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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1999
OR
[_] Transition Report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number 000-24435
MICROSTRATEGY INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation)
51-0323571
(I.R.S. Employer Identification Number)
8000 Towers Crescent Drive, Vienna, VA
(Address of Principal Executive Offices)
22182
(Zip Code)
Registrant's telephone number, including area code: (703) 848-8600
Securities registered pursuant to Section 12(b) of the Act: Not applicable
Securities registered pursuant to Section 12(g) of the Act:
Class A common stock, par value $0.001 per share
(Title of class)
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant (based on the last reported sale price of the Registrant's Class A
common stock on March 1, 2000 on the Nasdaq National Market) was approximately
$4.6 billion.
The number of shares of the registrant's Class A common stock and Class B
common stock outstanding on March 1, 2000 was 23,563,492 and 55,466,929,
respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 2000 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.
ii
MICROSTRATEGY INCORPORATED
TABLE OF CONTENTS
PART I Page
----
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 19
Item 3. Legal Proceedings........................................... 20
Item 4. Submission of Matters to a Vote of Security Holders......... 20
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters......................................... 21
Item 6. Selected Financial Data..................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 23
Item 7a. Quantitative and Qualitative Disclosures about Market Risk.. 43
Item 8. Financial Statements and Supplementary Data................. 43
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 44
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 44
Item 11. Executive Compensation...................................... 44
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 44
Item 13. Certain Relationships and Related Transactions.............. 44
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................... 44
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CERTAIN DEFINITIONS
All references in this Annual Report on Form 10-K to "MicroStrategy", "we",
"us", and "our" refer to MicroStrategy Incorporated and its consolidated
subsidiaries (unless the context otherwise requires).
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended. For
this purpose, any statements contained herein that are not statements of
historical fact, including without limitation, certain statements under "Item
1. Business" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and located elsewhere herein regarding
industry prospects and our results of operations or financial position, may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects," and similar
expressions are intended to identify forward-looking statements. The important
factors discussed below under the caption "Business--Risk Factors," among
others, could cause actual results to differ materially from those indicated by
forward-looking statements made herein and presented elsewhere by management
from time to time. Such forward-looking statements represent management's
current expectations and are inherently uncertain. Investors are warned that
actual results may differ from management's expectations.
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PART I
ITEM 1. BUSINESS
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 communication devices. Our
platform is designed for developing e-business solutions that are personalized
and proactive and that reach millions of users. We offer a comprehensive set of
consulting, education and technical support services for our customers and
partners.
In July 1999, we launched a new business unit called Strategy.com.
Strategy.com is our personal intelligence network, a new form of media that
brings speed to transactions by actively delivering highly personalized,
relevant and timely information to individuals through a wide variety of
delivery methods, including e-mail, telephone and wireless devices. The
Strategy.com network leverages the MicroStrategy software platform and is
organized around a suite of information channels. The network currently operates
a Finance Channel and plans to launch additional channels on subjects such as
weather, news, politics, arts, traffic, travel and entertainment. Strategy.com
syndicates its channels through other companies that serve as network affiliates
and network associates, which we refer to collectively as affiliates. Affiliates
offer the Strategy.com channels and services on a co-branded basis directly to
their customers and in turn share with Strategy.com a percentage of the revenues
they generate. Strategy.com also provides application maintenance, development,
customer billing, hosting and support services for those channels, enabling
affiliates to focus on their core businesses. Strategy.com has established more
than 100 network affiliate agreements with leading Internet companies,
communications carriers, media companies and financial institutions and now has
approximately 300,000 subscribers for its Strategy.com Finance Channel.
Strategy.com had recognized no revenue as of December 31, 1999.
Recent Developments
Our operations and prospects have been and are significantly affected by the
recent developments described below.
Restatement of Financial Results. We are revising our 1999, 1998 and 1997
financial statements. The principal reason for these revisions to revenues and
operating results was to conform with the accounting principles articulated in
Statement of Position 97-2 "Software Revenue Recognition." These revisions
primarily addressed the recognition of revenue for certain software arrangements
which should be accounted for under the subscription method or the percentage of
completion method, which spread the recognition of revenue over the entire
contract period. For example, when fees are received in a transaction in which
we are licensing software and also performing significant development,
customization or consulting services, the fees should be recognized using the
percentage of completion method and, therefore, product license and product
support and other services revenue are recognized as work progresses. Revenue
from arrangements where we
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provide hosting services is generally recognized over the hosting term, which is
generally two to three years. The effect of these revisions is to defer the time
in which revenue is recognized for large, complex contracts that combine both
products and services. These revisions also resulted in a substantial increase
in the amount of deferred revenue reflected on our balance sheet at the end of
1999 and 1998. Additionally, these revisions include the effects of changes in
the reporting periods when revenue from certain contracts are recognized. In the
course of reviewing our revenue recognition on various transactions, we became
aware that, in certain instances, we had recorded revenue on certain contracts
in one reporting period where customer signature and delivery had been
completed, but where the contract may not have been fully executed by us in that
reporting period. We subsequently reviewed license agreements executed near the
end of the years 1999, 1998 and 1997 and determined that revisions were
necessary to ensure that all agreements for which we were 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.
With the concurrence of our auditors, we reduced our 1999 reported revenue
from $205.3 million to $151.3 million and our results of operations from diluted
net income per share of $0.15 to a diluted net loss per share of $(0.44).
Correspondingly, deferred revenue at December 31, 1999 increased from $16.8
million to $71.3 million. We also reduced our reported revenue for 1998 from
$106.4 million to $95.5 million and our results of operations from diluted net
income per share of $0.08 to diluted net loss per share of $(0.03). In addition,
we reduced our reported revenue for 1997 from $53.6 million to $52.6 million and
our results of operations from diluted net income per share of $0.00 to diluted
net loss per share of $(0.02).
We also made certain revisions to our balance sheet as of December 31, 1999.
These revisions include a reclassification of approximately $21.5 million from
accounts receivable to short-term investments relating to the value of proceeds
from a software transaction that was received in the form of a right to receive
shares of the customer's common stock. We also recorded an increase to goodwill
of approximately $31.4 million, net of the increase in amortization, relating to
the purchase of the intellectual property and other tangible and intangible
assets, including the assembled workforce relating to NCR's Teracube project in
exchange for 566,372 shares of our Class A common stock. We made this revision
as a result of a re-measurement of the purchase price of the Teracube assets to
reflect the value of our Class A common stock on the transaction's closing date.
In addition, we reduced fixed assets by approximately $8.8 million, net of the
decrease in depreciation, in order to record software received for resale and
software acquired for internal use in barter transactions at the book value of
our assets surrendered in the exchange. Approximately $5.0 million of the
reduction in fixed assets is a reduction in revenue, as restated. Of this
amount, no revenue will be recorded unless this software is resold. See Note 3
to the Consolidated Financial Statements.
As a result of the foregoing revisions to our 1999, 1998 and 1997 financial
statements, we will also be amending other Securities and Exchange Commission
("SEC") filings to reflect the revisions to our quarterly results in those
periods. Our financial statements and announced earnings for those quarterly
periods should not be relied upon.
Legal Proceedings.
Actions Arising under Federal Securities Laws. In March 2000, numerous
separate complaints purporting to be class actions were filed in federal courts
in various jurisdictions alleging that we and certain of our officers and
directors violated section 10(b) of the Securities Exchange Act of 1934, as
amended, Rule 10b-5 promulgated by the SEC thereunder, and section 20(a) of the
Securities Exchange Act of 1934, as amended.
The complaints contain varying allegations, including that we made materially
false and misleading statements with respect to our 1999 and 1998 financial
results in our filings with the SEC, analysts' reports, press releases and media
reports. The complaints do not specify the amount of damages sought.
We have not filed any answers, motions to dismiss or other responsive
pleadings in this litigation. We intend to defend this matter vigorously.
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SEC Investigation. In March 2000, we were notified that the SEC had issued a
formal order of private investigation in connection with matters relating to our
restatement of our financial results. The SEC has requested that we provide them
with certain documents concerning the revision of our financial results and
financial reporting documents. The SEC indicated that its inquiry should not be
construed as an indication by the SEC or its staff that any violation of law has
occurred, nor as an adverse reflection upon any person, entity or security. We
are cooperating with the SEC in connection with this investigation and its
outcome cannot yet be determined.
Industry Background
The emergence and widespread acceptance of the Internet as a medium of
communication and commerce has dramatically changed the way businesses interact
with each other and with their customers. According to International Data
Corporation ("IDC"), worldwide spending on Internet business infrastructure will
increase from $211 billion in 1998 to $1.5 trillion in 2003, a compound annual
growth rate of approximately 48%. The Internet provides opportunities for
businesses to establish new revenue streams, create new distribution channels
and reduce costs. For example, companies are using Internet-based systems to
facilitate business operations, including sales automation, supply-chain
management, marketing, customer service and human resource management. Consumers
are also becoming increasingly sophisticated in their use of the Internet,
relying on the Internet not only to make online purchases, but to perform price
comparisons, analyze recommendations from like-minded individuals and educate
themselves about relevant products and offerings. The integration of the
Internet into business processes and increased consumer sophistication create
opportunities for companies to use intelligent e-business systems as part of a
more dynamic business model. Factors increasing demand for these systems
include:
Increased Electronic Capture of Transaction and Customer Information. The
rapid growth in the electronic capture of business transactions and the
increased availability of related profile data on the parties or products
involved in each transaction are providing businesses with a rich data
foundation for one-to-one customer interactions. Powerful data analysis tools
are required to sift through massive amounts of data to uncover information
regarding customer interactions, in turn enabling organizations to provide
superior service and products to customers.
Need to Create a Personalized, One-to-One Customer Experience While
Maintaining Privacy. Many companies are initiating one-to-one marketing
strategies that establish personalized relationships with each customer based on
their individual needs and preferences and earn customer loyalty by providing
superior service, security and convenience. In order to successfully acquire,
retain and upgrade customers, organizations need to understand their profiles,
their transaction history, their past responses to marketing campaigns, and
their interactions with customer service. Retrieving information from widely
dispersed and complex data sources and providing a holistic view of the customer
can be challenging. At the same time, while businesses have the opportunity to
collect a variety of information that could improve targeting, customers are
increasingly concerned about the potential for loss or abuse of their privacy.
Need to Integrate Online and Traditional Operations. While there are
substantial benefits to conducting business electronically, companies need to
ensure that their online operations work in concert with their traditional
bricks and mortar operations. Companies are seeking to ensure that an order
placed online can be reliably fulfilled according to the expectations of the
customer and to develop and maintain consistent interactions with customers
across different channels. Maintaining the integrity of, and enhancing, the
customer experience is crucial to fostering customer loyalty.
Emergence of Wireless Internet and Voice Technologies. Information can be more
valuable if there is untethered, ubiquitous access to the information. The
recent development of the wireless application protocol and improvements in
text-to-speech and voice-recognition technologies have created a uniform
technology
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platform for delivering Internet-based information and services to digital
mobile phones and other wireless devices. According to IDC, the total value of
wireless Internet transactions will increase from $4.3 billion in 1998 to more
than $38.0 billion by 2003, a compound annual growth rate of approximately 55%.
This development is expected to generate new business opportunities for
companies by providing an additional channel for existing services and creating
opportunities to provide new services that can be delivered any place and at any
time to anyone that has access to a wireless device. For instance, customers of
an online brokerage company will have the capability not only to get stock
portfolio updates and alerts over their phones, but will also be able to
immediately act on that information and buy or sell securities through a
wireless device.
The MicroStrategy Solution
MicroStrategy offers a comprehensive suite of software products and services
that enable businesses to develop and deploy intelligent e-business systems.
MicroStrategy's solution enables organizations seeking a strong, personalized
relationship with their customers to better understand customer interactions and
actively deliver personalized information to customers through the Internet, e-
mail, telephones or wireless devices.
Optimized Support for Large Data Volumes and All Major Relational
Database/Hardware Combinations. The MicroStrategy platform supports systems with
very large data volumes and is specifically designed to support all major
relational database platforms commonly used for intelligent e-business systems.
Important features of our solution in this area include:
. structured query language optimization drivers that improve performance of
each major database;
. ability to support very large user populations;
. designed to maximize up-time, even in high volume applications; and
. ability to work with many languages for international applications.
Extremely Powerful Analytics to Customer- and Transaction-Levels of Detail. We
believe that the MicroStrategy platform incorporates the most sophisticated
analysis engine available today, capable of answering highly detailed business
questions. The MicroStrategy platform offers support for information beyond the
summary level to include information at the customer transaction and interaction
level. This capability is critical to a wide range of applications, including
highly targeted direct marketing, e-commerce site personalization, customer and
product affinity analysis, call detail analysis, fraud detection, credit
analysis forecasting and trend metrics and campaign management. The
MicroStrategy platform allows the creation of highly sophisticated systems that
take e maximum advantage of the detail available in a company's databases.
Powerful Personalization Engine. The MicroStrategy platform includes a
customer transaction-level personalization engine. The underlying architecture
is designed to generate personalization parameters based on data gathered by an
organization from a variety of sources, including past customers' transactions,
customer clickstream information, stated user preferences and demographic
information. In addition, the MicroStrategy personalization engine is able to
determine when and under what circumstances a person is automatically provided
with a set of information.
Interactive Broadcast Engine for Delivery and Response Using Internet, E-mail,
Wireless or Voice Media. Our technology offers a high performance personalized
broadcast engine for delivering periodic- and alert-based information to people
via Internet, e-mail, wireless devices and traditional telephone via text-to-
speech conversion. The broadcast engine includes drivers for all major device
types used in both domestic and international markets enabling the delivery of
information to users when and where it is needed. In addition, users can respond
to a message delivered by the MicroStrategy broadcast engine. For example, a
store manager
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can be alerted via a personal digital assistant that an item is out of stock and
order additional inventory using this device.
Strategy
Our objective is to become the leading provider of intelligent e-business
software and related services to the largest 2000 enterprises in the world and
leading Internet businesses. The key elements of our strategy to achieve this
objective are as follows:
Marketing Strategy--Increase Brand Awareness. Our marketing strategy focuses
on communicating the possibilities for value creation through the use of our
intelligent e-business platform. We focus primarily upon the largest 2000
enterprises in the world, leading Internet businesses and high-volume data
providers. In January 2000, we launched an aggressive branding campaign through
traditional television and print media to expand awareness of the MicroStrategy
brand. We believe that by creating greater awareness of the company and the
value of our intelligent e-business solutions, we will generate not only greater
brand awareness for MicroStrategy, but also a larger group of potential
customers by helping them understand the advantages of intelligent e-business.
Technology Strategy--Provide a Scalable, Sophisticated and Maintainable
Intelligent E-Business Platform. We have designed our platform to be highly
scalable, sophisticated, reliable and easy to maintain. Our technology strategy
is focused on expanding our support for large customer oriented information
stores, enhancing our analysis and segmentation capabilities, strengthening our
personalization technology, enhancing our broadcasting functionality to the
broadest set of consumer devices and providing a platform that can be easily
integrated with e-commerce transaction engines. As part of this strategy, we are
developing technology that further differentiates our product offerings by
increasing functionality along the following key dimensions:
. personalization--the quality and sophistication of a one-to-one user
experience;
. content flexibility--the range of content, both structured and
unstructured, that can be efficiently utilized;
. media channel and interface flexibility--the range of media channels,
interface options, and display features supported;
. capacity--the volume of information that can be efficiently analyzed and
utilized;
. concurrency--the number of users which can be supported simultaneously;
. sophistication--the range of analytical methods available to the
application designer;
. performance--the response time of the system;
. database flexibility--the range of data sources, data warehouses and online
transaction processing databases which the software is capable of
efficiently querying without modification;
. robustness--the reliability and availability of the software in mission
critical environments; and
. deployability--the ease with which applications can be deployed, modified,
upgraded and tuned.
Sales Strategy--Increase Market Share Among World's 2000 Largest Companies,
Leading Internet Businesses and High-Volume Data Providers. Our sales strategy
focuses on building direct sales capabilities
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and relationships with indirect channel partners in order to increase market
share among the world's 2000 largest companies, leading Internet businesses, and
high-volume data providers, both domestically and abroad. We also seek to
increase sales to our installed base of customers by offering a range of
software and services utilizing our core intelligent e-business platform. In
order to improve customer satisfaction and to generate additional sales to
current and prospective customers, we are also expanding our active consulting
practice to enable existing customers to fully utilize the capabilities of their
existing product implementations and to ensure that current customers have
access to our field engineering and telephone support. Finally, we are expanding
our education program to enhance our potential customers' and channel partners'
understanding of the power of intelligent e-business applications.
Products
We offer a comprehensive suite of intelligent e-business software, known as
MicroStrategy 6, that is designed to enable businesses to turn information into
strategic insight, transform customer interactions into relationships and make
more effective business decisions. The following are the components of the
MicroStrategy 6 platform:
MicroStrategy Intelligence Server. MicroStrategy Intelligence Server is the
foundation for all of our intelligent e-business products. It performs
sophisticated analysis on information captured from multiple data sources. With
the ability to support millions of users, MicroStrategy Intelligence Server has
the capacity to power the most complex intelligent e-business solutions.
We believe that MicroStrategy Intelligence Server is the most sophisticated
analysis engine available today, capable of answering highly detailed business
questions. Its robust relational analysis technology enables organizations to
conduct large-scale product affinity and product profitability analyses,
research customer preferences through sales, contribution, and pricing analysis,
and compare present and historical customer retention data with forecasting and
trend metrics. MicroStrategy Intelligence Server generates highly optimized
queries through its very large database drivers, enabling high throughput and
fast response times.
MicroStrategy Intelligence Server is designed to be fault tolerant to ensure
system availability and guarantee high performance. Through an enterprise
management console, MicroStrategy Intelligence Server provides a sophisticated
array of enterprise management tools, such as caching and query prioritization
to streamline performance and batch job scheduling, which helps to maintain
disparate and diverse user communities. Administrators can automate the dynamic
adjustments of system and user governing settings, such as user thresholds and
database thread priorities, in order to smooth the database workload and ensure
the high performance that large user communities require.
MicroStrategy Web. MicroStrategy Web provides easy-to-use, interactive,
sophisticated analysis which extends the information access and analysis
capabilities of MicroStrategy Intelligence Server to any user with a web
browser. Using the MicroStrategy Web infrastructure, corporations can rapidly
implement systems that allow local and remote users to develop and access
sophisticated reports containing information from their relational databases.
MicroStrategy Web provides a graphical user interface designed to boost end-
user efficiency. Users gain access to an array of options for data exploration
and analysis, such as spreadsheet grids and a wide variety of graphs. A flexible
architecture enables businesses to implement a standardized structure for
analysis and ensure consistent work practices. Through MicroStrategy Web's
reporting capabilities, users receive key elements of a report in easily
understood, plain English messages. MicroStrategy Web also allows users to
dynamically analyze data with higher levels of detail to view the underlying
information or to create and save new analyses. In addition, MicroStrategy Web's
security plug-ins enable businesses to limit access to sensitive information.
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MicroStrategy Web includes an application protocol interface that allows
businesses to customize, integrate and embed MicroStrategy Web functionality
into other applications. For example, a data syndicate for healthcare
information could utilize MicroStrategy Web with a customized interface to sell
access to this information to HMOs, hospitals and pharmacies.
MicroStrategy Broadcaster. MicroStrategy Broadcaster is a powerful content
generation and information broadcast server designed to actively deliver
personalized information to millions of recipients via the Internet, e-mail,
telephone and wireless devices. MicroStrategy Broadcaster delivers targeted
information to individuals on an event-triggered or scheduled basis through the
consumer communication device that is most convenient. It provides both an
engine to implement targeted information messaging to acquire and retain
customers and a platform for distributing information throughout the corporate
enterprise and to customers, suppliers, and other constituencies.
MicroStrategy Agent. MicroStrategy Agent provides an advanced environment for
rapid application development and sophisticated analysis. It provides an object-
oriented view of business data--converting a company's business data into a
virtual library of valuable information, enabling users to develop sophisticated
business metrics, filtering criteria and pre-defined report templates.
Applications developed within MicroStrategy Agent are easily deployed throughout
the MicroStrategy architecture bringing integrated query and reporting
capabilities, powerful analytics and decision support workflow to analysts,
quantitative users and end users throughout the enterprise and beyond.
These applications provide better understanding of a business or customer base
through analyses such as customer profiling, clickstream analysis and sales and
inventory analyses.
MicroStrategy InfoCenter. MicroStrategy InfoCenter is a web-based interface
that can be used with existing web applications to provide targeted product
offerings over many devices. Through MicroStrategy InfoCenter, users subscribe
to information services by providing personal information and preferences,
ensuring that users receive personalized, appropriate product offerings and
information. Its integration with MicroStrategy Broadcaster and MicroStrategy
Telecaster is designed to allow the delivery of the appropriate offering via the
appropriate medium at the appropriate time.
MicroStrategy InfoCenter can be used by companies to create one-to-one
marketing campaigns, learn more about their customers and increase customer
click-through and sales. MicroStrategy InfoCenter also can be used within an
enterprise by customer relationship managers to view reports on their customer
base, analyze their campaigns and take action upon them.
MicroStrategy Telecaster. MicroStrategy Telecaster is an intelligent voice
broadcast server that enables organizations to deliver fully personalized
information services to employees, partners, suppliers or customers over any
telephone or voice mail system.
MicroStrategy Telecaster notifies end-users of relevant news based on
schedules or exception criteria such as a close of market portfolio update or an
inventory reorder point. When a user picks up the call, information is presented
in natural language and structured in a fully interactive and individually
tailored format. MicroStrategy Telecaster not only creates a personal message,
but also generates the appropriate menu of response options on a one-to-one
basis. Users can then select the appropriate option by simply pressing a button
on the phone keypad.
MicroStrategy Telecaster is designed to enable voice-based interaction via
two-way electronic devices. MicroStrategy Telecaster can process user input,
such as the selection of an alternate flight, or the number of shares that
should be traded, to communicate in real-time with any external database,
transaction or e-commerce system and call centers and telephone applications.
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MicroStrategy Telecaster's combination of analysis, broadcast, personalization
and interaction capabilities facilitates its use in a variety of intelligent e-
business applications, including:
. reminder services, such as drug refills;
. event based notification services, such as flight delays and bank account
notifications;
. personal intelligence, such as financial, news, weather, traffic and sports
information; and
. sales force automation and internal reporting services, such as sales
reports.
MicroStrategy Administrator. MicroStrategy Administrator enables
administrators to efficiently maintain large-scale data warehouse applications
supporting millions of users. Project migration utilities help administrators
develop, test and deploy systems. Performance analysis enables administrators to
monitor and tune systems for maximum performance and availability.
MicroStrategy Architect. MicroStrategy Architect is a development environment
for intelligent e-business applications. Software developers can use this
product to design powerful enterprise and e-business intelligence systems
rapidly. MicroStrategy Architect is highly automated and is based on an open,
flexible architecture, which greatly reduces the cost and time required to
implement and maintain systems.
Consulting, Education and Customer Support
Our services and customer support capabilities are as follows:
MicroStrategy Consulting--Intelligent E-Business Management and Technical
Consulting. MicroStrategy Consulting facilitates the development of high-end
applications for our customers. Our consultants design and implement scalable,
high performance applications that run against multi-terabyte databases for
companies throughout the world. MicroStrategy Consulting's mission is to provide
services that ensure customer success and return on investment through full use
of our advanced technology.
MicroStrategy Education--Intelligent E-Business Education Programs.
MicroStrategy Education provides our customers with a thorough understanding of
our products and the implementation of intelligent e-business systems through
quality instruction and hands-on experience. With nearly ten years of experience
training a diverse customer base, we have developed a comprehensive set of
education programs designed to help customers get up to speed quickly on
intelligent e-business technologies. Representative courses from our training
curriculum include:
. Introduction to Intelligent E-Business;
. MicroStrategy Fast Track for Developers;
. MicroStrategy Server Platforms: Administration;
. MicroStrategy Broadcaster: Intelligence Everywhere;
. E-Business: Methodology and Architecture;
. MicroStrategy InfoCenter: Personal Information Gateway; and
. MicroStrategy Telecaster: Personalized Voice Broadcast Server.
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MicroStrategy Support--Hotline, Knowledge Base and Field Engineering Services.
MicroStrategy technical support provides support services designed to help
customers extract the highest return on investment from our products.
MicroStrategy technical support offers a variety of support options geared to
resolve technical issues quickly and efficiently whenever they arise.
Customer Case Studies
The following case studies illustrate the application and implementation of
our products and related services by several of our customers.
GE Capital Fleet Services. GE Capital Fleet Services, one of the world's
leading vehicle fleet management companies, uses our intelligent e-business
platform to deliver innovative customer services as part of an overall e-
business strategy. The company deployed MicroStrategy Web to give its customers
desktop access to specific fleet information. MicroStrategy Web allows GE
Capital Fleet Services and its customers to extract valuable information from
its data warehouse. Customers use the tool to compare service histories of
different car models, identify drivers who are most accident-prone or review the
fleet's monthly mileage.
Additionally, with MicroStrategy Broadcaster, customers receive proactive
vehicle maintenance reminders. MicroStrategy Broadcaster automatically sends
personalized maintenance reminders directly to vehicle drivers via e-mail,
telephone or wireless device. According to GE Capital Fleet Services, the
innovative vehicle fleet management services made possible by the MicroStrategy
intelligent business platform are saving the company millions of dollars in
printing and postage costs and are creating stronger customer relationships.
First Union. First Union is the nation's sixth largest financial institution,
with more than $230 billion in assets under management. The company uses our
intelligent e-business platform to manage relationships with more than 16
million customers. First Union runs MicroStrategy Web against a 27-terabyte data
warehouse, one of the largest in the banking industry, to retrieve valuable
insights. MicroStrategy Web enables authorized First Union users to quickly and
easily obtain a comprehensive view of customer relationships, analyze their
current and potential profitability and improve business relationships with
them. The tool allows authorized users to analyze critical customer information
and create detailed product and marketing reports quickly. For example,
authorized users can quickly identify how many customers have a high balance
checking account and who would likely be interested in asset management
services. These sales leads are then automatically sent to First Union's sales
and services organizations for direct, personalized marketing efforts.
NBCi. NBC Interactive, known as NBCi, is a leading Internet integrated media
company. NBCi uses our intelligent e-business platform to conduct advanced
clickstream analysis of daily traffic to its Snap and XOOM.com web sites. The
resulting insight helps site managers improve their services and deliver a more
personal online experience for users. In addition, MicroStrategy Web enables
Snap and XOOM.com product, channel and marketing managers to identify user
preference and demographic information with the click of a mouse. NBCi also uses
MicroStrategy Broadcaster to send managers regular information updates via e-
mail.
With these tools, NBCi is able to identify the most popular content on its
sites, as well as areas that may need additional support. Detailed customer
information also supports Snap and XOOM.com efforts to attract advertisers who
want to reach specific demographic markets.
Strategy.com
In July 1999, we launched a new business unit called Strategy.com.
Strategy.com is our personal intelligence network, a new form of media that
brings speed to transactions by actively delivering highly
9
personalized, relevant and timely information to individuals through a wide
variety of delivery methods, including e-mail, telephone and wireless devices.
The Strategy.com network leverages the MicroStrategy software platform and is
organized around a suite of information channels. The network currently operates
a Finance Channel and plans to launch additional channels on subjects such as
weather, news, politics, arts, traffic, travel and entertainment. Strategy.com
syndicates its channels through other companies that serve as network affiliates
and network associates, which we refer to collectively as affiliates. Affiliates
offer the Strategy.com channels and services on a co-branded basis directly to
their customers and in turn share with Strategy.com a percentage of the revenues
they generate. Strategy.com also provides application maintenance, development,
customer billing, hosting and support services for those channels, enabling
network affiliates and associates to focus on their core businesses.
Strategy.com has established more than 100 network affiliate agreements with
leading Internet companies, communications carriers, media companies and
financial institutions and now has approximately 300,000 subscribers for its
Strategy.com Finance Channel. Strategy.com has recognized no revenue as of
December 31, 1999. The key attributes of the Strategy.com network are as
follows:
Personal Intelligence Agent. Strategy.com functions as a personal intelligence
agent that operates on the user's behalf and is based on a set of permissions
and requirements specified by the user. Strategy.com goes beyond sending
scheduled information updates by allowing users to choose to be notified
immediately upon the occurrence of a predefined event. These capabilities enable
consumers to receive tailored, pertinent and timely information. As the
Strategy.com network expands, we intend to develop Strategy.com's software
agents to act, with permission, proactively on the user's behalf. For example,
in the future the user may be able to specify conditions under which
Strategy.com could transfer assets from one financial institution to another,
based on relative interest rates. We believe that this capability will provide
significant value to consumers.
Diverse Delivery Methods. We deliver Strategy.com services to devices in three
general categories -- web, wireless and voice. A major component of
Strategy.com's technology strategy is to take advantage of the capabilities of
the wireless application protocol and the improvements in text-to-speech and
voice-recognition technologies to create a robust and content-rich wireless
Internet portal. Strategy.com believes it can exploit its position as one of the
first to market in this area to facilitate e-commerce transactions and expand
its network and base of subscribers. In the future, Strategy.com intends to
provide users the ability to buy or sell stock, purchase merchandise and make
reservations after receiving information on their wireless and other devices,
eliminating the need to use a computer or speak with someone on the telephone.
Our goal is to allow users to move beyond the desktop and allow us to
significantly broaden our reach by interacting with consumers throughout the day
via the most convenient means available.
Unique Personalization. Unlike traditional television, radio and cable
networks which send the same content to all audience members and which require
users to initiate the use of a dedicated device, Strategy.com allows individuals
to subscribe to the selected programs and services that interest them and to
receive richer, more detailed information via the delivery mechanism of their
choice. Subscribers will be able to access personalized updates on a range of
subjects using their wireless devices.
Content. Strategy.com's network is organized around content-specific channels.
Its initial channels are:
. Strategy.com Finance: As the first channel of the Strategy.com network,
Strategy.com Finance provides consumers with personalized portfolio and
market reports via the device of their choice. Strategy.com Finance
provides users with a variety of information, from intra-day stock movement
alerts to a personalized portfolio analysis sent via Excel spreadsheets. In
the future, Strategy.com intends to also allow users to conduct trades and
other financial transactions through the Internet or using their wireless
devices after receiving Strategy.com Finance alerts.
. Strategy.com Weather: Strategy.com Weather is currently operating on a test
basis and is expected to be commercially available in the second quarter of
2000. Strategy.com delivers personalized weather
10
reports, forecasts and alerts for over 55,000 locations across the globe.
Strategy.com will offer subscribers features such as severe weather alerts,
beach and boating reports and weekly forecasts, along with the convenience
of receiving personalized weather information.
. Strategy.com News: Strategy.com News is currently operating on a test basis
and is expected to be commercially available in the second quarter of 2000.
Strategy.com will deliver breaking news, news alerts and local and global
updates. Strategy.com News utilizes data from numerous content providers
and covers over 20,000 stories a day. Subscribers will have the ability to
easily personalize Strategy.com News so they only receive stories about the
issues and locations that are of importance to them.
Strategy.com has entered into agreements with leading content and data
providers, including the following:
Media General Financial Services Weather Labs
Standard & Poor's Briefing.com
Zacks AFP
National Weather Service Comtex
SportsTicker Metro Networks
We also have agreements with smaller local and specialized providers to supply
content for our channels. We expect to focus our efforts on content providers
that can provide comprehensive coverage and that feature content that has the
potential for targeting e-commerce opportunities.
We have established more than 100 network affiliate agreements with Internet
companies, communication carriers, media companies and financial institutions
such as Ameritrade, Belo, Metrocall, Nasdaq, Phillips International, Primark,
The Wall Street Journal, Earthlink, WashingtonPost.com and USA Today.com to
market our services directly to consumers. By offering Strategy.com services to
their customers, network affiliates seek to differentiate their core product
offerings, increase customer loyalty and create new revenue streams. The
affiliates provide the marketing and sales support for the service and
Strategy.com focuses on providing the technical infrastructure, including the
management of the software, hardware, billing and customer support processes and
the development and deployment of channels and content to users. Larger
Strategy.com affiliates have the ability to create co-branded web pages and
commission customized features, services and content using Strategy.com data.
Strategy.com also offers an associates program in which smaller businesses and
individuals can create co-branded web pages offering Strategy.com services to
their users.
Our vision for Strategy.com is to be the leading provider of personalized
intelligence to consumers. We believe that strengthening affiliate relationships
and strategic alliances with leading content providers is critical to attracting
and expanding our subscriber base. We also intend to engage in aggressive brand-
building in order to attain a leadership position.
We believe that Strategy.com capitalizes on both our powerful software
technology and the emerging development of wireless Internet information
delivery. We plan to aggressively invest significant resources to build the
Strategy.com personal intelligence network and increase brand awareness,
including investing in computer equipment and software, marketing, personnel and
other infrastructure.
11
Customers
MicroStrategy has over 900 customers across such diverse industries as retail,
telecommunications, banking and finance, pharmaceuticals and healthcare,
technology and consumer packaged goods. A representative list of the firms that
purchased over $250,000 of our products and services since January 1, 1997 is as
follows:
Banking & Finance
American Express*
Ameritrade*
Banco Santander
Bank of America
CIBC
Fannie Mae
First Data Corporation
First Union Corporation*
First USA Bank
Freddie Mac*
GE Capital*
Nationwide Insurance*
Royal Bank of Canada
USAA
Visa International
Retail
Asda Stores
B & Q
Best Buy*
Comet
Elder Beerman
Fox Entertainment Group
Kmart*
Kohl's Department Stores
Littlewoods
Liz Claiborne*
Marks & Spencer*
ShopKo*
The Limited
Victoria's Secret
Woolworth's
Travel & Entertainment
Blockbuster Entertainment*
Continental Airlines
The SABRE Group
Starwood Hotels & Resorts
Universal Studios*
Telecommunications
Ameritech
AT&T Wireless Services
Bell Atlantic*
Bell South*
Cable & Wireless
Concert Management
Services*
MCI WorldCom
Pacific Bell*
Sprint*
Pharmaceutical & Healthcare
Cardinal Health
Glaxo Wellcome*
Ingenix*
MedPartners
Merck/Medco*
Premier
Smithkline Beecham
Warner Lambert*
Grocery & Pharmacy
American Stores*
Associated Food Stores
CVS Pharmacy
Eckerd Corporation*
Food Lion
Harris Teeter
Marsh Supermarkets
Government/Public Services
Housing and Urban
Development*
Ohio Department of
Education
US Air Force
US Postal Service*
Consumer Packaged Goods
Beverage Data Network
Brown & Williamson
Hallmark
Ralston Purina
S.C. Johnson Wax
Technology
Belo Interactive*
Earthlink*
Exchange Applications*
Gateway
IBM Corporation*
Lexis Nexis
Network Solutions
Nielsen Media Research
NCR*
Perot Systems
Snap.com
Tandem Computers
Western Digital*
Manufacturing & Industrial
Allied Signal
DuPont
General Motors
Lexmark*
Michelin*
Monsanto
Samsung*
Shaw Industries
Unisys
* Indicates customers that purchased more than $1.0 million of our products and
services since January 1, 1997.
12
Sales and Marketing
Direct Sales Organization. We market our software and services primarily
through our direct sales force. As of December 31, 1999, we had domestic sales
offices in a number of cities, including Atlanta, Boston, Chicago, Cincinnati,
Dallas, Denver, Detroit, Kansas City, Los Angeles, Minneapolis, New York, San
Francisco, Seattle, Tampa and Washington, D.C., and international sales offices
located in Amsterdam, Barcelona, Madrid, Cologne, London, Paris, Sao Paolo,
Vienna, Milan, Toronto and Zurich. We are represented by distributors in
countries in which we do not have sales offices, including Australia, Chile,
Colombia, the Czech Republic, Finland, Greece, Ireland, New Zealand, Singapore,
South Africa, South Korea and Sweden.
Indirect Sales Channels. We have entered into relationships with more than 225
system integration, application development and platform partners whose products
and services are used in conjunction with our own. Agreements with these
partners generally provide them with non-exclusive rights to market our products
and services and allow access to our marketing materials, product training and
direct sales force for field level assistance. In addition, we offer our
partners product discounts. Favorable product recommendations from the leading
system integration, application development and platform partners to potential
customers facilitates the sale of our products. We believe that such indirect
sales channels allow us to leverage sales and service resources as well as
marketing and industry specific expertise to expand our user base and increase
our market coverage.
Value-Added Resellers. Value-added resellers who resell MicroStrategy software
bundled with their own software applications and/or syndicated data products
include:
Accrue Software
Acxiom
Beverage Data Network
Exchange Applications
Fair Isaac and Company
HNC Software
IDX Systems
M&I Data Services
Net Perceptions
Net.Genesis
Plum Tree
Prime Response
Radiant Systems
Radius Retail
Retek Information Systems
Systems Consulting Company
System Integrators. We have also entered into agreements to provide training,
support, marketing and sales assistance to a number of system integrators,
including:
American Management Systems
AnswerThink Consulting Group
Arthur Andersen
AutoMate Incorporated
BeggsHeidt Enterprise Consulting
BizIntel Technology
Braun Technology Group
CACI
Computer Sciences Corporation
Deloitte & Touche
Ernst & Young
Etensity
Greenbrier & Russel
KPMG Peat Marwick
Modis Solutions
NCR
Nex Genix
Perot Systems Corporation
Questra Corporation
Sapient Corporation
Silicon Graphics
Tessera Enterprise Systems
Whitman-Hart
Xpedior
Platform Partners. Our platform partners consist of firms which co-sell and
co-market complementary technology to the same target customer base. These
platform partners include IBM, Compaq, NCR, Sequent, ICL, Data General,
Informatica, Oracle, Informix, EDS and Deloitte & Touche.
Research and Product Development
We have made substantial investments in research and product development. We
believe that our future performance will depend in large part on our ability to
maintain and enhance our current product line, develop new products that achieve
market acceptance, maintain technological competitiveness and meet an expanding
13
range of customer requirements. As of December 31, 1999, our research and
product development staff consisted of 338 employees. Our total expenses for
research and development for the years 1999, 1998 and 1997 were $28.0 million,
$12.1 million and $5.0 million (excluding $1.9 million of capitalized software
costs), respectively.
Competition
The markets for e-business, e-commerce, customer relationship management,
portals, business intelligence and Internet-based and wireless-based information
networks are intensely competitive and subject to rapidly changing technology.
In addition, many of our competitors in these markets are offering, or may soon
offer, products and services that may compete with our products and our
Strategy.com network.
Our most direct competitors provide:
. e-business infrastructure software;
. customer relationship management products;
. e-commerce transaction systems;
. business intelligence products;
. web portals and information networks;
. vertical Internet portals and information networks; and
. wireless communications and wireless access protocol enabled products.
Each of these market segments are discussed more fully below.
E-business Infrastructure Software. In the e-business infrastructure market,
BroadVision, E.piphany, Vignette, Net Perceptions, Broadbase, Art Technology
Group, Engage Technologies, Doubleclick and Personify all provide products that
compete directly or indirectly with our software platform. Many of these
companies provide alternatives to our technology for adding intelligence and
personalization to e-commerce applications. For example, customer information,
such as past purchases, clickstream data and stated preferences, can be used to
create a personalized e-commerce experience that targets customers with offers
and interactions to which they are more likely to respond.
Customer Relationship Management Products. Companies that deliver customer
relationship management products alone or in conjunction with e-commerce
applications, such as BroadVision, E.piphany, Vignette, and Siebel, compete with
our intelligent e-business products.
E-Commerce Transaction Systems. Products that support e-commerce transactions,
such as those provided by Microsoft, IBM, America Online's Netscape division,
BroadVision, Open Market, InterWorld, and Oracle could provide competition for
us. These products have the potential to extend their capabilities to use
customer information as the basis for generating targeted, personalized product
offers, which would compete with our e-business products.
Business Intelligence Products. In the business intelligence market, we
compete with providers of software used to enable businesses to analyze and
optimize their operations. In the enterprise category, which is generally
focused on large deployments, Information Advantage, which was recently acquired
by Sterling
14
Software, competes with us. In the desktop analysis and reporting category, we
face competition from companies such as Business Objects, Cognos, and Brio
Technology. A third category includes products from companies such as Oracle,
Microsoft, and IBM that are generally bundled with or designed to work with
their own relational databases.
Web Portals and Information Networks. Web portals and information networks,
such as Microsoft Network, Yahoo, Lycos, Excite, America Online and
InfoSpace.com, offer an array of information that is similar to information
provided by Strategy.com. Strategy.com seeks to differentiate itself by:
. providing a greater level of personalization;
. allowing users to receive the precise information they want across the
broadest range of information delivery devices including through email,
wireless phone, pager, wireless access protocol enabled products, fax,
personal digital assistants and the telephone; and
. partnering with financial institutions, device manufacturers, Internet
companies, communication carriers, media companies and wireless companies,
to embed Strategy.com information services as an ingredient in their own
offerings.
One or more of these companies, however, could expand their offerings and
reduce our differentiation in these three areas.
Vertical Internet Portals and Information Networks. Expedia, Weather.com,
CNBC.com, ABC.com, ESPN.com, Microsoft Investor, StockBoss, Microsoft CarPoint,
InfoBeat, Internet Travel Network and others have developed custom applications
and products to commercialize, analyze and deliver specific information over the
Internet. These systems are usually tailored to one application, such as
providing news, sports or weather, but in the aggregate, they offer applications
similar to those provided by Strategy.com. Any one of these companies could
expand their offerings to more closely compete with Strategy.com.
Wireless Communications and Wireless Access Protocol Enabled Products.
Wireless communications providers, such as AT&T, Sprint, MCI WorldCom, Nextel
Communications, British Telecom, Deutsche Telekom, PageNet, Nokia, Ericsson,
Aether Systems, 3COM and Palm offer a variety of mobile phones and wireless
devices over which Strategy.com delivers information. These companies may
develop in-house information services or partner with other companies to deliver
information that is competitive to that offered by Strategy.com.
Many of our competitors have longer operating histories, significantly greater
financial, technical, marketing or other resources, and greater name recognition
than we do. In addition, many of our competitors have strong relationships with
current and potential customers and extensive knowledge of the e-business
industry. As a result, they may be able to respond more quickly to new or
emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sale of their products than we can.
Increased competition may lead to price cuts, reduced gross margins and loss of
market share. We cannot be sure that we will be able to compete successfully
against current and future competitors or that the competitive pressures we face
will not have a material adverse affect on our business, operating results and
financial condition.
Current and future competitors may also make strategic acquisitions or
establish cooperative relationships among themselves or with others. By doing
so, they may increase their ability to meet the needs of our potential
customers. Our current or prospective indirect channel partners may establish
cooperative relationships with 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
15
competitors may emerge and rapidly gain significant market share. These
developments could harm our ability to obtain maintenance revenues for new and
existing product licenses on favorable terms.
Intellectual Property and Licenses
We rely primarily on a combination of copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary technology. For example, we require software licensees to enter into
license agreements that impose certain restrictions on their use of the
software. In addition, we have made efforts to avoid disclosure of our trade
secrets, including but not limited to, requiring those persons with access to
our proprietary technology and information to enter into confidentiality
agreements with us and restricting access to our source code. We have no
patents. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. Policing unauthorized use of our
products is difficult, and while we are unable to determine the extent to which
piracy of our software products exists, software piracy can be expected to be a
persistent problem. In addition, the laws of some foreign countries do not
protect our proprietary rights to as great an extent as do the laws of the
United States. There can be no assurance that our means of protecting our
proprietary rights will be adequate or that our competitors will not
independently develop similar technology.
Generally, our products are licensed through named-user licenses, under which
only one identified user may access the product for each named-user license fee
paid. A user is an individual to whom a licensee has assigned an identification
number for purposes of tracking use of a product and who is under an obligation
to the licensee to protect any of our confidential information. Under our
standard software license agreement, we have the ability to request certified
statements of records regarding identification numbers in particular, and use of
the products in general, once per year, and have the right to audit use of the
products at least once per year. Copying of products and documentation is
limited to the number of users for whom license fees have been paid.
There can be no assurance that third parties will not claim infringement by us
with respect to current or future products. We expect that software product
developers will increasingly be subject to infringement claims as the number of
products and competitors in our industry segment grows and the functionality of
products in different industry segments overlaps. Any such claims, with or
without merit, could be time-consuming, result in costly litigation, cause
product shipment delays or require us to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required, may not be
available on terms acceptable to us or at all, which could have a material
adverse effect upon our business, operating results and financial condition.
Employees
As of December 31, 1999, we had a total of 1,662 employees, of whom 1,397 were
based in the United States and 265 were based internationally. Of the total, 579
were engaged in sales and marketing, 338 in product development, 486 in
professional services and 259 in finance, administration and corporate
operations. None of our employees is represented by a labor union. We have not
experienced any work stoppages and consider our relations with our employees to
be good.
We believe that effective recruiting, education, and nurturing of human
resources is critical to our success and have traditionally made substantial
investments in these areas in order to differentiate ourselves from our
competition, increase employee loyalty and create a culture conducive to
creativity, cooperation and continuous improvement. These measures include:
16
Professional Education. All newly hired professionals complete a professional
orientation course that ranges from 1 to 6 weeks long, presented by
"MicroStrategy University," our in-house education function. The curriculum
consists of lectures, problem sets and independent and group projects, covering
data, our products, competitors and customers. Certain lectures also deal with
general business practices, ethics and teamwork. At the end of this training,
students must pass a number of oral and written examinations in order to begin
their assignments. Following this introductory course, veteran employees
normally complete at least one week of continuing professional development each
year. Course content for MicroStrategy University is created by the most
experienced members of our professional staff, who generally have an annual
obligation to create expert content based upon the best practices they have most
recently observed in the field. This expert content is then used to upgrade and
revitalize our education, consulting, support, technology and marketing
operations.
Company Days. Each quarter, we invite most of the employee base together for
knowledge transfer within functions, across functions and across geographic
boundaries. These events are generally built around a set of company-wide
meetings and breakout sessions, but they also have particular cultural themes.
These events include:
. the "Company Retreat," which allows employees to network with colleagues in
an informal setting and which traditionally has consisted of a company-
sponsored cruise;
. "University Week," which focuses on continuing professional development
along with the creation and codification of industry-best practices;
. "Friends and Family Weekend," during which we sponsor a weekend-long open
house and host immediate and extended family, as well as friends of
employees; and
. "MicroStrategy World," where our business partners and customers are
encouraged to mix with the employee base in order to exchange information
and strengthen the firm's ties to the marketplace.
We believe that our "Company Day" events are long-term investments which will,
over time, result in superior productivity, morale and loyalty among the
employee base, and we expect to continue engaging in these activities in the
future.
Executive Officers and Directors
Our executive officers and directors and their ages and positions as of March
1, 2000 are as follows:
Name Age Title
- ---- --- -----
Michael J. Saylor.............. 35 President, Chief Executive Officer
and Chairman of the Board of
Directors
Sanju K. Bansal................ 34 Executive Vice President, Chief
Operating Officer and Director
Jonathan F. Klein.............. 33 Vice President, Law and General
Counsel
Mark S. Lynch.................. 36 Vice President, Finance and Chief
Financial Officer
Joseph P. Payne................ 35 Vice President, Marketing and Chief
Marketing Officer
17
Stephen S. Trundle............. 31 Vice President, Technology and
Chief Technology Officer
Frank A. Ingari(1)(2).......... 50 Director
Jonathan J. Ledecky............ 42 Director
Ralph S. Terkowitz(1)(2)....... 49 Director
John W. Sidgmore............... 48 Director
_________________
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Set forth below is certain information regarding the professional experience
of each of the above-named persons.
Michael J. Saylor has served as president, chief executive officer and
chairman of the board of directors since founding MicroStrategy in November
1989. Prior to that, Mr. Saylor was employed by E.I. du Pont de Nemours &
Company as a Venture Manager from 1988 to 1989 and by Federal Group, Inc. as a
consultant from 1987 to 1988. Mr. Saylor received an S.B. in Aeronautics and
Astronautics and an S.B. in Science, Technology and Society from the
Massachusetts Institute of Technology.
Sanju K. Bansal has served as executive vice president and chief operating
officer since 1993 and was previously vice president, consulting since joining
MicroStrategy in 1990. He has been a member of the board of directors of
MicroStrategy since September 1997. Prior to joining MicroStrategy, Mr. Bansal
was a consultant at Booz Allen & Hamilton, a worldwide technical and management
consulting firm, from 1987 to 1990. Mr. Bansal received an S.B. in Electrical
Engineering from the Massachusetts Institute of Technology and an M.S. in
Computer Science from The Johns Hopkins University.
Jonathan F. Klein has served as vice president, law and general counsel since
November 1998 and as corporate counsel from June 1997 to November 1998. Prior to
that, Mr. Klein was an appellate litigator with the United States Department of
Justice. Mr. Klein received a B.A. in Economics from Amherst College and a J.D.
from Harvard Law School.
Mark S. Lynch has served as vice president, finance and chief financial
officer since September 1997. Prior to that, Mr. Lynch was chief financial
officer for WorldCorp and World Airways from 1996 to 1997, and before that was
vice president, finance for InteliData Technologies, an electronic commerce
firm, from 1991 to 1996. Mr. Lynch has also held several senior accounting
positions with KPMG Peat Marwick and Clark Construction Group. Mr. Lynch is a
certified public accountant and received a B.S. in Accounting from Penn State
and an M.B.A. from George Washington University.
Joseph P. Payne has served as vice president of marketing, and chief marketing
officer since April 1999. From 1996 to 1999, Mr. Payne held several executive-
level positions at InteliData Technologies, including president and chief
executive officer of its Telecommunications Division. Prior to that, Mr. Payne
served as vice president, marketing of Royal Crown Company from 1994 to 1996.
Before that, Mr. Payne was a brand manager at the Coca-Cola Company from 1991 to
1994. Mr. Payne received an A.B. in Public Policy from Duke University and an
M.B.A from the Fuqua School of Business at Duke University.
18
Stephen S. Trundle has served as vice president, technology and chief
technology officer since July 1997 and as director, technology from 1994 to
1997. From 1992 to 1994, Mr. Trundle served as a consultant and then a senior
consultant with MicroStrategy. Prior to that, Mr. Trundle worked for Bath Iron
Works on the Aegis Destroyer program from 1991 to 1992. Mr. Trundle received an
A.B. in Engineering and an A.B. in Government from Dartmouth College.
Frank A. Ingari has been a member of the board of directors of MicroStrategy
since October 1997. Mr. Ingari is founder and chief executive officer of
Wheelhouse Corporation, an eMarketing services firm formed in April of 1999.
Between 1997 and April 1999, Mr. Ingari founded Growth Ally, L.L.C., a
consulting firm specializing in assisting private technology companies in
accelerating their growth and served as its chief executive officer. Mr. Ingari
was chairman and chief executive officer of Shiva Corporation from 1993 to 1997.
Prior to joining Shiva Corporation, Mr. Ingari was vice president, marketing at
Lotus Development Corporation. Mr. Ingari received a B.A. in Creative Writing
and U.S. Foreign Relations from Cornell University.
Jonathan J. Ledecky has been a member of the board of directors of
MicroStrategy since June 1998. Mr. Ledecky is currently vice chairman of Lincoln
Holdings LLC, which owns the Washington Capitals, the Washington Wizards and the
Washington Mystics sports teams. Mr. Ledecky founded U.S. Office Products
Company in October 1994 and served as its chairman of the board and chief
executive officer from inception through November 1997 and thereafter as a
director until May 1998. In February 1997, Mr. Ledecky founded Building One
Services Corp., now Encompass Services Corporation, and served as its chairman
until February 2000 and chief executive officer until June 1999. Mr. Ledecky is
also a director of publicly traded Aztec Technology Partners, UniCapital
Corporation and School Specialty.
Ralph S. Terkowitz has been a member of the board of directors of
MicroStrategy since September 1997. Mr. Terkowitz is vice president, technology
for the Washington Post Company, a position he has held since 1992. Until
February 1996, Mr. Terkowitz was chief executive officer, president and
publisher of Digital Ink, an Internet publishing venture that launched, among
other ventures, WashingtonPost.com and PoliticsNow. In 1998 he was co-chief
executive officer of HireSystems and instrumental in the formation of
BrassRing.com. Mr. Terkowitz is a director of ICSA, BigStep and OutTask. Mr.
Terkowitz received an A.B. in Chemistry from Cornell University an M.S. in
Chemical Physics from the University of California, Berkeley.
John W. Sidgmore has been a member of the board of directors of MicroStrategy
since February 2000. Mr. Sidgmore was the president and chief executive officer
of UUNET Technologies, Inc., a provider of worldwide Internet services, from
June 1994 until November 1998 and has served as chairman since November 1998.
Since December 1996, Mr. Sidgmore has served as the chief operating officer and
vice chairman of WorldCom Inc., now MCI WorldCom, a provider of long distance,
Internet and telecommunication services. Prior to joining UUNET, Mr. Sidgmore
was president and chief executive officer of Intelicom Solutions, now CSC
Intelicom, a telecommunications software company. Mr. Sidgmore is also a member
of the board of directors of MCI WorldCom and ADC Telecommunications, Inc.
ITEM 2. PROPERTIES
Our principal offices currently occupy over 300,000 square feet in Northern
Virginia pursuant to multiple leases, the majority of which expire between June
2003 and January 2007. We recently signed a lease agreement for an additional
146,000 square feet of office space, also in the Northern Virginia area, which
expires in February 2010. In addition, we also lease sales offices domestically
and internationally in a variety of locations, including Atlanta, Bedminster,
Boston, Chicago, Cincinnati, Dallas, Detroit, Los Angeles, Minneapolis, New
York, San Francisco, Seattle, Washington, D.C., Amsterdam, Barcelona, Cologne,
London, Madrid, Milan, Paris, Vienna and Zurich. We believe that suitable
additional or alternative space will be available in the future on commercially
reasonable terms as needed.
19
ITEM 3. LEGAL PROCEEDINGS
Actions Arising under Federal Securities Laws
In March 2000, numerous separate complaints purporting to be class actions
were filed in federal courts in various jurisdictions alleging that we and
certain of our officers and directors violated section 10(b) of the Securities
Exchange Act of 1934, as amended, Rule 10b-5 promulgated by the SEC thereunder,
and section 20(a) of the Securities Exchange Act of 1934, as amended.
The complaints contain varying allegations, including that we made materially
false and misleading statements with respect to our 1999 and 1998 financial
results in our filings with the SEC, analysts' reports, press releases and media
reports. The complaints do not specify the amount of damages sought.
We have not filed any answers, motions to dismiss or other responsive
pleadings in this litigation. We intend to defend this matter vigorously.
SEC Investigation
In March 2000, we were notified that the SEC had issued a formal order of
private investigation in connection with matters relating to our restatement of
our financial results. The SEC has requested that we provide them with certain
documents concerning the revision of our financial results and financial
reporting documents. The SEC indicated that its inquiry should not be construed
as an indication by the SEC or its staff that any violation of law has occurred,
nor as an adverse reflection upon any person, entity or security. We are
cooperating with the SEC in connection with this investigation and its outcome
cannot yet be determined.
Other Proceedings
We are 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 our financial position,
results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our Class A common stock, $.001 par value, is traded on the Nasdaq National
Market under the symbol, MSTR. Following our initial public offering on June 16,
1998, the following high and low closing prices, adjusted to reflect the
two-for-one stock split which occurred in January 2000, were reported by Nasdaq
in each quarter:
For the quarter ended High Low
--------------------- ----- ---
June 30, 1998.................... $ 14.25 $ 10.38
September 30, 1998............... 22.25 12.06
December 31, 1998................ 16.94 10.38
March 31, 1999................... 16.44 9.31
June 30, 1999.................... 18.94 7.75
September 30, 1999............... 28.03 13.22
December 31, 1999................ 115.66 28.81
As of March 1, 2000, there were approximately 315 stockholders of record of
our Class A common stock and 13 stockholders of record of our Class B common
stock, $0.001 par value.
We have never paid any cash dividends on our Class A common stock and do not
expect to pay any such dividends in the foreseeable future. Our stock price has
fluctuated substantially since our initial public offering in June 1998. The
trading price of our Class A common stock is subject to significant fluctuations
in response to variations in quarterly operating results, the gain or loss of
significant orders, changes in earnings estimates by analysts, announcements of
technological innovations or new products by us or our competitors, general
conditions in the software and computer industries and other events or factors.
In addition, the equity markets in general have experienced extreme price and
volume fluctuations which have affected the market price for many companies in
industries similar or related to that of ours and which have been unrelated to
the operating performance of these companies. These market fluctuations have
affected and may continue to affect the market price of our Class A common
stock.
We sold 8,880,000 shares of our Class A common stock on June 16, 1998 in our
initial public offering pursuant to a registration statement on Form S-1
(Registration No. 333-49899), which was declared effective by the SEC on June
10, 1998. Certain stockholders of ours sold an aggregate of 320,000 shares of
Class A common stock pursuant to such registration statement. The managing
underwriters of this offering were Merrill Lynch & Co., Hambrecht & Quist, and
Friedman, Billings, Ramsey & Co., Inc. The aggregate gross proceeds raised in
the initial public offering by us and the selling stockholders were $53.3
million and $1.9 million, respectively. Our total expenses in connection with
the initial public offering were approximately $5.1 million, of which $3.7
million was for underwriting discounts and commissions and approximately $1.4
million was for other expenses. Our net proceeds from this offering were
approximately $48.2 million. From the effective date through December 31, 1999,
we used $13.6 million of the net proceeds of the initial public offering to
repay net borrowings under our business loan facility. In addition, we used
$10.0 million of such net proceeds to repay all of the borrowings under our
$10.0 million dividend notes which were issued to certain stockholders of ours
prior to the consummation of the initial public offering. Approximately $9.5
million of the $10.0 million dividend payment was paid to certain officers,
directors and 10% stockholders. As of December 31, 1999, we had used all
proceeds from the initial public offering for general corporate purposes to
support our growth.
We sold 3,170,000 shares of our Class A common stock, on February 10, 1999
pursuant to a registration statement on Form S-1 (Registration No. 333-70919),
which was declared effective by the SEC on February 10, 1999. Certain
stockholders of ours sold an aggregate of 830,000 shares of Class A common stock
under the same registration statement.
21
ITEM 6. SELECTED FINANCIAL DATA
Years ended December 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Restated)/2/ (Restated)/2/ (Restated)/2/
(in thousands, except per share data)
Statements of Operations Data
Revenues:
Product licenses............................... $ 85,797 $61,635 $35,478 $15,873 $ 4,077
Product support and other services............. 65,461 33,854 17,073 6,730 5,700
-------- ------- ------- ------- -------
Total revenues................................ 151,258 95,489 52,551 22,603 9,777
-------- ------- ------- ------- -------
Cost of revenues:
Product licenses............................ 2,597 2,246 1,641 1,020 257
Product support and other services.......... 34,436 17,535 9,475 4,237 2,201
-------- ------- ------- ------- -------
Total cost of revenues................ 37,033 19,781 11,116 5,257 2,458
-------- ------- ------- ------- -------
Gross profit.................................... 114,225 75,708 41,435 17,346 7,319
Operating expenses:
Sales and marketing............................ 93,512 53,408 30,468 13,054 2,992
Research and development....................... 27,998 12,106 5,049 2,840 1,855
General and administrative..................... 24,448 12,743 6,552 3,742 2,395
In-process research and development............ 2,800 -- -- -- --
-------- ------- ------- ------- -------
Total operating expenses...................... 148,758 78,257 42,069 19,636 7,242
-------- ------- ------- ------- -------
(Loss) income from operations................... (34,533) (2,549) (634) (2,290) 77
Interest income................................. 2,174 1,028 94 22 16
Interest expense................................ (144) (720) (333) (127) (56)
Other income (expense), net..................... 6 (14) (12) 20 11
-------- ------- ------- ------- -------
(Loss) income before taxes...................... (32,497) (2,255) (885) (2,375) 48
Provision for income taxes...................... 1,246 -- -- -- --
-------- ------- ------- ------- -------
Net (loss) income............................... $(33,743) $(2,255) $ (885) $(2,375) $ 48
======== ======= ======= ======= =======
Basic and diluted net (loss) income per share/(1)/ $ (0.44) $ (0.03) $ (0.02) $ (0.04) $ 0.00
======== ======= ======= ======= =======
Weighted average shares used in computing
basic and diluted net (loss) income per share/(1)/ 77,028 66,986 58,988 58,988 57,793
======== ======= ======= ======= =======
As of December 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Restated)/2/ (Restated)/2/ (Restated)/2/
(in thousands)
Balance Sheet Data
Cash and cash equivalents....................... $ 25,941 $27,491 $ 3,506 $ 1,686 $ 643
Working capital (deficit)....................... 53,109 23,919 (6,997) (2,237) 1,343
Total assets.................................... 203,368 76,571 29,101 13,004 5,838
Notes payable, long-term portion................ -- -- 2,428 460 600
Total stockholders' equity (deficit)............ 101,816 37,775 (1,433) (793) 1,546
_________________
(1) Share and per share amounts for all periods presented have been restated to
reflect the two-for-one stock split which occurred in January 2000.
(2) See Note 3 of the Notes to Consolidated Financial Statements regarding
restatement of 1999, 1998 and 1997 financial statements.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We are a leading worldwide provider of intelligent e-business software and
related services that enable the transaction of one-to-one electronic business
through web, wireless and communication channels. Our product line enables both
proactive and interactive delivery of information from large-scale databases.
Our objective is to provide the largest 2000 enterprises in the world, leading
Internet businesses and high-volume data providers with a software platform to
develop solutions that deliver insight and intelligence to their enterprises,
customers and supply-chain partners.
Our software platform enables users to query and analyze the most detailed,
transaction-level databases, turning data into business intelligence. In
addition to supporting internal enterprise users, the platform delivers critical
business information beyond corporate boundaries to customers, partners and
supply chain constituencies through a broad range of communication channels such
as the Internet, e-mail, telephones and wireless communications devices. Our
platform is ideal for developing e-business solutions that are personalized and
proactive and that reach millions of users. We also offer a comprehensive set of
consulting, education and technical support services for our customers and
partners.
In July 1999, we launched a new business unit called Strategy.com.
Strategy.com is our personal intelligence network, a new form of media that
brings speed to transactions by actively delivering highly personalized,
relevant and timely information to individuals through a wide variety of
delivery methods, including e-mail, telephone and wireless devices. The
Strategy.com network leverages the MicroStrategy software platform and is
organized around a suite of information channels. The network currently operates
a Finance Channel and plans to launch additional channels on subjects such as
weather, news, politics, arts, traffic, travel and entertainment. Strategy.com
syndicates its channels through other companies that serve as network affiliates
and network associates, which we refer to collectively as affiliates. Affiliates
offer the Strategy.com channels and services on a co-branded basis directly to
their customers and in turn share with Strategy.com a percentage of revenues
they generate. Strategy.com also provides application maintenance, development,
customer billing, hosting and support services for these channels, enabling
affiliates to focus on their core businesses. Strategy.com has established more
than 100 network affiliate agreements with leading Internet companies,
communications carriers, media companies and financial institutions and now has
approximately 300,000 subscribers for its Strategy.com Finance Channel.
Strategy.com has recognized no revenue as of December 31, 1999.
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. We expect to continue to increase
staffing levels and incur additional associated costs in future periods. In
addition, we intend to substantially increase our investment in Strategy.com. We
therefore expect operating losses to significantly increase in 2000.
Our revenues historically have been derived from two principal sources, fees
for product licenses and fees for maintenance, technical support, education and
consulting services, which we refer to collectively as product support 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.
23
Technical support revenues are derived from customer support agreements
generally entered into in connection with initial product license sales and
subsequent renewals. Fees for our technical support services are displayed as
deferred revenue when paid by the customer and recognized ratably over the term
of the maintenance and support agreement, which is typically one year. We also
record as deferred revenue the fair value of implicit maintenance arrangements
when resellers or other customers that sell our software to end users offer
these end users the right to receive the then current version of our software at
the time of resale. Certain of these agreements extend over several years. Fees
for our education and consulting services are typically recognized at the time
the services are performed.
Revenues recognized from multiple-element software arrangements are allocated
to each element of the arrangement based on the relative fair values of the
elements, such as software products, upgrades, enhancements, technical support,
installation or education. The determination of fair value of each element is
based on objective evidence based on historical sales of the individual element
by us to other customers. If such evidence of fair value for each element of the
arrangement does not exist, all revenue from the arrangement is deferred until
such time that evidence of fair value does exist or until all elements of the
arrangement are delivered.
Customers at times require consulting and implementation services which
include evaluating their business needs, identifying resources necessary to meet
their needs and installing the solution to fulfill their needs. When the
software license arrangement requires the Company to provide significant
consulting services to produce, customize or modify software or when the
customer considers these services essential to the functionality of the software
product, both the product license revenue and product support and other services
revenue are recognized in accordance with the provisions of SOP 81-1. The
Company recognizes revenue from these arrangements using the percentage of
completion method and, therefore, both product license and product support and
other services revenue are recognized as work progresses. If the software
license arrangement obligates the Company to the delivery of unspecified future
products, then revenue is recognized on the subscription basis, ratably over the
term of the contract.
Beginning initially in the fourth quarter of 1998 and continuing throughout
1999, we began to sell our products and services to customers for large scale e-
commerce applications. In contrast to earlier periods in which our typical
customer transaction involved a stand-alone software license and maintenance,
these transactions typically involve multiple software products and services for
use by very large numbers of end users across web, wireless and voice
communications channels, and often incorporate elements from our Strategy.com
network. These multiple element transactions also often include significant
implementation and other consulting work and may also include our providing the
customer with hosting services, in which we manage the operation of hosting the
customer's specific e-commerce application. Customers often use our products and
services in a variety of ways, including internal use, integration with their
own products for resale to end users and creation of e-commerce applications.
These arrangements typically lead to our recording revenue from multiple
sources, including product license fees, product support fees and royalties
based on advertising, e-commerce transactions or the resale of solutions that
incorporate our software platform.
These large, multiple element transactions typically involve more complex
licensing and product support arrangements than the software licensing and
product support arrangements that comprised the bulk of our revenues in earlier
periods. Based on the revenue recognition criteria established in SOP 97-2 and
SOP 81-1, revenue from many of these large, multiple element contracts is not
recognizable upon full execution and delivery of the software product as in the
past, but instead is initially recorded as deferred revenue upon receipt of
cash, with product revenue recognized using the percentage of completion method
based on cost inputs or ratably over the entire term of the contract. As a
result of the size and complexity of these transactions, our results for any
quarter may depend significantly on the types of customer transactions that we
enter into during the quarter and on the mix of product licenses, support
agreements, implementation work and other specific
24
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. 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 39.2%, 33.6% and 27.0% of our revenues for 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, significant management
time and financial resources to developing direct and indirect international
sales and support channels.
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:
Years ended December 31,
----------------------------------------------------------------
1999 1998 1997
---- ---- ----
(Restated)/1/ (Restated)/1/ (Restated)/1/
Statements of Operations Data
Revenues:
Product licenses....................................... 56.7% 64.5% 67.5%
Product support and other services..................... 43.3 35.5 32.5
------ ----- -----
Total revenues........................................ 100.0 100.0 100.0
Cost of revenues:
Product licenses....................................... 1.7 2.4 3.1
Product support and other services..................... 22.8 18.4 18.0
------ ----- -----
Total cost of revenues................................ 24.5 20.8 21.1
------ ----- -----
Gross profit............................................ 75.5 79.2 78.9
Operating expenses:
Sales and marketing.................................... 61.8 55.9 58.0
Research and development............................... 18.5 12.7 9.6
General and administrative............................. 16.1 13.3 12.5
In-process research and development.................... 1.9 -- --
------ ----- -----
Total operating expenses.............................. 98.3 81.9 80.1
------ ----- -----
Loss from operations.................................... (22.8) (2.7) (1.2)
Interest income......................................... 1.4 1.1 0.2
Interest expense........................................ (0.1) (0.8) (0.6)
Provision for income taxes.............................. 0.8 -- --
------ ----- -----
Net loss................................................ (22.3)% (2.4)% (1.6)%
====== ===== =====
_________________
(1) See Note 3 of Notes to the Consolidated Financial Statements regarding
restatement of 1999, 1998 and 1997 financial statements.
25
Comparison of 1999, 1998 and 1997
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 $52.6 million
in 1997 to $95.5 million in 1998 and to $151.3 million in 1999, resulting in a
revenue growth rate of 132.7% in 1997, 81.6% in 1998 and 58.4% in 1999. There
can be no assurance that total revenues will continue to increase at the rates
experienced in prior periods. The slower growth rates in 1999 and 1998 were
attributed to our new evolving business model. We entered into several new
multiple element transactions for large scale e-commerce applications and
complex Strategy.com deployments during 1999 and 1998. Based on the revenue
recognition criteria established in SOP 97-2 and SOP 81-1, revenue from many of
these large, multiple element arrangements is recorded as deferred revenue upon
receipt of cash, with both product license revenues and product support and
other services revenues recognized using the percentage of completion method
based on cost inputs or ratably over the entire term of the contract or over the
hosting period, as applicable.
In 1999, we launched the Strategy.com Finance Channel and plan to launch
additional information channels in the future. We expect to begin earning
subscription, advertising, transaction and other fees from our Strategy.com
service by the end of 2000.
Product License Revenues. Product license revenues increased from $35.5
million in 1997 to $61.6 million in 1998 and to $85.8 million in 1999, resulting
in a growth rate of 123.5% in 1997, 73.7% in 1998 and 39.3% in 1999. The
increase in product license revenues was due to continued demand for our core
products, new product offerings supporting intelligent e-business solutions and
increasing market demand for intelligent e-business solutions. We are attracting
new customers and our existing customer base is purchasing additional licenses
and new products to support their e-business solutions. As we continue to pursue
our new business model of larger-scale, multiple element transactions, we expect
product license revenues as a percentage of total revenues to fluctuate on a
period-to-period basis, and may vary significantly from the percentage of total
revenues achieved in prior years. In addition, there can be no assurance that we
will be able to maintain or continue to increase market acceptance for our
family of products.
Product Support and Other Services Revenues. Product support and other
services revenues increased from $17.1 million in 1997 to $33.9 million in 1998
and to $65.5 million in 1999, resulting in a growth rate of 153.7% in 1997,
98.2% in 1998 and 93.4% in 1999. The increase in product support and other
services revenues was primarily due to the increase in product licenses sold as
well as an increase in large scale e-commerce applications which require
significant implementation and other consulting work. An element of our sales
and marketing strategy is to use third-party implementation services to enable
us to more rapidly penetrate our target market. In addition, we plan to use our
consultants more aggressively to help sell our products and services, assist
with development of Strategy.com channels and other research and development
projects. To the extent that such efforts are successful, our product support
and other services revenues could decline as a percentage of total revenues. As
a result of the above mentioned trends, we expect product support and other
services revenues as a percentage of total revenues to fluctuate on a period-to-
period basis, and may vary significantly from the percentage of total revenues
achieved in prior years.
International Revenues. International revenues increased from $14.2 million in
1997 to $24.9 million in 1998 and to $36.4 million in 1999, resulting in a
growth rate of 466.7% in 1997, 74.9% in 1998 and 45.9% in 1999. The increase in
these revenues is due to the expansion of our international operations, new
product offerings and growing international market acceptance of our software
products. We opened sales offices in Brazil in 1999, in Canada and Italy in 1998
and in Austria, France, the Netherlands, Germany, United Kingdom and Spain prior
to 1998. We anticipate that international revenues will continue to account for
a significant amount of total revenues and management expects to continue to
commit significant time and financial
26
resources to the maintenance and ongoing development of direct and indirect
international sales and support channels. We may not be able to maintain or
continue to increase international market acceptance for our family of products.
Costs and Expenses
Cost of Product License Revenues. Cost of product license revenues consists
primarily of the costs of product manuals, media, amortization of capitalized
software expenses and royalties paid to third party software vendors. Cost of
product license revenues increased from $1.6 million in 1997 to $2.2 million in
1998 and to $2.6 million in 1999. As a percentage of product license revenues,
however, cost of product license revenues decreased from 4.5% in 1997 to 3.6% in
1998 and to 3.0% in 1999. The decrease in cost of product license revenues as a
percentage of product license revenues was due to economies of scale realized by
producing larger volumes of product materials and decreased materials costs due
to an increase in the percentage of customers reproducing product documentation
at their sites. We anticipate that the cost of product license revenues will
continue to increase as product license revenues increase, but decrease as a
percentage of product license revenues. However, in the event that we enter into
any royalty arrangements with strategic partners in the future, cost of product
license revenues as a percentage of total product license revenues may increase.
Cost of Product Support 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 $9.5 million in 1997
to $17.5 million in 1998 and to $34.4 million in 1999. As a percentage of
product support and other services revenues, cost of product support and other
services revenues was 55.6% in 1997, 51.8% in 1998 and 52.5% in 1999. 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 the increase in product
licenses sold, new large scale e-commerce applications and complex Strategy.com
deployments. Despite the increase in personnel and other costs for 1998, the
total cost of product support revenues decreased as a percentage of revenues
during 1998 compared to 1997 primarily due to the increase in technical support
revenues which typically do not require proportionate increases in the costs
required to perform associated technical support services. This trend continued
in 1999; however, the improvements in margin due to increasing technical support
revenues were offset by the increased use of third parties to perform consulting
services.
We expect to continue to increase the number of customer education and
implementation consultants and technical support personnel in the future. To the
extent that our product support and other services revenues do not increase at
anticipated rates, the hiring of additional consultants and technical support
personnel could increase the cost of product support and other services revenues
as a percentage of product support and other services revenues. In addition, to
the extent that we cannot hire adequate numbers of support personnel to meet
demand, we may need to rely more heavily on third parties to perform consulting
services, further increasing cost of product support and other services revenues
as a percentage of product support and other services revenues.
Sales and Marketing Expenses. Sales and marketing expenses include personnel
costs, commissions, office facilities, travel, advertising, public relations
programs and promotional events, such as trade shows, seminars and technical
conferences. Sales and marketing expenses increased from $30.5 million in 1997
to $53.4 million in 1998 and to $93.5 million in 1999. As a percentage of total
revenues, sales and marketing expenses decreased from 58.0% in 1997 to 55.9% in
1998 and increased to 61.8% in 1999. The increase in sales and marketing
expenses was primarily the result of increased staffing levels in the sales
force, increased commissions earned, increased promotional activities and
advertising, increased marketing efforts for Strategy.com and general marketing
efforts. In addition, we began a national advertising campaign during the fourth
quarter of 1999, which we plan to continue in 2000. We have invested and will
continue to substantially increase our investment in sales and marketing over
the next twelve months in order to create better market
27
awareness of the value-added potential of our product suite and to seek to
acquire market share. In addition, we intend to invest heavily over the next
twelve months to market Strategy.com.
Research and Development Expenses. Research and development expenses consist
primarily of salaries and benefits of software engineering personnel,
depreciation of equipment and other costs. Research and development expenses
increased from $5.0 million in 1997 to $12.1 million in 1998 and to $28.0
million in 1999. As a percentage of total revenues, research and development
expenses increased from 9.6% in 1997 to 12.7% in 1998 and to 18.5% in 1999. 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 substantially increase our investment over the next twelve months
to develop sports, traffic and other channels as part of our suite of
information channels of our Strategy.com network. In addition, we expect that
research and development expenses will continue to increase as we continue to
invest in developing new products, applications and product enhancements for our
existing platform business.
In 1997, in accordance with Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Equipment to Be Sold,
Leased, or Otherwise Marketed," we capitalized research and development costs
associated with the version 5.0 release of our software product line. As a
result, we capitalized approximately $1.9 million of research and development
costs during 1997. During 1998 and 1999, no costs were capitalized as the
establishment of technological feasibility and general release of such software
had substantially coincided.
General and Administrative Expenses. General and administrative expenses
include personnel and other costs of our finance, human resources, information
systems, administrative and executive departments as well as outside
professional fees. General and administrative expenses increased from $6.6
million in 1997 to $12.7 million in 1998 and to $24.4 million in 1999. As a
percentage of total revenues, general and administrative expense were 12.5% in
1997, 13.3% in 1998 and 16.1% in 1999. The increase in general and
administrative expenses was primarily the result of increased staff levels and
related costs associated with the growth of our business during these periods.
Although we expect that general and administrative expenses will continue to
increase in the foreseeable future, such expenses are not expected to
significantly vary as a percentage of total revenues in the future.
In-process Research and Development. In December 1999, we purchased the
intellectual property and other tangible and intangible assets, including the
assembled workforce, relating to NCR's Teracube project in exchange for 566,372
shares of Class A common stock, valued at $49.6 million, based on the price of
our stock at the closing. We will develop the Teracube assets in concert with
its existing proprietary technology to create a business intelligence platform
for datawarehouses using NCR's Teradata database. Our preliminary allocation of
the $49.6 million purchase price was $2.8 million for in-process research and
development and $46.8 million to tangible and intangible assets including core
technology, computer equipment, assembled work force and agreements not to
compete. We believe the weighted average estimated useful life of such assets