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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
_________________
FORM 10-K
Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the year ended: December 31, 1998 Commission File Number: 000-24435
MICROSTRATEGY INCORPORATED
(Exact Name of registrant as specified in its charter)
DELAWARE 51-0323571
(State of incorporation) (I.R.S. Employer Identification Number)
8000 Towers Crescent Drive, Vienna, VA 22182
(Address of Principal Executive Offices) (Zip Code)
(703) 848-8600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $.001 per share
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 preceeding 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, 1999 on the Nasdaq National Market) was approximately
$198,429,204.
The number of shares of the registrant's Class A Common Stock and Class B Common
Stock outstanding on March 1, 1999 was 7,765,084 and 30,073,374, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 1999 Annual Meeting of
Stockholders, for its 1999 Annual Meeting of Stockholders, are incorporated by
reference into Part III of this Form 10-K.
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MICROSTRATEGY INCORPORATED
TABLE OF CONTENTS
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Page
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PART I
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Item 1. Business......................................................................................
Item 2. Properties....................................................................................
Item 3. Legal Proceedings.............................................................................
Item 4. Submission of Matters to a Vote of Security Holders...........................................
PART II
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Item 5. Market for Registrant's Common Stock and Related Security Holder Matters......................
Item 6. Selected Consolidated Financial Data..........................................................
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.........
Item 7a. Quantitative and Qualitative Disclosures about Market Risk....................................
Item 8. Consolidated Financial Statements and Supplementary Data......................................
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........
PART III
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Item 10. Directors and Executive Officers of the Registrant............................................
Item 11. Executive Compensation........................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management................................
Item 13. Certain Relationships and Related Transactions................................................
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...............................
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 the Company's results of operations or financial
position, may be deemed to be forward-looking statements. Without limiting the
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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
MicroStrategy is a leading worldwide provider of enterprise DSS software
applications and related services. DSS Suite provides Global 2000 enterprise and
other user communities with timely answers to mission-critical questions. It
enables users to query and analyze the most detailed, transaction-level
databases, turning data into business intelligence. In addition to supporting
enterprise users, our products extend DSS applications beyond corporate
boundaries to customers, partners, and supply chain constituencies. DSS Suite
is deployed across a broad range of pull and push technology such as the
Internet, e-mail, telephones, pagers and other wireless communications devices.
Our DSS Suite also provides the technology foundation for the deployment of
personalized, consumer-focused e-commerce applications.
INDUSTRY BACKGROUND
Online Transaction Processing; Construction of Data Warehouses. The
development of the DSS industry has been made possible by the widespread
implementation over the past ten years of online transaction processing systems
that create large volumes of transaction-oriented data. Online transaction
processing applications include standardized resource planning packages from
vendors such as SAP, Baan, PeopleSoft, Oracle and J.D. Edwards, as well as
custom and semi-custom systems which have been created to process transactions
such as securities trading, bank deposit withdrawals, airline reservations,
mortgage payments, wire transfers, retail sales, credit card payments and
telephone billing.
The transactional data created by online transaction processing systems is
typically detailed and updated regularly, and has a short utility time horizon.
In contrast, data required by decision support analysts are typically detailed
and have a lengthy utility time horizon. In order to provide data to decision
support analysts, relevant transactional data must often be extracted from
online transaction processing systems, cleansed, encoded, summarized and
uploaded into a database known as a data warehouse. Data warehouses have been
developed in order to store the vast historical logs of transaction details
generated from one or more online transaction processing applications. Data
warehouses are substantially larger than the online transaction processing
databases, as data warehouses contain a broader scope of transaction data
spanning longer periods of time. The majority of Global 2000 enterprises have
constructed or are constructing data warehouses to serve as an information
foundation for analyzing and optimizing their business operations. Forrester
Research predicts that the decision support market is projected to grow from
$1.6 billion in 1998 to $3.6 billion by 2001.
The Enterprise DSS Market Opportunity. The construction of data warehouses
from online transaction processing applications has created the market
opportunity for scalable, sophisticated and maintainable DSS applications that
can extract highly useful business information from data warehouses. The
mission of DSS applications is different from but complementary to that of
online transaction processing applications. While online transaction processing
enables companies to "do business" by processing transactions that are similar
in nature, cost, frequency and complexity, DSS applications enable companies to
"do business better" by allowing rapid, effective and comprehensive data
analysis. Using online transaction processing applications, companies may mail
proposals to prospects, bill customers, reverse fraudulent charges or book
airline seats. In contrast, using DSS applications, companies may select
prospect lists to receive direct mail, allocate inventory to sell to customers,
identify potentially fraudulent charges or allocate airline seats among various
travel routes. Business analysts often employ DSS applications to translate
business questions into database-interpretable queries. DSS applications
mathematically process query results to provide the business analyst with
insightful answers to their questions. "Enterprise DSS" refers to applications
designed to answer questions at all levels of detail, ranging from minute,
operational questions to large-scale strategic assessments, targeted at all
types of decision makers within an enterprise.
Enterprise DSS applications help users address critical uncertainties
affecting their business by answering highly focused performance questions.
These questions vary by industry. Examples include:
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Retail. What products or groups of products should be sold? Where? At what
price? How much shelf space should be allocated for specific products? How much
promotion should each product receive? Which products sell well together? How
much inventory should be carried? What are the primary customer characteristics?
Banking & Finance. Who should be targeted for direct marketing efforts? What
products are most likely to appeal to existing customers? How profitable are
existing customers? Which customer groups are credit risks? What is the proper
pricing strategy for a given set of financial products? How much fraudulent
activity is occurring? How efficiently are underwriters and credit officers
performing?
Healthcare. What is the range of outcomes for a given treatment? How
frequently is this treatment prescribed? Which drugs, hospitals, doctors,
healthplans are most effective? Which patient groups are most at risk? How
efficient and effective is a given technique for treating a specific illness?
The promise of Enterprise DSS applications is to offer decision makers across
a broad range of industries the opportunity to ask and answer mission-critical
questions about their businesses using transactional data assets that have been
captured but not exploited to their fullest extent.
Factors Driving Enterprise DSS Development. Despite the significant promise of
Enterprise DSS applications, until recently, a number of technical and cost
constraints had impaired development of the DSS market. The increase in
electronically captured and stored transactional data, together with recent
advances in software, hardware and networking, have converged to help resolve
these technical and cost constraints. Factors driving Enterprise DSS
development include:
Increased Electronic Capture of Transactional Data. Electronically captured
data is critical to Enterprise DSS applications. In industries such as retail,
telecommunications, financial services and healthcare, an increasing percentage
of customer and supply chain transactions are captured and stored
electronically. The rapid growth in the electronic capture of business
transactions and the increased availability of related profile data in the
parties or products involved in each transaction are providing a rich data
foundation for the growth of Enterprise DSS applications.
Improved Relational Database Management Software. Relational database
management system technology has become accepted as the primary data storage and
access platform for Enterprise DSS applications. Traditionally optimized for
online transaction processing applications only, relational database management
system technology has been improved specifically for DSS applications. Such
improvements have removed many of the database size, manageability and query
performance constraints that have traditionally made Enterprise DSS development
difficult.
Improved Performance-to-Price Ratio of Computing and Storage Hardware. The
widespread availability of scalable hardware from a variety of server vendors
has produced significant improvements in server price and performance. In the
early 1990's, building and managing databases of one to five gigabytes of stored
data was considered typical. Over the past four years, symmetric multi-
processing, or SMP, servers running Unix have achieved commercial acceptance,
providing relational database management system vendors with the first non-
proprietary hardware platforms capable of supporting enterprise-scale databases
which considerably exceed five gigabytes. Based on a survey of 50 companies in
the Fortune 1,000 published by Forrester Research, the average data warehouse
was 132 gigabytes in 1997 and is expected to grow to 259 gigabytes by 1999. SMP
servers have provided the capacity to store index, aggregate, query and manage
these large data volumes, and, because no one hardware vendor controls the
market for these servers, the capacity is available on a cost-effective basis.
Further developments, such as massively parallel processing servers, or MPP
servers, are expected to provide substantial improvements in performance over
SMP servers, and are also now becoming commercially available from a wide
variety of hardware vendors.
Improved Networking Protocols and Infrastructure. The emergence of protocols
such as TCP/IP, HTML, ActiveX and Java, combined with commercially available
servers and browsers supporting these protocols (collectively comprising the
infrastructure of the Web), bandwidth, security products, authoring tools,
administrative suites, access devices and third party expertise have
substantially decreased the cost of deploying multi-user applications such as
Enterprise DSS applications. The corresponding advances in usability,
reliability, maintainability and connectivity have accelerated the commercial
acceptance of Enterprise DSS applications by making such deployment less risky,
less expensive and less time-consuming for information systems organizations.
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The Emergence of New DSS Applications. Synergies produced by the combination
of improved database software, abundant computing power and efficiently
connected networks are resulting in a dramatic increase in overall DSS market
potential and growth rate. International Data Corporation projects that the
market for Internet-related DSS applications will grow from $970 million in 1998
to $2.3 billion by 2001, and based on its survey of 50 Fortune 1,000 companies,
Forrester Research estimates that 80% of the survey sample will have Web access
to the databases by 1999. As these advances converge, the value of DSS
applications (and therefore the size of information technology budgets which
support their development) is being enhanced by increasing the number of users,
the frequency of use and the importance of the information obtained and by
transforming under-utilized data into revenue-generating assets, not simply
measures for cost control. These advances are also increasing the size of the
market by enabling entirely new types of applications to be deployed to new
constituencies from the same central data warehouse. In particular, the
following three new classes of DSS applications are becoming factors in the
growth of the DSS market.
Remote DSS. Remote DSS applications provide information to operational
professionals throughout an enterprise and enable them to improve performance on
a routine basis. Potential users include managers and other professional staff
throughout the sales, marketing, manufacturing, logistics, finance, human
resources and technology functions regardless of their geographic location.
Although an enterprise rarely has more than a few hundred centralized analysts
and executives for any given DSS application, the same enterprise may have
thousands of remote enterprise users, spread across dozens, hundreds or even
thousands of locations. For example, a Remote DSS application that profiles
customers and provides relevant sales information allows account executives
located across a business organization to identify problem accounts, discern
abnormal trends in their territory and proactively manage sales calls.
Supply Chain DSS. Supply Chain DSS applications allow and encourage trading
partners to give preferential treatment to one another in exchange for greater
certainty and visibility up and down their value chains. In order to obtain the
information that enables this visibility and certainty, partners may want to
offer more favorable terms, invest more in co-marketing, make available
increased levels of supplies, provide more shelf space or pay higher prices.
Potential users include a firm's vendors, distributors, partners, outsourcers,
resellers and financing sources. The number of potential Supply Chain DSS
application users can range from hundreds to tens of thousands. For example, a
DSS application that provides access to retail sales information would be
valuable to the manufacturers and distributors who stock the shelves within each
store. This information can be used to design new products, refine marketing
campaigns, develop optimal pricing schemes, rationally allocate inventory and
proactively schedule factory production.
Commercial DSS. Commercial DSS applications offer customers a new value-added
information service that can result in improved pricing, greater market share,
longer customer retention or a new revenue stream for the owner of the DSS
application. Information systems have been successfully bundled with products
and services over the past decade, although largely in the context of online
transaction processing applications such as automated teller machines, voice
response units and ticketing reservation systems. Those firms in the best
position to exploit the opportunities of Commercial DSS applications include
major banks, financial services, healthcare providers, retailers, publishers,
utilities and travel service providers all of whom have large volumes of
customers who must make intricate decisions on a routine basis. Many of these
systems have the potential for hundreds of thousands, or even millions, of
users. For example, healthcare providers that use DSS applications to offer
outcome analysis for various combinations of patients, treatments, drugs,
hospitals and doctors could provide patients with substantial peace of mind,
possibly encouraging them to be treated by that provider.
Consumer DSS. Consumer DSS applications enable organizations to present
consumers with personalized services and product offerings based on a profile
which may include past selections and purchases by those consumers or their
peers. Consumer DSS applications use these profiles to deliver highly targeted
product offerings and information services on demand via the Internet, or
automatically via e-mail, telephones, pagers, and other wireless communications
devices. By integrating these personalized services and product offerings with
e-commerce applications, organizations can sell products and services, obtain
consumer approval, or confirm the delivery of information. For example, a
consumer could receive an e-mail from an online retailer two weeks before their
nephew's tenth birthday offering to sell by return e-mail the top three selling
toys for ten-year-olds in the nephew's town.
CHALLENGES FACING ENTERPRISE DSS DEVELOPERS
Notwithstanding the market potential for DSS applications, attempts to build
and deploy Enterprise DSS applications have traditionally been hampered by a
variety of factors, including the following.
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Optimal Query Generation Is Technically Challenging. Although Structured Query
Language, or SQL, has been held out as a universal software standard to enable
database queries, each relational database management system vendor has added
extensions and created a SQL interpreter that favors certain queries. In many
cases, the same SQL will not work against two different relational database
management systems and in most cases, the same SQL will not be optimal for both.
Changes in the relational database management system version, data warehouse
design, query profiles or application requirements may require costly and time-
consuming revisions to the SQL execution plans. Since relational database
management system vendors are constantly seeking to gain competitive advantage
for their particular database engine, severe maintenance demands have been
imposed on those firms developing their own DSS applications that generate SQL
directly against the relational database management system. Certain DSS tools
force the designer to "hardwire" application logic directly against the logical
database schema, resulting in either a "brittle" solution that may preclude any
future enhancements to the database, a "crippled" solution that prevents many
types of analysis from being implemented, or a "slow" solution because optimal
query response requires dynamic repathing at runtime.
Administrative Tools Are Lacking. Companies need to deploy a multitude of
applications to a variety of constituencies, each with their own set of security
and access privileges. These constituencies need to share the same data and
application reporting objects, while using them to perform different tasks.
Users also require tools for version control, customer billing, performance
management and tuning, usage assessment, application maintenance and mass
upgrades. Because the DSS market is relatively new and still developing, many of
the administrative tools that are taken for granted in the online transaction
processing market are still missing. Given the lack of management tools, it is
quite challenging to scale up a workgroup application meant to serve a small,
localized set of users into a family of DSS services.
End-User Application Protocol Interfaces Are in Flux. Currently, users
interact with their DSS applications through a variety of interfaces, including:
. native Windows applications that are tailored to the power-user or analyst;
. executive information system interfaces;
. printed reports;
. Microsoft Excel add-in modules;
. Web browsers supporting only HTML, Java, Active X or various combinations
of these protocols;
. custom interfaces constructed in Visual Basic, C++ or other programming
languages;
. Microsoft Access; and
. other Microsoft Office applications, such as Word or PowerPoint.
The optimal interface is a function of the user, its level of comfort with the
DSS application, the client hardware and the client operating system. Since
these factors are continually changing, it has been and remains unlikely that
any dominant interface will emerge. Accordingly, DSS developers are required to
develop applications that are compatible with a number of different application
protocol interfaces, or APIs, without the emergence of clear standards. This
interface flux introduces additional design, development, quality assurance and
support requirements into the typical Enterprise DSS project.
Certain DSS Toolsets Are Not Scalable. A number of DSS vendors have developed
OLAP and hybrid OLAP database toolsets in an attempt to solve data warehouse
design and query generation challenges. In contrast to relational OLAP
technology, OLAP and hybrid OLAP solutions require the creation of intermediate
data caches or proprietary, non-relational database management systems that
provide the basis for their analytical capabilities. These proprietary databases
have traditionally been optimized for the type of summary analysis that a
financial auditor or executive would find valuable in the context of a
planning/budgeting review, and their design reflects explicit trade-offs between
performance, simplicity, power and flexibility. Due to the rapid increase in the
size of decision support databases in recent years, the design constraints of
OLAP and hybrid OLAP architectures have become increasingly visible. For
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example, these "solutions" may truncate the range of schema designs (which are
the physical and logical models of how the data should be stored within a
database), limit data volumes, limit the breadth and richness of a data set and
require indexing, consolidating, caching and loading schemes that are
prohibitively expensive for Enterprise DSS applications.
Published benchmarks of OLAP vendors have seldom attempted to analyze more
than one gigabyte of input data. However, market research suggests that the
typical data warehouse contains in excess of 100 gigabytes of input data. Thus,
while very well suited for solving certain decision support problems, many
currently available OLAP toolsets are optimized to analyze datasets which are
two orders of magnitude smaller than those required for Enterprise DSS
applications.
Existing DSS Tools Lack Features. Multi-dimensional analysis performed on a
large, relatively amorphous relational database management system can prove
quite challenging due to the stresses placed on the application server, network
and client interface during the analytical process. The tools typically used for
DSS application development have been designed to satisfy a lowest common
denominator requirement--making certain assumptions about the volume and nature
of the data along with the complexity of analyses in order to simplify the
engineering challenges. Most do not allow the designer the ability to articulate
the sophisticated queries necessary for granular transaction-level analysis
(such as fraud detection, market basket analysis, call detail analysis, database
marketing, credit analysis and patient outcomes analysis). Others lack object-
based development environments, preventing developers from reusing standard
application logic. DSS tools may limit the range of dimensionality, attribute
richness, hierarchical choices, and filtering options available to the end-user.
They may lack advanced analytical capabilities such as rankings ("top 10 vendors
by department"), decilings ("bottom quartile of customers in sales"), time-based
calculations ("percent change over the same period last year") and multi-
dimensional calculations ("product contribution to division profitability").
Many tools also lack sophisticated SQL generators and are forced to rely upon
intermediate data caches that are created on the desktop or application server
in order to perform their analysis. These caches create network and CPU
bottlenecks that prevent the execution of certain queries and slow the
performance of the MPP and SMP servers storing the database.
The Existing Relational Database Management System Market Has Been Fragmented.
We believe that the data warehouse market has been fragmented. Supporting the
multiplicity of relational database management system APIs, as well as the
interface APIs, is difficult without incurring significant sacrifices in
functionality and scalability. Global 2000 enterprises, value added resellers,
data syndicators, original equipment manufacturers and system integrators
require DSS platforms that run well against relational database management
system platforms such as Oracle, Informix, Sybase, Tandem, Teradata, IBM's
DB2/390, DB2/400 and DB2/UDB and Microsoft's SQL Server and Access. Providing
this portability may not be desirable or even possible for DSS vendors that have
a disproportionately large investment in one of the competing relational
database management system standards. Even DSS vendors that claim to be "open"
often have not invested the resources necessary to provide scalable performance
against each of these databases.
Essential Enterprise DSS Services Are Scarce. Most relational database
management system vendors have tended to design their products for online
transaction processing performance, rather than DSS performance. As the data
warehousing market began to grow, the vendors of these products have added
features and modified their core products in order to better serve the needs of
the DSS product user. However, as a database grows in depth and breadth, and the
queries become more sophisticated, it has proven increasingly difficult to
create high-performance database designs that properly balance performance,
functionality and maintainability requirements. Designs can vary based upon the
nature of the relational database management system platform, server hardware,
network, client hardware, data set, user constituencies and query profile. The
complexities of data warehouse design have created a critical, but largely
unmet, need for Enterprise DSS services, including:
. data warehouse design education;
. DSS application design education;
. end-user DSS usage education;
. data warehouse consulting to assist with hardware selection, relational
database management system selection, network and database tuning, database
design and project management;
. DSS consulting to assist with metric, filter and report definition and
development; and
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. telephone, Web-based and on-site support from professionals that understand
Enterprise DSS products.
Successful Enterprise DSS developers must be able to quickly resolve problems
that arise in a heterogeneous environment consisting of multiple hardware
servers, database servers, application servers, networks, APIs and client
hardware devices from multiple vendors.
THE MICROSTRATEGY SOLUTION
Through DSS Suite, we offer a comprehensive set of products and services that
function as a platform for developing and deploying Enterprise DSS applications.
Our software is designed to address the requirements of DSS application
developers who are required to create scalable, portable and highly functional
systems. DSS Suite frees application developers from the need to divert scarce
resources to the technical and system integration challenges that are common
across every industry. Instead, developers are able to focus on solving the
business critical analytical problems unique to their particular industry. The
advantages of DSS Suite include:
Extremely Powerful Analytics to Transaction-Levels of Detail. DSS Suite
offers support beyond summary and detail queries to include queries at the most
detailed level. This feature is critical to a wide range of applications,
including call detail analysis, market basket analysis, fraud detection, credit
analysis and campaign management. DSS Suite supports analysis ranging from ten
attributes to 10,000 attributes, as well as support for sophisticated multi-
dimensional qualities (for example, weather, loan status or promotional flags)
and many-to-many relationships (such as colors and features). This
sophistication allows the creation of granular, transaction-specific DSS
applications that provide insight into customer behavior. Examples of the
difference between "Summary" and "Detail" questions (which many DSS tools can
offer) and "Transaction" level questions (where we believe we hold a distinct
advantage over our competition) are illustrated below for a typical retailer:
Summary: What were sales by department for the month of January?
Detail: What were sportswear item sales and costs by store for Mondays
in January?
Transaction: What were sales and costs for the top five selling items in
January? What were the five items most often purchased with each
of those items, and what is the typical customer profile of
individuals who buy these items by age, gender and income
bracket? What percentage of profits are derived from the five
items associated with our best sellers?
Applications built with DSS Suite can access volumes of data ranging from a
few megabytes to terabytes. Using DSS Suite, our customers have successfully
deployed DSS applications with terabytes of data, thousands of attributes, and
billions of rows of detail. This scalability is accomplished with support for
very large database schemes, a three-tier architecture with support for query
governing and asynchronous execution and a relational query engine that
intelligently leverages the relational database management system server,
thereby avoiding any middle tier or client caching bottlenecks.
Optimized Support for All Major Relational Database Management System/Hardware
Combinations. DSS Suite supports all major relational database management system
platforms commonly used for Enterprise DSS applications with SQL-optimizing
drivers that contain hundreds of optimization rules. DSS Suite has been designed
to take into account the strengths, weaknesses and idiosyncrasies of each
database's SQL interpreter so that queries are made as efficiently as possible.
Databases supported by DSS Suite include Oracle, Informix, Sybase, Teradata,
Tandem, SQL Server, DB2/390, DB2/400, DB2/UDB, MS Access, Adabas D and Dbase.
The databases can be run on platforms that support Unix, MVS, OS400, Windows NT
Windows, Tandem NonStop and OpenVMS and that include hardware from companies
such as Compaq, NCR, IBM, Sun, Sequent, Hewlett-Packard, Pyramid, SNI, Data
General and SGI. Although our DSS solutions allow the core database component to
reside on nearly all enterprise server hardware and operating system
combinations (Mainframe, AS/400, Unix, Windows NT, Windows), our application
server component currently runs only on the Windows NT operating system.
Therefore, our ability to increase sales of our products may depend on the
continued acceptance of the Windows NT operating system.
Applications Deployable to Multiple Types of Users with Full Interface
Flexibility. DSS Suite enables developers to create DSS applications in a
modular fashion and to deploy common components across the enterprise in a
variety of different forms without redundant coding. The same report logic can
be tailored for different constituencies such as non-
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computer users, company executives, spreadsheet analysts, operations personnel,
novices, power users, suppliers, customers and consumers. Applications developed
using DSS Suite will simultaneously run the following interfaces:
. Internet Explorer with HTML, optional Java and ActiveX modes;
. Netscape Navigator with HTML, optional Java and ActiveX modes;
. DSS Agent analytical interface on Windows 98, Windows 95, Windows NT,
Windows 3.1, Win-OS/2;
. DSS Executive information systems on Windows 98, Windows 95, Windows NT,
Windows 3.1, Win-OS/2;
. Microsoft Excel on Windows; and
. Custom applications developed using Visual Basic, Visual Basic for
Applications, Visual C++, combined with DSS Objects on the Windows
platform.
Support for Large Numbers of Users in Flexible Configurations. Our technology
allows applications built with DSS Suite to be deployed to very large user
populations--to tens of thousands for interactive analysis systems, and to
millions with DSS Broadcaster. DSS Suite fully leverages the parallel processing
and clustering features of the underlying relational database management system.
Applications can be run in the following modes:
. stand-alone and untethered on a single laptop;
. local area network with direct connection to the database server;
. wide area network, or WAN, with a high-speed connection to the application
server, which in turn connects to the data warehouse server via a slower
speed WAN;
. Internet via DSS Web and a standard browser; and
. remote, using DSS Web combined with wireless modems or satellite link-ups.
DSS Suite offers a wide variety of features to support international
deployment, including modular language support and support for many
international character sets.
Full Range of Services Necessary for Enterprise DSS Success. We offer a full
range of support services to ensure the success of our customers. During the
"proof of concept phase," our consultants assist with application prototyping,
infrastructure assessments, feasibility studies and provide overall Enterprise
DSS architecture guidance. Our educational courses, such as "Introduction to DSS
and Data Warehousing", provide the customer's information system professionals
with a framework for planning and managing the process during this concept
stage. During the data warehouse "construction phase," our consultants provide
project oversight and data warehouse design services, while our educators teach
courses such as "Data Warehousing--Data Modeling and Design" to the customer's
information system professionals. In order to support the "full-scale
development phase," our consultants assist with end-user requirements analysis,
DSS application design, project management and quality assurance. Our educators
offer courses in DSS design and development and certify DSS development
professionals. During the "deployment phase," our consultants offer end-user
support, system administration, performance tuning and troubleshooting
assistance. Our educators teach courses in Enterprise DSS management and
administration. Throughout all phases, our support staff provides online support
for databases and system utilities over the Web, along with hotline telephone,
fax and e-mail support. Our support engineers are fully certified DSS engineers,
capable of debugging client/server networks, providing relational database
management system configuration and tuning guidance, offering data warehouse
design support, DSS application development support, and are fully certified in
the installation, configuration and usage of our products. In the event that
technical issues cannot be resolved remotely, our field engineers are dispatched
on location to ensure the customer's success in implementing our product.
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STRATEGY
Our objective is to become the world's leading provider of DSS products and
related services implemented by Global 2000 enterprises. Our strategy for
achieving this objective includes marketing, technology and sales dimensions.
Marketing Strategy. Create Widespread Demand for Decision Support Services.
Our marketing strategy focuses on communicating the possibilities for value
creation that new DSS technology offers to data content owners and other
potential users. Organizations that have accumulated substantial data assets are
frequently unaware of the "resonance" these data assets may have both within and
outside their enterprise--i.e., the extent to which decision makers may benefit
from the ability to query and analyze data assets in diverse, sophisticated and
spontaneous ways. In other cases, there is a clear latent demand for
information, but organizations are unaware that the tools now exist to
facilitate the creation of "industrial strength" DSS applications that can
satisfy this demand. Accordingly, our marketing strategy is primarily
educational, seeking to create demand for DSS applications among the broadest
possible set of decision makers, while at the same time providing a clear
technology solution to the information technology professionals who are charged
with building these applications. We believe that the future of decision support
is "Query Tone," a cue signaling the availability of information on demand. We
seek to position DSS application services as a utility, comparable to water,
electricity, telecommunications and radio, to be relied upon daily by
individuals in both their professional and personal lives.
A principal theme of the Query Tone concept involves appealing to the
individual's "need to know." We believe that Query Tone will ultimately enable
knowledge workers to pose questions against databases that they previously had
thought were impossible to ask:
. How loyal are my customers?
. In which geographic areas are they concentrated?
. What are their demographic characteristics?
. How should marketing funds be allocated?
. To which customers should sales efforts be targeted?
Consumers may similarly benefit from Query Tone's interrogatory potential:
. How much money is in my bank account?
. What is my stock portfolio worth?
. Is someone using my credit card fraudulently?
. Which hospital has the best safety record for elective surgery?
. Which vacation resorts have the most loyal customer base?
We believe that Query Tone will become as commonplace as the dial tone, the
universally recognized cue signaling the availability of telecommunications
services on demand. We believe that Query Tone will provide data content owners
with a business opportunity that allows them to differentiate their current
offerings, capture new revenue streams, increase market share and ensure the
continued loyalty of existing customers.
Technology Strategy. Provide a Scalable, Sophisticated and Maintainable DSS
Platform. Our technology strategy is to provide scalable, sophisticated and
maintainable solutions that support the relational database management system
platforms maintained by the major vendors in the very large database segment of
the data warehouse market, including IBM, Oracle, NCR, Compaq, Informix, Sybase
and Microsoft. Through our commitment to cross-platform flexibility, we are
improving our competitive position vis-a-vis larger data warehouse developers by
exploiting the reluctance of the major vendors to provide optimal support for
each other's platforms and protocols. We intend to further differentiate our
product offerings by increasing functionality along the key dimensions of:
10
. capacity--the volume of information that can be efficiently analyzed;
. 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 to user queries;
. schema flexibility--the range of DSS and online transaction processing
databases which the software is capable of efficiently querying without
modification;
. maintain ability--the ease with which applications can be deployed,
modified, upgraded and tuned;
. interface flexibility--the number of interface options and display features
supported; and
. robustness--the reliability and availability of the software in mission
critical environments.
Sales Strategy. Acquire Market Share Among High-Volume Data Content Owners.
Our sales strategy focuses on building direct sales infrastructure and
relationships with indirect channel partners that are each targeted toward
acquiring market share among high-volume data content owners both domestically
and abroad. We believe that in many data-rich industries, including retail,
financial services and healthcare, a relative handful of large firms control a
disproportionate share of the data assets that have widespread business
applications both within those firms and throughout the larger economy. We also
believe that in light of the relatively long sales cycle associated with
acquiring DSS products and the recent emergence of the DSS industry, it is
critically important to gain market share with the firms that have "resonant"
data assets and that have the highest potential to attract large numbers of
decision makers. We are aggressively targeting key departments within these
firms that can be expected to help spread demand for our DSS solutions across
the enterprise as a whole. We are also expanding our active consulting practice
to enable ongoing customers to maximize the value of their investment, as well
as a support function to ensure that current customers have access to our field
engineering and tele-support. Finally, we are expanding our education program
to enhance our potential customers' and channel partners' understanding of the
power of DSS applications.
PRODUCTS
As illustrated by the following diagram, DSS Suite enables the access to and
analysis of information stored in large relational databases through various
access devices. DSS Suite provides the decision support infrastructure and
products used to implement three categories of applications:
. internal corporate information solutions;
. business-to-business information solutions; and
. business-to-consumer information solutions.
[GRAPHIC OF DSS SERVER APPEARS HERE]
Relational Online Analytical Processing Server
DSS Server. High Performance Server for Analysis of Very Large Databases. DSS
Server provides multidimensional analysis against our broad array of supported
relational database management systems, including Oracle, Informix, DB2, Tandem,
Sybase, SQL Server and Teradata. In order to optimize DSS application
performance, DSS Server also contains our High Performance Drivers, a set of
optimization rules built into our relational OLAP Engine that tunes the SQL
generated by DSS Server for superior query performance against the target data
warehouse relational database. Specifically designed for enterprise and
commercial data warehouse applications, DSS Server scales to meet the decision
making requirements of thousands of users accessing terabytes of information.
DSS Server provides a sophisticated array of enterprise-critical management
tools such as caching of frequently accessed data sets and query
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governing to streamline performance and batch job scheduling. DSS Server also
has built-in multi-threaded user and queue management for load balancing. With
this broad set of management tools, organizations have the flexibility to tailor
their DSS architecture to work optimally within their business environment.
DSS Server also has the capability to create dynamic relational data marts to
create summary tables within the data warehouse for improved performance and to
pull subsets of the data warehouse into another relational data store for
focused analysis.
Large-Scale Deployment Servers
DSS Web. Interactive Analysis Environment for the World Wide Web. DSS Web
extends the information access and analysis capabilities of DSS Server to any
Internet- or intranet-connected user with a Web browser. Using the DSS Web
infrastructure, corporations can rapidly implement systems that allow local and
remote users to develop and access business reports that contain information
from a relational database.
DSS Web provides a broad array of options for viewing information sets, such
as spreadsheet grids and a wide variety of graphs. Through DSS Web's exception
reporting capabilities, users receive key elements of a report in easily
interpretable, plain English messages. DSS Web also allows users to drill
dynamically to a lower level of detail to view the underlying information or to
create and save new analyses. For sensitive information, DSS Web's security
plug-ins allow businesses to extend the standard security functionality with
additional user authentication routines.
DSS Web includes an API that allows businesses to customize, integrate and
embed DSS Web functionality into other applications. For example, a data
syndicator for healthcare information could utilize DSS Web with a customized
interface to sell access to this information to HMOs, hospitals, and pharmacies.
DSS Broadcaster. Personalized Information Broadcast Server. DSS Broadcaster
is a powerful information broadcast server designed to be capable of delivering
personalized messages to many thousands of recipients via e-mail, fax, pager and
mobile phone. DSS Broadcaster sends personalized information to subscribers at
pre-defined intervals when business metrics exceed pre-defined thresholds.
Continually monitoring business conditions ensures that the appropriate
information is delivered when it is required. DSS Broadcaster's support for
consumer devices delivers information where it is most convenient, improving
productivity by eliminating the need for users to actively log onto a dedicated
information analysis application.
DSS Broadcaster provides both a platform for distributing information
throughout the corporate enterprise and an infrastructure to implement
information products and services over the Internet to target a broader
community. For example, a retailer will be able to offer suppliers a
subscription to a set of services that delivers product performance information
to a supplier's fax machine or e-mail.
DSS Broadcaster reduces information overload and helps security requirements
by automatically customizing the contents of broadcast messages for each
individual subscriber. Microsoft Excel enclosures and embedded hyperlinks to DSS
Web products provide access to the underlying details for further, interactive
analysis.
Advanced Analysis And Applications Development Interfaces DSS Agent. Desktop
Environment for Sophisticated Analysis and Development. DSS Agent is a desktop
product that allows users to ask sophisticated business questions against
relational databases. DSS Agent provides a broad range of business reporting
views, including spreadsheet grids, a wide variety of graphs, mapping, and
presentation-quality report writing. DSS Agent provides an advanced set of
analytical capabilities such as rankings, deciles, time-based calculations and
multi-dimensional calculations. The information filtering capabilities provided
by DSS Agent enable users to specify in plain English precisely which
constraints they wish to apply to the targeted information, allowing them to ask
questions such as: "What are the sales in Boston on weekends in June for
customers who are single, earn more than $30,000 per year and increased their
purchases by 15% over last year?" Once users have run a business report, DSS
Agent provides capabilities for analytical follow-up such as successively
interjecting new information into the report, and drilling throughout the user's
business information. DSS Agent's intelligent agents and alerts also allow users
to take actions by automatically scanning the data warehouse and highlighting
exception areas.
DSS Agent's filtering, reporting and analytical capabilities provide users
with the ability to scan through transaction-level detail in their data
warehouse and perform sophisticated market basket analyses. Through DSS Agent's
ability to
12
build a sophisticated analytical report, users can understand what products sell
well together and whether or not that combination of product sales is more or
less profitable than the average market basket of products sold. All reports and
analyses developed with DSS Agent can be distributed via the Internet with DSS
Web and by e-mail, fax, pager, and mobile phone with DSS Broadcaster. The sample
retail report in the figure below illustrates DSS Agent's powerful reporting
capabilities.
[GRAPHIC OF DSS AGENT SCREEN APPEARS HERE]
DSS Objects. API for Custom Application Development. DSS Objects is a
development tool for building customized applications on top of DSS Server.
Specialized applications (such as forecasting, category management, scenario
analysis, and budgeting) and applications that tightly integrate DSS with online
transaction processing are easily developed in Visual Basic, Visual Basic for
Applications, Delphi, and Visual C++. DSS Objects allows systems integrators,
value added resellers, in-house application developers and vertical solution
providers to develop customized relational OLAP applications.
DSS Objects also is packaged with an Excel add-in that enables relational OLAP
analyses to be conducted directly within Microsoft Excel for those end-users who
wish to use Excel as their analytical front-end interface. The Excel add-in
allows users to run reports against the data warehouse and conduct follow-on
analyses on that data through the use of the drill everywhere capabilities
included in the Excel add-in.
Application Development and Management Tools
DSS Architect. Tool for Rapid DSS Development. DSS Architect is a tool for
implementing information analysis applications on top of a relational database
management system. DSS Architect creates a set of business definitions and rules
based on the underlying structure of the relational database. Users of
applications such as DSS Agent, DSS Objects, DSS Web, and DSS Broadcaster can
use these business definitions to ask questions and conduct analysis of
information in the database. DSS Architect is highly automated and is based on
an open, flexible metadata architecture, which greatly reduces the cost and time
required to implement and maintain systems.
DSS Executive. Object-Based Executive Information Systems Development Tool.
DSS Executive is a design tool for developing Executive Information Systems or
briefing books that provide high-level users with a series of views that
describe their business. Once briefing books are created, end users can access
them by running DSS Agent in Executive Information Systems mode. These systems
are easily implemented on top of any DSS Agent application by simply compiling
sets of analyses into dynamic pages that immediately focus users on their key
business drivers.
DSS Administrator. Management and Monitoring Tools for Enterprise
Deployments. DSS Administrator provides a complete set of tools for managing and
monitoring large-scale decision support applications. System monitoring
capabilities provide the information needed to tune systems for high performance
and availability. The user and object management functionality provided by DSS
Administrator enables organizations to maintain enterprise systems supporting
thousands of users.
DSS Administrator's Billing module provides the infrastructure needed to
implement billing systems for Internet-based information services. The Billing
module can be used to track system usage and generate the reports needed to
charge users of an Internet-based information service.
Professional Services and Customer Support
DSS Consulting. Data Warehouse And DSS Implementation Service. DSS
Consulting is dedicated to providing clients with the DSS industry's most
focused data warehouse and DSS implementation expertise. Our QuickStrike
program, a consulting program for organizations who have already committed to a
DSS development effort, includes ten working days of consulting provided by an
experienced MicroStrategy data warehouse DSS expert at a client's facilities.
Our consultants contribute to the success of Enterprise DSS projects by
providing services such as:
. DSS application design, development, test and deployment;
13
. data warehouse design, population, development, tuning, and maintenance;
. system integration project planning, methodology and audit oversight; and
. custom application design, development and implementation methodology for
those who wish to develop applications with proprietary interfaces using
DSS Objects.
DSS Education. Data Warehouse and DSS Implementation Methodology. We offer
training courses to provide current and potential customers with an effective
way to learn about decision support systems and data warehousing. These courses
have been developed and are taught by senior MicroStrategy consultants with
years of experience designing and implementing data warehouses and DSS
solutions. Our training curriculum includes:
. Introduction to DSS and Data Warehousing;
. Data Warehousing, Decision Support and the Web;
. Advanced DSS Functionality and Architecture; and
. Data Warehousing--DSS Modeling and Design.
DSS Support. Hotline, Knowledge Base and Field Engineering Services. We
provide full product implementation cycle support for Enterprise DSS development
and deployment through a variety of channels, including a Web-accessible
knowledge base, a telephone hotline, e-mail and fax. Our support engineers are
capable of providing client/server configuration assistance, data warehouse
design support, DSS application development assistance, relational database
management system tuning and configuration assistance and installation,
configuration, tuning, and usage support for all of our products. Our support
engineers maintain close relationships with the development centers of the major
relational database management system providers in order to quickly resolve very
large database performance issues that arise from the interaction between DSS
and relational database management system software. In the event that it is not
possible to troubleshoot an issue remotely, our field engineers are available to
be dispatched directly to a client site to isolate and solve problems locally.
Our support personnel are capable of providing mission critical support and will
interface on behalf of the customer with the relevant very large database and
relational database management system providers to address incompatibilities,
particular to a given configuration, that are impairing the successful
deployment of our DSS applications.
The diagram set forth below illustrates the complete range of our consulting,
education and support services.
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CUSTOMERS
We provide DSS products and related services that can support thousands of
users in multiple countries, speaking different languages and working with
different currencies. We have in excess of 650 customers, spread across a
variety of major industries. A representative list of the firms that during and
after the year ended December 31, 1996 have purchased over $250,000 of our
products and services is as follows:
BANKING & FINANCE TELECOMMUNICATIONS CONSUMER PACKAGED GOODS
Bank of America* Ameritech Beverage Data Network
Banco Santander AT&T Wireless Services Brown & Williamson
CIBC Bell Atlantic* Estee Lauder
Fannie Mae* Bell South* Hallmark*
First Data Corporation* Concert Management Services Heublein
First Union Corporation* MCI Worldcom Ralston Purina*
First USA Bank Pacific Bell* S.C. Johnson Wax*
Freddie Mac* Sprint* U.S. Borax, Inc.
GE Capital*
The Provident Bank PHARMACEUTICAL & HEALTHCARE TECHNOLOGY
Royal Bank of Canada* Cardinal Health EDS Electronic Data Systems*
Societe Generale Glaxo Wellcome* IBM Corporation*
Visa International* MedPartners Nielsen Media Research
Merck/Medco* NCR
RETAIL Premier, Inc.* Oculus
Asda Stores* Smithkline Beecham Perot Systems*
B & Q* Warner-Lambert* Tandem Computers*
Bear Creak* Western Digital*
Best Buy* GROCERY & PHARMACY
Comet American Stores* MANUFACTURING & INDUSTRIAL
Dayton Hudson Associated Food Stores Allied Signal
Elder Beerman CVS Pharmacy* DuPont*
Federated Systems Group* Eckerd Corporation* Exxon Chemical
Kmart* Food Lion General Motors
Kohl's Department Stores Hannaford Brothers Koch Industries
LCBO Harris Teeter Lexmark
The Limited, Inc.* Marsh Supermarkets Monsanto*
Littlewoods* Nissan
Liz Claiborne* INSURANCE Samsung*
Marks & Spencer PLC* Commercial Union Insurance Shaw Industries
Payless Cashways National Heritage Insurance*
Payless Shoesource* Nationwide Insurance* OTHER
ShopKo* USAA* London Electric
The Burton Group* National Association of Securities
Victoria's Secret Dealers, Inc.
Woolworth's* Penn Traffic
The Sabre Group*
Universal Studios, Inc.*
US Airforce
* Indicates that customer has purchased in excess of $500,000 in products and
services during and after the year ended December 31, 1996.
15
SALES AND MARKETING
Direct Sales Organization. We market our software and services primarily
through our direct sales organization. As of December 31, 1998, we had domestic
sales offices in Atlanta, Bedminster, Boston, Charlotte, Chicago, Cincinnati,
Columbus, Dallas, Detroit, Houston, Kansas City, Los Angeles, Minneapolis, Mount
Laurel, New York City, Newport Beach, Phoenix, Pittsburgh, San Francisco,
Seattle, St. Louis and Washington, D.C., and international sales offices located
in Canada (Toronto and Vancouver), The Netherlands (Amsterdam), Spain (Barcelona
and Madrid), Germany (Cologne), the United Kingdom (London), France (Paris),
Austria (Vienna), and Italy (Milan). We are represented by distributors in
countries in which it does not have sales offices, including Australia, Brazil,
Chile, Columbia, Czech Republic, Finland, Greece, Ireland, New Zealand,
Singapore, South Africa, South Korea and Sweden.
Indirect Sales Channels. We have entered into relationships with over 150
system integration, application development and platform partners whose products
and services are used in conjunction with ours. 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. By using indirect sales channels, we obtain
favorable product recommendations from the leading system integration,
application developers and platform partners, thereby increasing our market
coverage. We also believe that such indirect sales channels allow us to leverage
sales and service resources, marketing and industry specific expertise to expand
our user base. We are not dependent upon any single third party partner or small
group of partners, the loss of which would have a material adverse effect on us.
Value-Added Resellers. VARs who resell DSS Suite bundled with their own
Enterprise DSS application and/or syndicated data products include:
RETAIL PHARMACEUTICAL FINANCE
AC Nielsen Concepts Dynamics American Management
Consist International IMS America Systems
FourGen Software IMS Canada Databasics
ICL Retail Systems Source Informatics PaySys
Intrepid Systems TELECOM CROSS INDUSTRY
Radiant Systems CableData Acxiom
Radius Retail Cincinnati Bell Chilton Research Services
Retek Systems Information Systems CIC/MetroMail
Technology Investments UTILITY Naviant
james + martin RDI - DW Specialists
System Integrators. We have also entered into agreements to provide
training, support, marketing and sales assistance to a number of system
integrators, including:
AMS EMS PRAGMATEK Consulting Group
Andersen Consulting Ernst & Young Professional Software Consulting
Archer Decision Sciences H.I.T. ProLink
Anubis Solutions james + martin EIS Pulse
Beggsheidt Enterprise Consulting John Galt Retail Dynamics (RDI)
CBSI Knightsbridge Solutions RIS Information Services
Clarity Consulting Lancet Software Development Revere Group
CMS Manifest Solutions Shamrock Computer Resources
Computer Sciences Corporation Marketing Info Systems Software AG
Cornerstone Concepts Naviant Technology Solutions Stonebridge Technologies
Database Technologies NCR Syndicated Technologies
Decision Support Associates NexGen SI Virtual Solutions
Deloitte & Touche Nichols Research Zyga
DMR/Trecom Noblestar Systems
Emergent Corporation Olympus Group
Perspective Data Architecture
16
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, Tandem/Compaq, NCR, Sequent, ICL, Data General,
Informatica, Oracle, Informix and Red Brick.
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
range of customer requirements. As of December 31, 1998, our research and
product development staff consisted of 171 employees. Our total expenses for
research and development for the years 1998, 1997, and 1996 were $12.1 million,
$5.0 million (excluding $1.9 million of capitalized software costs) and $2.8
million, respectively.
COMPETITION
The markets for decision support and Internet-based information services are
intensely competitive and subject to rapidly changing technology. Our most
direct competitors in these markets are providers of decision support software,
push products, browsers with webcasting functionality, electronic and Internet
commerce systems, vertical Internet information systems, wireless communications
products, OSPs and event-driven technology. Many of these competitors are
offering (or may soon offer) products and services that may compete with our
information analysis and soon-to-be-released information broadcasting products.
The bases of competition in these markets include volume and type of information
accessed, timeliness of information delivery, degree of personalization, range
of information delivery media, quality of presentation, price/performance,
sophistication of notification events and ease of implementation.
Our competitors in the decision support market fall generally into the
following categories: (i) vendors of ROLAP software such as Information
Advantage, Inc. and Platinum Technologies Corporation; (ii) vendors of desktop
OLAP software such as Business Objects S.A. and Cognos Incorporated; and (iii)
vendors of multidimensional OLAP software such as Oracle Corporation, Arbor
Software Corporation (which has entered into a strategic relationship with IBM),
Seagate and SAS. We anticipate continued growth and competition in the decision
support software market and the entrance of new competitors into this market in
the future. Such new competitors may include Microsoft, which has indicated
that it may introduce certain products in 1998 that may overlap to some extent
with the functionality of our products.
Push product vendors such as PointCast, Marimba and BackWeb offer technologies
that deliver information over the Internet to recipients via Web-browsers and
proprietary interfaces. Vendors of push products are focused generally on the
delivery of text-based information, such as news and sports, but often include
some level of numeric information such as stock price updates. Moreover,
Marimba has entered into technology partnerships that will extend the scope of
its offering to include the delivery of information and analysis from relational
data sources, which could provide us with increased competition.
Web-browsers with channels or webcasting functionality, such as Microsoft
Internet Explorer and Netscape Navigator, provide an infrastructure for
automatically updating a set of information on a recipient's computer. Although
this infrastructure is used by us to enhance the functionality of our DSS Web
product line, webcasting and desktop channels offer an alternative information
delivery infrastructure to our DSS Broadcaster product line.
Products and turn-key solutions for electronic commerce, Internet commerce and
electronic business, such as those provided by IBM, Open Market, U.S. Web, SVIP
and Sun, provide a set of functionality that could be used to implement
Internet-based information services. To the extent that these information
products sell information and analysis from relational databases they will
compete with our products.
Vertical Internet information systems, including Microsoft Expedia, Microsoft
Investor, StockBoss, Microsoft CarPoint, Mercury Mail, TechWeb, ESavers (US
Airways, Inc.), C.O.O.L. (Continental Airlines, Inc.), and Internet Travel
Network, have developed custom applications and products for the
commercialization, analysis and delivery of specific information via the
Internet. These systems are generally tailored to a particular application and
built in a
17
fashion that is difficult to leverage into other applications. These systems
represent competition, in that they provide similar functionality to
applications developed using our products.
Wireless communications and messaging providers, such as AT&T, Nextel, Sprint,
MCI, WorldCom, Tridium, PageNet and SkyTel, offer a variety of alpha enabled
mobile phones and pagers. It is possible that these companies will implement
custom-developed information services for consumers of their mobile phones and
pagers that will compete with applications using our products and services.
OSPs include companies such as America Online, MSN, Prodigy, @Home and WebTV
(acquired by Microsoft) that provide text-based content, such as news and
sports, over the Internet and on proprietary online services. The potential
exists for these companies to implement applications that overlap with the
functionality provided by us.
Providers of event notification systems include companies such as TIBCO, which
markets a product that monitors stock tickers and notifies subscribers when
preset thresholds are crossed; Clarify, which handles loan applications with a
financial system developed by SAP AG; BEA Systems, which provides middleware;
and Vitria Technology, which provides event-based workflow software. The
systems for event-driven notification provided by these companies at present and
in the future may result in technology that overlaps with that provided by us.
We believe that we differentiate ourselves from other industry participants by
offering comprehensive support for all significant relational database
platforms. If a single vendor wins a substantial share of the relational
database market, we may find it more difficult to differentiate our offerings
from our competitors, which may materially adversely affect our business,
operating results and financial condition.
Many of our competitors have longer operating histories, significantly greater
financial, technical, marketing or other resources, or greater name recognition
than us. In addition, many of our competitors have well established
relationships with current and potential customers and extensive knowledge of
the data warehouse industry. As a result, these competitors may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the development, promotion and
sale of their products, than we can. Increased competition may result in price
reductions, reduced gross margins and loss of market share. There can be no
assurance that we will be able to compete successfully against current and
future competitors or that competitive pressures faced by us will not materially
adversely affect our business, operating results and financial condition. See
"Business--Competition."
Current and potential competitors may make strategic acquisitions or establish
cooperative relationships among themselves or with third parties, thereby
increasing their ability to address the needs of our prospective customers. Our
current or future indirect channel partners may establish cooperative
relationships with our current or potential competitors, thereby limiting our
ability to sell our products through particular distribution channels.
Accordingly, it is possible that new competitors or alliances among current and
new competitors may emerge and rapidly gain significant market share. Such
competition could have a material adverse effect on our margins and 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 license rather than sell our software
and require licensees to enter into license agreements that impose certain
restrictions on licensees' use of the software. In addition, we have made
efforts to avoid disclosure of our trade secrets, including but not limited to
requiring those persons with access to our proprietary technology and
information to enter into confidentiality agreements with us and restricting
access to our source code. We seek to protect our software, documentation and
other written materials under trade secret and copyright laws, which afford only
limited protection. We presently have no patents or patent applications
pending. 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
18
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 has 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, 1998, we had a total of 907 employees, of whom 748 were
based in the United States and 159 based internationally. Of the total, 264
were engaged in sales and marketing, 171 in product development, 330 in
professional services and 142 in finance, administration and corporate
operations. Our future performance depends in significant part upon the
continued service of our key management personnel, none of whom is bound by an
employment agreement. The loss of the services of one or more of our key
employees could have a material adverse effect on our business, operating
results and financial condition. Our future success also depends on our
continuing ability to attract, train and retain highly qualified technical,
sales, service, marketing and managerial personnel. Competition for such
personnel is intense, and there can be no assurance that we can retain our key
personnel in the future. None of our employees is represented by a labor union.
We have not experienced any work stoppages and consider our relations with our
employees to be good.
We believe that effective recruiting, education, and nurturing of human
resources is critical to our success and have traditionally made substantial
investments in these areas in order to differentiate ourselves from our
competition, increase employee loyalty and create a culture conducive to
creativity, cooperation and continuous improvement. These measures include:
Professional Education. All newly hired professionals complete a
professional orientation course that ranges from 4-8 weeks long presented by
"MicroStrategy University," our in-house education function. The curriculum
consists of lectures, problem sets and independent and group projects, covering
data warehousing, Enterprise DSS, our products, our competitors and customers.
Certain lectures also deal with general business practices, ethics and teamwork.
At the end of this training, students must pass a number of oral and written
examinations in order to begin their assignments. Following this introductory
course, veteran employees normally complete at least two weeks of continuing
professional development each year. Course content for MicroStrategy University
is created by the most experienced members of the professional staff, who
generally have an annual obligation to 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 the entire 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 plays host to immediate and extended family, as well
as significant others of employees; and "Customer and Partner Festival," where
our business partners and customers are encouraged to mix with the
19
employee base in order to exchange information and strengthen the firm's ties to
the marketplace. We believe that our "Company Day" events are long-term
investments which will, over time, result in superior productivity, morale, and
loyalty among the employee base, and we expect to continue to engage in these
activities in the future.
20
DIRECTORS AND EXECUTIVE OFFICERS
The following information concerns members of our Board of Directors and our
executive officers:
Name Age Position
---- --- --------
Michael J. Saylor.................... 34 President, Chief Executive Officer and Chairman of the Board of Directors
Sanju K. Bansal...................... 33 Executive Vice President, Chief Operating Officer and Director
Siddartha Banerjee................... 33 Vice President, Consulting Services
Jonathan F. Klein.................... 32 Vice President, Law and General Counsel
Mark S. Lynch........................ 35 Vice President, Finance and Chief Financial Officer
Eduardo S. Sanchez................... 42 Vice President, International Operations
David B. Sherwood, Jr................ 30 Vice President, Marketing
Ray B. Tacoma........................ 49 Vice President, Sales
Stephen S. Trundle................... 30 Vice President, Technology
Charles A. Veley..................... 33 Vice President, Strategic Planning
Mark W. Walztoni..................... 44 Vice President, Corporate Development
John L. Wyatt........................ 47 Vice President, Corporate and President, Commercial Intelligence
Edward S. Yurcisin................... 31 Vice President, Customer Management
Frank A. Ingari...................... 49 Director
Jonathan J. Ledecky.................. 41 Director
Ralph S. Terkowitz................... 48 Director
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.
Siddhartha Banerjee has served as Vice President, Consulting Services since
November 1998. From 1996 to 1998, Mr. Banerjee served as Director of North
America Consulting Services. From 1993 to 1996, Mr. Banerjee served as a
Consulting Senior Manager and as Director of Western Operations. Prior to that,
Mr. Banerjee worked at Ernst & Young as a consulting manager from 1989 to 1991
and at Sprint International as a Product Manager from 1991 to 1993. Mr. Banerjee
received an S.B. and an M.S. in Electrical Engineering from the Massachusetts
Institute of Technology.
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, 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.
Eduardo S. Sanchez has served as Vice President, International Operations
since July 1997. From 1994 to 1997, he served as Managing Director, European
Operations and prior to that as Senior Manager, U.S. Consulting since joining
MicroStrategy in 1992. Prior to that, Mr. Sanchez was a manufacturing consultant
in Europe, the United States, South
21
America and Japan. Mr. Sanchez received an M.S. in Systems Engineering from
George Mason University and a B.S. in Electrical Engineering from the University
of La Plata in Argentina.
David B. Sherwood, Jr. has served as Vice President, Marketing since February
1998 and as Director, Sales Programs from 1997 to 1998. From 1992 to 1996, Mr.
Sherwood served as consultant and then Director of Field Sales. Prior to that,
Mr. Sherwood worked at Merrill Lynch as a financial analyst. Mr. Sherwood
received an A.B. in English from Dartmouth College.
Ray B. Tacoma has served as Vice President, Sales since January 1999, and
Northeast Regional Vice President from 1997 to 1998. From 1993 to 1996, Mr.
Tacoma served as Vice President, Sales and held various other management
positions at nCUBE Corporation. From 1973 to 1992, Mr. Tacoma served in a
variety of management and sales positions at Sequent Computer Systems, Tandem
Computers, Inc., and Digital Equipment Corporation. Mr. Tacoma received a
B.S.M.E. from the University of Evansville.
Stephen S. Trundle has served as Vice President, Technology 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.
Charles A. Veley has served as Vice President, Strategic Planning since March
1999 and as Vice President, Corporate Development since October 1997 and as
Director, Corporate Development from 1996 to October 1997. From 1994 to 1996,
Mr. Veley was an Account Executive for Cambridge Technology Partners, a
client/server system integrator. From 1991 to 1994, Mr. Veley was employed by
MicroStrategy as Vice President, Sales and Marketing. Prior to that, Mr. Veley
was an Associate Consultant with the Boston Consulting Group. Mr. Veley received
an A.B. in Computer Science from Harvard College.
Mark W. Walztoni has served as Vice President, Corporate Development since
March 1999. Prior to that, Mr. Walztoni was employed by Computer Horizons Corp.
as Vice President, Human Resources from July 1996 to March 1999. Mr. Walztoni
has also held several senior human resources positions with Ernst & Young LLP
and American Express Company. Mr. Walztoni received a B.S. in Business from
Northeastern Illinois University and an M.A. in Organizational Psychology from
Columbia University.
John L. Wyatt has served as Vice President, Corporate and President of
MicroStrategy's Commercial Intelligence business unit since February 1999. From
1991 until 1998, Mr. Wyatt was the Chief Executive Officer of James Martin & Co.
In 1997, he became a member of that company's board of directors, on which he
continues to serve. Mr. Wyatt served as the President of a North American start-
up subsidiary of an international consulting firm from 1987 to 1990 and as the
President of Cohen & Wyatt, Inc., a systems integration solutions company, from
1983 to 1986. Mr. Wyatt received a BEC in 1975 from the University of New
England in New South Wales, Australia.
Edward S. Yurcisin has served as Vice President, Customer Management since
November 1998. Since joining MicroStrategy in 1990, Mr. Yurcisin has also served
as a Consultant, a Consulting Manager, a Product Manager, an Account Manager,
and as Director of Technology Services. Mr. Yurcisin received a B.A. in
Economics and Political Science from Duke University.
ITEM 2. PROPERTIES
FACILITIES
Our principal offices currently occupy over 284,000 square feet in Vienna,
Virginia pursuant to multiple leases which expire between January 1999 and
September 2006. 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
City, San Francisco, Seattle, Washington, D.C., Amsterdam, Barcelona, Cologne,
London, Madrid, Milan, Paris and Vienna. We believe that suitable additional or
alternative space will be available in the future on commercially reasonable
terms as needed.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation that arises in the normal
course of our business operations. Currently, we are not a party to any
litigation that we believe could reasonably be expected to have a material
adverse effect on our business or results of operation.
22
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 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our Class A Common Stock, $.001 par value (the "Class A Common Stock"), is
traded on the Nasdaq National Market ("Nasdaq") under the symbol "MSTR".
Following our initial public offering on June 12, 1998, the following high and
low sales prices were reported by Nasdaq in each quarter:
1998 High Low
----- ------ -----
Fourth Quarter 33.88 20.75
Third Quarter 46.00 23.75
Second Quarter 29.75 15.88
As of March 1, 1999, there were approximately 216 shareholders of record of
our Class A Common Stock and 16 shareholders of record of our Class B Common
Stock, $.001 par value (the "Class B Common Stock").
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 4,440,000 shares of our Class A Common Stock on June 12, 1998 (the
"Initial Public Offering") pursuant to a Registration Statement on Form S-1
(Registration No. 333-49899), which was declared effective by the Securities and
Exchange Commission (the "Commission") on June 10, 1998 (the "Effective Date").
Certain stockholders of ours sold an aggregate of 160,000 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 $4.6 million, of which $3.7 million was for
underwriting discounts and commissions. Our net proceeds from this offering
were approximately $48.1 million. From the Effective Date through December 31,
1998, we used $8.9 million of the net proceeds of the Initial Public Offering to
repay net borrowings under our business loan facility (the "Business Loan"). As
of March 31, 1999, we had approximately $27.5 million of proceeds remaining from
the Offering, and pending use of the proceeds, we intend to invest such proceeds
primarily in investment-grade, interest-bearing instruments.
We sold 1,585,000 shares of our Class A Common Stock, on February 10, 1999
(the "Secondary Offering") pursuant to a Registration Statement on Form S-1
(Registration No. 333-70919), which was declared effective by the Commission on
February 10, 1999. Certain stockholders of ours sold an aggregate of 415,000
shares of Class A Common Stock pursuant to such registration statement.
23
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Years ended December 31,
---------------------------------------------------------------------------
1998/(1)/ 1997/(1)/ 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(in thousands, except share and per share data)
STATEMENT OF OPERATIONS DATA:
Revenues:
Product licenses................................. $ 72,721 $ 36,601 $ 15,873 $ 4,077 $ 622
Product support.................................. 33,709 16,956 6,730 5,700 4,358
----------- ----------- ----------- ----------- -----------
Total revenues.................................. 106,430 53,557 22,603 9,777 4,980
----------- ----------- ----------- ----------- -----------
Cost and expenses:
Cost of revenues................................. 19,781 11,116 5,257 2,458 2,057
Sales and marketing.............................. 53,408 30,468 13,054 2,992 771
Research and development......................... 12,106 5,049 2,840 1,855 200
General and administrative....................... 11,809 6,552 3,742 2,395 1,955
----------- ----------- ----------- ----------- -----------
Total costs and expenses........................ 97,104 53,185 24,893 9,700 4,983
----------- ----------- ----------- ----------- -----------
Income (loss) from operations..................... 9,326 372 (2,290) 77 (3)
Interest income (expense), net.................... 308 (239) (105) (40) (34)
Other income (expense), net....................... (14) (12) 20 11 (24)
----------- ----------- ----------- ----------- -----------
Income (loss) before taxes........................ $ 9,620 $ 121 $ (2,375) $ 48 $ (61)
Provision for income taxes........................ 3,442 -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss)................................. $ 6,178 $ 121 $ (2,375) $ 48 $ (61)
=========== =========== =========== =========== ===========
Basic net income (loss) per share................. $ 0.18 $ 0.00 $ (0.08) $ 0.00 $ 0.00
Shares used in computing basic net income (loss)
per share........................................ 33,492,869 29,493,873 29,493,873 28,896,622 27,988,000
Diluted net income (loss) per share............... $ 0.16 $ 0.00 $ (0.08) $ 0.00 $ 0.00
Shares used in computing diluted net income
(loss) per share................................. 38,601,389 32,362,277 29,493,873 28,896,622 27,988,000
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 27,491 $ 3,506 $ 1,686 $ 643 $ 249
Working capital (deficit)......................... 28,467 (5,991) (2,237) 1,343 848
Total assets...................................... 82,689 30,065 13,004 5,838 3,209
Notes payable, long-term portion.................. --- 2,428 460 600 193
Total stockholders' equity (deficit).............. 46,280 (427) (793) 1,546 1,446
- --------------
(1) On June 11, 1998, we elected to terminate our treatment as a Subchapter S corporation for federal and state income tax
purposes. Under Subchapter S, our income was allocated and taxable to our individual stockholders rather than to us.
Accordingly, no federal or state income taxes have been provided for in the financial statements, prior to consummation of the
Initial Public Offering. Our S corporation status terminated shortly prior to consummation of the Initial Public Offering at
which time we became subject to federal and state corporate income taxation as a Subchapter C corporation. As a result, we will
now account for income taxes as a Subchapter C corporation and have adopted SFAS No. 109, "Accounting for Income Taxes." Our
recorded income tax expense was $3,442 for the twelve months ended December 31, 1998. On a pro forma basis, had we been a tax-
paying entity, we would have recorded an income tax provision of approximately $3,649 and $489 and net income (loss) of
approximately $5,971 and $(368) for the years ended December 31, 1998 and 1997, respectively. Pro forma basic and diluted
income per share would have been $0.18 and $0.15, respectively, for the year ended December 31, 1998 and pro forma basic and
diluted loss per share would have been $0.01 for the year ended December 31, 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Our primary business following our incorporation in 1989 was to provide
software consulting services for customers to help them build custom decision
support systems. Our activities during 1994 and 1995 increasingly focused on
the development and sale of software products, culminating in the release of a
full complement of DSS products in 1995. Since this time, we have continued to
focus significant resources on the development of additional functionality and
features to our DSS software products. As a result, we have transitioned our
primary business from that of a provider of services to a provider of software
products.
Since 1995, we have significantly increased our sales and marketing, service
and support, research and development and general and administrative staff. We
have more than doubled our headcount each year since 1995. At January 1, 1995,
we had 59 employees, and at December 31, 1998, we had 907 employees. Although
our revenues have significantly increased in each of the last nine quarters, we
experienced fluctuating operating margins during 1996, 1997
24
and 1998 primarily as a result of increases in staff levels. We expect to
continue to increase staffing levels and incur additional associated costs in
future periods. If we are unable to achieve corresponding substantial revenue
growth, we could suffer operating losses in one or more fiscal quarters and may
be unable to forecast such losses prior to the end of any given fiscal quarter.
In addition, we have experienced net losses and losses from operations for the
fiscal years ended December 31, 1996 and December 31, 1994, and were only
marginally profitable for the fiscal years ended December 31, 1997 and December
31, 1995. While we have experienced significant percentage growth in revenues in
recent periods and currently expect continued, although potentially lower,
percentage growth in revenues throughout 1999, prior percentage revenue growth
rates should not be considered as necessarily indicative of future growth rates
or operating results, and there are a number of factors that could materially
affect expected revenue and operating results for fiscal 1999 and subsequent
periods. See "Risk Factors."
Our revenues are derived from two principal sources (i) product licenses and
(ii) fees for maintenance, technical support, education and consulting services
(collectively, "product support"). Prior to January 1, 1998, we recognized
revenue in accordance with Statement of Position 91-1, "Software Revenue
Recognition." Subsequent to December 31, 1997, we began recognizing revenue in
accordance with Statement of Position 97-2, "Software Revenue Recognition."
SOP 97-2 was amended on March 31, 1998 by SOP 98-4 "Deferral of the Effective
Date of a Provision of SOP 97-2." In December 1998, the AICPA issued SOP 98-9
"Modification of SOP 97-2, Software Revenue Recognition", which amends SOP 98-4,
and is effective after December 31, 1998. Management has assessed these new
statements and believes that their adoption will not have a material effect on
the timing of our revenue recognition or cause changes to our revenue
recognition policies. Product license revenues are generally recognized upon
the execution of a contract and shipment of the related software product,
provided that no significant Company obligations remain outstanding and the
resulting receivable is deemed collectible by management. Maintenance revenues
are derived from customer support agreements generally entered into in
connection with initial product license sales and subsequent renewals. Fees for
our maintenance and support plans are recorded as deferred revenue when billed
to the customer and recognized ratably over the term of the maintenance and
support agreement, which is typically one year. Fees for our education and
consulting services are recognized at the time the services are performed.
The sales cycle for our products may span nine months or more. Historically,
we have recognized a substantial portion of our revenues in the last month of a
quarter, with these revenues frequently concentrated in the last two weeks of a
quarter. Even minor delays in booking orders may have a significant adverse
impact on revenues for a particular quarter. To the extent that delays are
incurred in connection with orders of significant size, the impact will be
correspondingly greater. Moreover, we currently operate with virtually no order
backlog because our software products typically are shipped shortly after orders
are received. Product license revenues in any quarter are substantially
dependent on orders booked and shipped in that quarter. As a result of these
and other factors, our quarterly results have varied significantly in the past
and are likely to fluctuate significantly in the future. Accordingly, we
believe that quarter-to-quarter comparisons of our results of operations are not
necessarily indicative of the results to be expected for any future period.
See "Risk Factors--Potential Fluctuations in Quarterly Operating Results."
We license our software through our direct sales force and increasingly
through, or in conjunction with, Value Added Resellers ("VARs") and Original
Equipment Manufacturers ("OEMs"). Channel partners accounted for, directly or
indirectly, approximately 35.0%, 27.5%, and 9.0% of our revenues for the years
ended December 31, 1998, 1997 and 1996, respectively. Although we believe that
direct sales will continue to account for a majority of product license
revenues, we intend to increase the level of indirect sales activities. As a
result, we expect that sales of our product licenses through sales alliances,
distributors, resellers and other indirect channels will increase as a
percentage of product license revenues. 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.
25
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:
Year ended December 31,
------------------------------------------------------
1998 1997 1996
------ ------ ------
Consolidated Statements of Operations Data:
Revenues:
Product licenses.......................................... 68.3% 68.3% 70.2%
Product support........................................... 31.7 31.7 29.8
----- ----- ------
Total revenues......................................... 100.0 100.0 100.0
----- ----- ------
Cost of revenues:
Product licenses.......................................... 2.1 3.1 4.5
Product support........................................... 16.5 17.7 18.7
----- ----- ------
Total cost of revenues................................. 18.6 20.8 23.2
----- ----- ------
Gross margin 81.4 79.2 76.8
Operating expenses:
Sales and marketing....................................... 50.2 56.9 57.8
Research and development.................................. 11.4 9.4 12.6
General and administrative................................ 11.1 12.2 16.6
----- ----- ------
Total operating expenses............................... 72.7 78.5 87.0
Income (loss) from operations............................... 8.7 0.7 (10.2)
Interest income............................................. 1.0 0.2 0.1
Interest expense............................................ (0.7) (0.7) (0.6)
Other income (expense), net................................. -- -- 0.1
Provision for income taxes.................................. (3.2) -- --
----- ----- ------
Net income (loss)........................................... 5.8% 0.2% (10.6)%
===== ===== ======
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenues. Total revenues increased to $106.4 million for the year ended
December 31, 1998 from $53.6 million in the year ended December 31, 1997,
representing an increase of 98.5%. Total revenues consist of revenues derived
from sales of software product licenses, services and maintenance. There can be
no assurance that total revenues will continue to increase at the rates
experienced in prior periods, if at all.
Product License Revenues. Product license revenues increased to $72.7
million for the year ended December 31, 1998 from $36.6 million in the same
period ended December 31, 1997, representing an increase of 98.6%. Product
license revenues constituted 68.3% of total revenues for the years ended
December 31, 1998 and 1997. The significant increase in the dollar amount of
product license revenues was due to growing market acceptance of our software
products and continued expansion of our sales and marketing organization.
Product Support Revenues. Product support revenues increased to $33.7
million for the year ended December 31, 1998 from $17.0 million in the same
period ended December 31, 1997, representing an increase of 98.2%. Product
support revenues constituted 31.7% of total revenues for the years ended
December 31, 1998 and 1997. The significant increase in the dollar amount of
product support revenues was primarily due to the increase in the number of DSS
licenses sold. We expect product support revenues as a percentage of total
revenues to fluctuate on a period to period basis, but generally not to vary
significantly from the percentage of total revenues achieved in 1997 and 1998.
However, an element of our sales and marketing strategy is to leverage third-
party implementation services to enable us to more rapidly penetrate our target
market. To the extent that such efforts are successful, our product support
revenues could decline as a percentage of total revenues.
International Revenues. We recognized $25.1 million and $14.3 million of
international revenues for the years ended December 31, 1998 and 1997,
representing approximately 23.6% and 26.7% of total revenues, respectively. We
opened sales offices in Australia, Canada and Italy in 1998; in Austria, France
and the Netherlands in 1997; in Germany in 1996; in the United Kingdom in 1995;
and in Spain in 1994.
26
Costs and Expenses
Cost of Product License Revenues. Cost of product license revenues consists
primarily of the costs of product manuals, media, amortization of capitalized
software and shipping paid to third parties. Cost of product license revenues
was $2.2 million and $1.6 million for the years ended December 31, 1998 and
1997, representing 3.1% and 4.5% of total product license revenues,
respectively. The increase in the dollar amount of our cost of product licenses
was directly attributable to the increase in our product license revenues
coupled with the amortization of capitalized software. The total cost of product
license revenues as a percentage of revenues decreased during the year ended
December 31, 1998 from the year ended December 31, 1997, due to economies of
scale realized by producing larger volumes of product materials and an
increasing number of customers reproducing licenses at their sites. We
anticipate that the cost of product license revenues will increase in dollar
amount as license fee revenues increase, but remain relatively constant as a
percentage of product license revenues. However, in the event that we enter into
any royalty arrangements in the future, cost of product license revenues as a
percentage of total product license revenues may increase.
Cost of Product Support Revenues. Cost of product support revenues consists
of the costs of providing telephone support, training and consulting services to
customers and partners. Cost of product support revenues was $17.5 million and
$9.5 million for the years ended December 31, 1998 and 1997, representing 52.0%
and 55.9% of total product support revenues, respectively. The increase in the
dollar amount of our cost of product support revenues was primarily due to the
increase in the number of personnel providing consulting, training, and
telephone support to customers and to the training and related costs associated
with increasing personnel levels. Despite the increases in personnel and other
costs for the year ended December 31, 1998, the total cost of product support
revenues remained constant as a percentage of revenues during the year ended
December 31, 1998 compared to the year ended December 31, 1997 primarily