<PAGE>
As filed with the Securities and Exchange Commission on February 24, 2000
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed
Proposed Maximum
Amount Maximum Aggregate Amount of
Title of each class of to be Offering Price Offering Registration
securities to be registered Registered Per Share(1) Price(1) Fee
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock,
$.001 par value per share.. 7,475,000 148.06 $1,106,748,500 $292,182
- ------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of 1933,
as amended.
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 February 24, 2000.
6,500,000 Shares
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+[MICROSTRATEGY INCORPORATED LOGO] +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Class A Common Stock
-----------
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
February 23, 2000, was $154.63 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
-----------
Prospectus dated , 2000.
<PAGE>
[The inside front cover shows a graphic depiction of MicroStrategy products,
including MicroStrategy Intelligence Server, MicroStrategy Architect,
MicroStrategy Agent, MicroStrategy Web, MicroStrategy InfoCenter, MicroStrategy
Broadcaster, MicroStrategy Telcaster, MicroStrategy Administrator and listing
the database products that supply data to the software]
<PAGE>
[The inside front cover gatefold contains a schematic representation of the use
of the MicroStrategy intelligent e-business software platform, showing how
information can be used by various individuals across an enterprise.]
<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 a
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
1
<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.. 29,369,024 shares of Class
A common stock
53,480,115 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, 30,344,024 shares of Class A common stock and 53,105,115 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 February
23, 2000, and does not include:
. 12,846,640 shares of Class A common stock issuable upon the exercise of
currently outstanding stock options; and
. 4,890,118 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 53,480,115 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>
Nine Months
Ended
Years Ended December 31, September 30,
-------------------------------- ----------------
1995 1996 1997(1) 1998(1) 1998(1) 1999
------ ------- ------- -------- ------- --------
(unaudited)
(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 $70,699 $135,977
Income (loss) from
operations................. 77 (2,290) 372 9,326 5,140 12,645
Net income (loss)........... 48 (2,375) 121 6,178 3,412 8,864
Basic net income (loss) per
share(2)................... $ 0.00 $ (0.04) $ 0.00 $ 0.09 $ 0.05 $ 0.12
Weighted average shares used
in computing basic net
income (loss) per
share(2)................... 57,793 58,988 58,988 66,986 65,543 75,420
Diluted net income (loss)
per share(2)............... $ 0.00 $ (0.04) $ 0.00 $ 0.08 $ 0.04 $ 0.11
Weighted average shares used
in computing diluted net
income (loss) per
share(2)................... 57,793 58,988 64,725 77,203 75,873 84,005
</TABLE>
<TABLE>
<CAPTION>
As of September 30,
1999
--------------------
As
Actual Adjusted(3)
-------- -----------
(unaudited)
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................................. $ 22,380 $614,613
Working capital............................................ 71,880 663,013
Total assets............................................... 140,272 732,505
Total stockholders' equity................................. 104,822 695,955
</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 and an income tax provision of approximately $1,965
and net income of $3,205 for the nine months ended September 30, 1998. Pro
forma basic and diluted loss per share would have been $0.01 for the year
ended December 31, 1997, pro forma basic and diluted income per share would
have been $0.09 and $0.08, respectively, for the year ended December 31,
1998 and pro forma basic and diluted income per share would have been $0.05
and $0.04, respectively, for the nine months ended September 30, 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 $154.63
per share, after deducting the underwriting discount and the estimated
offering expenses that we will pay.
4
<PAGE>
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.
8
<PAGE>
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 February 23, 2000, holders of our Class B common stock
owned or controlled 55,516,929 shares of Class B common stock, or 96.0% 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 February 23, 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 nine months ended September 30,
1999 and for the years ended December 31, 1998, 1997 and 1996, channel partners
accounted directly or indirectly for 50.0%, 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
12
<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 19.1% of our total revenue for the nine
months ended September 30, 1999 and for 23.6%, 26.7%, and 11.1% of our total
revenues for the years ended December 31, 1998, 1997, and 1996, respectively.
We plan to continue expanding our international operations and to enter new
international markets. This will require significant management attention and
financial resources and could adversely affect our business, operating results
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 $591 million assuming a public
offering price of $154.63 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 $680 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 February 23, 2000)....................... $174.75 $98.00
</TABLE>
On February 23, 2000, the last reported sale price for the Class A common
stock was $154.63 per share. As of February 23, 2000, there were approximately
341 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 September 30, 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
$154.63 per share; and
. the application of the estimated net proceeds we expect to receive from
this offering.
The outstanding share information excludes:
. 12,511,738 shares of common stock issuable on exercise of outstanding
options as of September 30, 1999, of which options to purchase 2,571,428
shares were then exercisable; and
. 6,677,186 shares of common stock reserved for future issuance under our
stock option plans and employee stock purchase plan.
<TABLE>
<CAPTION>
As of September
30, 1999
------------------
As
Actual Adjusted
-------- --------
(unaudited)
(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, 18,776 shares issued and outstanding, actual;
24,813 shares issued and outstanding, as adjusted........ 19 25
Class B common stock, $0.001 par value; 100,000 shares
authorized, 58,111 shares issued and outstanding, actual;
56,074 shares issued and outstanding, as adjusted........ 58 56
Additional paid-in capital................................. 91,697 682,826
Accumulated other comprehensive income..................... 710 710
Deferred compensation...................................... (1,755) (1,755)
Retained earnings.......................................... 14,093 14,093
-------- --------
Total stockholders' equity............................... 104,822 695,955
-------- --------
Total capitalization................................... $104,822 $695,955
======== ========
</TABLE>
18
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with our
consolidated financial statements and the related notes incorporated by
reference in this prospectus 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 for the years ended December 31,
1994, 1995, 1996, 1997 and 1998 and for each of the five years in the period
ended December 31, 1998, have been derived from our audited financial
statements incorporated by reference in this prospectus. Our statements of
operations data for the nine months ended September 30, 1998 and 1999 and the
balance sheet data as of September 30, 1999, have been derived from our
unaudited consolidated financial statements, which in management's opinion
reflect all adjustments necessary to fairly present this information when read
in conjunction with the consolidated financial statements and the related notes
incorporated by reference in this prospectus.
<TABLE>
<CAPTION>
Nine Months
Ended
Years Ended December 31, September 30,
----------------------------------------- ----------------
1994 1995 1996 1997(1) 1998(1) 1998(1) 1999
------ ------ ------- ------- ------- ------- -------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenues
Product licenses....... $ 622 $4,077 $15,873 $36,601 $72,721 $47,476 $92,400
Product support........ 4,358 5,700 6,730 16,956 33,709 23,223 43,577
------ ------ ------- ------- ------- ------- -------
Total revenues......... 4,980 9,777 22,603 53,557 106,430 70,699 135,977
Costs and expenses:
Cost of revenues....... 2,057 2,458 5,257 11,116 19,781 13,610 25,498
Sales and marketing.... 771 2,992 13,054 30,468 53,408 35,759 62,295
Research and
development........... 200 1,855 2,840 5,049 12,106 8,086 19,581
General and
administrative........ 1,955 2,395 3,742 6,552 11,809 8,104 15,958
------ ------ ------- ------- ------- ------- -------
Total costs and
expenses.............. 4,983 9,700 24,893 53,185 97,104 65,559 123,332
------ ------ ------- ------- ------- ------- -------
Income (loss) from
operations............. (3) 77 (2,290) 372 9,326 5,140 12,645
Interest income
(expense), net......... (34) (40) (105) (239) 308 61 1,626
Other income (expense),
net.................... (24) 11 20 (12) (14) (31) 26
------ ------ ------- ------- ------- ------- -------
Income (loss) before
taxes.................. (61) 48 (2,375) 121 9,620 5,170 14,297
Provision for income
taxes.................. -- -- -- -- 3,442 1,758 5,433
------ ------ ------- ------- ------- ------- -------
Net income (loss)....... $ (61) $ 48 $(2,375) $ 121 $ 6,178 $ 3,412 $ 8,864
====== ====== ======= ======= ======= ======= =======
Basic net income (loss)
per share(2)........... $ 0.00 $ 0.00 $ (0.04) $ 0.00 $ 0.09 $ 0.05 $ 0.12
Weighted average shares
used in computing basic
net income (loss) per
share(2)............... 55,976 57,793 58,988 58,988 66,986 65,543 75,420
Diluted net income
(loss) per share(2).... $ 0.00 $ 0.00 $ (0.04) $ 0.00 $ 0.08 $ 0.04 $ 0.11
Weighted average shares
used in computing
diluted net income
(loss) per share(2).... 55,976 57,793 58,988 64,725 77,203 75,873 84,005
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of
--------------------------------------- September 30,
1994 1995 1996 1997 1998 1999
------ ------ ------- ------- ------- -------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 249 $ 643 $ 1,686 $ 3,506 $27,491 $ 22,380
Working capital
(deficit).............. 848 1,343 (2,237) (5,991) 28,467 71,880
Total assets............ 3,209 5,838 13,004 30,065 82,689 140,272
Notes payable, long term
portion................ 193 600 460 2,428 -- --
Total stockholders'
equity (deficit)....... 1,446 1,546 (793) (427) 46,280 104,822
</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 and
an income tax provision of approximately $1,965 and net income of $3,205
for the nine months ended September 30, 1998. Pro forma basic and diluted
loss per share would have been $0.01 for the year ended December 31, 1997,
pro forma basic and diluted income per share would have been $0.09 and
$0.08, respectively, for the year ended December 31, 1998 and pro forma
basic and diluted income per share would have been $0.05 and $0.04,
respectively, for the nine months ended September 30, 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 incorporated by reference
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 the nine months
ended September 30, 1999 and during 1998, 1997 and 1996 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. If we are unable to
achieve corresponding substantial revenue growth, we could suffer operating
losses in one or more quarters and may be unable to forecast such losses prior
to the end of any given quarter. In addition, we have experienced net losses
and losses from operations for the year ended December 31, 1996, and were only
marginally profitable for the years ended December 31, 1997 and December 31,
1995. While we have experienced significant percentage growth in revenues in
recent periods, prior percentage revenue growth rates should not be considered
as necessarily indicative of future growth rates or operating results.
Additionally, there are a number of factors that could materially affect
expected revenue and operating results for 1999 and subsequent periods. See
"Risk Factors."
20
<PAGE>
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 the related software product,
provided that no significant obligations remain outstanding on the part of
MicroStrategy 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 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 our education and consulting services are recognized at the time the
services are performed.
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 50.0%, 35.0%, 27.5% and 9.0% of our revenues for the
nine months ended September 30, 1999 and for the years ended December 31, 1998,
1997 and 1996, 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>
Nine Months
Years ended ended
December 31, September 30,
-------------------- --------------
1998 1997 1996 1998 1999
----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Operations
Data:
Revenues:
Product licenses...................... 68.3% 68.3% 70.2% 67.2% 68.0%
Product support....................... 31.7 31.7 29.8 32.8 32.0
----- ----- ------ ------ ------
Total revenues...................... 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
Product licenses...................... 2.1 3.1 4.5 2.4 1.4
Product support....................... 16.5 17.7 18.7 16.9 17.3
----- ----- ------ ------ ------
Total cost of revenues.............. 18.6 20.8 23.2 19.3 18.7
----- ----- ------ ------ ------
Gross margin............................ 81.4 79.2 76.8 80.7 81.3
Operating expenses:
Sales and marketing................... 50.2 56.9 57.8 50.6 45.8
Research and development.............. 11.4 9.4 12.6 11.4 14.4
General and administrative............ 11.1 12.2 16.6 11.5 11.7
----- ----- ------ ------ ------
Total operating expenses............ 72.7 78.5 87.0 73.5 71.9
----- ----- ------ ------ ------
Income (loss) from operations........... 8.7 0.7 (10.2) 7.2 9.4
Interest income......................... 1.0 0.2 0.1 0.1 1.2
Interest expense........................ 0.7 0.7 0.6 -- --
Other income, net....................... -- -- 0.1 -- --
Provision for income taxes.............. 3.2 -- -- 2.5 4.0
----- ----- ------ ------ ------
Net income (loss)....................... 5.8% 0.2% (10.6)% 4.8% 6.6%
===== ===== ====== ====== ======
</TABLE>
Nine Months Ended September 30, 1998 and 1999
Revenues
Total revenues increased to $136.0 million for the nine months ended
September 30, 1999 from $70.7 million for the nine months ended September 30,
1998, representing an increase of 92.3%. Total revenues consist of revenues
derived from sales of software product licenses and product support. Total
revenues may not continue to increase at the rates experienced in prior
periods.
Product License Revenues. Product license revenues increased to $92.4
million for the nine months ended September 30, 1999 from $47.5 million for the
nine months ended September 30, 1998, representing an increase of 94.6%. The
significant increase in product license revenues was due to growing market
acceptance of our software products and continued expansion of our sales and
marketing organization. Product license revenues constituted 68.0% and 67.2% of
total revenues for the nine months ended September 30, 1999 and 1998,
respectively.
Product Support Revenues. Product support revenues increased to $43.6
million for the nine months ended September 30, 1999 from $23.2 million for the
nine months ended September 30, 1998, representing an increase of 87.6%.
Product support revenues constituted 32.0% and 32.8% of total revenues for the
nine months ended September 30, 1999 and 1998, respectively. The increase in
product support revenues was primarily due to the increase in product licenses
sold. We expect
22
<PAGE>
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 quarters.
International Revenues. International revenues were $26.0 million and $16.1
million for the nine months ended September 30, 1999 and 1998, representing
approximately 19.1% and 22.7% of total revenues, respectively. We opened sales
offices in Brazil, Australia, Canada and Italy in 1999 and in Austria, France,
the Netherlands, Germany, United Kingdom and Spain prior to 1999.
Costs and Expenses
Cost of Product License Revenues. Cost of product license revenues consists
primarily of the costs of product manuals, media, amortization of capitalized
software and shipping paid to third parties. Cost of product license revenues
was $1.9 million and $1.7 million for the nine months ended September 30, 1999
and 1998, representing 2.1% and 3.5% of total product license revenues,
respectively. The decrease in total cost of product license revenues as a
percentage of total product license revenues was due to economies of scale
realized by producing larger volumes of product materials and decreased
materials costs due to an increase in the percentage of customers reproducing
licenses at their sites. We anticipate that the cost of product license
revenues will continue to increase as product license revenues increase, but
decrease as a percentage of product license revenues. However, in the event
that we enter into any royalty arrangements with strategic partners in the
future cost of product license revenues as a percentage of total product
license revenues may increase.
Cost of Product Support Revenues. Cost of product support revenues consists
of the costs of providing technical support, education and consulting services
to customers and partners. Cost of product support revenues was $23.6 million
and $11.9 million for the nine months ended September 30, 1999 and 1998,
representing 54.1% and 51.4% of total product support revenues, respectively.
The increase in cost of product support revenues in 1999 was primarily due to
the increase in product licenses sold and, thus, an increase in the number of
personnel providing consulting, education, and technical support to customers.
We expect to continue to increase the number of customer education and
implementation consultants in the future, as well as technical support
personnel. To the extent that our product support revenues do not increase at
anticipated rates, the hiring of additional consultants and technical support
personnel could increase the cost of product support revenues as a percentage
of product support revenues. 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 partners 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, promotional events such as trade
shows, seminars and technical conferences, advertising and public relations
programs. Sales and marketing expenses were $62.3 million and $35.8 million for
the nine months ended September 30, 1999 and 1998, representing 45.8% and 50.6%
of total revenues, respectively. The increase in sales and marketing expenses
was primarily the result of increased staffing levels in the sales force,
increased commissions earned and increased promotional activities, trade show
participation and general marketing efforts. We have invested and will continue
to invest heavily in sales and marketing in order to create better market
awareness of the value-added potential of MicroStrategy products.
Research and Development Expenses. Research and development expenses consist
primarily of salaries and benefits of software engineering personnel, payments
to contract programmers, depreciation of equipment and expendable equipment
purchases. Research and development expenses were $19.6 million and $8.1
million for the nine months ended September 30, 1999 and 1998, representing
14.4% and 11.4% of total revenues, respectively. The increase in research and
development expenses was primarily due to additional hiring of research and
development personnel
23
<PAGE>
and continued development of new products and product releases. We expect that
research and development expenses will continue to increase as we continue to
invest in developing new products, applications and product enhancements.
During 1998 and for the nine months ended September 30, 1999, no costs were
capitalized as the establishment of technological feasibility and general
release of such software had substantially coincided. 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 the year ended December 31, 1997.
General and Administrative Expenses. General and administrative expenses
include the personnel and other costs of our finance, human resources,
information systems, administrative and executive departments. General and
administrative expenses were $16.0 million and $8.1 million for the nine months
ended September 30, 1999 and 1998, representing 11.7% and 11.5% of total
revenues, respectively. The increase in general and administrative expenses was
primarily the result of increased staff levels and related costs associated
with the growth of our business during these periods. 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.
Provision for Income Taxes. Our effective tax rate was 38.0% for the nine
months ended September 30, 1999. For the nine months ended September 30, 1999
we recorded income tax expense of $5.4 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
$2.0 million, a 38.0% effective tax rate.
Years Ended December 31, 1997 and 1998
Revenues
Total revenues increased to $106.4 million for the year ended December 31,
1998 from $53.6 million in the year ended December 31, 1997, representing an
increase of 98.5%.
Product License Revenues. Product license revenues increased to $72.7
million for the year ended December 31, 1998 from $36.6 million in the same
period ended December 31, 1997, representing an increase of 98.6%. Product
license revenues constituted 68.3% of total revenues for the years ended
December 31, 1998 and 1997. The significant increase in the dollar amount of
product license revenues was due to growing market acceptance of our software
products and continued expansion of our sales and marketing organization.
Product Support Revenues. Product support revenues increased to $33.7
million for the year ended December 31, 1998 from $17.0 million in the same
period ended December 31, 1997, representing an increase of 98.2%. Product
support revenues constituted 31.7% of total revenues for the years ended
December 31, 1998 and 1997. The significant increase in the dollar amount of
product support revenues was primarily due to the increase in the number of
licenses sold.
International Revenues. We recognized $25.1 million and $14.3 million of
international revenues for the years ended December 31, 1998 and 1997,
representing approximately 23.6% and 26.7% of total revenues, respectively.
24
<PAGE>
Costs and Expenses
Cost of Product License Revenues. Cost of product license revenues was $2.2
million and $1.6 million for the years ended December 31, 1998 and 1997,
representing 3.1% and 4.5% of total product license revenues, respectively. The
increase in the dollar amount of our cost of product licenses was directly
attributable to the increase in our product license revenues coupled with the
amortization of capitalized software. The total cost of product license
revenues as a percentage of revenues decreased during the year ended December
31, 1998 from the year ended December 31, 1997, due to economies of scale
realized by producing larger volumes of product materials and an increasing
number of customers reproducing licenses at their sites.
Cost of Product Support Revenues. Cost of product support revenues was $17.5
million and $9.5 million for the years ended December 31, 1998 and 1997,
representing 52.0% and 55.9% of total product support revenues, respectively.
The increase in the dollar amount of our cost of product support revenues was
primarily due to the increase in the number of personnel providing consulting,
education and technical support to customers. Despite the increases in
personnel and other costs for the year ended December 31, 1998, the total cost
of product support revenues remained constant as a percentage of revenues
during the year ended December 31, 1998 compared to the year ended December 31,
1997 primarily due to increases in maintenance revenues which typically do not
require proportionate increases in the costs required to perform associated
maintenance services.
Sales and Marketing Expenses. Sales and marketing expenses were $53.4
million and $30.5 million for the years ended December 31, 1998 and 1997,
representing 50.2% and 56.9% of total revenues, respectively. The significant
increase in sales and marketing expenses for the year ended December 31, 1998
was primarily due to increased staffing as we established new domestic and
international sales offices and expanded our existing direct sales force and,
to a lesser extent, increased commissions to sales representatives as a result
of increased sales of software licenses and increased promotional activities
relating to the announcement of certain product enhancements or releases.
Research and Development Expenses. Research and development expenses were
$12.1 million and $5.0 million for the years ended December 31, 1998 and 1997,
representing 11.4% and 9.3% of total revenues, respectively. The increase in
research and development expenses was primarily due to additional hiring of
research and development personnel. 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 the year ended December 31, 1997. During the year ended December
31, 1998, the costs incurred between the establishment of technological
feasibility and general availability of our products were not material and
therefore such amounts have been expensed rather than capitalized.
General and Administrative Expenses. General and administrative expenses
were $11.8 million and $6.6 million for the years ended December 31, 1998 and
1997, representing 11.1% and 12.2% of total revenues, respectively. The
increase in the dollar amount of 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.
Deferred Compensation Expense. During the year ended December 31, 1998, we
granted approximately 3,754,000 options to purchase shares of common stock, of
which options to purchase approximately 1,072,000 shares of common stock were
granted at exercise prices below fair market value. We will amortize
approximately $1.3 million of compensation expense relating to these options
ratably over the five year vesting period of these options. In addition, we
issued 100,000 warrants to purchase Class A common stock, which resulted in
deferred compensation expense of $0.9 million. For the year ended December 31,
1998 compensation expense related to the previously mentioned
25
<PAGE>
options and warrants is $0.2 million. We will record additional compensation
expense relating to the options to be allocated across the above expense
categories, as appropriate, for the years ending December 31, 1999, 2000, 2001,
2002 and 2003 of $0.5 million, $0.5 million, $0.5 million, $0.5 million and
$0.3 million, respectively.
Provision for Income Taxes. Prior to consummation of 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 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 our initial public offering.
Our S corporation status was terminated shortly prior to consummation of our
initial public offering at which time we became subject to federal and state
corporate income taxation as a Subchapter C corporation. As a result, we
account for income taxes as a Subchapter C corporation and have adopted
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." We recorded income tax expense of $3.4 million for the year ended
December 31, 1998. The adoption of SFAS No. 109 did not have a material impact
on our operating results. As of December 31, 1998, our deferred tax assets of
approximately $5.8 million consist primarily of net operating loss
carryforwards related to foreign operations. We recorded a valuation allowance
on a portion of the net deferred tax assets related to foreign net operating
losses which in our opinion, may not be realizable. Our effective tax rate for
the period ended December 31, 1998 was approximately 36%. Had we been a C
corporation throughout 1998, we would have recorded a provision of $3.6
million.
Years Ended December 31, 1997 and 1996
Revenues
Total revenues increased 136.9% to $53.6 million for the year ended December
31, 1997 from $22.6 million for the year ended December 31, 1996.
Product License Revenues. Product license revenues increased 130.6% to $36.6
million for the year ended December 31, 1997 from $15.9 million for the year
ended December 31, 1996, representing 68.3% and 70.2% of total revenues,
respectively. The significant increase in product license revenues was due to
growing market acceptance of our software products and continued expansion of
our sales and marketing organization.
Product Support Revenues. Product support revenues increased 151.9% to $17.0
million for the year ended December 31, 1997 from $6.7 million for the year
ended December 31, 1996, representing 31.7% and 29.8% of total revenues,
respectively. The increase in the dollar amount of product support revenues was
primarily due to the increase in the number of licenses sold.
International Revenues. We recognized $14.3 million and $2.5 million of
international revenues for the years ended December 31, 1997 and 1996,
representing approximately 26.7% and 11.1% of total revenues, respectively.
Costs and Expenses
Cost of Product License Revenues. Cost of product license revenues increased
to $1.6 million for the year ended December 31, 1997 from $1.0 million for the
same period ended December 31, 1996, representing 4.5% and 6.4% of total
product license revenues, respectively. The increase in our cost of product
licenses was directly attributable to the increase in our product license
revenue, coupled with the amortization of capitalized software. The total cost
of product license revenues as a percentage of revenues decreased during 1997
from the same period in 1996 due to economies of scale realized by producing
larger volumes of product materials and an increasing number of customers
reproducing licenses at their sites.
26
<PAGE>
Cost of Product Support Revenues. Cost of product support revenues increased
to $9.5 million for the year ended December 31, 1997 from $4.2 million for the
same period ended December 31, 1996, representing 55.9% and 63.0% of total
product support revenues, respectively. The increase in our cost of product
support revenues in 1997 was primarily due to the increase in the number of
personnel providing consulting, training and technical support to customers.
Sales and Marketing Expenses. Sales and marketing expenses increased to
$30.5 million for the year ended December 31, 1997 from $13.1 million for the
same period ended December 31, 1996, representing 56.9% and 58.0% of total
revenues, respectively. The increase in sales and marketing expenses in 1998
was primarily due to increased staffing as we established new international
sales offices and expanded our existing direct sales force in addition to
increased commissions to sales representatives as a result of increased sales
of software licenses and increased promotional activities relating to the
announcement of certain product enhancements or releases.
Research and Development Expenses. Research and development expenses
increased to $5.0 million for the year ended December 31, 1997 from $2.8
million for the same period ended December 31, 1996, representing 9.3% and
12.4% of total revenues, respectively. The increase in research and development
expenses was primarily due to additional hiring of research and development
personnel. We expect that research and development expenses will continue to
increase in dollar amount as we continue to invest in developing new products,
applications and product enhancements. In 1996, in accordance with SFAS 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 the year ended December 31,
1997. During the year ended December 31, 1996, in accordance with SFAS No. 86,
the costs incurred between the establishment of technological feasibility and
general availability of our products were not material and therefore have been
expensed rather than capitalized.
General and Administrative Expenses. General and administrative expenses
increased to $6.6 million for the year ended December 31, 1997 from $3.7
million for the same period ended December 31, 1996, representing 12.2% and
16.6% of total revenues, respectively. The increase in the dollar amount of
general and administrative expenses was primarily the result of increased
staffing and related costs associated with the growth of our business during
these periods.
Provision for Income Taxes. Prior to consummation of 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 and taxable to our individual stockholders rather than to us.
Accordingly, no federal or state income taxes have been provided for in our
financial statements for periods prior to consummation of our initial public
offering.
Our S corporation status terminated shortly prior to consummation of our
initial public offering. We are now subject to federal and state corporate
income taxation as a Subchapter C corporation. As a result, we have adopted
SFAS No. 109, "Accounting for Income Taxes." The adoption of SFAS No. 109 did
not have a material impact on our operating results. As of December 31, 1997,
our deferred tax assets would have been approximately $3.0 million consisting
primarily of net operating loss carryforwards related to foreign operations and
differences between tax and book treatment of allowances and reserves. We would
have recorded a valuation of $1.8 million primarily due to the lack of
consistent earnings in certain foreign operations and the uncertainty as to
whether the deferred tax asset related to those foreign operations' net
operating losses is realizable.
Effects of Inflation. We believe that inflation and changing prices over the
past three years have not had a significant impact on our net sales and
revenues or on income from continuing operations.
27
<PAGE>
Quarterly Results of Operations
The following tables set forth the unaudited consolidated statements of
operations data for the eight quarters ended September 30, 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 incorporated by reference
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
-----------------------------------------------------------------------------
Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30,
1997 1998 1998 1998 1998 1999 1999 1999
-------- --------- -------- --------- -------- --------- -------- ---------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenues:
Product licenses....... $13,191 $14,282 $16,245 $16,949 $25,245 $23,124 $31,057 $38,219
Product support........ 5,603 5,613 7,545 10,065 10,486 12,660 14,581 16,336
------- ------- ------- ------- ------- ------- ------- -------
Total revenues........ 18,794 19,895 23,790 27,014 35,731 35,784 45,638 54,555
Cost of revenues:
Product licenses....... 454 538 552 586 570 520 563 844
Product support........ 3,155 3,163 4,113 4,658 5,601 6,609 7,906 9,056
------- ------- ------- ------- ------- ------- ------- -------
Total cost of
revenues............... 3,609 3,701 4,665 5,244 6,171 7,129 8,469 9,900
------- ------- ------- ------- ------- ------- ------- -------
Gross margin............ 15,185 16,194 19,125 21,770 29,560 28,655 37,169 44,655
Operating expenses:
Sales and marketing.... 10,268 10,828 12,005 12,926 17,649 16,774 21,145 24,376
Research and
development............ 1,912 2,092 2,776 3,218 4,020 5,060 6,088 8,433
General and
administrative......... 2,389 2,563 2,600 2,941 3,705 4,280 5,363 6,315
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 14,569 15,483 17,381 19,085 25,374 26,114 32,596 39,124
Income from operations.. 616 711 1,744 2,685 4,186 2,541 4,573 5,531
Interest income......... 40 47 84 551 346 504 671 594
Interest expense........ 131 237 264 120 99 92 51 --
Other income (expense),
net.................... (9) 21 (45) (7) 17 46 (14) (6)
Provision for income
taxes.................. -- -- 577 1,181 1,684 1,140 1,968 2,325
------- ------- ------- ------- ------- ------- ------- -------
Net income ............. $ 516 $ 542 $ 942 $ 1,928 $ 2,766 $ 1,859 $ 3,211 $ 3,794
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------
Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30,
1997 1998 1998 1998 1998 1999 1999 1999
-------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Percent of Total
Revenues:
Product licenses....... 70.2% 71.8% 68.3% 62.7% 70.7% 64.6% 68.1% 70.1%
Product support........ 29.8 28.2 31.7 37.3 29.3 35.4 31.9 29.9
----- ----- ----- ----- ----- ----- ----- -----
Total revenues........ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
Cost of revenues:
Product licenses....... 2.4 2.7 2.3 2.2 1.6 1.4 1.2 1.5
Product support........ 16.8 15.9 17.3 17.2 15.7 18.5 17.3 16.6
----- ----- ----- ----- ----- ----- ----- -----
Total cost of
revenues............... 19.2 18.6 19.6 19.4 17.3 19.9 18.5 18.1
----- ----- ----- ----- ----- ----- ----- -----
Gross margin............ 80.8 81.4 80.4 80.6 82.7 80.1 81.5 81.9
Operating expenses:
Sales and marketing.... 54.6 54.4 50.5 47.8 49.4 46.9 46.3 44.7
Research and
development............ 10.2 10.5 11.7 11.9 11.2 14.1 13.3 15.5
General and
administrative......... 12.7 12.9 10.9 10.9 10.4 12.0 11.8 11.6
----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses............... 77.5 77.8 73.1 70.6 71.0 73.0 71.4 71.8
Income from operations.. 3.3 3.6 7.3 10.0 11.7 7.1 10.1 10.1
Interest income......... 0.2 0.2 0.4 2.0 1.0 1.4 1.3 1.1
Interest expense........ 0.7 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
----- ----- ----- ----- ----- ----- ----- -----
Net income ............. 2.8% 2.7% 4.0% 7.2% 7.7% 5.2% 7.1% 6.9%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
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Liquidity and Capital Resources
From inception until the initial public offering, we primarily financed our
operations and met our capital expenditure requirements through cash flows from
operations and short- and long-term borrowings. We raised $48.7 million, net of
expenses, from our initial public offering. On February 10, 1999, we raised an
additional $40.1 million, net of expenses, from the sale of 3,170,000 shares of
Class A common stock. As a result, on September 30, 1999 and December 31, 1998,
we had $43.8 million and $27.5 million of cash, cash equivalents, and short-
term investments, respectively.
Cash used in operations was $2.5 million and $6.1 million for the nine
months ended September 30, 1999 and 1998, respectively. The decrease in cash
used in operations during the nine months ended September 30, 1999 compared to
the same period in 1998 was primarily attributable to an increase in net
income.
Cash used in investing activities was $47.1 and $6.1 million for the nine
months ended September 30, 1999 and 1998, respectively. The increase in cash
used in investing activities during the nine months ended September 30, 1999
compared to the same period in 1998 reflected purchases of short-term
investments and capital expenditures related to the acquisition of computer and
office equipment required to support expansion of our operations and building
of infrastructure to support our Strategy.com network. We expect to continue to
aggressively invest in capital expenditures to support our growth.
Our financing activities provided cash of $44.5 million and $38.4 million
for the nine months ended September 30, 1999 and 1998, respectively. The
principal source of cash from financing activities during the nine months ended
September 30, 1999 was from the additional sale of 3,170,000 shares of Class A
common stock in which we raised $40.1 million, net of expenses. Prior to the
sale of Class A common stock and the initial public offering, our principal
source of cash from financing activities was net borrowings from commercial
lending institutions. During December 1996, we entered into a loan agreement
with a commercial bank. In July 1998, we repaid all net borrowings under the
business loan. On March 26, 1999, we signed a loan agreement which provided for
a $25.0 million revolving line of credit. Borrowings under the revolving line
of credit will bear interest at a variable rate equal to LIBOR plus 1.0% to
1.75%, depending upon the ratio of funded debt to earnings. As of September 30,
1999, no amounts were outstanding under the revolving line of credit.
We declared a $10.0 million dividend to our shareholders prior to the
initial public offering. The dividend was paid in the form of notes prior to
the termination of our S corporation election, which occurred immediately prior
to the consummation of the initial public offering. As of September 30, 1999,
the entire $10.0 million of the dividend notes had been repaid.
In September 1999, we entered into a commitment to purchase $10.0 million of
computer equipment and software over the twelve month period ending September
2000.
We believe that the proceeds generated by the sale of Class A common stock
offered by us in our initial public offering, our February 1999 public
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.
Subsequent Events
On December 23, 1999, we purchased the intellectual property and other
intangible assets relating to NCR's TeraCube business in exchange for 566,372
shares of Class A common stock. We will develop the TeraCube assets as a
business intelligence platform for data warehouses 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
29
<PAGE>
for in-process research and development during the quarter ended December 31,
1999. In addition we recorded intangible assets of $13.6 million and assembled
workforce of $1.3 million. We will amortize intangible assets over five years
and the assembled workforce over 10 years beginning December 23, 1999.
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 equivalent terms as in the lease
plus 1.5%.
In February 2000, we made a series of announcements regarding our
Strategy.com network. Among other announcements, we indicated that we intend to
invest at least $100 million over the next twelve months to market, develop and
operate Strategy.com. Due to these anticipated ongoing expenses, we expect that
our operations will use significant cash for the forseeable future.
Recent Accounting Pronouncements
In June 1999, the FASB 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 No. 133 will not have a material effect on our financial statements.
30
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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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<PAGE>
[insert graphic]
[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
33
<PAGE>
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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<PAGE>
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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<PAGE>
The following diagram illustrates the MicroStrategy 6 platform:
[INSERT GRAPHIC]
[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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<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
Consulting, Education and Customer Support
The following diagram illustrates our services and customer support
capabilities:
[GRAPH]
[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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<PAGE>
.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
Ameritrade AT&T Wireless Services Brown & Williamson
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
USAnt Glaxo Wellcome* Network Solutions
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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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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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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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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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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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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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 43,549,324 shares of Class B common stock (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 41,889,324 shares of
Class B common stock (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 41,601,824 shares of Class B common stock
(78.4% of the Class B common stock then outstanding).
52
<PAGE>
(2) Prior to giving effect to the offering, Mr. Bansal's holdings of common
stock consist of 8,679,958 shares of Class B common stock (15.6% of the
Class B common stock outstanding) and 19,000 shares of Class A common
stock held beneficially by Mr. Bansal as a result of his beneficial
ownership in Shangri-La LLC. After giving effect to the offering, Mr.
Bansal's holdings of common stock will consist of 8,253,144 shares of
Class B common stock (15.4% of the Class B common stock then outstanding)
and 19,000 shares of Class A common stock. 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 8,165,644 shares of Class B common stock (15.4% of the Class B common
stock then outstanding) and 19,000 shares of Class A common stock.
(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. After giving effect to the offering, Mr. Terkowitz's
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.
(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.
53
<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 and Chase Securities Inc.
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. ................................................
---------
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
54
<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.
55
<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 incorporated in this prospectus by reference to
the Annual Report on Form 10-K for the year ended December 31, 1998, have been
so incorporated 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
56
<PAGE>
MICROSTRATEGY INCORPORATED
SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
(unaudited)
<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................................ -- 716
-------- -------
Total current assets............................. 122,499 63,459
-------- -------
Property and equipment, net.......................... 39,400 13,773
Other long-term receivables.......................... -- 2,700
Goodwill and other intangible assets net............. 15,760 987
Deposits and other assets............................ 1,559 1,770
Deferred tax asset................................... 3,337 --
-------- -------
Total assets..................................... $182,555 $82,689
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and other......................... $ 14,388 $11,904
Accrued compensation and employee benefits......... 14,912 7,356
Deferred revenue................................... 13,574 10,732
Deferred tax liability............................. 2,434 --
Dividend notes payable............................. -- 5,000
-------- -------
Total current liabilities........................ 45,308 34,992
Deferred revenue................................... 3,208 746
Deferred tax liability............................. -- 671
-------- -------
Total liabilities................................ $ 48,516 $36,409
-------- -------
Stockholders' (deficit) equity:
Preferred stock; $.001 par value; 5,000 shares
authorized; no shares issued or outstanding ...... -- --
Class A Common Stock; $.001 par value; 100,000
shares authorized; 22,384 and 10,104 shares issued
and outstanding, respectively..................... 22 11
Class B Common Stock; $.001 par value;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)
Other comprehensive income........................... 197 894
Retained earnings.................................... 17,849 5,229
-------- -------
Total stockholders' equity....................... 134,039 46,280
-------- -------
Total liabilities & stockholders' equity......... $182,555 $82,689
======== =======
</TABLE>
S-1
<PAGE>
MICROSTRATEGY INCORPORATED
SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months
Ended Twelve Months Ended
December 31, December 31,
---------------- -------------------
1999 1998 1999 1998
------- ------- ----------- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues
Product licenses...................... $50,793 $25,245 $143,193 $72,721
Product support....................... 18,559 10,487 62,136 33,709
------- ------- -------- -------
Total revenues...................... 69,352 35,732 205,329 106,430
------- ------- -------- -------
Cost of Revenues
Product licenses...................... 670 570 2,597 2,246
Product support....................... 10,908 5,601 34,479 17,535
------- ------- -------- -------
Total cost of revenues.............. 11,578 6,171 37,076 19,781
------- ------- -------- -------
Gross profit............................ 57,774 29,561 168,253 86,649
------- ------- -------- -------
Operating Expenses
Sales and marketing................... 31,493 17,644 93,788 53,408
Research and development.............. 9,099 4,020 28,680 12,106
In-process research and development
(1).................................. 2,800 -- 2,800 --
General and administrative............ 8,708 3,704 24,666 11,809
------- ------- -------- -------
Total operating expenses............ 52,100 25,368 149,934 77,323
------- ------- -------- -------
Income from operations.................. 5,674 4,193 18,319 9,326
Interest income......................... 405 345 2,174 1,028
Interest expense........................ 1 98 144 720
Other income (expense), net............. (20) 17 6 (14)
------- ------- -------- -------
Total other income.................. 384 264 2,036 294
------- ------- -------- -------
Income before taxes..................... 6,058 4,457 20,355 9,620
Income tax.............................. 2,302 1,691 7,735 3,442
------- ------- -------- -------
Net income.............................. $ 3,756 $ 2,766 $ 12,620 $ 6,178
------- ------- -------- -------
Earnings per share (basic) (2).......... $ 0.05 $ 0.04 $ 0.16 $ 0.09
======= ======= ======== =======
Weighted average outstanding shares
(basic) (2)............................ 77,404 71,267 77,028 66,986
======= ======= ======== =======
Earnings per share (diluted) (2)........ $ 0.04 $ 0.03 $ 0.15 $ 0.08
======= ======= ======== =======
Weighted average outstanding shares
(diluted) (2).......................... 87,152 81,111 85,881 77,203
======= ======= ======== =======
Pro forma information (3):
Pro forma net income.................... $ 5,971
=======
Pro forma earnings per share (basic)
(2).................................... $ 0.09
=======
Pro forma earnings per share (diluted)
(2).................................... $ 0.08
=======
</TABLE>
- --------
(1) In-process research and development costs are one-time non-cash acquisition
related costs which were incurred as a result of the acquisition of NCR's
TeraCube assets.
(2) Share and per share amounts for all periods presented have been restated to
reflect the two-for-one stock split effected as a stock dividend which
occurred in January 2000.
(3) Presented on a pro forma basis, to reflect federal and state income taxes
based on estimated applicable tax rates as if the company had been a
subchapter C corporation for the year ended December 31, 1998.
S-2
<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................................................................. 31
Management............................................................... 50
Principal and Selling Stockholders....................................... 52
Underwriters............................................................. 54
Legal Matters............................................................ 56
Experts.................................................................. 56
Where you can find more Information...................................... 56
Incorporation of Certain Documents by Reference.......................... 56
Supplemental Consolidated Financial Data................................. S-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
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
------- -----------
<S> <C>
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
4.2 See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the Certificate of Incorporation and
By-Laws of the Registrant defining the rights of holders of common stock of the Registrant
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 (see page II-5)
</TABLE>
- --------
* 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 24th day
of February, 2000.
MICROSTRATEGY INCORPORATED
/s/ Michael J. Saylor
By: _________________________________
Michael J. Saylor
President and Chief Executive
Officer
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers, directors and authorized representatives of
MicroStrategy Incorporated hereby severally constitute and appoint Michael J.
Saylor, Sanju K. Bansal and Mark S. Lynch, and each of them singly, our true
and lawful attorneys with full power to them, and each of them singly, with
full powers of substitution and resubstitution, to sign for us and in our names
in the capacities indicated below, the Registration Statement on Form S-3 filed
herewith and any and all pre-effective and post-effective amendments to said
Registration Statement, and any subsequent Registration Statement for the same
offering which may be filed under Rule 462(b), and generally to do all such
things in our names and on our behalf in our capacities as officers and
directors to enable MicroStrategy Incorporated to comply with the provisions of
the Securities Act of 1933, as amended, and all requirements of the Securities
and Exchange Commission, hereby ratifying and confirming our signatures as they
may be signed by our said attorneys, or any of them, or their substitute or
substitutes, to said Registration Statement and any and all amendments thereto
or to any subsequent Registration Statement for the same offering which may be
filed under Rule 462(b).
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>
/s/ Michael J. President, Chief Executive Officer and February 24, 2000
Saylor Director (Principal Executive Officer)
______________
Michael J.
Saylor
/s/ Mark S. Chief Financial Officer (Principal Financial February 24, 2000
Lynch and Accounting Officer)
______________
Mark S. Lynch
/s/ Sanju K. Director February 24, 2000
Bansal
______________
Sanju K.
Bansal
/s/ Frank A. Director February 24, 2000
Ingari
______________
Frank A.
Ingari
/s/ Jonathan J. Director February 24, 2000
Ledecky
______________
Jonathan J.
Ledecky
/s/ Ralph S. Director February 24, 2000
Terkowitz
______________
Ralph S.
Terkowitz
/s/ John W. Director February 24, 2000
Sidgmore
______________
John W.
Sidgmore
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
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
4.2 See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the Certificate of Incorporation and
By-Laws of the Registrant defining the rights of holders of common stock of the Registrant
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 (see page II-5)
</TABLE>
- --------
* 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 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-3 of our report dated February 16, 1999 relating to the
financial statements and financial statement schedules, which appears in
MicroStrategy Incorporated's Annual Report on Form 10-K for the year ended
December 31, 1998. We also consent to the reference to us in the heading
"Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
February 24, 2000
McLean, Virginia
