Delivery, as to the performance by the Company and the Selling
Stockholders of all of their respective obligations hereunder to be
performed at or prior to such Time of Delivery, and as to such other
matters as you may reasonably request, and the Company shall have furnished
or caused to be furnished certificates as to the matters set forth in
subsections (a) and (f) of this Section.
8. (a) The Company and each of the Selling Stockholders noted on Schedule
II as "Principal Sellers", jointly and severally, will indemnify and hold
harmless each Underwriter against any losses, claims, damages or liabilities,
joint or several, to which such Underwriter may become
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subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and will
reimburse each Underwriter for any legal or other expenses reasonably incurred
by such Underwriter in connection with investigating or defending any such
action or claim as such expenses are incurred; provided, however, that the
Company and the Selling Stockholders shall not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in any Preliminary Prospectus, the Registration Statement or the
Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through Goldman, Sachs & Co. expressly for use therein; and provided, further,
that the liability of a Selling Stockholder shall not exceed the product of the
numer of shares sold by such Selling Stockholder (including any Option Shares)
and the public offering price of the Shares as set forth in the Prospectus.
(b) Each of Kimberley F. Trundle and NCR Corporation, will indemnify and
hold harmless each Underwriter against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by such Selling Stockholder expressly for use therein;
and will reimburse each Underwriter for any legal or other expenses reasonably
incurred by such Underwriter in connection with investigating or defending any
such action or claim as such expenses are incurred; provided, however, that such
Selling Stockholder shall not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
any Preliminary Prospectus, the Registration Statement or the Prospectus or any
such amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through Goldman, Sachs &
Co. expressly for use therein; and provided, further, that the liability of a
Selling Stockholder shall not exceed the product of the numer of shares sold by
such Selling Stockholder (including any Option Shares) and the initial public
offering price of the Shares as set forth in the Prospectus.
(c) Each Underwriter will indemnify and hold harmless the Company and each
Selling Stockholder against any losses, claims, damages or liabilities to which
the Company or such Selling Stockholder may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged
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omission was made in any Preliminary Prospectus, the Registration Statement or
the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
through Goldman, Sachs & Co. expressly for use therein; and will reimburse the
Company and each Selling Stockholder for any legal or other expenses reasonably
incurred by the Company or such Selling Stockholder in connection with
investigating or defending any such action or claim as such expenses are
incurred.
(d) Promptly after receipt by an indemnified party under subsection (a),
(b) or (c) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under such subsection. In case any such
action shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and, after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal
expenses of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the defense thereof other
than reasonable costs of investigation. No indemnifying party shall, without
the written consent of the indemnified party, effect the settlement or
compromise of, or consent to the entry of any judgment with respect to, any
pending or threatened action or claim in respect of which indemnification or
contribution may be sought hereunder (whether or not the indemnified party is an
actual or potential party to such action or claim) unless such settlement,
compromise or judgment (i) includes an unconditional release of the indemnified
party from all liability arising out of such action or claim and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act, by or on behalf of any indemnified party.
(e) If the indemnification provided for in this Section 8 is unavailable to
or insufficient to hold harmless an indemnified party under subsection (a), (b)
or (c) above in respect of any losses, claims, damages or liabilities (or
actions in respect thereof) referred to therein, then each indemnifying party
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect the relative benefits
received by the Company and the Selling Stockholders on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law or if the indemnified party failed to give the notice required
under subsection (d) above, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company and the Selling Stockholders on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Stockholders on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses) received
by the Company and the Selling Stockholders bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault
shall be determined by reference to, among other
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things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Selling Stockholders on the one hand or the
Underwriters on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company, each of the Selling Stockholders and the Underwriters agree that it
would not be just and equitable if contributions pursuant to this subsection (e)
were determined by pro rata allocation (even if the Underwriters were treated as
one entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this
subsection (e). The amount paid or payable by an indemnified party as a result
of the losses, claims, damages or liabilities (or actions in respect thereof)
referred to above in this subsection (e) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (e), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Shares underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (e) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(f) The obligations of the Company and the Selling Stockholders under this
Section 8 shall be in addition to any liability which the Company and the
respective Selling Stockholders may otherwise have and shall extend, upon the
same terms and conditions, to each person, if any, who controls any Underwriter
within the meaning of the Act; and the obligations of the Underwriters under
this Section 8 shall be in addition to any liability which the respective
Underwriters may otherwise have and shall extend, upon the same terms and
conditions, to each officer and director of the Company (including any person
who, with his or her consent, is named in the Registration Statement as about to
become a director of the Company) and to each person, if any, who controls the
Company or any Selling Stockholder within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase the
Shares which it has agreed to purchase hereunder at a Time of Delivery, you may
in your discretion arrange for you or another party or other parties to purchase
such Shares on the terms contained herein. If within thirty-six hours after
such default by any Underwriter you do not arrange for the purchase of such
Shares, then the Company and the Selling Stockholders shall be entitled to a
further period of thirty-six hours within which to procure another party or
other parties satisfactory to you to purchase such Shares on such terms. In the
event that, within the respective prescribed periods, you notify the Company and
the Selling Stockholders that you have so arranged for the purchase of such
Shares, or the Company and the Selling Stockholders notify you that they have so
arranged for the purchase of such Shares, you or the Company and the Selling
Stockholders shall have the right to postpone a Time of Delivery for a period of
not more than seven days, in order to effect whatever changes may thereby be
made necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees to file promptly any
amendments to the Registration Statement or the Prospectus which in your opinion
may thereby be made necessary. The term "Underwriter" as used in this Agreement
shall include any person substituted under this Section with like effect as if
such person had originally been a party to this Agreement with respect to such
Shares.
20
<PAGE>
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company and
the Selling Stockholders as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased does not exceed one-eleventh of
the aggregate number of all the Shares to be purchased at such Time of Delivery,
then the Company and the Selling Stockholders shall have the right to require
each non-defaulting Underwriter to purchase the number of Shares which such
Underwriter agreed to purchase hereunder at such Time of Delivery and, in
addition, to require each non-defaulting Underwriter to purchase its pro rata
share (based on the number of Shares which such Underwriter agreed to purchase
hereunder) of the Shares of such defaulting Underwriter or Underwriters for
which such arrangements have not been made; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company and
the Selling Stockholders as provided in subsection (a) above, the aggregate
number of such Shares which remains unpurchased exceeds one-eleventh of the
aggregate number of all of the Shares to be purchased at such Time of Delivery,
or if the Company and the Selling Stockholders shall not exercise the right
described in subsection (b) above to require non-defaulting Underwriters to
purchase Shares of a defaulting Underwriter or Underwriters, then this Agreement
(or, with respect to the Second Time of Delivery, the obligations of the
Underwriters to purchase and of the Company [and the Selling Stockholders] to
sell the Optional Shares) shall thereupon terminate, without liability on the
part of any non-defaulting Underwriter or the Company or the Selling
Stockholders, except for the expenses to be borne by the Company and the Selling
Stockholders and the Underwriters as provided in Section 6 hereof and the
indemnity and contribution agreements in Section 8 hereof; but nothing herein
shall relieve a defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations, warranties and
other statements of the Company, the Selling Stockholders and the several
Underwriters, as set forth in this Agreement or made by or on behalf of them,
respectively, pursuant to this Agreement, shall remain in full force and effect,
regardless of any investigation (or any statement as to the results thereof)
made by or on behalf of any Underwriter or any controlling person of any
Underwriter, or the Company, or any of the Selling Stockholders, or any officer
or director or controlling person of the Company, or any controlling person of
any Selling Stockholder, and shall survive delivery of and payment for the
Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
neither the Company nor the Selling Stockholders shall then be under any
liability to any Underwriter except as provided in Sections 6 and 8 hereof; but,
if for any other reason any Shares are not delivered by or on behalf of the
Company and the Selling Stockholders as provided herein, the Company will
reimburse the Underwriters through you for all out-of-pocket expenses approved
in writing by you, including fees and disbursements of counsel, reasonably
incurred by the Underwriters in making preparations for the purchase, sale and
delivery of the Shares not so delivered, but the Company and the Selling
Stockholders shall then be under no further liability to any Underwriter in
respect of the Shares not so delivered except as provided in Sections 6 and 8
hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives; and in all dealings with any Selling Stockholder hereunder, you
and the Company shall be entitled to act and rely upon any statement, request,
notice or agreement on behalf
21
<PAGE>
of such Selling Stockholder made or given by any or all of the Attorneys-in-Fact
for such Selling Stockholder.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 32 Old Slip, 9th Floor, New York, New York 10005, Attention: Registration
Department; if to any Selling Stockholder shall be delivered or sent by mail,
telex or facsimile transmission to counsel for such Selling Stockholder at its
address set forth in Schedule II hereto; and if to the Company shall be
delivered or sent by mail, telex or facsimile transmission to the address of the
Company set forth in the Registration Statement, Attention: Secretary; provided,
however, that any notice to an Underwriter pursuant to Section 8(d) hereof shall
be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its Underwriters' Questionnaire or telex
constituting such Questionnaire, which address will be supplied to the Company
or the Selling Stockholders by you on request. Any such statements, requests,
notices or agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company and the Selling Stockholders and, to the
extent provided in Sections 8 and 10 hereof, the officers and directors of the
Company and each person who controls the Company, any Selling Stockholder or any
Underwriter, and their respective heirs, executors, administrators, successors
and assigns, and no other person shall acquire or have any right under or by
virtue of this Agreement. No purchaser of any of the Shares from any
Underwriter shall be deemed a successor or assign by reason merely of such
purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
15. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
16. This Agreement may be executed by any one or more of the parties hereto
in any number of counterparts, each of which shall be deemed to be an original,
but all such counterparts shall together constitute one and the same instrument.
If the foregoing is in accordance with your understanding, please sign and
return to us eight counterparts hereof, and upon the acceptance hereof by you,
on behalf of each of the Underwriters, this letter and such acceptance hereof
shall constitute a binding agreement between each of the Underwriters, the
Company and each of the Selling Stockholders. It is understood that your
acceptance of this letter on behalf of each of the Underwriters is pursuant to
the authority set forth in a form of Agreement among Underwriters, the form of
which shall be submitted to the Company and the Selling Stockholders for
examination, upon request, but without warranty on your part as to the authority
of the signers thereof.
22
<PAGE>
Any person executing and delivering this Agreement as Attorney-in-Fact for
a Selling Stockholder represents by so doing that he has been duly appointed as
Attorney-in-Fact by such Selling Stockholder pursuant to a validly existing and
binding Power-of-Attorney which authorizes such Attorney-in-Fact to take such
action.
Very truly yours,
MicroStrategy Incorporated
By:
------------------------------
Name: Michael J. Saylor
Title: Chief Executive Officer
Michael J. Saylor Stephen S. Trundle
Alcantara LLC Kimberley F. Trundle
Sanju K. Bansal Ralph S. Terkowitz
Shangri-La LLC Jonathan J. Ledecky
NCR Corporation Frank A. Ingari
Mark S. Lynch
By:
-------------------------------
Name:
Title:
As Attorney-in-Fact acting on behalf of
each of the Selling Stockholders named
in Schedule II to this Agreement.
Accepted as of the date hereof at
NewYork, New York
Goldman, Sachs & Co.
Friedman, Billings, Ramsey &Co., Inc.
Merrill Lynch, Pierce, Fenner & Smith, Incorporated
Chase Securities Inc.
FAC Equities, a division of First Albany Corp.
By:
---------------------------------
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
23
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE I
Number of Optional
Shares to be
Total Number of Purchased if
Firm Shares Maximum Option
Underwriter to be Purchased Exercised
----------- --------------- ------------------
<S> <C> <C>
Goldman, Sachs & Co.........................................................
Friedman, Billings, Ramsey &Co., Inc........................................
Merrill Lynch, Pierce, Fenner & Smith, Incorporated.........................
Chase Securities............................................................
---------------
===============
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
Number of Optional
Shares to be
Total Number of Sold if
Firm Shares Maximum Option
to be Sold Exercised
----------------- ----------------
<S> <C> <C>
The Company.................................................. 4,000,000 600,000
The Selling Stockholder(s):...............................
Alcantara LLC (Michael J. Saylor) 1,660,000 287,500
Shangri-La LLC (Shangri-La LLC) 426,814 87,500
NCR Corporation 283,186
Mark S. Lynch 25,000
Stephen S. Trundle 55,000
Kimberley F. Trundle 5,000
Ralph S. Terkowitz 18,000
Jonathan J. Ledecky 18,000
Frank A. Ingari 9,000
----------- ------------
Total.................................................... 6,500,000 975,000
=========== ============
</TABLE>
- ---------------
(a) This Selling Stockholder is represented by [ ] and has appointed Michael J.
Saylor, Mark S. Lynch and Jonathan K, and each of them, as the Attorneys-in-Fact
for such Selling Stockholder.
(b) This Selling Stockholder is represented by [Name and Address of Counsel]
and has appointed [Names of Attorneys-in-Fact (not less than two)], and each of
them, as the Attorneys-in-Fact for such Selling Stockholder.
(c) This Selling Stockholder is represented by [Name and Address of Counsel]
and has appointed [Names of Attorneys-in-Fact (not less than two)], and each of
them, as the Attorneys-in-Fact for such Selling Stockholder.
(d) This Selling Stockholder is represented by [Name and Address of Counsel]
and has appointed [Names of Attorneys-in-Fact (not less than two)], and each of
them, as the Attorneys-in-Fact for such Selling Stockholder.
(e) This Selling Stockholder is represented by [Name and Address of Counsel]
and has appointed [Names of Attorneys-in-Fact (not less than two)], and each of
them, as the Attorneys-in-Fact for such Selling Stockholder.
25
<PAGE>
ANNEX I
ANNEX I DESCRIPTION OF COMFORT LETTER
FOR REGISTRATION STATEMENTS ON FORM S-3
Pursuant to Section 7(d) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(xxiv) (i) They are independent certified public accountants with respect
to the Company and its subsidiaries within the meaning of the Act and the
applicable published rules and regulations thereunder;
(xxv) (ii) In their opinion, the financial statements and any supplementary
financial information and schedules (and, if applicable, financial
forecasts and/or pro forma financial information) examined by them and
included or incorporated by reference in the Registration Statement or the
Prospectus comply as to form in all material respects with the applicable
accounting requirements of the Act or the Exchange Act, as applicable, and
the related published rules and regulations thereunder; and, if applicable,
they have made a review in accordance with standards established by the
American Institute of Certified Public Accountants of the consolidated
interim financial statements, selected financial data, pro forma financial
information, financial forecasts and/or condensed financial statements
derived from audited financial statements of the Company for the periods
specified in such letter, as indicated in their reports thereon, copies of
which have been [separately] furnished to the representatives of the
Underwriters (the "Representatives")[and are attached hereto];
(xxvi) (iii) They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants of
the unaudited condensed consolidated statements of income, consolidated
balance sheets and consolidated statements of cash flows included in the
Prospectus and/or included in the Company's quarterly report on Form 10-Q
incorporated by reference into the Prospectus as indicated in their reports
thereon copies of which [have been separately furnished to the
Representatives][are attached hereto]; and on the basis of specified
procedures including inquiries of officials of the Company who have
responsibility for financial and accounting matters regarding whether the
unaudited condensed consolidated financial statements referred to in
paragraph (vi)(A)(i) below comply as to form in all material respects with
the applicable accounting requirements of the [Act and the Exchange] Act
and the related published rules and regulations, nothing came to their
attention that caused them to believe that the unaudited condensed
consolidated financial statements do not comply as to form in all material
respects with the applicable accounting requirements of the [Act and the
Exchange] Act and the related published rules and regulations;
(xxvii) (iv) The unaudited selected financial information with respect to
the consolidated results of operations and financial position of the
Company for the five most recent fiscal years included in the Prospectus
and included or incorporated by reference in Item 6 of the Company's Annual
Report on Form 10-K for the most recent fiscal year agrees with the
corresponding amounts (after restatement where applicable) in the audited
consolidated financial statements for such five fiscal years which were
included or incorporated by reference in the Company's Annual Reports on
Form 10-K for such fiscal years;
(xxviii) (v) They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K and on
the basis of limited procedures
<PAGE>
specified in such letter nothing came to their attention as a result of the
foregoing procedures that caused them to believe that this information does
not conform in all material respects with the disclosure requirements of
Items 301, 302, 402 and 503(d), respectively, of Regulation S-K;
(xxix) (vi) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available interim
financial statements of the Company and its subsidiaries, inspection of the
minute books of the Company and its subsidiaries since the date of the
latest audited financial statements included or incorporated by reference
in the Prospectus, inquiries of officials of the Company and its
subsidiaries responsible for financial and accounting matters and such
other inquiries and procedures as may be specified in such letter, nothing
came to their attention that caused them to believe that:
(A) the unaudited condensed consolidated statements of income,
consolidated balance sheets and consolidated statements of cash flows
included in the Prospectus and/or included or incorporated by reference
in the Company's Quarterly Reports on Form 10-Q incorporated by
reference in the Prospectus do not comply as to form in all material
respects with the applicable accounting requirements of the Exchange Act
as it applies to Form 10-Q and the related published rules and
regulations, or (ii) any material modifications should be made to the
unaudited condensed consolidated statements of income, consolidated
balance sheets and consolidated statements of cash flows included in the
Prospectus or included in the Company's Quarterly Reports on Form 10-Q
incorporated by reference in the Prospectus, for them to be conformity
with generally accepted accounting principles;
(B) any other unaudited income statement data and balance sheet
items included in the Prospectus do not agree with the corresponding
items in the unaudited consolidated financial statements from which such
data and items were derived, and any such unaudited data and items were
not determined on a basis substantially consistent with the basis for
the corresponding amounts in the audited consolidated financial
statements included or incorporated by reference in the Company's Annual
Report on Form 10-K for the most recent fiscal year;
(C) the unaudited financial statements which were not included in
the Prospectus but from which were derived the unaudited condensed
financial statements referred to in clause (A) and any unaudited income
statement data and balance sheet items included in the Prospectus and
referred to in clause (B) were not determined on a basis substantially
consistent with the basis for the audited financial statements included
or incorporated by reference in the Company's Annual Report on Form 10-K
for the most recent fiscal year;
(D) any unaudited pro forma consolidated condensed financial
statements included or incorporated by reference in the Prospectus do
not comply as to form in all material respects with the applicable
accounting requirements of the Act and the published rules and
regulations thereunder or the pro forma adjustments have not been
properly applied to the historical amounts in the compilation of those
statements;
(E) as of a specified date not more than five days prior to the date
of such letter, there have been any changes in the consolidated capital
stock (other than issuances of capital stock upon exercise of options
and stock appreciation rights, upon earn-outs of
<PAGE>
performance shares and upon conversions of convertible securities, in
each case which were outstanding on the date of the latest balance sheet
included or incorporated by reference in the Prospectus) or any increase
in the consolidated long-term debt of the Company and its subsidiaries,
or any decreases in consolidated net current assets or stockholders'
equity or other items specified by the Representatives, or any increases
in any items specified by the Representatives, in each case as compared
with amounts shown in the latest balance sheet included or incorporated
by reference in the Prospectus, except in each case for changes,
increases or decreases which the Prospectus discloses have occurred or
may occur or which are described in such letter; and
(F) for the period from the date of the latest financial statements
included or incorporated by reference in the Prospectus to the specified
date referred to in clause (E) there were any decreases in consolidated
net revenues or operating profit or the total or per share amounts of
consolidated net income or other items specified by the Representatives,
or any increases in any items specified by the Representatives, in each
case as compared with the comparable period of the preceding year and
with any other period of corresponding length specified by the
Representatives, except in each case for increases or decreases which
the Prospectus discloses have occurred or may occur or which are
described in such letter; and
(xxx) (vii) In addition to the examination referred to in their report(s)
included or incorporated by reference in the Prospectus and the limited
procedures, inspection of minute books, inquiries and other procedures
referred to in paragraphs (iii) and (vi) above, they have carried out
certain specified procedures, not constituting an examination in accordance
with generally accepted auditing standards, with respect to certain
amounts, percentages and financial information specified by the
Representatives which are derived from the general accounting records of
the Company and its subsidiaries, which appear in the Prospectus (excluding
documents incorporated by reference) or in Part II of, or in exhibits and
schedules to, the Registration Statement specified by the Representatives
or in documents incorporated by reference in the Prospectus specified by
the Representatives, and have compared certain of such amounts, percentages
and financial information with the accounting records of the Company and
its subsidiaries and have found them to be in agreement.
(xxxi)
(xxxii) Annex II(a)
(xxxiii)
(xxxiv) Opinion of Ropes & Gray
(xxxv)
(xxxvi) Annex II(b)
(xxxvii)
(xxxviii) Opinion of Hale and Dorr LLP
(xxxix)
(xl) Annex III
(xli)
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-3, as
amended, of our report dated January 26, 2000, except for Note 14, for which
the date is February 24, 2000, relating to the financial statements of
MicroStrategy Incorporated for the year ended December 31, 1999, which appear
in such Registration Statement. We also consent to the reference to us in the
heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
March 3, 2000
McLean, Virginia
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 25,941
<SECURITIES> 19,627
<RECEIVABLES> 64,478
<ALLOWANCES> 3,329
<INVENTORY> 0
<CURRENT-ASSETS> 122,499
<PP&E> 50,693
<DEPRECIATION> 11,293
<TOTAL-ASSETS> 182,555
<CURRENT-LIABILITIES> 45,308
<BONDS> 0
0
0
<COMMON> 78
<OTHER-SE> 133,961
<TOTAL-LIABILITY-AND-EQUITY> 182,555
<SALES> 143,193
<TOTAL-REVENUES> 205,329
<CGS> 2,597
<TOTAL-COSTS> 37,076
<OTHER-EXPENSES> 149,934
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 144
<INCOME-PRETAX> 20,355
<INCOME-TAX> 7,735
<INCOME-CONTINUING> 12,620
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,620
<EPS-BASIC> .16
<EPS-DILUTED> .15
</TABLE>
