UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2004
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-24435
MICROSTRATEGY INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation)
1861 International Drive, McLean, VA
(Address of Principal Executive Offices)
22102
(Zip Code)
51-0323571
(I.R.S. Employer
Identification Number)
Registrant’s telephone number, including area code: (703) 848-8600
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
The number of shares of the registrant’s class A common stock and class B common stock outstanding on May 1, 2004 was 12,441,598 and 3,603,730, respectively.
MICROSTRATEGY INCORPORATED
FORM 10-Q
| Page | ||||
| PART I. |
FINANCIAL INFORMATION | |||
| Item 1. |
Financial Statements | |||
| Consolidated Balance Sheets as of March 31, 2004 (unaudited) and December 31, 2003 | 1 | |||
| Consolidated Statements of Operations For the Three Months Ended March 31, 2004 (unaudited) and 2003 (unaudited) | 2 | |||
| Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2004 (unaudited) and 2003 (unaudited) | 3 | |||
| Notes to Consolidated Financial Statements (unaudited) | 4 | |||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 10 | ||
| Item 3. |
Quantitative and Qualitative Disclosures About Market Risk | 27 | ||
| Item 4. |
Controls and Procedures | 27 | ||
| PART II. |
OTHER INFORMATION | |||
| Item 1. |
Legal Proceedings | 28 | ||
| Item 6. |
Exhibits and Reports on Form 8-K | 29 | ||
PART I. FINANCIAL INFORMATION
| ITEM 1. | FINANCIAL STATEMENTS |
MICROSTRATEGY INCORPORATED
(in thousands, except per share data)
| March 31, 2004 |
December 31, 2003 |
|||||||
| (unaudited) | ||||||||
| Assets |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 76,321 | $ | 51,882 | ||||
| Restricted cash |
726 | 747 | ||||||
| Accounts receivable, net |
23,144 | 30,993 | ||||||
| Prepaid expenses and other current assets |
3,398 | 3,888 | ||||||
| Deferred tax assets, net |
1,873 | 1,807 | ||||||
| Total current assets |
105,462 | 89,317 | ||||||
| Property and equipment, net |
16,636 | 16,113 | ||||||
| Goodwill and intangible assets, net |
586 | 604 | ||||||
| Capitalized software development costs, net |
3,551 | 3,693 | ||||||
| Deposits and other assets |
1,236 | 1,380 | ||||||
| Deferred tax assets, net |
3,371 | 3,686 | ||||||
| Total assets |
$ | 130,842 | $ | 114,793 | ||||
| Liabilities and Stockholders’ Equity |
||||||||
| Current liabilities: |
||||||||
| Accounts payable and accrued expenses |
$ | 14,235 | $ | 12,768 | ||||
| Accrued compensation and employee benefits |
12,477 | 17,968 | ||||||
| Accrued restructuring costs |
2,431 | 2,599 | ||||||
| Deferred revenue and advance payments |
37,017 | 28,374 | ||||||
| Total current liabilities |
66,160 | 61,709 | ||||||
| Deferred revenue and advance payments |
3,267 | 2,750 | ||||||
| Other long-term liabilities |
2,426 | 2,443 | ||||||
| Accrued restructuring costs |
3,106 | 3,544 | ||||||
| Total liabilities |
74,959 | 70,446 | ||||||
| Commitments and Contingencies |
||||||||
| Stockholders’ Equity: |
||||||||
| Preferred stock undesignated, par value $0.001 per share, 4,971 shares authorized, no shares issued or outstanding |
— | — | ||||||
| Class A common stock, par value $0.001 per share, 330,000 shares authorized, 12,441 and 12,362 shares issued and outstanding, respectively |
12 | 12 | ||||||
| Class B common stock, par value $0.001 per share, 165,000 shares authorized, 3,604 and 3,604 shares issued and outstanding, respectively |
4 | 4 | ||||||
| Additional paid-in capital |
389,529 | 387,625 | ||||||
| Accumulated other comprehensive income |
1,872 | 2,619 | ||||||
| Accumulated deficit |
(335,534 | ) | (345,913 | ) | ||||
| Total stockholders’ equity |
55,883 | 44,347 | ||||||
| Total liabilities and stockholders’ equity |
$ | 130,842 | $ | 114,793 | ||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
1
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
| Three Months Ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| Revenues: |
||||||||
| Product licenses |
$ | 18,811 | $ | 16,529 | ||||
| Product support and other services |
30,295 | 20,906 | ||||||
| Total revenues |
49,106 | 37,435 | ||||||
| Cost of revenues: |
||||||||
| Product licenses |
844 | 790 | ||||||
| Product support and other services |
6,911 | 5,958 | ||||||
| Total cost of revenues |
7,755 | 6,748 | ||||||
| Gross profit |
41,351 | 30,687 | ||||||
| Operating expenses: |
||||||||
| Sales and marketing |
16,406 | 12,683 | ||||||
| Research and development |
6,730 | 6,933 | ||||||
| General and administrative |
7,953 | 7,184 | ||||||
| Amortization of intangible assets |
18 | 130 | ||||||
| Total operating expenses |
31,107 | 26,930 | ||||||
| Income from operations |
10,244 | 3,757 | ||||||
| Financing and other income (expense): |
||||||||
| Interest income |
115 | 90 | ||||||
| Interest expense, including discount amortization expense on notes payable of $0 and $973, respectively |
(14 | ) | (2,298 | ) | ||||
| Gain on early extinguishment of notes payable |
— | 18 | ||||||
| Other income (expense), net |
806 | (38 | ) | |||||
| Total financing and other income (expense) |
907 | (2,228 | ) | |||||
| Income before income taxes |
11,151 | 1,529 | ||||||
| Provision for income taxes |
772 | 864 | ||||||
| Net income |
$ | 10,379 | $ | 665 | ||||
| Basic earnings per share |
$ | 0.65 | $ | 0.05 | ||||
| Diluted earnings per share |
$ | 0.60 | $ | 0.05 | ||||
| Basic weighted average shares outstanding |
16,010 | 13,788 | ||||||
| Diluted weighted average shares outstanding |
17,253 | 14,056 | ||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
2
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Three months ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| Operating activities: |
||||||||
| Income from continuing operations |
$ | 10,379 | $ | 665 | ||||
| Adjustments to reconcile income from continuing operations to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
2,061 | 2,477 | ||||||
| Bad debt expense (recovery) |
306 | (144 | ) | |||||
| Discount amortization expense on notes payable |
— | 973 | ||||||
| Other, net |
8 | (30 | ) | |||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable |
7,268 | 4,560 | ||||||
| Prepaid expenses and other current assets |
423 | 173 | ||||||
| Deferred tax assets, net |
248 | 320 | ||||||
| Deposits and other assets |
152 | 2 | ||||||
| Accounts payable and accrued expenses, compensation and employee benefits, accrued interest |
(3,966 | ) | (2,895 | ) | ||||
| Accrued restructuring costs |
(610 | ) | (1,305 | ) | ||||
| Deferred revenue and advance payments |
8,809 | 2,912 | ||||||
| Other long-term liabilities |
(17 | ) | (250 | ) | ||||
| Net cash provided by operating activities |
25,061 | 7,458 | ||||||
| Investing activities: |
||||||||
| Purchases of property and equipment, net |
(2,019 | ) | (682 | ) | ||||
| Capitalized software development costs |
(418 | ) | — | |||||
| Increase in restricted cash |
(1 | ) | (1 | ) | ||||
| Net cash used in investing activities |
(2,438 | ) | (683 | ) | ||||
| Financing activities: |
||||||||
| Proceeds from sale of class A common stock under employee stock purchase plan and exercise of employee stock options |
1,904 | 97 | ||||||
| Net cash provided by financing activities |
1,904 | 97 | ||||||
| Effect of foreign exchange rate changes on cash and cash equivalents |
(123 | ) | 93 | |||||
| Net increase in cash and cash equivalents from continuing operations |
24,404 | 6,965 | ||||||
| Net cash received from (advanced to) discontinued operations |
35 | (72 | ) | |||||
| Net increase in cash and cash equivalents |
24,439 | 6,893 | ||||||
| Cash and cash equivalents, beginning of period |
51,882 | 15,036 | ||||||
| Cash and cash equivalents, end of period |
$ | 76,321 | $ | 21,929 | ||||
| Supplemental disclosure of noncash investing and financing activities: |
||||||||
| Early extinguishment of notes payable |
$ | — | $ | (1,276 | ) | |||
| Issuance of class A common stock in connection with early extinguishment of notes payable |
$ | — | $ | 1,293 | ||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) Basis of Presentation
Except for the consolidated balance sheet of MicroStrategy Incorporated (“MicroStrategy” or the “Company”) as of December 31, 2003, which is derived from audited financial statements, the accompanying consolidated financial statements are unaudited. In the opinion of management, all adjustments (consisting of normal recurring items) necessary for a fair presentation of such financial statements have been included. Interim results are not necessarily indicative of results for a full year.
The consolidated financial statements and notes are presented as required by Form 10-Q and do not contain certain information included in the Company’s annual financial statements and notes. These financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto filed with the Securities and Exchange Commission (“SEC”) in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
Certain prior year amounts in the consolidated financial statements have been reclassified to conform to the current year presentation.
(2) Recent Accounting Standards
In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” In December 2003, the FASB revised FIN 46 to reflect decisions it made regarding a number of implementation issues. FIN 46, as revised, requires that the primary beneficiary of a variable interest entity consolidate the entity even if the primary beneficiary does not have a majority voting interest. This interpretation applies to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. This interpretation also identifies those situations where a controlling financial interest may be achieved through arrangements that do not involve voting interests. The interpretation also establishes additional disclosures which are required regarding an enterprise’s involvement with a variable interest entity when it is not the primary beneficiary. The requirements of this interpretation are required to be applied for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions must be applied for the first interim or annual period ending after December 15, 2003. The Company does not have any controlling interest, contractual relationships or other business relationships with unconsolidated variable interest entities and therefore the adoption of this standard did not have any effect on the Company’s financial position and results of operations.
(3) Accounts Receivable
Accounts receivable, net of allowances, consist of the following, as of (in thousands):
| March 31, 2004 |
December 31, 2003 |
|||||||
| Billed and billable |
$ | 46,951 | ||||||