SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-24435
MICROSTRATEGY INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation)
8000 Towers Crescent Drive, Vienna, VA
(Address of Principal Executive Offices)
22182
(Zip Code)
51-0323571
(I.R.S. Employer Identification Number)
Registrant's telephone number, including area code: (703) 848-8600
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
The number of shares of the registrant's Class A common stock and Class B
common stock outstanding on November 1, 2000 was 25,208,764 and 55,036,766,
respectively.
EXPLANATORY NOTE
This Form 10-Q/A revises the Consolidated Statements of Operations for the three
months ended September 30, 2000 and 1999 and the Consolidated Statements of
Operations for the nine months ended September 30, 2000 and 1999 as follows:
sales and marketing expenses are being decreased by $4,398,000 and general and
administrative expenses are being increased by $4,398,000 for the three and nine
month period ended September 30, 2000. The dollar value, percentage of revenue
and percentage changes over prior year sales and marketing and general and
administrative expenses in Management's Discussion and Analysis of Financial
Condition and Results of Operations have been changed accordingly to reflect the
change. In addition, this Form 10-Q/A revises the Consolidated Balance Sheet as
of September 30, 2000 as follows: current deferred revenue and advance payments
are being decreased by $12,796,000 and non-current deferred revenue and advance
payments are being increased by $12,796,000. The current and non-current
deferred product support and other service revenue in the related notes and
Management's Discussion and Analysis of Financial Condition and Results of
Operations have been changed accordingly to reflect the change.
MICROSTRATEGY INCORPORATED
FORM 10-Q/A
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2000 (unaudited) and December 31, 1999.... 1
Consolidated Statements of Operations For the Three Months Ended September 30, 2000 and
1999 (unaudited)........................................................................... 2
Consolidated Statements of Operations For the Nine Months Ended September 30, 2000 and
1999 (unaudited)........................................................................... 3
Consolidated Statement of Stockholders' Equity (Deficit) For the Nine Months Ended
September 30, 2000 (unaudited)............................................................. 4
Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2000 and
1999 (unaudited)........................................................................... 5
Notes to Consolidated Financial Statements (unaudited)..................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................. 42
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................... 43
Item 2. Changes in Securities and Use of Proceeds.................................................. 43
Item 6. Exhibits and Reports on Form 8-K........................................................... 44
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MICROSTRATEGY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
September December
30, 2000 31, 1999
-----------------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents ......................................................... $ 38,704 $ 25,941
Restricted cash ................................................................... 26,220 --
Short-term investments ............................................................ 2,364 42,418
Accounts receivable, net .......................................................... 39,465 37,586
Prepaid expenses and other current assets ......................................... 14,148 15,461
--------- --------
Total current assets ........................................................... 120,901 121,406
Property and equipment, net ......................................................... 61,655 30,594
Long term investments ............................................................... 5,261 --
Intangible assets, net of accumulated amortization of $13,449 and $503, respectively 38,295 47,154
Deposits and other assets ........................................................... 15,951 4,214
--------- ---------
Total assets ................................................................... $ 242,063 $ 203,368
========= =========
Liabilities and Stockholders'Equity
Current liabilities:
Accounts payable and accrued expenses ............................................. $ 42,382 $ 15,357
Accrued compensation and employee benefits ........................................ 19,142 14,912
Deferred revenue and advance payments ............................................. 47,070 38,028
--------- ---------
Total current liabilities ...................................................... 108,594 68,297
Deferred revenue and advance payments ............................................... 29,023 33,255
Accrued litigation settlement ....................................................... 123,950 --
Other long-term liabilities ......................................................... 2,710 --
--------- ---------
Total liabilities .............................................................. 264,277 101,552
--------- ---------
Commitments and contingencies (Notes 9 and 10)
Series A convertible preferred stock, par value $0.001 per share, 18 shares
authorized, 13 shares issued and outstanding ............................... 119,667 --
Stockholders' equity:
Preferred stock undesignated, par value $0.001 per share, 4,982 shares
authorized; no shares issued or outstanding .................................... -- --
Class A common stock, par value $0.001 per share, 330,000 shares authorized;
24,994 and 22,384 shares issued and outstanding, respectively ................. 25 22
Class B common stock, par value $0.001 per share, 165,000 shares authorized;
55,147 and 55,867 shares issued and outstanding, respectively ................. 55 56
Additional paid-in capital ........................................................ 150,319 138,943
Accumulated other comprehensive (loss) income ..................................... (415) 1,643
Deferred compensation ............................................................. (692) (895)
Accumulated deficit ............................................................... (291,173) (37,953)
--------- ---------
Total stockholders' (deficit) equity ........................................... (141,881) 101,816
--------- ---------
Total liabilities and stockholders' equity ..................................... $ 242,063 $ 203,368
========= =========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
1
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 2000 and 1999
(in thousands, except per share data)
Three Months Ended
September 30,
2000 1999
----------------
(unaudited) (unaudited)
Revenues:
Product licenses .......................................................... $ 28,124 $ 18,159
Product support and other services ........................................ 36,731 17,150
--------- --------
Total revenues .......................................................... 64,855 35,309
Cost of revenues:
Product licenses .......................................................... 120 844
Product support and other services ........................................ 26,153 9,023
--------- --------
Total cost of revenues .................................................. 26,273 9,867
--------- --------
Gross profit ................................................................. 38,582 25,442
--------- --------
Operating expenses:
Sales and marketing ....................................................... 36,419 24,324
Research and development .................................................. 16,031 8,082
General and administrative ................................................ 17,108 6,223
Amortization of intangible assets ......................................... 4,798 20
Restructuring and related charges ......................................... 10,835 --
--------- --------
Total operating expenses ................................................ 85,191 38,649
--------- --------
Loss from operations ......................................................... (46,609) (13,207)
Financing & other income (expense):
Net interest .............................................................. 1,360 594
Loss on investments ....................................................... (8,985) --
Provision for litigation settlement ....................................... (113,700) --
Other income (expense), net ............................................... 56 (6)
-------- --------
Total financing & other income (expense) ................................ (121,269) 588
-------- --------
Loss before income taxes ..................................................... (167,878) (12,619)
Provision for income taxes ................................................... 350 155
--------- --------
Net loss ..................................................................... $(168,228) $(12,774)
--------- --------
Accrued preferred stock dividends ............................................ $ (2,188) $ --
--------- --------
Net loss attributable to common stockholders ................................. $(170,416) $(12,774)
========= ========
Basic and diluted net loss per share ......................................... $ (2.13) $ (0.17)
========= ========
Weighted average shares used in computing basic and diluted net loss per share 79,975 76,723
The accompanying notes are an integral part of these
Consolidated Financial Statements.
2
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 2000 and 1999
(in thousands, except per share data)
Nine Months Ended
September 30,
2000 1999
----------------------
(unaudited) (unaudited)
Revenues:
Product licenses .......................................................... $ 75,964 $ 59,754
Product support and other services ........................................ 89,850 45,342
--------- ---------
Total revenues .......................................................... 165,814 105,096
Cost of revenues:
Product licenses .......................................................... 1,117 1,927
Product support and other services ........................................ 63,690 23,538
--------- ---------
Total cost of revenues .................................................. 64,807 25,465
--------- ---------
Gross profit ................................................................. 101,007 79,631
--------- ---------
Operating expenses:
Sales and marketing ....................................................... 116,274 62,243
Research and development .................................................. 48,044 19,231
General and administrative ................................................ 46,611 15,731
Amortization of intangible assets ......................................... 12,946 61
Restructuring and related charges ......................................... 10,835 --
--------- ---------
Total operating expenses ................................................ 234,710 97,266
--------- ---------
Loss from operations ......................................................... (133,703) (17,635)
Financing & other income (expense):
Net interest .............................................................. 2,251 1,626
Loss on investments ....................................................... (7,629) --
Provision for litigation settlement ....................................... (113,700) --
Other income .............................................................. 161 26
--------- ---------
Total financing & other income (expense) ............................... (118,917) 1,652
--------- ---------
Loss before income taxes ..................................................... (252,620) (15,983)
Provision for income taxes ................................................... 600 598
--------- ---------
Net loss ..................................................................... $(253,220) $ (16,581)
--------- ---------
Accrued preferred stock dividends ............................................ $ (2,500) $ --
Beneficial conversion feature ................................................ $ (19,375) $ --
--------- ---------
Net loss attributable to common stockholders ................................. $(275,095) $ (16,581)
========= =========
Basic and diluted net loss per share ......................................... $ (3.46) $ (0.22)
========= =========
Weighted average shares used in computing basic and diluted net loss per share 79,546 75,420
========= =========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
3
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Nine Months Ended September 30, 2000
(in thousands)
(unaudited)
Accumulated Other
Comprehensive
Income (Loss)
--------------------
Unrealized Foreign
Class A Class B Additional Gain on Currency Accumu- Deferred
Common Stock Common Stock Paid-in Short-term Translation lated Comp-
Shares Amount Shares Amount Capital Investments Adjustment Deficit ensation Total
----------------------------------------------------------------------------------------------
Balance at December 31, 1999. 22,384 $ 22 55,867 $ 56 $ 138,943 $ 1,367 $ 276 $ (37,953) $ (895)$ 101,816
------ ------ ------ ----- --------- -------- ------ --------- ------- ---------
Net loss.................... -- -- -- -- -- -- -- (253,220) -- (253,220)
Unrealized loss on short-term
investments, net of applicable
taxes....................... -- -- -- -- -- (1,336) -- -- -- (1,336)
Foreign currency translation
adjustment.................. -- -- -- -- -- -- (722) -- -- (722)
--------
Comprehensive loss.......... -- -- -- -- -- -- -- -- -- (255,278)
Conversion of Class B to
Class A common stock........ 720 1 (720) (1) -- -- -- -- -- --
Issuance of Class A common
stock under stock option and
purchase plans.............. 1,833 2 -- -- 7,790 -- -- -- -- 7,792
Stock issued in connection
with consulting services
agreement................... 57 -- -- -- 1,600 -- -- -- -- 1,600
Capital contribution
related to stockholder
stock grant..... -- -- -- -- 3,003 -- -- -- -- 3,003
Acceleration of vesting
provisions on stock
options............ -- -- -- -- 1,483 -- -- -- -- 1,483
Preferred stock dividends... -- -- -- -- (2,500) -- -- -- -- (2,500)
Amortization of deferred
stock compensation.......... -- -- -- -- -- -- -- -- 203 203
Balance at September 30,2000 24,994 $ 25 55,147 $ 55 $ 150,319 $ 31 $ (446) $(291,173) $ (692)$(141,881)
====== ====== ====== ===== ========= ===== ====== ========= ======== =========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
4
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2000 and 1999
(in thousands)
Nine Months Ended
September 30,
2000 1999
-------------------
(unaudited) (unaudited)
Operating activities:
Net loss ........................................................................ $(253,220) $(16,581)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ................................................. 23,732 4,902
Provision for doubtful accounts ............................................... 4,022 1,039
Amortization of deferred compensation ......................................... 203 201
Loss on other than temporary decline in investments ........................... 10,359 --
Gain on hedging transaction ................................................... (1,375) --
Gain on sale of short-term investments ........................................ (1,355) --
Compensation expense recognized on stockholder stock grant .................... 3,003 --
Compensation expense on accelerated options ................................... 1,483 --
Provision for litigation settlement ........................................... 113,700 --
Changes in operating assets and liabilities:
Accounts receivable ......................................................... (7,076) (6,045)
Prepaid expenses and other current assets ................................... 1,968 (1,670)
Deposits and other assets ................................................... (1,576) (377)
Accounts payable and accrued expenses, compensation and benefits ............ 29,588 3,691
Deferred revenue and advance payments ....................................... (7,480) 10,914
Other long-term liabilities ................................................. 1,508 --
--------- --------
Net cash used in operating activities .................................... (82,516) (3,926)
--------- --------
Investing activities:
Purchases of property and equipment ............................................. (41,564) (20,078)
Purchases of short-term investments ............................................. (1,496) (24,492)
Purchases of long-term investments .............................................. (5,011) --
Maturities of short-term investments ............................................ 5,500 3,000
Proceeds from sale of short-term investments .................................... 38,388 --
Proceeds from realized gain on hedging transaction .............................. 1,375 --
Increase in restricted cash ..................................................... (26,220) --
Purchases of intangible assets .................................................. (2,443) --
--------- --------
Net cash used in investing activities ...................................... (31,471) (41,570)
--------- --------
Financing activities:
Proceeds from sale of Class A common stock and exercise of stock options, net of
offering costs ................................................................ 7,792 45,624
Proceeds from sale of Series A convertible preferred stock, net of offering costs 119,667 --
Payments of dividend notes payable .............................................. -- (5,000)
--------- --------
Net cash provided by financing activities .................................. 127,459 40,624
--------- --------
Effect of foreign exchange rate changes on cash and cash equivalents ....... (709) (239)
--------- --------
Net increase (decrease) in cash and cash equivalents ............................... 12,763 (5,111)
Cash and cash equivalents, beginning of period ..................................... 25,941 27,491
--------- --------
Cash and cash equivalents, end of period ........................................... $ 38,704 $ 22,380
========= ========
Supplemental disclosure of noncash investing and financing activities:
Change in unrealized gain on short-term investments, net of tax ................. $ (1,336) $ (114)
========= ========
Stock received in exchange for products and services ............................ $ 12,556 --
========= ========
Issuance of Class A common stock related to consulting services agreement ....... $ 1,600 $ --
========= ========
Preferred stock dividends ....................................................... $ 2,500 $ --
========= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest ........................................ $ 26 $ 87
========= ========
Cash paid during the period for income taxes .................................... $ 160 $ 2,113
========= ========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
5
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) Basis of Presentation
The consolidated balance sheet of MicroStrategy Incorporated
("MicroStrategy" or the "Company") as of September 30, 2000, the related
consolidated statements of operations for the three and nine months ended
September 30, 2000 and 1999, the consolidated statement of stockholders' equity
(deficit) for the nine months ended September 30, 2000, and the consolidated
statements of cash flows for the nine months ended September 30, 2000 and 1999
are unaudited. In the opinion of management, all adjustments (consisting of
normal recurring items) necessary for a fair presentation of such financial
statements have been included. Interim results are not necessarily indicative of
results for a full year.
The consolidated financial statements and notes are presented as required
by Form 10-Q and do not contain certain information included in the Company's
annual financial statements and notes. These financial statements should be read
in conjunction with the Company's audited financial statements and the notes
thereto filed with the Securities and Exchange Commission ( "SEC ") in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
Certain amounts in the prior year consolidated financial statements have
been reclassified to conform to the current year presentation.
Subsequent to the filing of a registration statement on Form S-3 with the
SEC in the first quarter of 2000 which included the Company's audited financial
statements for the years ended December 31, 1999, 1998 and 1997, the Company
became aware that the timing and amount of reported earned revenues from license
transactions in 1999, 1998 and 1997 required revision.
As discussed in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999 in Note 3 of the Notes to Consolidated Financial Statements,
these revisions primarily addressed the recognition of revenue for certain
software arrangements which should be accounted for under the subscription
method or the percentage of completion method. The Company also reviewed license
agreements executed near the end of each quarter and determined that revisions
to its reported revenues were necessary, primarily to ensure that all agreements
for which the Company was recognizing revenue in a reporting period were
executed by both parties no later than the end of the reporting period in which
the revenue is recognized. The amounts reported in the financial statements
related to 1999 are the restated amounts.
(2) Recent Accounting Pronouncements
In December 1999, the SEC released Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition in Financial Statements," which provides guidance on
the recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. Subsequently, the SEC released SAB 101A, which delayed the
implementation date of SAB 101 for registrants with fiscal years that begin
between December 16, 1999 and March 15, 2000. In June 2000, the SEC issued SAB
101B, further delaying the required implementation of SAB 101 by the Company
until the fourth quarter of fiscal year 2000. The Company does not expect the
application of SAB 101 to have a material impact on its financial position or
results of operations.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation ("FIN") No. 44, "Accounting for Certain Transactions
Involving Stock Compensation - An Interpretation of APB Opinion No. 25." FIN 44
clarifies the application of APB Opinion No. 25 and, among other issues,
clarifies the following: the definition of an employee for purposes of applying
APB Opinion No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequence of various modifications to
the terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 was
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The
application of FIN 44 did not have a material impact on its financial position
or results of operations.
6
In June 1999, FASB issued Statement of Financial Accounting Standards
("SFAS") No. 137, which delays the effective date of SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," which will be effective for
the fiscal year 2001. This statement establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
also requires that changes in the derivative's fair value be recognized in
earnings unless specific hedge accounting criteria are met. The Company does not
expect the adoption of SFAS Nos. 133 and 137 to have a material impact on its
financial position or results of operations.
(3) Restructuring and Related Charges
In the third quarter of 2000, the Company's Board of Directors approved and
the Company announced a restructuring plan designed to bring costs more in line
with revenues and strengthen the financial performance of the business.
The restructuring plan includes a reduction of the Company's workforce by
231 or approximately 10% of the worldwide headcount and the cancellation of a
number of new jobs for which candidates had not yet started with the Company.
All of these actions were completed prior to September 30, 2000. As a result of
the reduction in headcount, the Company plans to consolidate its operations in
the vicinity of its Northern Virginia headquarters. In addition, the Company is
reducing or eliminating certain quarterly corporate events, including the
cancellation of its annual cruise. Finally, the Company is reducing expenditures
on external consultants and contractors across all functional areas. The Company
anticipates annual savings of approximately $25 million as a result of these
actions.
In connection with this restructuring plan, the Company incurred severance
costs for terminated employees and costs for rescinded offers of employment,
accelerated the vesting provisions of certain stock option grants, wrote-off
certain assets that are no longer of service, and accrued related professional
fees. In addition, Michael J. Saylor, the chairman and CEO of the Company, made
grants of the Company's Class A common stock to terminated employees from his
personal stock holdings. Since he is a principal shareholder of the Company, his
actions are deemed to be an action undertaken on behalf of the Company for
accounting purposes. Accordingly, the Company recognized an expense and a
capital contribution by Mr. Saylor for approximately $3.0 million, which
represents the fair value of the stock on the date of grant.
The Company also recognized a liability related to its commitments
associated with the annual cruise that the Company will no longer sponsor.
The following table sets forth a summary of these restructuring costs and
related charges (in thousands):
Severance & rescinded employment offers ......... $ 2,854
Stock grant & applicable payroll taxes .......... 3,192
Compensation expense on accelerated stock options 1,483
Elimination of corporate events ................. 2,838
Write-off of impaired assets .................... 360
Accrual for professional fees ................... 108
-------
Total restructuring expense ..................... $10,835
=======
Included in the $10.8 million restructuring charge incurred in the third
quarter of 2000 are $6.2 million of cash costs and $4.6 million in non-cash
related costs. Substantially all restructuring costs and related charges have
been paid as of September 30, 2000.
7
(4) Short-term Investments
In December 1999, the Company received 824,742 shares of Exchange
Applications, Inc. ("Exchange Applications") stock valued at $21.5 million, in
consideration for the sale of MicroStrategy software, technical support and
consulting services. The Company sold all of its economic interest in these
shares for a net realized gain of $1.5 million during the first two quarters of
2000.
In the current year, the Company received an additional 485,067 shares of
Exchange Applications' stock, valued at $12.6 million, in consideration for the
sale of MicroStrategy software, technical support and consulting services.
On September 29, 2000, Exchange Applications announced that third quarter
results would not meet expectations, resulting in a significant decrease in the
market value of their stock. The timing and amount of any future recovery, if
any, of this asset is uncertain and the Company does not consider the decline in
value to be temporary. Accordingly, the Company has written down the investment
to its fair value at September 30, 2000, and recognized a loss of $10.4 million
in the third quarter. This loss was partially offset by a hedging transaction
that resulted in a gain of $1.4 million in the third quarter of 2000.
(5) Accounts Receivable
Accounts receivable, net of allowances, consist of the following, as of (in
thousands):
September 30, December 31,
2000 1999
------------------------
Billed and billable ................ $ 82,447 $ 66,181
Less deferred revenue .............. (35,667) (25,266)
-------- --------
46,780 40,915
Less allowance for doubtful accounts (7,315) (3,329)
-------- --------
$ 39,465 $ 37,586
======== ========
(6) Consulting Services Agreement
In June 2000, the Company entered into a consulting services agreement with
the controlling stockholder of a software integrator. The agreement requires the
controlling stockholder to refer the employees of the software integrator to the
Company and also to perform certain consulting services for the Company. In
exchange for these services, the Company issued 57,143 shares of Class A common
stock to the controlling stockholder, which had a value of $1.6 million as of
the consummation date and which are restricted until registered with the
Securities and Exchange Commission (SEC). The Company will issue up to $3.4
million in additional shares of Class A common stock over the next two years at
the then current market price of the Class A common stock on the date of
issuance based on an agreed upon formula including revenue and attrition
objectives. The Company recorded the initial issuance of stock as an intangible
asset in the amount of $1.6 million and has recognized $251,000 of amortization
expense through September 30, 2000. The first installment will be amortized over
the duration of the consulting services of two years.
8
(7) Bank Borrowings
In March 1999, the Company entered into a line of credit agreement with a
commercial bank, which provided for a $25.0 million unsecured revolving line of
credit for general working capital purposes. In May 2000, the Company entered
into a modification of the line of credit agreement, which, among other things,
increased the line to include an additional line of credit, removed any
financial covenants and cured any financial covenant defaults. The line of
credit is secured by $26.2 million of cash and cash equivalents, which is
classified as restricted cash on the consolidated balance sheet. The cash is
restricted through May 31, 2001, the expiration of the agreement. The modified
line of credit bears interest at LIBOR plus 1.75%, includes a 0.2% unused line
of credit fee, and requires monthly payments of interest. As of September 30,
2000, after consideration of outstanding letters of credit, the Company had
$18.7 million of borrowing capacity under this credit line.
(8) Deferred Revenue and Advance Payments
Deferred revenue and advance payments from customers consist of the
following, as of (in thousands):
September 30, December 31,
2000 1999
----------------------
Current:
Deferred product revenue .......................... $ 31,094 $ 38,164
Deferred product support and other services revenue 41,133 24,267
-------- --------
72,227 62,431
Less amount in accounts receivable ................ (25,157) (24,403)
-------- --------
$ 47,070 $ 38,028
======== ========
Non-current:
Deferred product revenue .......................... $ 19,035 $ 9,461
Deferred product support and other services revenue 20,498 24,657
-------- --------
39,533 34,118
Less amount in accounts receivable ................ (10,510) (863)
-------- --------
$ 29,023 $ 33,255
======== ========
(9) Commitments and Contingencies
The Company has $3.4 million in commitments with content providers, which
extend through 2003.
(10) Litigation
The Company and certain of its officers and directors are defendants in a
private securities class action lawsuit alleging that they have violated Section
10(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
Rule 10(b)(5) promulgated thereunder, and Section 20(a) and Section 20A of the
Exchange Act in connection with various statements that were made with respect
to the 1997, 1998 and 1999 financial results. The action has been consolidated
in the United States District Court for the Eastern District of Virginia. The
class action complaint does not specify the amount of damages sought. In June
2000, purported holders of the Company's common stock filed a shareholder
derivative lawsuit in the Delaware Court of Chancery seeking recovery for
various alleged breaches of fiduciary duties by certain directors and officers
relating to the restatement of financial results for 1997, 1998 and 1999.
9
In October, 2000, the Company entered into agreements to settle these
lawsuits. Both settlements are subject to confirmatory discovery, final
documentation, court approval and certain other conditions.
Under the class action settlement agreements, class members will receive:
1) five-year unsecured promissory notes issued by the Company having an
aggregate principal amount of $80.5 million and bearing interest at 7.5% per
year; 2) 550,000 shares of the Company's Class A common stock, with the number
of shares to be increased if the market value of the shares, based on the dollar
weighted average trading price during a specified trading period prior to the
district court settlement hearing, is less than $30 per share so that the
minimum value of the shares is $16.5 million; and 3) warrants issued by the
Company to purchase 1.9 million shares of the Company's Class A common stock at
an exercise price of $50 per share, with the warrants expiring five years from
the date they are issued.
The Company will have the right, at any time, to prepay the promissory
notes, or to mandatorily convert the promissory notes into shares of the
Company's Class A common stock at a conversion price equal to 80% of the dollar
weighted average trading price per share for all round lot transactions in the
Company's stock on the Nasdaq National Market for the ten trading days ending
two days prior to the date that written notice of conversion has been given. The
warrants may be exercised for cash or by tendering promissory notes valued for
the purpose of warrant exercise at 133% of their principal amount plus accrued
interest.
Under the derivative settlement agreement, the Company will add a new,
independent director with finance experience to the audit committee of its Board
of Directors and will ensure continued adherence with applicable legal and
regulatory requirements regarding the independence of audit committee members
and trading by insiders. In addition, certain officers of the Company will
contribute a portion of the shares of the Company's Class A common stock to be
issued to class members in settlement of the class action lawsuit. Specifically,
Michael J. Saylor, Sanju K. Bansal and Mark S. Lynch will contribute to the
class action settlement shares of Class A common stock with a total value of $10
million.
These settlement agreements provide the Company the ability to estimate the
value, for accounting purposes, of the liability related to these actions.
Accordingly, the Company separately evaluated the individual components of the
settlement agreements in consideration of existing market conditions and
established an estimate for the cost of the litigation settlement. The details
of this estimate are as follows (in thousands):
Issuance of debt securities ....... $ 69,200
Issuance of Class A common stock .. 16,500
Issuance of warrants .............. 37,500
Legal fees ........................ 2,875
Administration costs............... 750
---------
Total ............................. 126,825
Less insurance recoveries ......... (13,125)
---------
Net estimated litigation settlement $ 113,700
=========
The Company has recorded the unpaid amounts of $124.0 million in the
accompanying consolidated balance sheet as a long-term liability pending
approval by the courts and satisfaction of certain other conditions and $1.6
million in accounts payable and accrued expenses related to amounts due
currently. In addition, the Company recorded $11.9 million in deposits and other
assets related to amounts still receivable from insurance companies. Other
amounts have been paid by the insurance company. Upon issuance of the
securities, the Company will record such amounts as liabilities or stockholders'
equity based on the nature of the individual securities.
The final value of the settlements may differ significantly from the
estimates currently recorded depending on a variety of factors including the
market value of the Company's stock when issued and potential changes in market
conditions affecting the valuation of the other securities. Additionally, the
settlements are contingent on confirmatory discovery, final documentation, court
approval and certain other conditions. Accordingly, the Company will revalue the
estimate of the settlement on a quarterly basis and at the time the securities
are issued.
10
In March 2000, the Company was notified that the SEC had issued a formal
order of private investigation in connection with matters relating to the
Company's restatement of its financial results. The SEC indicated that its
inquiry should not be construed as an indication by the SEC or its staff that
any violation of law has occurred, or as an adverse reflection upon any person,
entity or security. The Company is cooperating with the SEC in connection with
this investigation and its outcome cannot yet be determined.
The Company is also involved in other legal proceedings through the normal
course of business. Management believes that any unfavorable outcome related to
these other proceedings will not have a material effect on the Company's
financial position, results of operations or cash flows.
(11) Convertible Preferred Stock
On June 19, 2000, the Company issued 12,500 shares of its Series A
convertible preferred stock in a private placement to institutional investors
for $119.7 million, net of estimated closing costs of $5.3 million. Dividends
are payable quarterly at a rate of 7% per annum, in cash or in shares of Class A
common stock. The convertible preferred stock is currently convertible into
3,744,152 shares of Class A common stock based on the current conversion price
of $33.39 per share. The conversion price may be adjusted at certain future
dates dependent upon the trading price of the Class A common stock and an agreed
upon formula. The convertible preferred stock is also redeemable upon certain
triggering events such as failure of the registration statement to be declared
effective on or before the first anniversary of the initial issuance date and
other events as defined in the Certificate of Designations, Preferences and
Rights of the Series A Convertible Preferred Stock.
During the second quarter of 2000, the Company recorded a $19.4 million
charge attributable to the beneficial conversion feature of the Series A
convertible preferred stock based on the difference between the fair market
value of the Class A common stock on the closing date of the private placement
and the conversion rate. The conversion rate was computed based on the volume
weighted average price of the stock for the 17 trading days subsequent to the
closing date in accordance with the Certificate of Designations, Preferences and
Rights of the Series A Convertible Preferred Stock.
The Company has accrued dividends of $2.2 million and $2.5 million during
the three months and nine months ended September 30, 2000, respectively.
(12) Basic and Diluted Net Loss Per Share
Basic net loss per share is determined by dividing the net loss applicable
to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted net loss per share is determined by
dividing the net loss applicable to common stockholders by the weighted average
number of common shares and potential common shares outstanding during the
period. Potential common shares are included in the diluted net loss per share
calculation when dilutive. Potential common shares consisting of common stock
issuable upon exercise of outstanding common stock options, convertible
preferred stock and warrants are computed using the treasury stock method. The
Company's net loss per share calculation for basic and diluted is based on the
weighted average common shares outstanding. There are no reconciling items in
the numerator and denominator of the Company's net loss per share calculation.
Employee stock options of 15,091,353 and 12,390,738 and warrants of 78,334 and
114,000 for the three and nine month periods ended September 30, 2000 and 1999,
respectively, have been excluded from the net loss per share calculation because
their effect would be anti-dilutive. Additionally, Series A convertible
preferred stock, which is convertible into 3,744,152 shares of Class A common
stock, was excluded from the net loss per share calculation for the three and
nine months ended September 30, 2000 because their effect would be anti-
dilutive.
11
(13) Segment Information
The Company applies provisions of SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information." SFAS No. 131 requires certain
disclosures about operating segments, products and services, geographic areas,
and major customers. The method for determining what information to report is
based on the way that management organizes the operating segments within the
Company for making operational decisions and assessments of financial
performance. The Company's chief operating decision maker is considered to be
the Company's CEO. The CEO reviews financial information presented on a
consolidated basis accompanied by disaggregated information about revenues by
operating segments for purposes of making operating decisions and assessing
financial performance.
The Company has two operating segments, MicroStrategy Platform and
Strategy.com. MicroStrategy Platform provides scalable, sophisticated and
maintainable solutions that enable businesses to develop and deploy intelligent
e-business systems. Revenues are derived from sales of product licenses and
product support and other services, including technical support, education and
consulting and hosting services. Strategy.com delivers personalized information
to consumers through its personal intelligence network via the web, wireless
applications, protocol-enabled devices, e-mail, mobile phones, faxes, pagers and
regular telephones. Strategy.com syndicates its channels through network
affiliates and offers them to consumers directly through its website. Revenues
are derived from network affiliate fees, OEM and subscription fees, royalty
fees, advertising fees, hosting fees, and transaction fees. The Company began
operating its business as two segments in the latter part of 1999. Revenues were
recognized for Strategy.com beginning in 2000. Prior years' segment information
has been restated to reflect the operations of Strategy.com.
The accounting policies of both segments are the same as those described in
the summary of significant accounting policies in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999. Certain corporate support costs
are allocated to Strategy.com based on factors such as headcount, gross asset
value and the specific level of activity directly related to such costs.
12
The following summary discloses certain financial information regarding the
Company's operating segments (in thousands):
MicroStrategy
Platform Strategy.com Consolidated
---------------------------------------
Three Months Ended September 30, 2000
Total license and service revenues ... $ 59,539 $ 5,316 $ 64,855
Gross profit ......................... 39,291 (709) 38,582
Depreciation and amortization ........ 7,947 1,534 9,481
Operating expenses ................... 72,033 13,158 85,191
Loss from operations ................. (32,741) (13,868) (46,609)
Total assets ......................... 218,880 23,183 242,063
Three Months Ended September 30, 1999
Total license and service revenues ... $ 35,309 $ -- $ 35,309
Gross profit ......................... 25,442 -- 25,442
Depreciation and amortization ........ 1,699 348 2,047
Operating expenses ................... 36,418 2,231 38,649
Loss from operations ................. (10,976) (2,231) (13,207)
Total assets ......................... 108,585 6,123 114,708
MicroStrategy
Platform Strategy.com Consolidated
------------------------------------------
Nine Months Ended September 30, 2000
Total license and service revenues .. $ 159,241 $ 6,573 $ 165,814
Gross profit ........................ 101,848 (841) 101,007
Depreciation and amortization ....... 20,417 3,315 23,732
Operating expenses .................. 198,279 36,431 234,710
Loss from operations ................ (96,431) (37,272) (133,703)
Total assets ........................ 218,880 23,183 242,063
Nine Months Ended September 30, 1999
Total license and service revenues .. $ 105,096 $ -- $ 105,096
Gross profit ........................ 79,631 -- 79,631
Depreciation and amortization ....... 4,438 464 4,902
Operating expenses .................. 93,482 3,784 97,266
Loss from operations ................ (13,851) (3,784) (17,635)
Total assets ........................ 108,585 6,123 114,708
The following summary discloses total revenues and long-lived assets,
excluding long-term deferred tax assets, relating to the Company's geographic
regions (in thousands):
Domestic International Consolidated
-----------------------------------
Three Months Ended September 30, 2000
Total license and service revenues ... $ 47,329 $17,526 $ 64,855
Long-lived assets .................... $117,862 $ 3,300 $121,162
Three Months Ended September 30, 1999
Total license and service revenues ... $ 24,873 $10,436 $ 35,309
Long-lived assets .................... $ 29,870 $ 1,989 $ 31,859
13
Domestic International Consolidated
--------------------------------------
Nine Months Ended September 30, 2000
Total license and service revenues .. $125,760 $40,054 $165,814
Long-lived assets ................... $117,862 $ 3,300 $121,162
Nine Months Ended September 30, 1999
Total license and service revenues .. $ 79,837 $25,259 $105,096
Long-lived assets ................... $ 29,870 $ 1,989 $ 31,859
Transfers of $2.2 million and $2.4 million for the three months ended
September 30, 2000 and 1999, respectively, and transfers of $6.5 million and
$5.5 million for the nine months ended September 30, 2000 and 1999,
respectively, from international to domestic operations have been excluded from
the above table and eliminated in the accompanying consolidated financial
statements.
(14) Subsequent Events
On October 30, 2000, the Company announced a strategic alliance with Aether
Systems, Inc. ("Aether"), a provider of wireless data products and services. The
alliance includes initiatives in four areas:
o The companies will develop a new product, MicroStrategy 7M(TM), that will
be designed to combine Aether's wireless technology with the functionality
and performance of the MicroStrategy 7(TM) platform to deliver
personalized, intelligent information services to a full range of wireless
devices.
o Aether Capital, the investment arm of Aether, will lead a $52.75 million
round of financing for Strategy.com with a $25 million investment.
Strategy.com is a subsidiary of MicroStrategy that helps companies connect
with their customers by delivering personalized, timely information via
web, wireless and voice communications channels.
o Aether Chairman and CEO Dave Oros will join the board of directors of
Strategy.com.
o Aether will offer Strategy.com services to its customers.
On October 18, 2000, Strategy.com issued 13,401,253 shares of Series A
convertible preferred stock in exchange for $42.75 million in an initial
closing. Strategy.com will issue an additional 3,134,796 shares to an investor
for proceeds of approximately $10 million, subject to the satisfaction of
certain conditions, in a second closing. The preferred stock is convertible on a
one-for-one basis into Class A common stock of Strategy.com. Upon completion of
the second closing, this round of financing will represent approximately 16% of
the economic interest in the outstanding equity of Strategy.com on an as
converted, diluted basis. The remaining 84% economic interest will continue to
be owned by the Company. The Company will have approximately 98% of the voting
interest in Strategy.com.
Immediately preceding this investment, the Company completed a
reorganization of the business, which resulted in the establishment of
Strategy.com as a stand-alone subsidiary. As part of this reorganization the
Company assigned rights to MicroStrategy software, certain contracts, employees
and intellectual property to Strategy.com in exchange for approximately 84.0
million shares of Class B common stock, which at the time represented all of the
outstanding common stock of Strategy.com. The Company also agreed to enter into
various intercompany agreements covering consulting services, sales and
marketing activities and administrative services to be provided by MicroStrategy
on behalf of Strategy.com.
In addition, Strategy.com has implemented a stock option plan that provides
for the issuance of options to purchase up to 17.2 million shares of Class A
common stock in Strategy.com. As of October, 2000, Strategy.com had committed to
issue approximately 5.1 million options under this plan to employees of
MicroStrategy and Strategy.com. The exercise price of the options will generally
be the fair market value of the Strategy.com Class A common stock on the day of
grant.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We are a leading worldwide provider of intelligent e-business software and
related services that enable the transaction of one-to-one electronic business
through web, wireless and voice communication channels. Our product line enables
both proactive and interactive delivery of information from large-scale
databases. Our objective is to provide the largest 2000 enterprises in the
world, leading Internet businesses and high-volume data providers with a
software platform to develop solutions that deliver insight and intelligence to
their enterprises, customers and supply-chain partners.
Our software platform enables users to query and analyze the most detailed,
transaction-level databases, turning data into business intelligence. In
addition to supporting internal enterprise users, the platform delivers critical
business information beyond corporate boundaries to customers, partners and
supply chain constituencies through a broad range of communication channels such
as the Internet, e-mail, telephones and wireless communications devices. Our
platform is ideal for developing e-business solutions that are personalized and
proactive and that reach millions of users. We also offer a comprehensive set of
consulting, education and technical support services for our customers and
partners.
In July 1999, we launched a new business unit called Strategy.com.
Strategy.com is our personal intelligence network, a new form of media that
brings speed to transactions by actively delivering highly personalized,
relevant and timely information to individuals through a wide variety of
delivery methods, including e-mail, telephone and wireless devices. The
Strategy.com network leverages the MicroStrategy software platform and is
organized around a suite of information channels. The network currently operates
Finance, News and Weather Channels and plans to launch additional information
channels in the future. Strategy.com syndicates its channels through other
companies that serve as network affiliates and network associates, which we
refer to collectively as affiliates. Affiliates offer the Strategy.com channels
and services on a co-branded basis directly to their customers and in turn share
with Strategy.com a percentage of revenues they generate. Strategy.com also
provides application maintenance, development, customer billing, hosting and
support services for these channels, enabling affiliates to focus on their core
businesses. Currently, Strategy.com has established over 230 network affiliate
agreements with leading Internet companies, communications carriers, media
companies and financial institutions and now has over 450,000 subscribers to its
Strategy.com network. In October 2000, Strategy.com received financing through
the sale of convertible preferred stock to investors. Upon the completion of
this round of financing, the investors will own approximately 16% of the
economic interest in the outstanding equity of Strategy.com on an as converted,
diluted basis and Strategy.com will have received aggregate proceeds of
approximately $52.75 million.
Since 1995, we have significantly increased our sales and marketing,
service and support, research and development and general and administrative
staff. Although our revenues have significantly increased over the last three
years, we experienced fluctuating operating margins during 1997, 1998 and 1999
primarily as a result of increases in staff levels. Our net loss increased
substantially during 2000, as our growth in revenues, and particularly higher
margin product license revenues, decreased substantially, while our expenses
have significantly increased due primarily to aggressive hiring of additional
personnel and increased legal and professional fees relating to class action
lawsuits and an SEC investigation in connection with matters relating to our
restatement of our 1999, 1998 and 1997 financial statements, described in Note 1
of the Notes to Consolidated Financial Statements.
Our net loss expanded significantly in the quarter ended September 30, 2000
to $168.2 million as we recorded the following charges: (1) a $113.7 million
expense associated with an agreement to settle outstanding class action and
derivative shareholder lawsuit litigation (of which approximately $3.6 million
is a cash charge for legal fees and administration costs and approximately
$110.1 million is a non-cash charge); (2) a $10.8 million charge related to
restructuring activities; and (3) a $10.4 million write down of investments.
These matters are discussed in more detail below and in the Notes to
Consolidated Financial Statements.
15
Our revenues historically have been derived from two principal sources,
fees for product licenses and fees for maintenance, technical support, education
and consulting services, which we refer to collectively as product support and
other services. We recognize revenue in accordance with Statement of Position
("SOP") 97-2, "Software Revenue Recognition," as amended by SOP 98-4, "Deferral
of the Effective Date of a Provision of SOP 97-2" and SOP 98-9, "Modification of
SOP 97-2, Software Revenue Recognition," and SOP 81-1, "Accounting for
Performance of Construction-Type and Certain Production-Type Contracts," as
applicable.
Product license revenues are generally recognized upon the execution of a
contract and shipment of the related software product if no significant
obligations remain outstanding on our part and the resulting receivable is
deemed collectible by management.
Technical support revenues are derived from customer support agreements
generally entered into in connection with initial product license sales and
subsequent renewals. Fees for our technical support services are recorded as
deferred revenue when paid by the customer and recognized ratably over the term
of the maintenance and support agreement, which is typically one year. We also
record as deferred revenue the fair value of implicit maintenance arrangements
when resellers or other customers that sell our software to end users offer
these end users the right to receive the then current version of our software at
the time of resale. Certain of these agreements extend over several years. Fees
for our education and consulting services are typically recognized at the time
the services are performed.
Revenues recognized from multiple-element software arrangements are
allocated to each element of the arrangement based on the relative fair values
of the elements, such as software products, upgrades, enhancements, technical
support, installation or education. The determination of fair value of each
element is based on objective evidence based on historical sales of the
individual element by us to other customers. If such evidence of fair value for
each element of the arrangement does not exist, all revenue from the arrangement
is deferred until such time that evidence of fair value does exist or until all
elements of the arrangement are delivered.
Customers at times require consulting and implementation services, which
include evaluating their business needs, identifying resources necessary to meet
their needs and installing the solution to fulfill their needs. When the
software license arrangement requires us to provide significant consulting
services to produce, customize or modify software or when the customer considers
these services essential to the functionality of the software product, both the
product license revenue and product support and other services revenue are
recognized in accordance with the provisions of SOP 81-1. We recognize revenue
from these arrangements using the percentage of completion method and,
therefore, both product license and product support and other services revenue
are recognized as work progresses. If the software license arrangement obligates
us to the delivery of unspecified future products, then revenue is recognized on
the subscription basis, ratably over the term of the contract.
Beginning initially in the fourth quarter of 1998 we began to sell our
products and services to customers for large scale e-commerce applications and
have continued to enter into similar transactions through the current quarter.
In contrast to earlier periods in which our typical customer transaction
involved a stand-alone software license and maintenance, these transactions
typically involve multiple software products and services for use by very large
numbers of end users across web, wireless and voice communications channels, and
often incorporate elements from our Strategy.com network. These multiple element
transactions also often include significant implementation and other consulting
work and may also include our providing the customer with hosting services, in
which we manage the operation of hosting the customer's specific e-commerce
application. Customers often use our products and services in a variety of ways,
including internal use, integration with their own products for resale to end
users and creation of e-commerce applications. These arrangements typically lead
to our recording revenue from multiple sources, including product license fees,
product support fees and royalties based on advertising, e-commerce transactions
or the resale of solutions that incorporate our software platform.
These large, multiple element transactions typically involve more complex
licensing and product support arrangements than the software licensing and
product support arrangements that comprised the bulk of our revenues in earlier
periods. Based on the revenue recognition criteria established in SOP 97-2 and
SOP 81-1, revenue from many of these large, multiple element contracts is not
recognizable upon full execution and delivery of the software product as in the
past, but instead is initially recorded as deferred revenue upon receipt of
16
cash, with product revenue recognized using the percentage of completion method
based on cost inputs or ratably over the entire term of the contract. As a
result of the size and complexity of these transactions, our results for any
quarter may depend significantly on the types of customer transactions that we
enter into during the quarter and on the mix of product licenses, support
agreements, implementation work and other specific terms of each transaction,
each of which may have a significant effect on the manner in which we recognize
revenue from the transaction.
The sales cycle for our products may span nine months or more.
Historically, we have recognized a substantial portion of our revenues in the
last month of a quarter, with these revenues frequently concentrated in the last
two weeks of a quarter. Even minor delays in booking orders may have a
significant adverse impact on revenues for a particular quarter. To the extent
that delays are incurred in connection with orders of significant size, the
impact will be correspondingly greater. Product license revenues in any quarter
can be dependent on orders booked and shipped in that quarter. Due to a business
slowdown during the summer, particularly in Europe, our third quarter sequential
growth rate in revenues historically has been, and may continue to be, less than
the sequential growth rate in other quarters. As a result of these and other
factors, our quarterly results have varied significantly in the past and are
likely to fluctuate significantly in the future. Accordingly, we believe that
quarter-to-quarter comparisons of our results of operations are not necessarily
indicative of the results to be expected for any future period.
We license our software through our direct sales force and increasingly
through, or in conjunction with, value-added resellers, system integrators and
original equipment manufacturers. Channel partners accounted for, directly or
indirectly, approximately 40%, 39%, 34% and 27% of our product license revenues
for the nine months ended September 30, 2000 and the years ended December 31,
1999, 1998 and 1997, respectively. Although we believe that direct sales will
continue to account for a majority of product license revenues, we intend to
increase the level of indirect sales activities. However, there can be no
assurance that our efforts to continue to expand indirect sales will be
successful. We also intend to continue to expand our international operations
and have committed, and continue to commit, management time and financial
resources to developing direct and indirect international sales and support
channels.
We recently implemented a new multi-channel distribution strategy and
product-pricing plan designed to expand our customer base, improve operating
efficiency and decrease the length of sales cycles. The strategy includes the
use of the web as a channel for distributing products where new and existing
customers can test our software on a demonstration basis and configure, upgrade
and order software directly online via a standard pricing model. In addition, we
will now provide complimentary development software for all potential customers
and qualified partners.
Recognizing the need to bring operating expenses in line with our revenue
expectations, during the third quarter we developed and implemented a
restructuring plan that called for the elimination of 231 employees or
approximately 10% of our workforce. We also rescinded approximately 230 offers
of employment, reduced various Company-sponsored events for employees, limited
the use of external contractors and consultants and developed a plan to
consolidate facilities. To implement these actions we made severance payments to
employees, incurred costs for rescinded job offers, recognized expenses
associated with stock grants and the acceleration of vesting provisions of stock
options and recorded a liability for commitments related to Company-sponsored
events. These costs totaled $10.8 million. We expect that annualized savings
from these actions will approximate $25.0 million and will contribute to slowing
the growth of our sales and marketing expenses and our general and
administrative expenses.
Our operations and prospects have been and will be significantly affected
by the developments relating to our revision to our 1999, 1998 and 1997
financial statements described in Note 1 of the Notes to Consolidated Financial
Statements. We and certain of our officers and directors are defendants in a
class action lawsuit alleging violations of various securities laws and certain
of our officers and directors are defendants in a shareholder derivative lawsuit
alleging that they breached their fiduciary duties related to our restated
financial statements. In addition, in March 2000, we were notified that the SEC
had issued a formal order of private investigation in connection with matters
relating to our restatement of our financial results.
17
In October , 2000, we entered into agreements to settle the class action
and shareholder derivative lawsuits. Both settlements are subject to
confirmatory discovery, final documentation, court approval and certain other
conditions.
Under the class action settlement agreement, class members will receive: 1)
five-year unsecured promissory notes issued by the Company having an aggregate
principal amount of $80.5 million and bearing interest at 7.5% per year; 2)
550,000 shares of the Company's Class A common stock, with the number of shares
to be increased if the market value of the shares, based on the dollar weighted
average trading price during a specified trading period prior to the district
court settlement hearing, is less than $30 per share so that the minimum value
of the shares is $16.5 million; and 3) warrants issued by the Company to
purchase 1.9 million shares of the Company's Class A common stock at an exercise
price of $50 per share, with the warrants expiring five years from the date they
are issued.
We will have the right, at any time, to prepay the promissory notes, or to
mandatorily convert the promissory notes into shares of the Company's Class A
common stock at a conversion price equal to 80% of the dollar weighted average
trading price per share for all round lot transactions in the stock on the
Nasdaq National Market for the ten trading days ending two days prior to the
date that written notice of conversion has been given. The warrants may be
exercised for cash or by tendering promissory notes valued for the purpose of
warrant exercise at 133% of their principal amount plus accrued interest.
Under the derivative settlement agreement, we will add a new, independent
global director with finance experience to the audit committee of our Board of
Directors and will ensure continued adherence with applicable legal and
regulatory requirements regarding the independence of audit committee members
and trading by insiders. In addition, certain of our officers will contribute a
portion of the shares of the Company's Class A common stock to be issued to
class members in settlement of the class action lawsuit. Specifically, Michael
J. Saylor, Sanju K. Bansal and Mark S. Lynch will contribute to the class action
settlement shares of Class A common stock with a total value of $10 million.
These settlement agreements provide us the ability to estimate the value of
the liability related to these actions. Accordingly, we separately evaluated the
individual components of the settlement agreement in consideration of existing
market conditions and recorded an estimated charge of $113.7 million for the
cost of the litigation settlement. Additionally, the settlement is contingent on
confirmatory discovery, final documentation, court approval and certain other
conditions. We have recorded the unpaid amounts of $124.0 million in the
consolidated balance sheet as a long-term liability pending approval by the
courts and satisfaction of certain other conditions and $1.6 million in accounts
payable and accrued expenses related to amounts due currently. In addition we
recorded $11.9 million in deposits and other assets related to amounts still
receivable from insurance companies. Other amounts have been paid by the
insurance company. Upon issuance of the securities, we will record such amounts
as liabilities or stockholders' equity based on the nature of the individual
securities.
The final value of the settlements may differ significantly from the
estimates currently recorded depending on a variety of factors including the
market value of the Company's stock when issued and potential changes in market
conditions affecting the valuation of the other securities. Accordingly, we will
revalue the estimate of the settlement on a quarterly basis and at the time the
securities are issued.
These legal proceedings are more fully described in Note 10 of the Notes to
Consolidated Financial Statements and in "Other Information-Legal Proceedings"
of Part II of this Quarterly Report on Form 10-Q.
18
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:
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------------------------------------------
Consolidated Statements of Operations Data
Revenues:
Product licenses ......................... 43.4% 51.4% 45.8% 56.9%
Product support and other services ....... 56.6 48.6 54.2 43.1
------ ------ ------ ------
Total revenues ......................... 100.0 100.0 100.0 100.0
Cost of revenues:
Product licenses ......................... 0.2 2.4 0.7 1.8
Product support and other services ....... 40.3 25.5 38.4 22.4
------ ----- ------ ------
Total cost of revenues ................. 40.5 27.9 39.1 24.2
------ ------ ------ ------
Gross profit ................................ 59.5 72.1 60.9 75.8
Operating expenses:
Sales and marketing ...................... 56.1 68.9 70.1 59.2
Research and development ................. 24.7 22.9 29.0 18.3
General and administrative ............... 26.4 17.6 28.2 15.0
Amortization of intangible assets ........ 7.4 0.1 7.8 0.1
Restructuring and related charges ........ 16.7 -- 6.5 --
------ ----- ------ ------
Total operating expenses ............... 131.3 109.5 141.6 92.6
Loss from operations ........................ (71.8) (37.4) (80.7) (16.8)
Financing & other income (expense):
Net interest ............................. 2.1 1.7 1.4 1.6
Loss on investments ...................... (13.9) (--) (4.6) (--)
Provision for litigation settlement ...... (175.3) (--) (68.6) (--)
Other income (expense), net .............. 0.1 (--) 0.1 --
------ ------ ------ ------
Total financing & other income (expense) (187.0) 1.7 (71.7) 1.6
Provision for income taxes .................. 0.5 0.4 0.4 0.6
------ ------ ------ ------
Net loss .................................... (259.3)% (36.1)% (152.8)% (15.8)%
====== ===== ====== ======
Comparison of the Three and Nine Months Ended September 30, 2000 and 1999
Revenues
Total revenues consist of revenues derived from sales of product licenses
and product support and other services, including technical support, education
and consulting services. Total revenues increased from $35.3 million to $64.9
million for the three months ended September 30, 1999 and 2000, respectively, an
increase of 83.7%, and increased from $105.1 million to $165.8 million for the
nine months ended September 30, 1999 and 2000, respectively, an increase of
57.8%. There can be no assurance that total revenues will continue to increase
at the rates experienced in prior periods. Additionally, based on the revenue
recognition criteria established in SOP 97-2 and SOP 81-1, revenue from many
large, multiple element arrangements is recorded as deferred revenue upon
receipt of cash, with both product license revenues and product support and
other services revenues recognized using the percentage of completion method
based on cost inputs or ratably over the entire term of the contract or over the
hosting period, as applicable.
19
In 1999, we launched the Strategy.com Finance Channel, in 2000 we launched
the Strategy.com News and Weather Channels, and we plan to launch additional
information channels in the future. We did not recognize revenues related to
Strategy.com until 2000 in which, during the three and nine months ended
September 30, 2000, we recognized $5.3 million and $6.6 million, respectively,
in network affiliate and subscription fees and other services. During the three
months ended September 30, 2000, approximately $5 million of the Strategy.com
revenues related to one customer, Deutsche Bank, which we do not expect to
generate recurring revenue in the future. We expect revenues from OEM fees,
network affiliation fees, subscription fees, advertising, hosting, transaction
and other fees from our Strategy.com service in the future. However, we expect
that Strategy.com revenues in the fourth quarter 2000 will be less than revenues
in the third quarter of 2000 and comparable to the revenue Strategy.com recorded
in the first half of 2000.
During the quarter, we and a significant customer, Deutsche Bank, agreed to
restructure our relationship, terminating the Strategy.com affiliation and joint
research and development agreement and replacing it with a standard enterprise
software license and maintenance agreement. While we had been providing services
to the customer over the past six months, no revenue had been recognized in
accordance with our revenue recognition accounting polices. In view of changes
in the customer's goals, Deutsche Bank and we entered into an agreement in which
we agreed to cease further development efforts and deliver all existing work
product to Deutsche Bank. Since we have no future obligations to Deutsche Bank,
all payments were made prior to the end of the quarter, and all other revenue
recognition criteria were met, we recorded revenues of $9.5 million, with $4.4
million and $5.1 million recorded as product license and services revenue,
respectively, and deferred an additional $1.5 million related to ongoing product
support obligations.
Product License Revenues. Product license revenues increased from $18.2
million to $28.1 million for the three months ended September 30, 1999 and 2000,
respectively, an increase of 54.9%, and increased from $59.8 million to $76.0
million for the nine months ended September 30, 1999 and 2000, respectively, an
increase of 27.1%. The increase in product license revenues for the three months
ended September 30, 2000 compared to the same period in 1999 was due to
increased customer acceptance of our recently released products and the growth
of the business intelligence software market in general. Product license
revenues were also positively affected by the restructuring of the Deutsche Bank
relationship described above which resulted in $4.4 million of product license
revenue. We are attracting new customers and our existing customer base is
purchasing additional licenses and new products to support their e-business
solutions. We expect product license revenues as a percentage of total revenues
to fluctuate on a period-to-period basis and vary significantly from the
percentage of total revenues achieved in prior years. There can be no assurance
that we will be able to maintain or continue to increase market acceptance for
our family of products, including our newly released MicroStrategy 7.0 software.
Product Support and Other Services Revenues. Product support and other
services revenues increased from $17.2 million to $36.7 million for the three
months ended September 30, 1999 and 2000, respectively, an increase of 114.2%,
and increased from $45.3 million to $89.9 million for the nine months ended
September 30, 1999 and 2000, respectively, an increase of 98.2%. The increase in
product support and other services revenues was primarily due to new product
licenses sold associated with a continuing increase in large-scale e-commerce
applications which require significant implementation, the revenue associated
with the services provided to Deutsche Bank as described above, and other
consulting work. As a result of expected fluctuations in product license revenue
discussed above, we expect product support and other services revenues as a
percentage of total revenues to fluctuate on a period-to-period basis and vary
significantly from the percentage of total revenues achieved in prior years.
International Revenues. International revenues increased from $10.4 million
to $17.5 million for the three months ended September 30, 1999 and 2000,
respectively, an increase of 67.9%, and increased from $25.3 million to $40.1
million for the nine months ended September 30, 1999 and 2000, respectively, an
increase of 58.6%. The increase in these revenues is due to the expansion of our
international operations, new product offerings and growing international market
acceptance of our software products. In addition, $4.4 million of product
license revenues for the three months ended September 30, 2000 was from Deutsche
Bank as mentioned earlier. We also opened new sales offices in Argentina
and
20
Switzerland in 2000. We anticipate that international revenues will continue to
account for a significant amount of total revenues and management expects to
continue to commit significant time and financial resources to the maintenance
and ongoing development of direct and indirect international sales and support
channels. We may not be able to maintain or continue to increase international
market acceptance for our family of products.
Costs and Expenses
Cost of Product License Revenues. Cost of product license revenues consists
primarily of the costs of product manuals, media, amortization of capitalized
software expenses and royalties paid to third party software vendors. Cost of
product license revenues decreased from $844,000 to $120,000 for the three
months ended September 30, 1999 and 2000, respectively, and from $1.9 million to
$1.1 million for the nine months ended September 30, 1999 and 2000,
respectively. As a percentage of product license revenues, cost of product
license revenues decreased from 4.6% to 0.4% for the three months ended
September 30, 1999 and 2000, respectively, and from 3.2% to 1.5% for the nine
months ended September 30, 1999 and 2000, respectively. The decrease in cost of
product license revenues as a percentage of product license revenues was due to
economies of scale realized by producing larger volumes of product materials and
decreased materials and shipping costs due to an increase in the percentage of
customers reproducing product documentation at their sites. We anticipate that
the cost of product license revenues may increase as product license revenues
increase. In the event that we enter into any royalty arrangements with
strategic partners in the future, cost of product license revenues as a
percentage of total product license revenues may increase.
Cost of Product Support and Other Services Revenues. Cost of product
support and other services revenues consists of the costs of providing technical
support, education and consulting services to customers and partners. Cost of
product support and other services revenues increased from $9.0 million to $26.2
million for the three months ended September 30, 1999 and 2000, respectively,
and from $23.5 million to $63.7 million for the nine months ended September 30,
1999 and 2000, respectively. As a percentage of product support and other
services revenues, cost of product support and other services revenues increased
from 52.6% to 71.2% for the three months ended September 30, 1999 and 2000,
respectively, and from 51.9% to 70.9% for the nine months ended September 30,
1999 and 2000, respectively. The increase in cost of product support and other
services revenues was primarily due to the increase in the number of personnel
providing consulting, education and technical support to customers as a result
of new product licenses sold associated with a continuing increase in
large-scale e-commerce applications and complex Strategy.com deployments. The
total cost of product support and other services revenues increased as a
percentage of product support and other services revenues due to the significant
increase in the use of third parties to perform consulting services, an increase
in consulting services revenues as a percentage of total product support and
other services revenues, which are at lower margins than other product support
revenues, the agreement to restructure a large customer relationship which
resulted in recognizing a significant amount of services revenue at no margin,
and excess capacity in consulting personnel.
We have hired additional consulting, education and technical support
personnel based on anticipated increases in revenues. To the extent our product
support and other services revenues increase at anticipated rates, we expect
cost of product support and other services revenues as a percentage of product
support and other services revenues to decrease. In addition, the cost of
providing hosting services and operating the Strategy.com network may become
more significant as we build up our customer base, further increasing the cost
of product support and other services revenues as a percentage of product
support and other services revenues.
Sales and Marketing Expenses. Sales and marketing expenses include costs
related to personnel costs, commissions, office facilities, travel, advertising,
public relations programs and promotional events, such as trade shows, seminars
and technical conferences. Sales and marketing expenses increased from $24.3
million to $36.4 million for the three months ended September 30, 1999 and 2000,
respectively, and from $62.2 million to $116.3 million for the nine months ended
September 30, 1999 and 2000, respectively. As a percentage of total revenues,
sales and marketing expenses decreased from 68.9% to 56.1% for the three months
ended September 30, 1999 and 2000, respectively, and increased from 59.2% to
70.1% for the nine months ended September 30, 1999 and 2000, respectively. The
increase in sales and marketing expenses was primarily the result of increased
staffing levels in the sales force, increased commissions earned, increased
promotional activities and advertising, increased marketing efforts for
21
Strategy.com and other general marketing efforts. Additionally, during the first
quarter of 2000, we invested heavily in advertising, including a national
television and print advertising campaign and other marketing efforts in order
to create better market awareness of the value-added potential of our product
suite and Strategy.com and to seek to acquire market share. As a result of these
significant expenses during the first quarter of 2000, sales and marketing
expenses decreased in the second and third quarters compared to the first
quarter. We intend to continue to market our MicroStrategy 7.0 software;
however, we may reduce our overall advertising and marketing efforts going
forward in order to align our costs with anticipated revenues.
Research and Development Expenses. Research and development expenses
consist primarily of salaries and benefits of software engineering personnel,
depreciation of equipment and other costs. Research and development expenses
increased from $8.1 million to $16.0 million for the three months ended
September 30, 1999 and 2000, respectively, and from $19.2 million to $48.0
million for the nine months ended September 30, 1999 and 2000, respectively. As
a percentage of total revenues, research and development expenses increased from
22.9% to 24.7% for the three months ended September 30, 1999 and 2000,
respectively, and from 18.3% to 29.0% for the nine months ended September 30,
1999 and 2000, respectively. The increase in research and development expenses
was primarily due to hiring additional research and development personnel to
continue development of Strategy.com channels, new products, product releases
and e-commerce technology. We intend to increase our investment over the next
twelve months to develop other channels as part of our suite of information
channels of our Strategy.com network. In addition, we expect that research and
development expenses will increase as we continue to invest in developing new
products, applications and product enhancements for our existing platform
business and the Strategy.com network.
General and Administrative Expenses. General and administrative expenses
include personnel and other costs of our finance, human resources, information
systems, administrative and executive departments as well as outside
professional fees. General and administrative expenses increased from $6.2
million to $17.1 million for the three months ended September 30, 1999 and 2000,
respectively, and from $15.8 million to $46.6 million for the nine months ended
September 30, 1999 and 2000, respectively. As a percentage of total revenues,
general and administrative expenses increased from 17.6% to 26.4% for the three
months ended September 30, 1999 and 2000, respectively, and from 15.0% to 28.2%
for the nine months ended September 30, 1999 and 2000, respectively. The
increase in general and administrative expenses was the result of increased
staff levels, increased office occupancy costs, costs associated with the
growth of our business and an increase in outside professional fees,
specifically legal and other consultancy fees related to the recent litigation
associated with our restatement of our financial statements and the related SEC
investigation. We expect that general and administrative expenses will start to
decrease on a quarterly basis in view of the recent litigation settlement
agreements, staff reductions and reductions in the use of external
consultants.
Amortization of Intangible Assets. In June 2000, we entered into a
consulting services agreement with the controlling stockholder of a software
integrator. The agreement requires the controlling stockholder to refer the
employees of the software integrator to us and also to perform certain
consulting services for us. In exchange for these services, we issued 57,143
shares of Class A common stock to the controlling stockholder. We will issue up
to $3.4 million in additional shares of Class A common stock over the next two
years based on an agreed upon formula including revenue and attrition
objectives. We have recorded $1.6 million related to the first installment as
deferred consulting costs. The first installment will be amortized over two
years, the duration of the consulting services.
Beginning in December 1999 and during the first half of 2000 we acquired
the right to use certain Internet domain names for $2.4 million. We are
amortizing these assets over their expected useful life of 3 years.
In December 1999, in connection with the purchase of intellectual property
and other tangible and intangible assets relating to NCR's Teracube project, we
allocated $46.8 million to tangible and intangible assets. As a result, we have
incurred and will continue to incur substantially increased amortization expense
in periods subsequent to December 1999. The intangible assets are being
amortized over their useful lives, ranging from one to three years.
22
In January 1998, we recorded $1.1 million for acquired intangible assets
representing the excess of the fair market value of the shares issued in
exchange for the non-controlling interests' shares in the foreign subsidiaries.
The intangible assets consist primarily of distribution channels, trade name and
customer lists and are being amortized on a straight-line basis over weighted
average useful lives of approximately 14 years.
As a result, we have recorded $20,000 and $4.8 million in amortization
expense for the three months ended September 30, 1999 and 2000, respectively,
and $61,000 and $12.9 million in amortization expense for the nine months ended
September 30, 1999 and 2000, respectively, relating to intangible assets. We
expect our rate of amortization expense to be substantially the same over the
next 2 years.
Restructuring and related charges. In the third quarter of 2000, our Board
of Directors approved and we announced a restructuring plan designed to bring
costs more in line with revenues and strengthen the financial performance of the
business.
The restructuring plan includes a reduction of our workforce by 231 or
approximately 10% of the worldwide headcount and the cancellation of a number of
new jobs for which candidates had not yet started with us. All of these actions
were completed prior to September 30, 2000. As a result of the reduction in
headcount, we plan to consolidate facilities located in the vicinity of our
Northern Virginia headquarters. In addition, we are eliminating or reducing
certain quarterly corporate events, including canceling our annual cruise.
Finally, we are reducing expenditures on external consultants and contractors
across all functional areas. We anticipate realizing annual savings of
approximately $25 million as a result of these actions.
In connection with this restructuring plan, the Company incurred severance
costs for terminated employees and costs for rescinded offers of employment,
accelerated the vesting provisions of certain stock option grants, wrote-off
certain assets that are no longer of service, and accrued related professional
fees. In addition, Michael J. Saylor, the chairman and CEO of the Company, made
grants of the Company's Class A common stock to terminated employees from his
personal stock holdings. Since he is a principal shareholder of the Company, his
actions are deemed to be an action undertaken on behalf of the Company for
accounting purposes. Accordingly, the Company recognized an expense and a
capital contribution by Mr. Saylor for approximately $3.0 million, which
represents the fair value of the stock on the date of grant.
We also recognized a liability related to our commitments associated with
the annual cruise for employees that has been canceled.
Included in the $10.8 million restructuring charge incurred in the third
quarter of 2000 are approximately $6.2 million of cash costs and $4.6 million in
non-cash related costs. Substantially all restructuring costs and related
charges have been paid as of September 30, 2000.
This restructuring action is more fully described in Note 3 of the Notes to
Consolidated Financial Statements.
Loss on investments. As of September 30, 2000, we held 485,067 shares of
Exchange Applications stock. On September 29, 2000, Exchange Applications
announced that third quarter results would not meet expectations, resulting in a
significant decrease in the market value of their stock. The timing and amount
of any future recovery, if any, in the value of this asset is uncertain and we
consider the decline in fair value of this investment as other than temporary.
Accordingly, we have written down the investment to its fair value at September
30, 2000, and have recognized a loss of $10.4 million in the third quarter. This
loss was partially offset by a hedging transaction that resulted in a gain of
$1.4 million in the third quarter of 2000.
Provision for litigation settlement. We and certain of our officers and
directors are defendants in a private securities class action lawsuit alleging
that we have violated Section 10(b) of the Securities Exchange Act of 1934, as
amended (the Exchange Act), Rule 10(b)(5) promulgated thereunder, and Section
20(a) and Section 20A of the Exchange Act in connection with various statements
that we had made with respect to our 1997, 1998 and 1999 financial results. In
June 2000, purported holders of our common stock filed a shareholder derivative
lawsuit in the Delaware Court of Chancery seeking recovery for various alleged
23
breaches of fiduciary duties by certain of our directors and officers relating
to our restatement of financial results for 1997, 1998 and 1999. In October,
2000, we entered into agreements to settle these lawsuits. Both settlements are
subject to confirmatory discovery, final documentation, court approval and
certain other conditions.
These settlement agreements provide us the ability to estimate the value of
the liability related to these actions. Accordingly, we separately evaluated the
individual components of the settlement agreements in consideration of existing
market conditions and recorded an estimated charge of $113.7 million for the
cost of the litigation settlement. We expect interest charges related to the
five-year unsecured promissory notes to be approximately $8.3 million per annum,
of which approximately $6.0 million per year will be cash costs and the
remainder non-cash.
The final value of the settlements may differ significantly from the
estimates currently recorded depending on a variety of factors including the
market value of the stock when issued and potential changes in market conditions
affecting the valuation of the other securities. Additionally, the settlements
are contingent on confirmatory discovery, final documentation, court approval
and certain other conditions. Accordingly, we will revalue the estimate of the
settlements on a quarterly basis and at the time the securities are issued.
Provision for Income Taxes. We recorded $350,000 and $155,000 of income tax
expense for the three months ended September 30, 2000 and 1999, respectively,
and $600,000 and $598,000 of income tax expense for the nine months ended
September 30, 2000 and 1999, respectively. The provision for both quarters and
the nine months ended in each year relates to income taxes payable in certain
foreign jurisdictions where we were profitable in 1999 and expect to be
profitable in 2000.
Beneficial Conversion Feature. During the second quarter of 2000, we
recorded a $19.4 million charge attributable to the beneficial conversion
feature of the Series A convertible preferred stock based on the difference
between the fair market value of the Class A common stock on the closing date of
the private placement and the conversion rate. The conversion rate was computed
based on the volume weighted average price of the stock for the 17 trading days
subsequent to the closing date in accordance with the Certificate of
Designations, Preferences and Rights of the Series A Convertible Preferred
Stock. In addition, in the event the conversion price decreases, in accordance
with the Certificate of Designations, Preferences and Rights of the Series A
Convertible Preferred Stock, an additional charge per share of outstanding
convertible preferred stock will be recorded in the future based on the
difference between the current conversion price and the new conversion price.
Deferred Revenue
Deferred revenue represents product support and other services fees that
are collected in advance; product license and product support and other services
fees relating to multiple element software arrangements for which the fair value
of each element cannot be established; or product license and product support
and other services fees relating to arrangements which require implementation
related services that are significant to the functionality of features of the
software product, including arrangements with subsequent hosting services.
Deferred revenue was $76.1 million as of September 30, 2000 compared to $71.3
million as of December 31, 1999. We expect to recognize approximately $47.1
million of this deferred revenue over the next 12 months; however, the timing
and ultimate recognition of our deferred revenue depends on our performance of
various service obligations. Because of the possibility of customer changes in
development schedules, delays in implementation and development efforts and the
need to satisfactorily perform product support and other services, deferred
revenue as of any particular date may not be representative of actual revenue
for any succeeding period.
Liquidity and Capital Resources
From inception until our initial public offering, we primarily financed our
operations and met our capital expenditure requirements through cash flows from
operations and short- and long-term borrowings. On June 16, 1998, we raised
24
$48.2 million, net of offering costs, from our initial public offering, and we
raised an additional $40.1 million, net of offering costs, on February 10, 1999
from a public offering of 3,170,000 shares of Class A common stock. On June 17,
2000, we issued 12,500 shares of our Series A convertible preferred stock in a
private placement to institutional investors for cash proceeds of $119.7
million, net of offering costs. On September 30, 2000 and December 31, 1999, we
had $67.3 million and $68.4 million of cash, cash equivalents, and short-term
investments, respectively, of which $26.2 million is restricted cash as of
September 30, 2000. Subsequent to September 30, 2000, Strategy.com received
financing through the sale of convertible preferred stock to investors. Upon the
completion of this round of financing, the investors will own approximately 16%
of the economic interest in the outstanding equity of Strategy.com on an as
converted, diluted basis, and Strategy.com will have received aggregate proceeds
of approximately $52.75 million.
Cash used in operations was $82.5 million and $3.9 million for the nine
months ended September 30, 2000 and 1999, respectively. The increase in cash
used in operations from 1999 to 2000 was primarily attributable to a substantial
increase in sales and marketing, and other operating expenses, which increased
at a significantly greater rate than revenues. However, during the quarter we
took several actions to curtail our operating expenses including a reduction in
headcount and discontinuation of various company sponsored events. We have also
implemented actions to reduce the use of outside consultants and contractors and
other sales and marketing expenses. These actions were taken to achieve our goal
of making the core business breakeven on an operating basis by the end of 2001,
excluding amortization, preferred dividends and other non-operating expenses.
Cash used in investing activities was $31.5 million and $41.6 million for
the nine months ended September 30, 2000 and 1999, respectively. In December
1999, we received 824,742 shares of Exchange Applications stock, valued at $21.5
million, in consideration for the sale of MicroStrategy software, technical
support and application development. We have sold all of our economic interest
in the shares we received in December 1999 for a total net realized gain of $1.5
million. The decrease in cash used in investing activities from 1999 to 2000
reflected the sale of these shares and other short-term investments offset by
the increase in restricted cash and purchases of additional short-term
investments and capital expenditures related to the acquisition of computer and
office equipment required to support expansion of our operations and building of
infrastructure to support Strategy.com. During the three months ended September
30, 2000, we invested $5.0 million in exchange for an approximately 5% interest
in PriceInteractive, Inc., a voice portal technology company, as a part of a
strategic allegiance.
Our financing activities provided cash of $127.5 million and $40.6 million
for the nine months ended September 30, 2000 and 1999, respectively. In June
2000, we issued 12,500 shares of our Series A convertible preferred stock in a
private placement to institutional investors for cash proceeds of $119.7
million, net of closing costs. Dividends are payable quarterly at a rate of 7%
per annum, in cash or in shares of Class A common stock. The convertible
preferred stock is currently convertible into 3,744,152 shares of Class A common
stock based on the current conversion price of $33.39 per share. The conversion
price may be adjusted at certain future dates depending upon the trading price
of the Class A common stock and an agreed upon formula. The convertible
preferred stock is also redeemable upon certain triggering events such as
failure of the registration statement to be declared effective by the SEC on or
prior to the first anniversary of the initial issuance date and other events as
defined in the Certificate of Designations, Preferences and Rights of the Series
A Convertible Preferred Stock.
We also recorded a $19.4 million charge attributable to the beneficial
conversion feature of the Series A convertible preferred stock equal to the
difference between the fair market value of the Class A common stock on the
closing date of the private placement and the conversion rate. The conversion
rate was computed based on the volume weighted average price of the stock for
the 17 trading days subsequent to the closing date in accordance with the
Certificate of Designations, Preferences and Rights of the Series A Convertible
Preferred Stock. We have accrued dividends of $2.2 million during the three
months ended September 30, 2000.
In October 2000, we issued 13.4 million shares of convertible preferred
stock of Strategy.com to a group of institutional and accredited investors for
cash proceeds of $42.75 million. Aether Capital, the investment arm of Aether
led the financing and will purchase an additional 3.1 million shares for $10.0
million upon expiration of the Hart-Scott-Rodino waiting period and the
satisfaction of certain other conditions. The total proceeds of $52.75 million
will be used to fund ongoing operations of our Strategy.com subsidiary. The
preferred stock is convertible into Class A common stock of Strategy.com on a
one-for-one basis.
25
We expect to pay approximately $6.0 million per year in interest charges as
part of the class action litigation settlement commencing upon the settlement
hearing date. We also expect to receive $11.9 million of cash during the fourth
quarter from insurance carriers in connection with the class action and
shareholder derivative litigation.
The principal source of cash from financing activities during 1999 was from
the sale of 3,170,000 shares of Class A common stock in which we raised $40.1
million, net of offering costs.
In March 1999, we entered into a line of credit agreement with a commercial
bank, which provided for a $25.0 million unsecured revolving line of credit for
general working capital purposes. On May 15, 2000, we entered into a
modification of the line of credit agreement, which, among other things,
increased to include an additional letter of credit, removed any financial
covenants and cured any financial covenant defaults. The line of credit is
secured by $26.2 million of cash and cash equivalents, which is classified as
restricted cash on the balance sheet. The cash is restricted through May 31,
2001, the expiration of the agreement. The modified line of credit bears
interest at LIBOR plus 1.75%, includes a 0.2% unused line of credit fee, and
requires monthly payments of interest. As of September 30, 2000, after
consideration of outstanding letters of credit, we had $18.7 million of
borrowing capacity under this credit line.
We have significantly grown the Company over the last year and prior years
in anticipation of our high revenue growth. We have recently taken actions to
realign our cost structure to better match our expected revenue growth by
reducing our workforce, limiting discretionary operating expenses and reducing
capital expenditures. If revenues do not grow at anticipated rates we will
require additional external financing through credit facilities, sale of
additional equity in MicroStrategy or in our Strategy.com subsidiary or other
financing facilities to support our current cost structure. There are no
assurances that such financing facilities would be available on acceptable
terms. We believe that our existing cash, cash generated internally by
operations and the amended line of credit entered into in May 2000 will meet our
working capital requirements for the next 12 months.
The Company and selling shareholders sold an aggregate 9,200,000 shares of
our class A common stock in our initial public offering on June 16, 1998 at a
price (adjusted for a 2 for 1 stock split in January 2000) per share of $6.00
for an aggregate purchase price of $55.2 million and 4,000,000 shares of our
class A common stock at a price (adjusted for a 2 for 1 stock split in January
2000) per share of $13.50 in an additional public offering on February 15, 1999
for an aggregate purchase price of $54.0 million. The shares were sold pursuant
to prospectuses that contained financial statements that we subsequently
revised. The inclusion of these financial statements that required revision in
the registration statements and prospectuses used in the offering and sale of
these shares may constitute a violation of the Securities Act.
If the inclusion of these financial statements that required revision in
the registration statements and prospectuses used in the offerings did
constitute a violation of the Securities Act, the purchasers in these offerings
would have the right for a period of one year from the date that they
discovered, or should have discovered with reasonable diligence, that such
financial statements required revision in the applicable registration statement
and prospectus, but in no event later than three years from the date of the sale
of shares to them, to obtain recovery of the consideration paid in connection
with their purchase of class A common stock or, if they have already sold the
stock, to sue us for damages based upon the difference between the price they
paid for class A common stock and the proceeds they obtained from the sale of
the stock. The amount of these damages could be substantial.
Recent Accounting Pronouncements
In December 1999, the SEC released Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition in Financial Statements," which provides guidance on
the recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. Subsequently, the SEC released SAB 101A, which delayed the
implementation date of SAB 101 for registrants with fiscal years that begin
between December 16, 1999 and March 15, 2000. In June 2000, the SEC issued SAB
101B, further delaying our required implementation of SAB 101 until the fourth
quarter of fiscal year 2000. We do not expect the application of SAB 101 to have
a material impact on our financial position or results of operations.
26
In March 2000, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation ("FIN") No. 44, "Accounting for Certain Transactions
Involving Stock Compensation - An Interpretation of APB Opinion No. 25." FIN 44
clarifies the application of APB Opinion No. 25 and, among other issues,
clarifies the following: the definition of an employee for purposes of applying
APB Opinion No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequence of various modifications to
the terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 was
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The
application of FIN 44 did not have a material impact on our financial position
or results of operations.
In June 1999, FASB issued Statement of Financial Accounting Standards
("SFAS") No. 137, which delays the effective date of SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," which will be effective for
our fiscal year 2001. This statement establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
also requires that changes in the derivative's fair value be recognized in
earnings unless specific hedge accounting criteria are met. We do not expect the
adoption of SFAS Nos. 133 and 137 to have a material impact on our financial
position or results of operations.
Risk Factors
The following important factors, among others, could cause actual results
to differ materially from those contained in forward-looking statements made in
this quarterly report on Form 10-Q or presented elsewhere by management from
time to time. The risks and uncertainties described below are not the only ones
facing our company. Additional risks and uncertainties not presently known to us
or that we currently deem immaterial may also impair our business operations.
If any of the events described in the following risks actually occur, our
business, financial condition or results of operations could be materially
adversely affected. In such case, the trading price of our Class A common stock
could decline and you may lose all or part of your investment.
We may need additional financing which could be difficult to obtain
We may require additional external financing through credit facilities,
sale of additional equity in MicroStrategy or in our Strategy.com subsidiary or
other financing facilities to support our operations as we expect to incur
operating losses for the foreseeable future. Obtaining additional financing will
be subject to a number of factors, including:
o market conditions;
o our operating performance; and
o investor sentiment.
These factors may make the timing, amount, terms and conditions of
additional financing unattractive to us. If we are unable to raise capital to
fund our operations, our business, operating results and financial condition may
be materially and adversely affected.
27
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:
o the size, timing and execution of significant orders and shipments;
o the mix of products and services of customer orders, which can affect
whether we recognize revenue upon the signing and delivery of our
software products or whether revenue must be recognized as work
progresses or over the entire contract period;
o the timing of new product announcements;
o changes in our pricing policies or those of our competitors;
o market acceptance of business intelligence software generally and of
new and enhanced versions of our products in particular;
o the length of our sales cycles;
o changes in our operating expenses;
o personnel changes;
o our success in expanding our direct sales force and adding to our
indirect distribution channels;
o the pace and success of our international expansion;
o utilization of our consulting personnel, which can be affected by
delays or deferrals of customer implementation of our software
products and consulting, education and support services;
o changes in foreign currency exchange rates; and
o seasonal factors, such as our traditionally lower pace of new sales in
the summer.
Limited Ability to Adjust Expenses. Because we have sought to expand our
business, our operating expenses have increased substantially in the past twelve
months. In particular, we have increased significantly the costs associated with
marketing, developing and operating our Strategy.com network and with expanding
our technical support, research and development and sales and marketing
organizations. We also have devoted substantial resources to expanding our
indirect sales channels and international operations. We base our operating
expense budgets on expected revenue trends. In the short term we may not be able
to reduce the actual operating expenses associated with our planned expansion.
Based on the above factors, we believe that quarter-to-quarter comparisons
of our operating results are not a good indication of our future performance. It
is possible that in one or more future quarters, our operating results may be
below the expectations of public market analysts and investors. In that event,
the trading price of our Class A common stock may fall.
28
We have recently introduced our Strategy.com network and it is uncertain whether
it will achieve widespread acceptance
We have implemented the Finance, News and Weather Channels of our
Strategy.com network. We plan to introduce additional channels as part of our
suite of information channels, but they are still in development. While we
expect to implement these additional channels on a commercial basis by the end
of 2000, we may encounter delays or difficulties in this commercial
introduction. We expect that a portion of our future revenue will depend on fees
from subscribers for the use of the Strategy.com network service, from products
and services offered through this network, and from royalties from affiliates
who bundle our Strategy.com network with their own product and service
offerings. We have not, to date, generated any material revenue from our
Strategy.com network and may not be able to do so in the future. If this
service, or the products and services offered through it, fails to achieve
widespread customer acceptance, our business, operating results and financial
condition would be materially adversely affected. In addition, revenue from
Strategy.com would be adversely affected if our affiliates do not perceive that
the integration of our Strategy.com network with their product and service
offerings will increase demand for their products and services or will otherwise
be able to generate a sufficient return on their investment in the use of our
network.
We intend to make significant expenditures in developing our Strategy.com
network, which would result in us incurring operating losses and require
additional external financing
We plan to significantly increase the amounts we will expend on our
Strategy.com network compared to the expenses we have incurred to date, in order
to expand the network's product offerings and capabilities. We will only be able
to make these expenditures if we are able to secure significant additional
external financing. We would then substantially increase our investment in
Strategy.com over the next twelve months to market, develop and operate
Strategy.com and would expect operating losses to increase in 2000 and 2001.
We may lose sales, or sales may be delayed, due to the long sales and
implementation cycles for our products, which would reduce our revenues
To date, our customers have typically invested substantial time, money and
other resources and involved many people in the decision to license our software
products. As a result, we may wait nine months or more after the first contact
with a customer for that customer to place an order while they seek internal
approval for the purchase of our products. During this long sales cycle, events
may occur that affect the size or timing of the order or even cause it to be
canceled. For example, our competitors may introduce new products, or the
customer's own budget and purchasing priorities may change.
Even after an order is placed, the time it takes to deploy our products
varies widely from one customer to the next. Implementing our product can
sometimes last several months, depending on the customer's needs and may begin
only with a pilot program. It may be difficult to deploy our products if the
customer has complicated deployment requirements, which typically involve
integrating databases, hardware and software from different vendors. If a
customer hires a third party to deploy our products, we cannot be sure that our
products will be deployed successfully.
Our employees, investors, customers, vendors and lenders may react adversely to
the revision of our 1999, 1998 and 1997 revenues and operating results
Our future success depends in large part on the support of our key
employees, investors, customers, vendors and lenders, who may react adversely to
the revision of our 1999, 1998 and 1997 revenues and operating results. The
revision of our 1999, 1998 and 1997 revenues and operating results has resulted
in substantial amounts of negative publicity about us and we believe that this
publicity has caused some of our potential customers to defer purchases of our
29
software or to do business with other vendors. We may not be able to retain key
employees and customers if they lose confidence in us, and our vendors and
lenders may reexamine their willingness to do business with us. In addition,
investors may lose confidence, which may cause the trading price of our Class A
common stock to decrease. If we lose the services of our key employees or are
unable to retain and attract our existing and new customers, vendors and
lenders, our business, operating results and financial condition could be
materially and adversely affected.
Our recognition of deferred revenue is subject to future performance obligations
and may not be representative of actual revenues for succeeding periods
Our deferred revenue was $76.1 million as of September 30, 2000. The timing
and ultimate recognition of our deferred revenue depends on our performance of
various service obligations. Because of the possibility of customer changes in
development schedules, delays in implementation and development efforts and the
need to satisfactorily perform product support services, deferred revenue at any
particular date may not be representative of actual revenue for any succeeding
period.
We face litigation that could have a material adverse effect on our business,
financial condition and results of operations
We and certain of our directors and executive officers are named as
defendants in a private securities class action lawsuit and a shareholder
derivative lawsuit relating to the restatement of our 1997, 1998 and 1999
financial results. Although we have entered into agreements to settle such
lawsuits, the settlements are subject to confirmatory discovery, final
documentation, court approval and certain other conditions. If the agreed upon
settlements are not consummated, it is possible that we may be required to pay
substantial damages or settlement costs which could have a material adverse
effect on our financial condition or results of operation. In addition, the SEC
has issued a formal order of private investigation in connection with matters
relating to the restatement of our financial results. We are cooperating with
the SEC in connection with this investigation. Regardless of the outcome of any
of these matters, it is likely that we will incur substantial defense costs and
that such actions may cause a diversion of management time and attention.
Shares in our public offerings may have been offered and sold in violation of
the Securities Act and purchasers in one or more of these offerings may have
claims that could result in a substantial amount of damages
The Company and selling shareholders sold an aggregate 9,200,000 shares of
our class A common stock in our initial public offering on June 16, 1998 at a
price (adjusted for a 2 for 1 stock split in January 2000) per share of $6.00
for an aggregate purchase price of $55.2 million and 4,000,000 shares of our
class A common stock at a price (adjusted for a 2 for 1 stock split in January
2000) per share of $13.50 in an additional public offering on February 15, 1999
for an aggregate purchase price of $54.0 million. The shares were sold pursuant
to prospectuses that contained financial statements that we subsequently
revised. The inclusion of these financial statements that required revision in
the registration statements and prospectuses used in the offering and sale of
these shares may constitute a violation of the Securities Act.
If the inclusion of these financial statements that required revision in
the registration statements and prospectuses used in the offerings did
constitute a violation of the Securities Act, the purchasers in these offerings
would have the right for a period of one year from the date that they
discovered, or should have discovered with reasonable diligence, that such
financial statements required revision in the applicable registration statement
and prospectus, but in no event later than three years from the date of the sale
of shares to them, to obtain recovery of the consideration paid in connection
with their purchase of class A common stock or, if they have already sold the
stock, to sue us for damages based upon the difference between the price they
paid for class A common stock and the proceeds they obtained from the sale of
the stock. The amount of these damages could be substantial.
30
We are currently unable to borrow additional amounts under our master equipment
lease agreement
We signed a three-year master lease agreement to lease up to $40.0 million
of computer equipment, of which we have leased approximately $17.8 million as of
November 1, 2000. Future drawdowns and interest rates under the lease agreement
are subject to our credit worthiness. Currently, we are not able to draw down
additional amounts under the lease agreement.
We face intense competition, which may lead to lower prices for our products,
reduced gross margins, loss of market share and reduced revenue
The markets for e-business, e-commerce, customer relationship management,
portals, business intelligence and Internet-based and wireless-based information
networks are intensely competitive and subject to rapidly changing technology.
In addition, many of our competitors in these markets are offering, or may soon
offer, products and services that may compete with our products and our
Strategy.com network.
Our most direct competitors provide:
o e-business infrastructure software;
o customer relationship management products;
o e-commerce transaction systems;
o business intelligence products;
o web portals and information networks;
o vertical Internet portals and information networks; and
o 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, Doubleclick and Personify all provide products that
compete directly or indirectly with our software platform. Many of these
companies provide alternatives to our technology for adding intelligence and
personalization to e-commerce applications. For example, customer information,
such as past purchases, clickstream data and stated preferences, can be used to
create a personalized e-commerce experience that targets customers with offers
and interactions to which they are more likely to respond.
Customer Relationship Management Products. Companies that deliver customer
relationship management products alone or in conjunction with e-commerce
applications, such as BroadVision, E.piphany, Vignette and Siebel, compete with
our intelligent e-business products.
E-Commerce Transaction Systems. Products that support e-commerce
transactions, such as those provided by Microsoft, IBM, America Online's
Netscape division, BroadVision, Open Market, InterWorld and Oracle, could
provide competition for us. These products have the potential to extend their
capabilities to use customer information as the basis for generating targeted,
personalized product offers, which would compete with our e-business products.
31
Business Intelligence Products. In the business intelligence market, we
compete with providers of software used to enable businesses to analyze and
optimize their operations. In the enterprise category, which is generally
focused on large deployments, Information Advantage, which was recently acquired
by Sterling Software, competes with us. In the desktop analysis and reporting
category, we face competition from companies such as Business Objects, Cognos
and Brio Technology. A third category includes products from companies such as
Oracle, Microsoft and IBM that are generally bundled with or designed to work
with their own relational databases.
Web Portals and Information Networks. Web portals and information networks, such
as Microsoft Network, Yahoo, Lycos, Excite, America Online and InfoSpace.com,
offer an array of information that is similar to information provided by
Strategy.com.
Vertical Internet Portals and Information Networks. Expedia, Weather.com,
CNBC.com, ABC.com, ESPN.com, Microsoft Investor, StockBoss, Microsoft CarPoint,
InfoBeat, Internet Travel Network and others have developed custom applications
and products to commercialize, analyze and deliver specific information over the
Internet. These systems are usually tailored to one application, such as
providing news, sports or weather, but in the aggregate, they offer applications
similar to those provided by Strategy.com. Any one of these companies could
expand their offerings to more closely compete with Strategy.com.
Wireless Communications and Wireless Access Protocol Enabled Products.
Wireless communications providers, such as AT&T, Sprint, MCI WorldCom, Nextel
Communications, British Telecom, Deutsche Telekom, PageNet, Nokia, Ericsson,
Aether Systems, 3COM and Palm offer a variety of mobile phones and wireless
devices over which Strategy.com delivers information. These companies may
develop in-house information services or partner with other companies to deliver
information that is competitive to that offered by Strategy.com.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing or other resources, and greater name
recognition than we do. In addition, many of our competitors have strong
relationships with current and potential customers and extensive knowledge of
the e-business industry. As a result, they may be able to respond more quickly
to new or emerging technologies and changes in customer requirements or devote
greater resources to the development, promotion and sale of their products than
we can. Increased competition may lead to price cuts, reduced gross margins and
loss of market share. We cannot be sure that we will be able to compete
successfully against current and future competitors or that the competitive
pressures we face will not have a material adverse effect on our business,
operating results and financial condition.
Current and future competitors may also make strategic acquisitions or
establish cooperative relationships among themselves or with others. By doing
so, they may increase their ability to meet the needs of our potential
customers. Our current or prospective indirect channel partners may establish
cooperative relationships with our current or future competitors. These
relationships may limit our ability to sell our products through specific
distribution channels. Accordingly, it is possible that new competitors or
alliances among current and future competitors may emerge and rapidly gain
significant market share. These developments could harm our ability to obtain
maintenance revenues for new and existing product licenses on favorable terms.
We have increased our operating costs in anticipation of an expansion of our
business and our failure to manage this expansion effectively, as well as the
strain on our resources, could have a material adverse effect on our business,
operating results and financial condition
We have been expanding rapidly. Our total number of employees has grown
from 907 on December 31, 1998 to 2,054 on September 30, 2000. We have placed
significant demands on our administrative, operational, financial and personnel
resources and expect to continue doing so. In particular, we expect the current
and planned growth of our international operations to lead to increased
financial and administrative demands. For example, expanded facilities will
complicate operations, managing relationships with new foreign partners will
32
mean additional administrative burdens, and managing foreign currency risks will
require expanded treasury functions. We may also need to expand our support
organization to develop our indirect distribution channels in new and expanded
markets and to accommodate growth in our installed customer base. Failure to
manage our expansion effectively could have a material adverse effect on our
business, operating results and financial condition.
In addition, the development of our Strategy.com network could divert the
time and attention of our senior management from our other business. Michael J.
Saylor, our chairman and chief executive officer, currently is responsible for
the strategic planning and direction of both our MicroStrategy Platform and
Strategy.com businesses. If Mr. Saylor does not effectively manage his time and
attention between our businesses, it could materially adversely affect our
business, operating results and financial condition.
If we are unable to recruit or retain skilled personnel, or if we lose the
services of any of our key management personnel, our business, operating results
and financial condition would be materially adversely affected
Our future success depends on our continuing ability to attract, train,
assimilate and retain highly skilled personnel. Competition for these employees
is intense. We may not be able to retain our current key employees or attract,
train, assimilate or retain other highly skilled personnel in the future. Our
future success also depends in large part on the continued service of key
management personnel, particularly Michael J. Saylor, our chairman and chief
executive officer, and Sanju K. Bansal, our executive vice president and chief
operating officer. If we lose the services of one or both of these individuals
or other key personnel, or if we are unable to attract, train, assimilate and
retain the highly skilled personnel we need, our business, operating results and
financial condition could be materially adversely affected.
Our inability to develop and release product enhancements and new products to
respond to rapid technological change in a timely and cost-effective manner
would have a material adverse effect on our business, operating results and
financial condition
The market for our products is characterized by rapid technological change,
frequent new product introductions and enhancements, changing customer demands
and evolving industry standards. The introduction of products embodying new
technologies can quickly make existing products obsolete and unmarketable. We
believe that our future success depends largely on three factors:
o our ability to continue to support a number of popular operating
systems and databases;
o our ability to maintain and improve our current product line; and
o 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
33
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.
The legal environment regarding collection and use of personal information is
uncertain and new laws or government regulations could have a material adverse
effect on our business, operating results and financial condition
Although some existing laws govern the collection and use of personal
information obtained through the Internet or other public data networks, it is
unclear whether they apply to our products and us. Most of these laws were
adopted before the widespread use and commercialization of the Internet and
other public data networks. As a result, the laws do not address the unique
issues presented by these media.
Due to increasing use of the Internet and the dramatically increased access
to personal information made possible by technologies like ours, the U.S.
federal and various state and foreign governments have recently proposed
limitations on the collection and use of personal information of users of the
Internet and other public data networks.
Although we attempt to obtain permission from users prior to collecting or
processing their personal data, new laws or regulations governing personal
privacy may change the ways in which we and our customers and affiliates may
gather this personal information. There may be significant costs and delays
involved with adapting our products to any change in regulations.
Our business, and in particular our Strategy.com network, depends upon our
receiving detailed personal information about subscribers in order to provide
them with the services they select. Privacy concerns may cause some potential
subscribers to forego subscribing to our service. If new laws or regulations
prohibit us from using information in the ways that we currently do or plan to
do, or if users opt out of making their personal preferences and information
available to us and our affiliates, the utility of our products will decrease,
which could have a material adverse effect on our business, operating results
and financial condition. If our customers, our network or our affiliates misuse
personal information, our legal liability may be increased and our growth may
be limited.
The Federal Trade Commission has recently launched investigations of the
data collection practices of various Internet companies. In addition, numerous
individuals and privacy groups have filed lawsuits or administrative complaints
against other companies asserting that they were harmed by the misuse of their
personal information. If comparable legal proceedings were commenced against us,
regardless of the merits of the claim, we could be required to spend significant
amounts on legal defense and our senior management's time and attention could be
diverted from our business. In addition, demand for our products could be
reduced if companies are not permitted to use clickstream data derived from
their web sites. This could materially and adversely affect our business,
operating results and financial condition.
In addition, in Europe, the European Union Directive on Data Protection, a
comprehensive administrative and regulatory program, currently limits the
ability of companies to collect, store and exchange personal data with other
entities. Because the U.S. may not currently provide a level of data protection
sufficient to meet the guidelines under the European Union Directive, U.S.
companies could be prohibited from obtaining personal data from or exchanging
such data with companies in Europe.
34
Our business may suffer if either the Internet infrastructure or the wireless
communication infrastructure is unable to effectively support the growth in
demand placed upon it
Our Strategy.com network and our other products depend increasingly upon
the Internet infrastructure and wireless communications infrastructures to
collect information and deliver information to customers. We cannot assure you
that either of these infrastructures will continue to effectively support the
capacity, speed and security demands placed upon them as they continue to
experience increased numbers of users, frequency of use and increased
requirements for data transmission by users. Even if the necessary
infrastructure or technologies are developed, we may incur considerable costs to
adapt our solutions accordingly. Furthermore, the Internet has experienced a
variety of outages and other delays due to damage to portions of its
infrastructure or attacks by hackers. These outages and delays could impact the
web sites using our products or hosting our Strategy.com network and could
materially affect our business, operating results and financial condition.
If the market for business intelligence software fails to grow as we expect, or
if businesses fail to adopt our products, our business, operating results and
financial condition would be materially adversely affected
Nearly all of our revenues to date have come from sales of business
intelligence software and related technical support, consulting and education
services. We expect these sales to account for a large portion of our revenues
for the foreseeable future. Although demand for business intelligence software
has grown in recent years, the market for business intelligence software
applications is still emerging. Resistance from consumer and privacy groups to
increased commercial collection and use of data on spending patterns and other
personal behavior may impair the further growth of this market, as may other
developments. We cannot be sure that this market will continue to grow or, even
if it does grow, that businesses will adopt our solutions. We have spent, and
intend to keep spending, considerable resources to educate potential customers
about business intelligence software in general and our solutions in particular.
However, we cannot be sure that these expenditures will help our products
achieve any additional market acceptance. If the market fails to grow or grows
more slowly than we currently expect, our business, operating results and
financial condition would be materially adversely affected.
Because of the rights of our two classes of common stock, and because we are
controlled by our existing stockholders, these stockholders could transfer
control of MicroStrategy to a third party without anyone else's approval or
prevent a third party from acquiring MicroStrategy
We have two classes of common stock: Class A common stock and Class B
common stock. Holders of our Class A common stock generally have the same rights
as holders of our Class B common stock, except that holders of Class A common
stock have one vote per share while holders of Class B common stock have ten
votes per share. As of November 1, 2000, holders of our Class B common stock
owned or controlled 55,036,776 shares of Class B common stock, or 96% of the
total voting power. Michael J. Saylor, our chairman and chief executive officer,
controlled 43,421,985 shares of Class B common stock, or 75% of the total voting
power, as of November 1, 2000. Accordingly, Mr. Saylor is able to control
MicroStrategy through his ability to determine the outcome of elections of our
directors, amend our certificate of incorporation and bylaws and take other
actions requiring the vote or consent of stockholders, including mergers, going
private transactions and other extraordinary transactions and their terms.
Our certificate of incorporation allows holders of Class B common stock,
almost all of who 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.
35
The conversion of the Series A preferred shares could result in substantial
numbers of additional shares being issued if our market price declines during
periods in which the conversion price of the Series A preferred shares may
adjust
As of November 1, 2000, the Series A preferred shares are convertible at a
conversion price equal to $33.3854 per share. This conversion price may be
adjusted if the preferred stock remains outstanding on June 19, 2001 and on each
subsequent anniversary of such date, or upon the occurrence of various events,
including the failure to maintain the effectiveness of the registration
statement to which this prospectus relates, based on the market price of our
Class A common stock if such adjustment would result in a lower conversion
price. As a result, the lower the price of our Class A common stock at these
intervals, the greater the number of shares the holder will receive upon
conversion after any such adjustment. For example, the number of shares of Class
A common stock that we would be required to issue upon conversion of all 12,500
Series A preferred shares, excluding shares issued as accrued dividends, would
increase from approximately 3,744,152 shares, based on the applicable conversion
price of $33.3854 per share as of November 1, 2000, to approximately:
o 4,992,212 shares if the applicable conversion price decreased 25%;
o 7,488,303 shares if the applicable conversion price decreased 50%; or
o 14,976,516 shares if the applicable conversion price decreased 75%.
To the extent the Series A preferred shares are converted or dividends on
the Series A preferred shares are paid in shares of Class A common stock rather
than cash, a significant number of shares of Class A common stock may be sold
into the market, which could decrease the price of our Class A common stock and
encourage short sales. Short sales could place further downward pressure on the
price of our Class A common stock. In that case, we could be required to issue
an increasingly greater number of shares of our Class A common stock upon future
conversions of the Series A preferred shares as a result of the annual and other
adjustments described above, sales of which could further depress the price of
our Class A common stock.
The conversion of and the payment of dividends in shares of Class A common
stock in lieu of cash on the Series A preferred shares may result in substantial
dilution to the interests of other holders of our Class A common stock. No
selling stockholder may convert its Series A preferred shares if upon such
conversion the selling stockholder together with its affiliates would have
acquired a number of shares of Class A common stock during the 60-day period
ending on the date of conversion which, when added to the number of shares of
Class A common stock held at the beginning of such 60-day period, would exceed
9.99% of our then outstanding Class A common stock, excluding for purposes of
such determination shares of Class A common stock issuable upon conversion of
Series A preferred shares which have not been converted. Nevertheless, a selling
stockholder may still sell a substantial number of shares in the market. By
periodically selling shares into the market, an individual selling stockholder
could eventually sell more than 9.99% of our outstanding Class A common stock
while never holding more than 9.99% at any specific time.
We may be required to pay substantial penalties to the holders of the Series A
preferred shares if specific events occur
In accordance with the terms of the agreements relating to the issuance of
the Series A preferred shares, we are required to pay substantial penalties to a
holder of the Series A preferred shares under specified circumstances,
including, among others:
o nonpayment of dividends on the Series A preferred shares in a timely
manner;
o failure to deliver shares of our Class A common stock upon conversion
of the Series A preferred shares after a proper request;
36
o nonpayment of the redemption price at maturity of the Series A
preferred shares;
o failure to hold a meeting of our stockholders on or before July 31,
2001 to approve the issuance of the shares of Class A common stock
issuable upon conversion of and in lieu of cash dividends on the
Series A preferred shares; or
o failure of a registration statement relating to the shares of Class A
common stock issuable upon conversion of and in lieu of cash dividends
on the Series A preferred shares to be declared effective by the SEC
on or before December 15, 2000, or after such registration statement
is declared effective, the unavailability of such registration
statement to cover the resale of such shares for more than brief
intervals.
Such penalties are generally paid in the form of interest payments, subject
to any restrictions imposed by applicable law, on the amount that a holder of
Series A preferred shares was entitled to receive on the date of determination.
In the third quarter of 2000, we incurred $577,500 in penalties as a result of a
14 day delay in the filing of a registration statement registering the shares of
Class A common stock issuable upon conversion of and in lieu of dividends on the
Series A preferred shares.
We rely on our strategic channel partners and if we are unable to develop or
maintain successful relationships with them, our business, operating results and
financial condition will suffer
In addition to our direct sales force, we rely on strategic channel
partners, such as original equipment manufacturers, system integrators and
value-added resellers, to license and support our products in the United States
and internationally. In particular, for the three months ended September 30,
2000 and the years ended December 31, 1999, 1998 and 1997, channel partners
accounted for, directly or indirectly, approximately 40%, 39%, 34% and 27% of
our total product license 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.
Our relationship with Strategy.com could create the potential for
conflicts of interest
We hold an approximately 84% economic interest in the equity of our
Strategy.com subsidiary. Conflicts may arise between us and other investors in
Strategy.com, including: the allocation of business opportunities, the sharing
of rights, technologies, facilities, personnel and other resources, and the
fiduciary duties owed by officers, directors and other personnel who provide
services to both us and Strategy.com.
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.
37
Third party providers of information and services for our Strategy.com network
may fail to provide us such information and services or may also provide such
information and services to our competitors
We rely on third parties to provide information and services for our
Strategy.com network. For example, we rely on Ameritrade to provide users of our
Strategy.com network with stock quote information and expect to rely upon a
third party to execute trades in securities when this capability is added to our
network. If one or more of these providers were to stop working with us, we
would have to rely on other parties to provide the information and services we
need. We cannot predict whether other parties would be willing to do so on
reasonable terms. Furthermore, we do not have long-term agreements with our
providers of information and services and we cannot restrict them from providing
similar information and services to our competitors. As a result, our
competitors may be able to duplicate some of the information and services that
we provide and may, therefore, find it easier to enter the market for personal
intelligence and compete with us.
We rely upon our network affiliates to deliver services we offer through our
Strategy.com network and if they have difficulty in doing so, we could be
exposed to liability and our reputation could suffer
We depend upon our affiliates to deliver services to subscribers of our
Strategy.com network. If our affiliates fail to deliver reliable services, we
could face liability claims from our subscribers and our reputation could be
damaged. In addition, we will be dependent on the performance of the systems
deployed and maintained by these parties, whom we will not control. We expect to
include contractual provisions limiting our liability to the subscriber for
failures and delays, but we cannot be sure that these limits will be enforceable
or will be sufficient to shield us from liability. We will seek to obtain
liability insurance to cover problems of this sort, but we cannot guarantee that
insurance will be available or that the amounts of our coverage will be
sufficient to cover all potential claims.
Our network affiliates will rely on us to maintain the infrastructure of the
Strategy.com network and any problems with that infrastructure could expose us
to liability from our affiliates and their customers
Our network affiliates depend on us to maintain the software and hardware
infrastructure of our Strategy.com network. If this infrastructure fails or our
affiliates or their customers otherwise experience difficulties or delays in
accessing the network, we could face liability claims from them. We expect to
include contractual provisions limiting our liability to our affiliates for
system failures and delays, but we cannot be sure that these limits will be
enforceable or will be sufficient to shield us from liability. We will seek to
obtain liability insurance to cover problems of this sort, but we cannot
guarantee that insurance will be available or that the amounts of our coverage
will be sufficient to cover all potential claims.
We are vulnerable to system failures, which could cause interruptions or
disruptions in our service
The hardware infrastructure on which the Strategy.com system operates is
located at the Exodus Communications data center in Northern Virginia. We cannot
assure you that we will be able to manage this relationship successfully to
mitigate any risks associated with having our hardware infrastructure maintained
by Exodus. Unexpected events such as natural disasters, power losses and
vandalism could damage our systems. Telecommunications failures, computer
viruses, electronic break-ins or other similar disruptive problems could
adversely affect the operation of our systems. Our insurance policies may not
adequately compensate us for any losses that may occur due to any damages or
interruptions in our systems. Accordingly, we could be required to make capital
expenditures in the event of damage. We do not currently have a formal disaster
recovery plan. Periodically, we experience unscheduled system downtime that
results in our web site being inaccessible to subscribers. Although we have not
suffered material losses during these downtimes to date, if these problems
persist in the future, users, network affiliates and advertisers could lose
confidence in our services.
38
System capacity constraints may diminish our ability to generate revenues from
Strategy.com
A substantial increase in the use of the products and services offered by
Strategy.com could strain the capacity of our systems, which could lead to
slower response time or system failures. System failures or slowdowns could
adversely affect the speed and responsiveness of our Strategy.com network. These
would diminish the experience for our subscribers and affect our reputation. The
ability of our systems to manage a significantly increased volume of
transactions in a production environment is unknown. As a result, we face risks
related to our ability to scale up to our expected transaction levels while
maintaining satisfactory performance. If our transaction volume increases
significantly, we may need to purchase additional servers and networking
equipment to maintain adequate data transmission speeds. The availability of
these products and related services may be limited or their cost may be
significant.
We have only limited protection for our proprietary rights in our software,
which makes it difficult to prevent third parties from infringing upon our
rights
We regard our software products as proprietary and we rely on a combination
of federal and international copyright, state and federal trademark and service
mark and state and common law trade secret laws, customer licensing agreements,
employee and third-party nondisclosure agreements and other methods to protect
our proprietary rights. However, these laws and contractual provisions provide
only limited protection. We have no patents and only limited registered
trademarks. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use our products or
technology. Policing such unauthorized use is difficult, and we cannot be
certain that we can prevent it, particularly in countries where the laws may not
protect our proprietary rights as fully as in the United States.
Our products may be susceptible to claims by other companies that our products
infringe upon their proprietary rights, which could adversely affect our
business, operating results and financial condition
As the number of software products in our target markets increases and the
functionality of these products further overlaps, we may become increasingly
subject to claims by a third party that our technology infringes such party's
proprietary rights. Regardless of their merit, any such claims could be time
consuming and expensive to defend, may divert management's attention and
resources, could cause product shipment delays and could require us to enter
into costly royalty or licensing agreements. If successful, a claim of
infringement against us and our inability to license the infringed or similar
technology could have a material adverse effect on our business, operating
results and financial condition.
Expanding our international operations will be difficult and our failure to do
so successfully or in a cost-effective manner would have a material adverse
effect on our business, operating results and financial condition
International sales accounted for 24.2%, 24.0%, 26.1% and 27.1% of our
total revenues for the nine months ended September 30, 2000 and the years ended
December 31, 1999, 1998 and 1997, respectively. We plan to continue expanding
our international operations and to enter new international markets. This will
require significant management attention and financial resources and could
adversely affect our business, operating results and financial condition. In
order to expand international sales successfully, we must set up additional
foreign operations, hire additional personnel and recruit additional
international resellers and distributors. We cannot be sure that we will be able
to do so in a timely manner, and our failure to do so may limit our
international sales growth.
39
There are certain risks inherent in our international business activities
including:
o changes in foreign currency exchange rates;
o unexpected changes in regulatory requirements;
o tariffs and other trade barriers;
o costs of localizing products for foreign countries;
o lack of acceptance of localized products in foreign countries;
o longer accounts receivable payment cycles;
o difficulties in managing international operations;
o tax issues, including restrictions on repatriating earnings;
o weaker intellectual property protection in other countries; and
o 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, operating results and
financial condition.
The nature of our products makes them particularly vulnerable to undetected
errors, or bugs, which could cause problems with how the products perform and
which could in turn reduce demand for our products, reduce our revenue and lead
to product liability claims against us
Software products as complex as ours may contain errors or defects,
especially when first or subsequent versions are released. Although we test our
products extensively, we have in the past discovered software errors in new
products after their introduction. We cannot be certain that, despite testing by
us and by our current and potential customers, errors will not be found in new
products or releases after commercial shipments begin. This could result in lost
revenue or delays in market acceptance, which could have a material adverse
effect upon our business, operating results and financial condition.
Our license agreements with customers typically contain provisions designed
to limit our exposure to product liability claims. It is possible, however, that
these provisions may not be effective under the laws of certain domestic or
international jurisdictions. Although there have been no product liability
claims against us to date, our license and support of products may involve the
risk of these claims. A successful product liability claim against us could have
a material adverse effect on our business, operating results and financial
condition.
40
The price of our stock may be extremely volatile
The market price for our class A common stock has historically been
volatile and could fluctuate significantly for any of the following reasons:
o quarter-to-quarter variations in our operating results;
o developments or disputes concerning proprietary rights;
o technological innovations or new products;
o governmental regulatory action;
o general conditions in the software industry;
o increased price competition;
o changes in earnings estimates by analysts; or
o other events or factors.
Many of the above factors are beyond our control.
The stock market has recently experienced extreme price and volume
fluctuations. These fluctuations have particularly affected the market price of
many computer software companies, often without regard to their operating
performance.
41
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about our market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. We are exposed to the impact of
interest rate changes and foreign currency fluctuations.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily
to our cash equivalents and short-term investments. We do not use derivative
financial instruments. We invest our excess cash in short-term, fixed income
financial instruments. These fixed rate investments are subject to interest rate
risk and may fall in value if market interest rates increase. If market interest
rates were to increase immediately and uniformly by 10% from the levels at
September 30, 2000, the fair market value of the portfolio would decline by an
immaterial amount. We have the ability to hold our fixed income investments
until maturity and, therefore, we do not expect our operating results or cash
flows to be materially affected by a sudden change in market interest rates on
our investment portfolio.
Foreign Currency Risk
We face exposure to adverse movements in foreign currency exchange rates.
Our international revenues and expenses are denominated in foreign currencies,
principally the British pound sterling and the German deutsche mark. The
functional currency of each of our foreign subsidiaries is the local currency.
Our international business is subject to risks typical of an international
business, including but not limited to, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility. Based on our
overall currency rate exposure at September 30, 2000, a 10% change in foreign
exchange rates would have had an immaterial effect on our financial position,
results of operations and cash flows. To date, we have not hedged the risks
associated with foreign exchange exposure. Although we may do so in the future,
we cannot be sure that any hedging techniques we may implement will be
successful or that our business, operating results, financial condition and cash
flows will not be materially adversely affected by exchange rate fluctuations.
To date, our foreign currency gains and losses have been immaterial.
42
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Actions Arising under Federal Securities Laws and Delaware Derivative
Litigation. From March through May 2000, 25 class action complaints were filed
in federal courts in various jurisdictions alleging that we and certain of our
officers and directors violated section 10(b) of the Exchange Act, Rule 10(b)(5)
promulgated thereunder, and section 20(a) and section 20A of the Exchange Act.
Our outside auditor, PricewaterhouseCoopers LLP, was also named in two of the
lawsuits. The complaints contained varying allegations, including that we made
materially false and misleading statements with respect to our 1999, 1998 and
1997 financial results in our filings with the SEC, analysts' reports, press
releases and media reports. In June 2000, these putative class action lawsuits
were consolidated before one judge in the United States District Court for the
Eastern District of Virginia. On July 7, 2000, the lead plaintiffs filed an
amended class action complaint naming us, certain of our officers and directors,
and PricewaterhouseCoopers LLP as defendants. The amended class action complaint
alleges claims under section 10(b), section 20(a) and section 20A of the
Exchange Act. The amended class action complaint does not specify the amount of
damages sought. On July 17, 2000, we filed a motion to dismiss all counts of the
amended complaint. By order dated September 15, 2000, the motion to dismiss was
granted in part as to one count against one of our directors and denied in all
other respects. In addition, in June 2000, purported holders of our common stock
filed a shareholder derivative lawsuit in the Delaware Court of Chancery seeking
recovery for various alleged breaches of fiduciary duties by certain of our
directors and officers relating to our restatement of financial results. We have
filed a motion to dismiss the derivative complaint. No ruling has yet been made
with respect to that motion.
In October, 2000, we announced that we had reached agreements to settle
both the class action lawsuit and the Delaware derivative litigation. Under the
class action settlement agreement, class members will receive: (a) five-year
unsecured promissory notes issued by the Company having an aggregate principal
amount of $80.5 million and bearing interest at 7.5% per year; (b) 550,000
shares of the Company's Class A Common Stock, with the number of shares to be
increased if the market value of the shares, based on the dollar weighted
average trading price during a specified trading period prior to the district
court settlement hearing, is less than $30 per share so that the minimum value
of the shares is $16.5 million; and (c) warrants issued by the Company to
purchase 1.9 million shares of the Company's Class A Common Stock at an exercise
price of $50 per share, with the warrants expiring five years from the date they
are issued. Under the derivative settlement agreement, we will add a new,
independent director with finance experience to the audit committee of our Board
of Directors and will ensure continued adherence with applicable legal and
regulatory requirements regarding the independence of audit committee members
and trading by insiders. In addition, certain of our officers will contribute a
portion of the shares of Class A Common Stock to be issued to class members in
settlement of the class action lawsuit. Specifically, Michael J. Saylor, Sanju
K. Bansal and Mark S. Lynch will contribute to the class action settlement
shares of the Company's Class A Common Stock with a total value of $10 million.
The settlement of the class action lawsuit and the Delaware derivative
litigation are subject to confirmatory discovery, final documentation, court
approval and certain other conditions.
SEC Investigation. In March 2000, we were notified that the SEC had issued
a formal order of private investigation in connection with matters relating to
our restatement of our financial results. The SEC indicated that its inquiry
should not be construed as an indication by the SEC or its staff that any
violation of law has occurred, or as an adverse reflection upon any person,
entity or security. We are cooperating with the SEC in connection with this
investigation and its outcome cannot yet be determined.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 13, 2000 and July 28, 2000, the Company issued and sold 1,000 and 4
unregistered shares of its Class A Common Stock, respectively, for an aggregate
purchase price of $22,165.75. These shares were issued in connection with the
exercise of stock options granted to two employees pursuant to the Company's
1999 Stock Option Plan. The issuance and sale of the securities in the above
transactions were made in reliance on the exemption from registration under the
Securities Act of 1933, as amended, provided by Section 4(2) thereunder. No
underwriters were involved in the foregoing sale of securities.
43
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
3.1 Amended and Restated Certificate of Incorporation of the Company (Filed as Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (Registration No. 333-49899) and incorporated by reference herein)
3.2 Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company (Filed as
Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000 (File
No. 000-24435) and incorporated by reference herein)
3.3 Certificate of Designations, Preferences and Rights of the Series A Convertible Preferred Stock (Filed as
Exhibit 3.1 to the Company's Current Report on Form 8-K (File No. 000-24435) filed on June 19, 2000 and
incorporated by reference herein)
3.4 Restated Bylaws of the Company (Filed as Exhibit 3.2 to the Company's Registration Statement on Form S-
1 (Registration No. 333-49899) and incorporated by reference herein)
4.1 Form of Certificate of Class A Common Stock of the Company (Filed as Exhibit 4.1 to the Company's
Registration Statement on Form S-1 (Registration No. 333-49899) and incorporated by reference herein)
10.1 Series A Preferred Stock Purchase Agreement by and among Strategy.com Incorporated, Aether Capital LLC
and the other parties thereto, dated as of October 18, 2000 (Filed as Exhibit 10.1 to the Company's Current
Report of Form 8-K (File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein)
10.2 Amended and Restated Certificate of Incorporation of Strategy.com Incorporated, dated as of October 17, 2000
(Filed as Exhibit 10.2 to the Company's Current Report of Form 8-K (File No. 000-24435) filed on November 6, 2000
and incorporated by reference herein)
10.3 Investor Rights Agreement by and among Strategy.com Incorporated, the Company, Aether Capital LLC and the other
parties thereto, dated as of October 18, 2000 (Filed as Exhibit 10.3 to the Company's Current Report of Form
8-K (File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein)
10.4 Stockholders's Voting Agreement by and among Strategy.com Incorporated, the Registrant, Aether Capital LLC and
the other parties thereto, dated as of October 18, 2000 (Filed as Exhibit 10.4 to the Company's Current Report
of Form 8-K (File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein)
10.5 Memorandum of Understanding by and among the Company, Strategy.com Incorporated and certain other affiliates of
the Company, dated as of October 17, 2000 (Filed as Exhibit 10.5 to the Company's Current Report of Form 8-K
(File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein)
10.6 United States Intellectual Property Assignment and License Back Agreement by and between the Registrant and
Strategy.com Incorporated, dated as of October 17, 2000 (Filed as Exhibit 10.6 to the Company's Current
Report of Form 8-K (File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein)
10.7 U.S. Intellectual Property License Agreement by and between the Company and Strategy.com Incorporated, dated
as of October 17, 2000 (Filed as Exhibit 10.7 to the Company’s Current Report of Form 8-K (File No.
000-24435) filed on November 6, 2000 and incorporated by reference herein)
10.8 U.S. Software License Agreement by and between the Company and Strategy.com Incorporated, dated as of October
44
17, 2000 (Filed as Exhibit 10.8 to the Company's Current Report of Form 8-K (File No. 000-24435) filed on
November 6, 2000 and incorporated by reference herein)
10.9 International Software License Agreement by and between MicroStrategy International II Limited and Strategy.com
International Limited, dated as of October 17, 2000 (Filed as Exhibit 10.9 to the Company's Current Report of
Form 8-K (File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein)
10.10 International Intellectual Property License Agreement by and between MicroStrategy International II Limited and
Strategy.com International Limited, dated as of October 17, 2000 (Filed as Exhibit 10.10 to the Company's
Current Report of Form 8-K (File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein)
10.11 Memorandum of Understanding regarding the settlement of the class action lawsuit, dated as of October 23, 2000
(Filed as Exhibit 10.11 to the Company's Current Report of Form 8-K (File No. 000-24435) filed on November
6, 2000 and incorporated by reference herein)
27.1 Financial Data Schedule
45
B. Reports on Form 8-K
On August 3, 2000, the Company filed a Current Report on Form 8-K, dated
July 26, 2000, announcing its financial results for the three month period ended
June 30, 2000 and changes to the Company's management.
All other items are omitted because they are not applicable or the answers
are none.
46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Microstrategy Incorporated
By: /s/ Michael J. Saylor
-----------------------------
Michael J. Saylor
Chief Executive Officer
By: /s/ Eric F. Brown
----------------------------
Eric F. Brown
President and
Chief Financial Officer
Date: February 20, 2001
47
EXHIBIT INDEX
3.1 Amended and Restated Certificate of Incorporation of the Company (Filed as Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (Registration No. 333-49899) and incorporated by reference herein)
3.2 Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company (Filed as
Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000 (File
No. 000-24435) and incorporated by reference herein)
3.3 Certificate of Designations, Preferences and Rights of the Series A Convertible Preferred Stock (Filed as
Exhibit 3.1 to the Company's Current Report on Form 8-K (File No. 000-24435) filed on June 19, 2000 and
incorporated by reference herein)
3.4 Restated Bylaws of the Company (Filed as Exhibit 3.2 to the Company's Registration Statement on Form S-
1 (Registration No. 333-49899) and incorporated by reference herein)
4.1 Form of Certificate of Class A Common Stock of the Company (Filed as Exhibit 4.1 to the Company's
Registration Statement on Form S-1 (Registration No. 333-49899) and incorporated by reference herein)
10.1 Series A Preferred Stock Purchase Agreement by and among Strategy.com Incorporated, Aether Capital LLC and
the other parties thereto, dated as of October 18, 2000 (Filed as Exhibit 10.1 to the Company's Current Report
of Form 8-K (File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein)
10.2 Amended and Restated Certificate of Incorporation of Strategy.com Incorporated, dated as of October 17, 2000
(Filed as Exhibit 10.2 to the Company's Current Report of Form 8-K (File No. 000-24435) filed on November 6, 2000
and incorporated by reference herein)
10.3 Investor Rights Agreement by and among Strategy.com Incorporated, the Company, Aether Capital LLC and the other
parties thereto, dated as of October 18, 2000 (Filed as Exhibit 10.3 to the Company’s Current Report of Form 8-K
(File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein)
10.4 Stockholders' Voting Agreement by and among Strategy.com Incorporated, the Registrant, Aether Capital LLC and the
other parties thereto, dated as of October 18, 2000 (Filed as Exhibit 10.4 to the Company's Current Report of
Form 8-K (File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein)
10.5 Memorandum of Understanding by and among the Company, Strategy.com Incorporated and certain other affiliates of the
Company, dated as of October 17, 2000 (Filed as Exhibit 10.5 to the Company's Current Report of Form 8-K (File
No. 000-24435) filed on November 6, 2000 and incorporated by reference herein)
10.6 United States Intellectual Property Assignment and License Back Agreement by and between the Registrant and Strategy.com
Incorporated, dated as of October 17, 2000 (Filed as Exhibit 10.6 to the Company's Current Report of Form 8-K
(File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein)
10.7 U.S. Intellectual Property License Agreement by and between the Company and Strategy.com Incorporated, dated as of
October 17, 2000 (Filed as Exhibit 10.7 to the Company's Current Report of Form 8-K (File No. 000-24435) filed on
November 6, 2000 and incorporated by reference herein)
10.8 U.S. Software License Agreement by and between the Company and Strategy.com Incorporated, dated as of October 17, 2000
(Filed as Exhibit 10.8 to the Company's Current Report of Form 8-K (File No. 000-24435) filed on November 6, 2000 and
incorporated by reference herein)
48
10.9 International Software License Agreement by and between MicroStrategy International II Limited and Strategy.com
International Limited, dated as of October 17, 2000 (Filed as Exhibit 10.9 to the Company's Current Report of
Form 8-K (File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein)
10.10 International Intellectual Property License Agreement by and between MicroStrategy International II Limited and
Strategy.com International Limited, dated as of October 17, 2000 (Filed as Exhibit 10.10 to the Company's
Current Report of Form 8-K (File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein)
10.11 Memorandum of Understanding regarding the settlement of the class action lawsuit, dated as of October 23, 2000
(Filed as Exhibit 10.11 to the Company's Current Report of Form 8-K (File No. 000-24435) filed on November
6, 2000 and incorporated by reference herein)
27.1 Financial Data Schedule
49