SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-24435
MICROSTRATEGY INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 1861 International Drive, McLean, VA 22102 51-0323571
(State of incorporation) (Address of Principal Executive Offices) (Zip Code) (I.R.S. Employer
Identification Number)
Registrant's telephone number, including area code: (703) 848-8600
Securities registered pursuant to Section 12(b) of the Act: Not applicable
Securities registered pursuant to Section 12(g) of the Act:
Class A common stock, par value $0.001 per share
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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, 2002 on the Nasdaq National Market) was approximately
$123.3 million.
The number of shares of the registrant's class A common stock and class B
common stock outstanding on March 1, 2002 was 46,165,556 and 46,531,368,
respectively.
MICROSTRATEGY INCORPORATED
TABLE OF CONTENTS
Page
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PART I
Item 1. Business ..................................................................................... 1
Item 2. Properties ................................................................................... 12
Item 3. Legal Proceedings ............................................................................ 12
Item 4. Submission of Matters to a Vote of Security Holders .......................................... 13
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters ......................... 14
Item 6. Selected Financial Data ...................................................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ........ 17
Item 7a. Quantitative and Qualitative Disclosures about Market Risk ................................... 46
Item 8. Financial Statements and Supplementary Data .................................................. 47
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ......... 47
PART III
Item 10. Directors and Executive Officers of the Registrant ........................................... 48
Item 11. Executive Compensation ....................................................................... 50
Item 12. Security Ownership of Certain Beneficial Owners and Management ............................... 54
Item 13. Certain Relationships and Related Transactions ............................................... 56
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .............................. 58
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CERTAIN DEFINITIONS
All references in this Annual Report on Form 10-K to "MicroStrategy", "we",
"us", and "our" refer to MicroStrategy Incorporated and its consolidated
subsidiaries (unless the context otherwise requires).
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended. For
this purpose, any statements contained herein that are not statements of
historical fact, including without limitation, certain statements under "Item 1.
Business" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and located elsewhere herein regarding
industry prospects and our results of operations or financial position, may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects," and similar expressions are
intended to identify forward-looking statements. The important factors discussed
below under the caption "Risk Factors," among others, could cause actual results
to differ materially from those indicated by forward-looking statements made
herein and presented elsewhere by management from time to time. Such
forward-looking statements represent management's current expectations and are
inherently uncertain. Investors are warned that actual results may differ from
management's expectations.
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PART I
ITEM 1. BUSINESS
Overview
We are a leading worldwide provider of business intelligence software that
enables companies to analyze the raw data stored across their enterprise to
reveal the trends and answers needed to manage their business effectively. Our
software delivers this critical insight to workgroups, the enterprise and
extranet communities via e-mail, web, wireless and voice communication channels.
Businesses can use our software platform to develop user-friendly solutions,
proactively optimize revenue-generating strategies, enhance cost-efficiency and
productivity and improve their customer relationships.
Our software platform enables users to query and analyze the most detailed,
transaction-level databases, turning data into business intelligence and
delivering reports and alerts about the users' business processes. Our web
architecture provides reporting, security, performance and standards that are
critical for web deployment. Within intranets, our products provide employees
with information to enable them to make better, more cost-effective business
decisions. In extranets, enterprises can use our MicroStrategy 7 software to
build stronger relationships by linking customers and suppliers via the
Internet. We also offer a comprehensive set of consulting, education and
technical support services for our customers and partners.
Industry Background
Business intelligence offers decision makers across a broad range of industries
the opportunity to ask and answer mission-critical questions about their
businesses using data that has been captured but not exploited to its fullest
extent.
Four key trends have driven demand for business intelligence tools:
. Intranets: Supplier transactions become more efficient with direct
access to inventory and other related data. For true vendor-managed
inventory and collaborative commerce systems, vendors need to have
access to key information about how their products are performing
against business metrics. For example, vendors should be able to see
how their products are selling in each geographic region so as not to
over-ship products that are slow-moving or under-ship products that
are selling quickly. By opening vendor performance information to the
vendors themselves, they become partners in the quest to optimize
sales, margin and inventory.
. Extranets: Business partners collaborate more effectively with access
to shared data. By granting access to information such as the
manufacturing pipeline and build schedule, partners can be more
effective at satisfying end customers and setting expectations.
Opening invoice and purchase order information to partners will enable
them to reduce the overhead associated with channel management,
resulting in cost savings and time efficiencies. For example,
notifying channel sales partners of changes in the manufacturing
schedule allows them to reset end customer expectations or to increase
selling activity.
. User Scalability: Businesses derive increasing value from information
about their products and services. By providing information to more
employees, businesses can differentiate their service offering or
become more efficient by enabling more customer self-service. In a
market crowded with mass-market advertising, customers increasingly
value meaningful interactions with companies. Customers want companies
to know their interests and preferences. Customers also want to be
able to login to their providers' systems to check their billing and
order status. These are features that a business intelligence platform
can deliver to help differentiate each company in a crowded
marketplace.
. Data Scalability: The growth in data volumes and database sizes has
allowed businesses to paint a more comprehensive picture of their
operations. The ability to offer various types of analyses and
information to more employees, such as seasonality, product placement,
market baskets, quality, returns, fraud
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detection and analysis, is making businesses more profitable and
efficient. An integrated business intelligence platform can facilitate
better decisions from this wealth of data.
The emergence and widespread acceptance of the Internet or "web" as a medium of
communication and commerce have dramatically changed the way businesses interact
with each other and their customers. Simultaneously, the amount of corporate
information stored in databases continues to grow exponentially. Companies are
giving an increasing number of employees, customers, and partners access to
their information. Business intelligence tools are the gateway to this
information. The Internet provides opportunities for businesses to establish new
revenue streams, create new distribution channels and reduce costs. For example,
companies are using Internet-based systems to facilitate business operations,
including sales automation, supply-chain management, marketing, customer service
and human resource management. Consumers are also becoming increasingly
sophisticated in their use of the Internet, relying on the Internet not only to
make online purchases, but to perform price comparisons, analyze recommendations
from like-minded individuals and educate themselves about relevant products and
offerings. The integration of the Internet into business processes and increased
consumer sophistication create opportunities for companies to use business
intelligence applications as part of a more dynamic business model. Factors
driving demand for these applications include:
Increased Electronic Capture of Transaction, Operational, and Customer
Information. The rapid growth in the electronic capture of business information
and the increased availability of related profile data on the parties or
products involved in each transaction are providing businesses with a rich data
foundation for performing analyses and making decisions. Powerful data analysis
tools are required to sift through massive amounts of data to uncover
information regarding customer interactions, trends, patterns, and exceptions,
in turn enabling organizations to provide superior service and products to
customers.
Need to Create a Personalized, One-to-One Customer and/or Supplier Experience
While Maintaining Privacy. Many companies are initiating strategies that
establish personalized relationships with each customer and/or supplier based on
individual needs and preferences, and earn their loyalty by providing superior
service, security and convenience. In order to successfully acquire, retain and
upgrade customers, organizations need to understand their profiles, their
transaction history, their past responses to marketing campaigns, and their
interactions with customer service. Retrieving information from widely dispersed
and complex data sources and providing a holistic view of the customer can be
challenging. At the same time, while businesses have the opportunity to collect
a variety of information that could improve targeting, customers are
increasingly concerned about the potential for loss or abuse of their privacy.
Need to Integrate Online and Traditional Operations. While there are substantial
benefits to conducting business electronically, companies need to ensure that
their online operations work in combination with their traditional bricks and
mortar operations. Companies are seeking to ensure that an order placed online
can be reliably fulfilled according to the expectations of the customer and to
develop and maintain consistent interactions with customers across different
channels. Maintaining the integrity of, and enhancing, the customer experience
is crucial to fostering customer loyalty and supply chain relationships.
Emergence of Wireless Internet and Voice Technologies. Information can be more
valuable if there is untethered, ubiquitous access to the information. The
development of the wireless application protocol and improvements in
text-to-speech and voice-recognition technologies have created a uniform
technology platform for delivering Internet-based information and services to
mobile devices. An integrated platform reduces the need for relying on multiple
vendors for these products and services. This development is expected to
generate new business opportunities for companies by providing an additional
channel for existing services and creating opportunities to provide new services
that can be delivered any place and at any time to anyone that has access to a
wireless device.
Emergence of Web Browsers as the Standard Interface for Business Intelligence
Applications. Until recently, business intelligence tools were primarily
deployed only at the headquarter offices of a company. With web-based business
intelligence applications, store clerks, customer service representatives and
technicians can have the tools to make data-driven decisions in the field via
intranets. The web facilitates an unprecedented degree of collaboration between
geographically distributed people. Headquarters-based users and distributed
users now have access to the same data through the same tool. Hopes for the web
have revolved around its ability to serve as a point-of-transaction for
customers and trading partners. With a web-based business intelligence system,
the web can
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also become the "point-of-decision" that provides users, customers and partners
with the information they need to make insightful decisions.
Increased Openness of Business Intelligence Applications to Customers, Suppliers
and Partners. Business intelligence systems are no longer confined to the
corporation. Today, companies are extending their business intelligence insight
to suppliers, channel partners and customers via extranets. Business partners
can have up-to-the-minute access to sales histories, inventory status and
billing information through their web browsers.
MicroStrategy Solution
MicroStrategy offers MicroStrategy 7, an integrated, enterprise-class business
intelligence platform, that enables organizations to consolidate all business
intelligence applications onto a single platform for reporting, analysis and
information delivery applications. The platform provides reliable and
maintainable solutions with a low total cost of ownership. Whether an
organization is seeking a departmental, enterprise, or extranet deployment,
MicroStrategy 7 offers functionality, power, and control. The MicroStrategy 7
Business Intelligence Platform can be used to identify trends, improve
operational efficiencies, reduce costs, and increase profitability. Since
businesses integrate information from across the enterprise, solutions built on
the MicroStrategy 7 Business Intelligence Platform give analysts, managers, and
executives critical insight they need in optimizing their business operations.
Integrated web-based reporting, information delivery, and real-time alerting
capabilities can enable the entire enterprise to work smarter, faster and
better.
Specific benefits of the MicroStrategy 7 Business Intelligence Platform include:
Optimized Support for Large Data Volumes and All Major Relational
Database/Hardware Combinations. The MicroStrategy platform supports systems with
very large data volumes and is specifically designed to support all major
relational database platforms commonly used for business intelligence systems.
Important features of our solution in this area include:
. Structured Query Language (SQL) optimization drivers that improve
performance of each major database;
. The ability to support very large user populations;
. Maximized up-time, even in high volume applications; and
. The ability to work with and support nine languages for international
applications.
Powerful Analytics to Customer- and Transaction-Levels of Detail. We believe
that the MicroStrategy 7 platform incorporates the most sophisticated analysis
engine available today, capable of answering highly detailed business questions.
It offers support for information beyond the summary level to include
information at the customer transaction and interaction level. This capability
is critical to a wide range of applications, including highly targeted direct
marketing, e-commerce site personalization, customer and product affinity
analysis, call detail analysis, fraud detection, credit analysis forecasting and
trend metrics and campaign management. The MicroStrategy platform allows the
creation of highly sophisticated systems that take maximum advantage of the
detail available in a company's databases.
Powerful Personalization Engine. The MicroStrategy platform includes a customer-
and transaction-level personalization engine. The underlying architecture is
designed to generate personalization parameters based on data gathered by an
organization from a variety of sources, including past customers' transactions,
customer clickstream information, stated user preferences and demographic
information. In addition, the MicroStrategy personalization engine is able to
determine when and under what circumstances a person is automatically provided
with a set of information which proves useful in fraud detection and homeland
security applications.
Interactive Narrowcast Engine for Delivery and Response Using Internet, e-mail,
Wireless or Voice Media. Our technology offers a high performance personalized
narrowcast engine for delivering periodic and alert-based information to people
via Internet, e-mail, wireless devices and traditional telephone via
text-to-speech conversion. The broadcast engine includes drivers for all major
device types used in both domestic and international markets, enabling the
delivery of information to users when and where it is needed. In addition, users
can respond to a message delivered by the MicroStrategy narrowcast engine. For
example, a store manager can be alerted via a personal digital assistant that an
item is out of stock and order additional inventory using this device.
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The MicroStrategy 7 platform's advanced technology provides high performance
functionality in five key business intelligence areas:
. Speed and power
. Functionality and ease of use
. On-demand insight and intelligent alerts
. Packaged functionality and customization
. Security and scalability
Strategy
Our business objective is to become the leading provider of business
intelligence software and related services to the largest 2,000 enterprises,
governments and the largest databases and data providers in the world. The key
elements of our strategy to achieve this objective are as follows:
Marketing Strategy. Our business intelligence platform marketing strategy is
designed to increase our footprint in the business intelligence market, by
increasing awareness of the MicroStrategy 7 platform. In the business
intelligence market, our marketing programs target four principal
constituencies:
. Our historical base of corporate technology buyers and departmental
technology buyers in Global 2000 enterprises;
. Corporate and departmental technology buyers in mid-sized enterprises,
with revenue between $250 million and $1 billion;
. Government technology buyers and the vendors to the government
community; and
. Independent software vendors who want to embed analytical tools in
their solutions.
We continually increase our brand awareness by focusing messaging on the
possibilities for value creation with our business intelligence platform, the
benefits of using our platform and competitive differentiators. The mediums we
use to communicate with these constituencies are:
. Print ads
. On-line ads
. Direct e-mail
. Industry events
. Partners
. Word of mouth
. Industry awards
. Our website
Technology Strategy. Our technology strategy is focused on expanding our support
for large information stores, enhancing our analysis and segmentation
capabilities, strengthening our personalization technology, enhancing our
narrowcasting functionality to all commonly used devices and providing a
platform that can be easily integrated with the broadest set of databases and
operational systems. As part of this strategy, we are developing technology that
further differentiates our product offerings by increasing functionality along
the following key dimensions:
. Personalization--the quality and sophistication of a one-to-one user
experience;
. Content Flexibility--the range of content, both structured and
unstructured, that can be efficiently utilized;
. Media Channel and Interface Flexibility--the range of media channels,
interface options, and display features supported;
. Capacity--the volume of information that can be efficiently analyzed
and utilized;
. Concurrency--the number of users which can be supported
simultaneously;
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.. Sophistication--the range of analytical methods available to the
application designer;
.. Performance--the response time of the system;
.. Database Flexibility--the range of data sources, data warehouses and online
transaction processing databases which the software is capable of
efficiently querying without modification;
.. Robustness--the reliability and availability of the software in mission
critical environments; and
.. Deployability--the ease with which applications can be deployed, modified,
upgraded and tuned.
Sales Strategy. Our sales strategy focuses on direct sales through our dedicated
sales force and relationships with indirect channel partners in order to
increase market share in both domestic and international markets. We also seek
to increase sales to our existing base of customers by offering a range of
software and services utilizing our integrated business intelligence platform.
Finally, we offer a comprehensive set of educational programs that enhance our
potential customers' and channel partners' understanding of the power of our
platform.
Products
We offer an integrated business intelligence platform, known as MicroStrategy 7,
which is designed to enable businesses to turn information into strategic
insight and make more effective business decisions. Revenues from sales of
product licenses accounted for approximately $72.8 million of total revenues
during 2001. The following are the components of the MicroStrategy 7 platform:
MicroStrategy Intelligence Server. MicroStrategy Intelligence Server is the
foundation for our business intelligence platform. We believe that MicroStrategy
Intelligence Server is the most sophisticated analysis engine available in the
market, capable of answering highly detailed business questions. Its robust
relational analysis technology enables organizations to conduct large-scale
product affinity and product profitability analyses, research customer
preferences through sales, contribution and pricing analysis, and compare
present and historical customer retention data with forecasting and trend
metrics. MicroStrategy Intelligence Server generates highly optimized queries
through its very large database drivers, enabling high throughput and fast
response times.
The MicroStrategy Intelligence Server has been built with the scalability and
fault tolerance required for sophisticated analysis of multi-terabyte databases
and can be deployed to thousands of users through complete user, object and data
security and management. It contains thousands of specific optimizations for all
major relational databases and includes the load distribution, prioritization
and system tuning capabilities demanded by large-scale implementations.
MicroStrategy Intelligence Server contains an analytical engine with over 150
different sophisticated mathematical and statistical functions with the
flexibility for further function extensions. MicroStrategy Intelligence Server
combines the power of its analytical engine with the scalability of a relational
database to perform complex data analysis with maximum efficiency. All the other
products in the MicroStrategy 7 platform integrate with the MicroStrategy
Intelligence Server and benefit from its broad functionality.
MicroStrategy Intelligence Server is designed to be fault-tolerant to ensure
system availability and high performance. Through an enterprise management
console, MicroStrategy Intelligence Server provides a sophisticated array of
enterprise management tools, such as caching and query prioritization to
streamline performance and batch job scheduling, which helps to maintain
disparate and diverse user communities. Administrators can automate the dynamic
adjustments of system and user governing settings, such as user thresholds and
database thread priorities, in order to smooth the database workload and ensure
the high performance that large user communities require.
MicroStrategy Web. MicroStrategy Web provides easy-to-use, interactive,
sophisticated analysis, which extends the information access and analysis
capabilities of MicroStrategy Intelligence Server to any user with a web
browser. MicroStrategy Web can be accessed through a web browser on various
operating systems, eliminating deployment issues associated with customer-side
Java and Active X controls. Using the MicroStrategy Web infrastructure,
customers can rapidly implement systems that allow local and remote users to
develop and access sophisticated reports containing information from their
relational databases.
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MicroStrategy Web provides a graphical user interface designed to boost end user
efficiency. Users gain access to an array of options for data exploration and
analysis, such as spreadsheet grids and a wide variety of graphs. A flexible
architecture enables businesses to implement a standardized structure for
analysis and ensure consistent work practices. Through MicroStrategy Web's
reporting capabilities, users are able to receive key elements of a report in
easily understood messages. MicroStrategy Web also allows users to dynamically
analyze data with higher levels of detail to view the underlying information or
to create and save new analyses. In addition, MicroStrategy Web's security
plug-ins enable businesses to limit access to sensitive information. In order to
accommodate the various business requirements of end users, MicroStrategy Web is
available in a full-featured version, a simplified version and an enterprise
reporting version.
MicroStrategy Narrowcast Server. MicroStrategy Narrowcast Server is a powerful
content generation and information narrowcast server designed to proactively
deliver personalized information to millions of recipients via the Internet,
e-mail, telephone and wireless devices. MicroStrategy Narrowcast Server delivers
targeted information to individuals on an event-triggered or scheduled basis
through the communication device that is most convenient. It provides an engine
to implement targeted messaging to acquire and retain customers, and a platform
for distributing information to corporate departments, the entire enterprise and
other stakeholders including customers and suppliers.
MicroStrategy Narrowcast Server has a web-based interface that can be used with
existing web applications. Users can subscribe to information services by
providing personal information and preferences, ensuring they receive
personalized information relevant to them.
In addition to proactively delivering information from the MicroStrategy 7
platform, MicroStrategy Narrowcast Server's open information source modules
enable it to deliver information from a multitude of information sources to the
business user. The multiple information sources can be combined to provide users
with requested information in one personalized e-mail, message or document.
MicroStrategy MDX Adapter. MicroStrategy MDX Adapter opens the analytical power
and scalability of the MicroStrategy 7 Platform to other business intelligence
reporting tools. With MicroStrategy MDX Adapter, reporting tools that use the
OLE DB for OLAP (ODBO) standard created by Microsoft can connect through
MicroStrategy Intelligence Server and access any major relational database.
Companies such as Cognos, Microsoft, Business Objects and Brio Software support
ODBO compliant reporting tools.
MicroStrategy MDX Adapter helps companies that have reached the data scalability
and analytical limitations of their current business intelligence solution.
Unlike MicroStrategy, many business intelligence applications depend on
replication of pre-calculated data into multidimensional, physical cubes. These
proprietary cubes can reach data storage limitations quickly. Furthermore, the
process to build and load cubes uses valuable time and resources. By eliminating
the need for physical cubes, MicroStrategy MDX Adapter gives users access to
terabytes of data in any major relational database without costly modifications
to the physical cubes or expensive data replication.
MicroStrategy MDX Adapter allows organizations to standardize on a reporting and
analysis platform, while still enabling users to access the platform from a
variety of user interfaces. Companies that have hit scalability, administration,
security and analytical limits with their existing analysis tools can continue
to provide users with their interface of choice, while replacing the underlying
business intelligence engine with the more robust and reliable MicroStrategy 7
Business Intelligence Platform. This leverages investments in databases,
software and training and removes some of the traditional burdens of cube-based
architectures.
MicroStrategy SDK. MicroStrategy SDK completes the MicroStrategy 7 platform by
enabling developers to integrate, extend and fully harness the power of
MicroStrategy 7. Through a set of rich XML, Java and COM-based application
programming interfaces that fully expose all platform functionality, businesses
can leverage this powerful development environment to quickly deploy custom
applications and embed intelligence into a website.
MicroStrategy Agent. MicroStrategy Agent provides an advanced environment for
rapid application development and sophisticated analysis. It provides an
object-oriented view of business data--converting a company's business data into
a virtual library of valuable information, enabling users to develop
sophisticated business metrics, filtering criteria and pre-defined report
templates. Applications developed within MicroStrategy Agent are easily deployed
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throughout the MicroStrategy architecture bringing integrated query and
reporting capabilities, powerful analytics and decision support workflow to
analysts, quantitative users and end users throughout the enterprise and beyond.
The applications developed can provide better understanding of a business or
customer base through analyses such as customer profiling, clickstream analysis
and sales and inventory analyses. Once applications have been created through
MicroStrategy Architect, they can be deployed through a number of different
interfaces. For power analysts and application developers desiring to use a
client-server Microsoft Windows interface, MicroStrategy Agent is an advanced
environment providing a full range of analytical functionality, a rich
mathematical function library, built-in workflow and data mining integration.
MicroStrategy Architect. MicroStrategy Architect is the MicroStrategy 7
component in which applications are modeled through an intuitive graphical user
interface. MicroStrategy Architect provides a unified environment for creating
and maintaining various aspects of web reporting and business intelligence
applications. MicroStrategy Architect is highly automated and is based on an
open, flexible architecture, which greatly reduces the cost and time required to
implement and maintain systems.
MicroStrategy Administrator. MicroStrategy Administrator enables administrators
to efficiently maintain large-scale data warehouse applications supporting
millions of users. Project migration utilities help administrators develop, test
and deploy systems. Performance analysis enables administrators to monitor and
tune systems for maximum performance and availability. MicroStrategy
Administrator has been designed to ensure easy management of application objects
and users across multiple development, testing, and production environments.
MicroStrategy Administrator eases the burden of maintaining users and security
by using textual commands that can be saved as scripts. These commands and
scripts can be executed from either a graphical interface or from the command
line giving system administrators the flexibility and ease-of-use necessary for
efficient systems management.
MicroStrategy Transactor. To integrate business intelligence and online
transaction processing systems, MicroStrategy Transactor employs intelligent
transaction agents that interpret and integrate web information with various
enterprise information systems, such as database, commerce, business
intelligence, and enterprise resource planning systems through an open driver
application programming interface, allowing customers to transact with
businesses via XML-compliant devices such as web-enabled phones, personal
digital assistants and web browsers. Through its transaction and extraction
capabilities, MicroStrategy Transactor enables e-commerce applications through a
variety of devices and communications media.
MicroStrategy Analytical Modules. MicroStrategy's Analytical Modules provide a
starting point for customers and partners to develop their own customized
analytical solutions with the MicroStrategy 7 Business Intelligence Platform.
MicroStrategy's Analytical Modules are an easy-to-use, web-based starter kit
built on the MicroStrategy 7 platform. There are five modules currently
available with additional modules to be available in 2002 and beyond. Many of
our partners use these as the foundation for developing their own solutions.
MicroStrategy 7i. In mid-2002, we expect to complete development of
MicroStrategy 7i and make it available for general release. MicroStrategy 7i is
designed to integrate the two leading business intelligence approaches, "cube"
and "ROLAP" delivering quick response time against almost any size data set,
full access to transaction-level data and a myriad of options for complex
analysis. Additionally, MicroStrategy 7i is designed to provide a single
interface for reporting, analysis, and information delivery for all business
intelligence applications. We expect MicroStrategy 7i will enable organizations
to consolidate business intelligence applications onto a single platform,
resulting in reliable and maintainable solutions with a low total cost of
ownership.
Product Support and Other Services
MicroStrategy Consulting. MicroStrategy Consulting offers a broad range of
business intelligence and data warehousing expertise gathered from helping
thousands of customers across diverse industries implement departmental,
enterprise, and extranet applications across various types of databases. Our
consulting staff identifies the optimal design and implementation strategy that
includes detailed business requirements, user interface requirements and
performance tuning. By leveraging our best practices, strategic visioning,
project planning and platform expertise, we help ensure that customers'
technical staff and projects are successful and business users will
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adopt the solution - the ultimate assurance of return on investment. Revenues
from consulting services accounted for approximately 27%, 30% and 21% of total
revenues during 2001, 2000 and 1999, respectively.
MicroStrategy Technical Support. MicroStrategy Technical Support provides a
diverse set of support options to meet the needs of customers and projects and
offers product upgrades when available. Our product experts help ensure that
every MicroStrategy implementation is successful from development to deployment
to the production environment. Our support offerings include access to our
highly skilled support team during standard business hours, around the clock
access to our Online Support Site, and options to secure dedicated technical
support at any time of the day. Revenues from technical support services
accounted for approximately 27%, 18% and 16% of total revenues during 2001, 2000
and 1999, respectively.
MicroStrategy Education. MicroStrategy Education offers goal-oriented,
comprehensive education solutions for customers and partners. Through the use of
self-tutorials, custom course development, joint training with customers'
internal staff or standard course offerings, we develop an ongoing education
program that meets our customers' specific education needs. Our team of
education consultants delivers quality, cost-effective instruction and skill
development for administrators, developers and analysts. Revenues from education
services accounted for approximately 6%, 5% and 6% of total revenues during
2001, 2000 and 1999, respectively.
Customers
MicroStrategy has over 1,500 customers across such diverse industries as retail
(50% of the Global 200 Retailers and 6 of the top 10 globally),
telecommunications (8 of the top 10 globally), financial services (7 of the top
10 globally), pharmaceuticals (7 of the top 10 globally) and healthcare,
manufacturing (6 of the top 10 global auto manufacturers), consumer packaged
goods (over 60 companies) and technology. International sales accounted for
34.1%, 25.9% and 24.0% of our total revenues in 2001, 2000 and 1999,
respectively. A representative list of the firms that are using the
MicroStrategy 7 Business Intelligence Platform are:
.. Retail: Best Buy, WH Smith PLC, Lowe's Home Improvement Warehouse, The
Limited, Hallmark, CVS/Pharmacy
.. Financial Services: Wachovia, Bank of Montreal, Fannie Mae, LaCaixa,
FleetBoston Financial
.. Pharmaceutical and Healthcare: Pharmacia, AstraZeneca, GlaxoSmithKline,
Premier
.. Telecommunications: Bellsouth, AT&T, Worldcom, Cable and Wireless, Telecom
Italia, OmniTel, Vodafone
.. Manufacturing: Honda, Michelin, Avnet, Western Digital
.. Consumer Goods: Kimberly-Clark, Estee Lauder, Campbell's Soup, Revlon
.. Government/Public Services: US Department of Housing and Urban Development,
Ohio Department of Education, US Postal Service
Customer Case Studies
FleetBoston Financial. FleetBoston Financial is using the MicroStrategy 7
Business Intelligence Platform for its business intelligence and customer
relationship management (CRM) applications in a portal environment. FleetBoston
uses MicroStrategy's technology in its Wholesale Bank business group to more
effectively manage its corporate client relationships by uncovering
cross-selling opportunities and driving customer retention and loyalty efforts.
With MicroStrategy's technology, relationship managers are able to view the
history and profitability of transactions that a corporate or institutional
client has with the bank. Relationship managers can then better manage the
bank's credit risk exposure to client corporations, resulting in higher levels
of added value to the shareholder. FleetBoston also has the ability to identify
opportunities for cross-selling new products and services to existing clients,
and can tailor services to the risk and profitability profile of each corporate
and commercial client. With the
8
ability to differentiate customer segments, FleetBoston has the capability to
better market the full spectrum of its offerings to its customers, and turn less
profitable clients into more profitable ones.
Freddie Mac. Freddie Mac, a leader in the housing finance industry, uses
MicroStrategy's technology to open the doors of affordable housing to millions
of families in America. Over the years, Freddie Mac has financed homes for more
than 20 million people, or one in six homebuyers in America. The MicroStrategy
platform is helping Freddie Mac end users track and minimize loan delinquencies
handled by lenders across the country. The technology is also helping to improve
the flow and accuracy of sales, product and investor information within Freddie
Mac. The result is more flexible, more affordable and more widely available
mortgages for America's borrowers.
WH Smith PLC. WH Smith PLC is one of the leading UK retailing groups
incorporating market leading companies in the areas of retailing, consumer
publishing and news distribution and is the number one book and magazine seller
in the United Kingdom. Completed in less than six months and below budget, WH
Smith launched its MicroStrategy-based reporting system across its countrywide
high street stores. Approximately 530 high street store managers and 27 area
managers are able to run performance reports on individual store-level sales,
business profit and product rankings. In addition, WH Smith's management noted
that the implementation project with MicroStrategy was "one of its best ever
experiences" working with non-WH Smith business system project staff.
Sales And Marketing
Direct Sales Organization. We market our software and services primarily through
our direct sales force. In an effort to simplify the sales process and reduce
our historically long sales cycle, we are emphasizing the use of standard
contracts with our customers; however, under certain limited circumstances, we
may, nevertheless, enter into large, non-standard, complex contracts to meet
special needs of our customers. As of December 31, 2001, we had domestic sales
offices in a number of cities, including Atlanta, Boston, Carlsbad, Charlotte,
Chicago, Cincinnati, Dallas, Denver, Detroit, Los Angeles, Minneapolis, New
York, San Francisco, Seattle, and St. Louis, and international sales offices
located in Barcelona, Buenos Aires, Cologne, London, Madrid, Mexico City, Milan,
Montreal, Munich, Paris, Sao Paolo, Seoul, Sydney, Tokyo, Toronto, Utrecht, and
Vienna. We are represented by distributors in several countries where we do not
have sales offices, including Bulgaria, Chile, Colombia, the Czech Republic,
Denmark, Finland, India, Ireland, Korea, Malaysia, Malta, Norway, Peru,
Portugal, Singapore, Slovenia, South Africa, Sweden, Switzerland, Turkey,
Ukraine, and Uruguay.
Indirect Sales Channels. We have entered into relationships with more than 225
reseller, system integration, original equipment manufacturers (OEM), and
technology partners who utilize the MicroStrategy platform for a variety of
commercial purposes. Agreements with these partners generally provide
non-exclusive rights to market our products and services and allow access to our
marketing materials, product training and direct sales force for field level
assistance. In addition, we offer our partners product discounts. Favorable
product recommendations to potential customers from the leading system
integration, application development and platform partners facilitate the sale
of our products. We believe that such indirect sales channels allow us to
leverage sales and service resources as well as marketing and industry specific
expertise to expand our user base and increase our market coverage. In addition,
we have entered into agreements with resellers who resell our software on a
stand-alone basis.
Reseller/System Integration Partners. Our resellers/systems integration partners
consist of value-added resellers who resell the MicroStrategy 7 platform
software bundled with their own software applications and system integrators who
deploy MicroStrategy solutions to their customers, including:
Accenture Deloitte Consulting One, Inc.
American Management Systems Electronic Data Systems Relational Solutions
Anexinet IBM Sybase
Annams Infowise Systech
Cap Gemini Ernst and Young IOLAP Trinus
Compaq KPMG Unisys
Conchango Logan Britton Webb Information Systems
Convansys Nexgenix Wizard Business Systems
9
OEM Partners. Our OEM partners integrate the MicroStrategy 7 Business
Intelligence Platform or some of its components into their applications. These
OEM partners include:
Accrue I-Many, Inc. Protagana
Annuncio Informatica Radiant Systems
Appian Interworld Retek
Applied Digital Solutions JD Edwards SageTree, Inc.
CCI/Triad Myriad Information Solutions SQLiaison
Centerforce Technologies NDC Health Sybase
Digital Connexxions Net Perceptions Systech
DMI NetGenesis Systems Excellence
DST Innovis Part Miner Teradata, a division of NCR
Enkata Peak Effects Corporation
Epylon PeopleSoft TransAtlantic
I-Beacon Personify Vision Chain
IBM PowerMarket
Technology Partners. In order to deliver even higher value to our customers,
MicroStrategy has integrated its Business Intelligence platform with the leading
data warehouse and related technology platforms and software. We have integrated
our platform with the leading portal technology, ETL technology, and specialized
display technology products to name just a few. Through our Technology Partner
program, we continue our efforts to ensure that customers can easily implement
the MicroStrategy 7 Business Intelligence Platform alongside other chosen
corporate technology standards. Our technology partners include:
Ascential Software
IBM Corporation
Sun Microsystems
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, 2001, our research and
product development staff consisted of 224 employees. Our total expenses for
research and development, after consideration of those costs capitalized as
software development costs, for the years 2001, 2000 and 1999 were $32.8
million, $43.9 million and $24.2 million, respectively.
Competition
The markets for business intelligence software, analytical applications and
narrowcast messaging technologies are intensely competitive and subject to
rapidly changing technology. In addition, many of our competitors in these
markets are offering, or may soon offer, products and services that may compete
with MicroStrategy products.
MicroStrategy's most direct competitors provide:
. business intelligence software;
. OLAP tools;
. query and reporting tools;
. web-based static reporting tools; and
. information delivery and proactive reporting.
10
Each of these markets are discussed more fully below.
Business Intelligence Software. Makers of business intelligence software provide
business intelligence capabilities designed for integration, customization and
application development. Leading analyst firms classify companies such as
Microsoft, Oracle, Hyperion Solutions, SAP AG, Computer Associates and SAS to be
leading providers of business intelligence software.
OLAP Tools. Companies that build software to perform online analytical
processing (OLAP) provide offerings competitive with the core MicroStrategy 7
platform. Whether web-based or client-server, these tools give end users the
ability to query underlying data sources without having to hand code structured
query language queries. Most OLAP tools allow users to build their own
calculations and specify report layouts and other options. Additionally, OLAP
tools provide users the ability to navigate throughout the underlying data in an
easy, graphical mode, often referred to as drilling. Providers of OLAP tools
include Cognos, Hyperion Solutions, Brio Software, IBM, Crystal Decisions and
Microsoft.
Query and Reporting Tools. Query and reporting tools allow large numbers of end
users to gain access to pre-defined reports for simple analysis. Often the end
users are able to specify some sort of run-time criteria that customizes the
result set for that particular person. Some limited drilling is also provided.
Companies that produce query and reporting tools include Business Objects,
Cognos, Oracle, Crystal Decisions, nQuire, Information Builders and Brio
Software.
Web-based Static Reporting Tools. Companies that offer software to deliver
pre-built reports for end user viewing and consumption can also compete with
MicroStrategy. These applications often lack the sophistication, robustness and
scalability of MicroStrategy's platform, but can be attractive for small,
departmental applications. Vendors in this category include Actuate, Business
Objects, Crystal Decisions, Microsoft and SAS.
Information Delivery and Proactive Reporting. Companies that focus on the
proactive delivery of information, via e-mail, website, or other medium can
compete with MicroStrategy's offerings. Typically, these tools serve to push out
compiled reports on a scheduled basis to sets of users based on job type.
MicroStrategy software has integrated this technology into the MicroStrategy 7
platform. Vendors of such technology include Actuate and Business Objects.
Many of our competitors have longer operating histories, significantly greater
financial, technical, marketing or other resources, and greater name recognition
than we do. In addition, many of our competitors have strong relationships with
current and potential customers and extensive knowledge of the business
intelligence industry. As a result, they may be able to respond more quickly to
new or emerging technologies and changes in customer requirements or devote
greater resources to the development, promotion and sale of their products than
we can. Increased competition may lead to price cuts, reduced gross margins and
loss of market share. We cannot be sure that we will be able to compete
successfully against current and future competitors or that the competitive
pressures we face will not have a material adverse effect on our business,
operating results and financial condition.
Current and future competitors may also make strategic acquisitions or establish
cooperative relationships among themselves or with others. By doing so, they may
increase their ability to meet the needs of our potential customers. Our current
or prospective indirect channel partners may establish cooperative relationships
with our current or future competitors. These relationships may limit our
ability to sell our products through specific distribution channels.
Accordingly, new competitors or alliances among current and future competitors
may emerge and rapidly gain significant market share. These developments could
harm our ability to obtain maintenance revenues for new and existing product
licenses on favorable terms.
Employees
As of December 31, 2001, we had a total of 844 employees, of whom 599 were based
in the United States and 245 were based internationally. Of the total, 228 were
engaged in sales and marketing, 224 in product development, 243 in professional
services and 149 in finance, administration and corporate operations. None of
our employees are represented by a labor union. We have not experienced any work
stoppages and consider our relations with our employees to be good.
11
We believe that effective recruiting, education and nurturing of human resources
are critical to our success and have traditionally made 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.
All newly hired professionals complete a professional orientation course that
ranges from one day to four 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 on our products,
competitors and customers. Certain lectures also deal with general business
practices, ethics and teamwork. Throughout this training, students typically
must pass a number of oral and written examinations in order to begin their
assignments. Course content for MicroStrategy University is created by
experienced members of our professional staff, who generally have an annual
obligation to create expert content based upon the best practices they have most
recently observed in the field. This expert content is then used to upgrade and
revitalize our education, consulting, support, technology and marketing
operations.
ITEM 2. PROPERTIES
Our principal offices are located in Northern Virginia in leased facilities
pursuant to multiple leases, the majority of which expire between June 2003 and
June 2010. Our office facilities comprise a total of 468,000 square feet, of
which we currently occupy 255,000 square feet. In connection with restructuring
plans adopted during 2001, we vacated 213,000 square feet of office space, of
which 74,000 square feet has been subleased as of December 31, 2001 (Note 19 of
our accompanying consolidated financial statements included in Item 14 of this
Annual Report on Form 10-K). In addition, we also lease sales offices
domestically and internationally in a variety of locations, including Atlanta,
Boston, Carlsbad, Charlotte, Chicago, Cincinnati, Dallas, Denver, Detroit, Los
Angeles, Minneapolis, New York, San Francisco, Seattle, St. Louis, Barcelona,
Buenos Aires, Cologne, London, Madrid, Mexico City, Milan, Montreal, Munich,
Paris, Sao Paolo, Seoul, Sydney, Tokyo, Toronto, Utrecht, and Vienna. We believe
our properties are suitable and adequate for our present and near term needs and
we do not expect to add additional office space in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
Actions Arising under Federal Securities Laws
From March through May 2000, twenty-five class action complaints were filed in
federal courts in various jurisdictions alleging that we and certain of our
officers and directors violated section 10(b) of the Securities and Exchange Act
of 1934, as amended (the "Exchange Act"), Rule 10b-5 promulgated thereunder, and
section 20(a) and section 20A of the Exchange Act. Our outside auditor,
PricewaterhouseCoopers LLP, was also named in two of the suits. The complaints
contained varying allegations, including that we made materially false and
misleading statements with respect to our 1999, 1998 and 1997 financial results
in our filings with the Securities and Exchange Commission ("SEC"), analysts'
reports, press releases and media reports. In June 2000, these putative class
action lawsuits were consolidated in the United States District Court for the
Eastern District of Virginia. On July 7, 2000, the lead plaintiffs filed an
amended class action complaint naming us, certain of our officers and directors,
and PricewaterhouseCoopers LLP as defendants. The amended class action complaint
alleges claims under section 10(b), section 20(a) and section 20A of the
Exchange Act. The amended class action complaint does not specify the amount of
damages sought.
On October 23, 2000, the Company, its officers and directors named as
defendants, and plaintiffs' counsel entered into a settlement agreement in the
consolidated class action. Under the settlement agreement, class members will
receive: (1) five-year unsecured subordinated promissory notes issued by
MicroStrategy having an aggregate principal amount of $80.5 million and bearing
interest at 7.5% per year; (2) 2,777,778 shares of our class A common stock; and
(3) warrants to purchase 1,900,000 shares of class A common stock at an exercise
price of $40 per share with the warrants expiring five years from the date they
are issued. On November 7, 2001, certain of our officers tendered to us for no
consideration an aggregate of 1,683,504 shares of class A common stock held by
them for cancellation, as part of the settlement of the Delaware Derivative
Litigation described below and in satisfaction of a condition to the settlement
agreement relating to the class action. Accordingly, upon the completion of the
12
distribution, we will have effected a net issuance of 1,094,274 shares of class
A common stock as part of the class action settlement.
On January 19, 2001, the district court authorized notice of the proposed
settlement to be sent to all putative class members. The notice informs class
members of their rights including their rights to object to the proposed
settlement and to object the proposed settlement and pursue their claims
separately. On April 2, 2001, the district court approved the settlement, and
the period from which an appeal could have been taken has expired. The
settlement is subject to various closing conditions. On March 12, 2002, the
court entered the final distribution order allowing distribution of the
settlement consideration. We expect that the consideration will be issued to the
class members in the second quarter of 2002 after the remaining closing
conditions have been met.
Delaware Derivative Litigation
On June 30, 2000, a shareholder derivative action was filed in the Delaware
Court of Chancery seeking recovery for various alleged breaches of fiduciary
duties by certain of our directors and officers relating to our restatement of
financial results. On October 23, 2000, the Company, the directors and officers
named as defendants and the derivative plaintiff reached an agreement in
principle settling the derivative action. Under the derivative settlement
agreement, we have added two new independent directors with finance experience
to the audit committee of our Board of Directors and will ensure continued
adherence with applicable legal and regulatory requirements regarding the
independence of audit committee members and trading by insiders. On November 7,
2001 as a part of the derivative settlement agreement and in satisfaction of a
condition to the distribution of the securities to be issued as part of the
class action settlement, Michael J. Saylor, our Chairman of the Board of
Directors and Chief Executive Officer, Sanju K. Bansal, our Vice Chairman,
Executive Vice President and Chief Operating Officer, and Mark S. Lynch, our
former Chief Financial Officer and current Vice President of Business Affairs,
tendered to the Company for cancellation an aggregate of 1,683,504 shares of
class A common stock held by them. At a hearing on August 7, 2001, the Chancery
Court approved the settlement.
Business Objects Litigation
On October 2, 2001, we filed a lawsuit in the Virginia Circuit Court for Fairfax
County against two field employees of Business Objects, S.A. ("BO"). Our lawsuit
alleged that these employees, who previously worked for us, breached their
fiduciary and contractual obligations to us by, among other things,
misappropriating our trade secrets and confidential information and soliciting
our employees and customers. Our complaint sought injunctive relief and damages
of at least $3 million. On October 17, 2001, BO filed suit against us in the
United States District Court for the Northern District of California, claiming
that our software infringes a patent issued to BO relating to relational
database access. The suit seeks injunctive relief and unspecified monetary
damages. We intend to vigorously defend the case. On October 31, 2001, we filed
suit against BO in the United States District Court for the Eastern District of
Virginia, claiming that BO's software infringes two patents held by us relating
to asynchronous control of report generation using a web browser and a system
and method of adapting automatic output of OLAP reports to disparate user output
devices. On February 21, 2002, we filed a motion to amend our complaint against
BO to add claims for violations of the federal Computer Fraud and Abuse Act,
misappropriation of trade secrets, and tortious interference with contractual
relations. We are seeking monetary damages and injunctive relief. On March 13,
2002, we voluntarily dismissed without prejudice our lawsuit pending in the
Virginia Circuit Court for Fairfax County against the two field employees of BO.
Other Proceedings
We are also involved in other legal proceedings through the normal course of
business. Management believes that any unfavorable outcome related to these
other proceedings will not have a material effect on our financial position,
results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2001.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our class A common stock, $0.001 par value per share, is traded on the Nasdaq
National Market under the symbol "MSTR." The following table sets forth the high
and low sales prices for the common stock for the periods indicated, adjusted to
reflect the two-for-one stock split which occurred in January 2000, as reported
by the Nasdaq National Market.
High Low
---------- -----------
Year ended December 31, 2000
First Quarter 313.00 74.78
Second Quarter 77.12 17.31
Third Quarter 35.75 20.25
Fourth Quarter 28.00 9.25
Year ended December 31, 2001
First Quarter 17.06 2.88
Second Quarter 5.64 2.46
Third Quarter 3.89 1.13
Fourth Quarter 4.71 1.19
As of March 1, 2002, there were approximately 626 stockholders of record of our
class A common stock and 11 stockholders of record of our class B common stock,
$0.001 par value per share.
We have never declared or paid any cash dividends on our class A common stock
and the terms of our credit facility and preferred stock prohibit the payment of
cash dividends. Accordingly, we do not anticipate declaring or paying 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.
14
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read
in conjunction with "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations," the
consolidated financial statements and notes thereto, and other
financial information appearing elsewhere in this Annual Report
on Form 10-K.
Years ended December 31,
-------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ---------- ---------
(in thousands, except per share data)
Statements of Operations Data
Revenues:
Product licenses $ 72,781 $ 100,582 $ 85,797 $ 61,635 $ 35,478
Product support and other services 107,635 114,679 65,461 33,854 17,073
--------- --------- --------- -------- ---------
Total revenues 180,416 215,261 151,258 95,489 52,551
--------- --------- --------- -------- ---------
Cost of revenues:
Product licenses 4,170 2,600 2,597 2,246 1,641
Product support and other services 41,473 74,961 34,436 17,535 9,475
--------- --------- --------- -------- ---------
Total cost of revenues 45,643 77,561 37,033 19,781 11,116
--------- --------- --------- -------- ---------
Gross profit 134,773 137,700 114,225 75,708 41,435
--------- --------- --------- -------- ---------
Operating expenses:
Sales and marketing 74,792 137,534 88,733 53,294 30,468
Research and development 32,819 43,890 24,225 11,834 5,049
General and administrative 37,168 47,082 23,342 12,707 6,552
Restructuring and impairment charges 39,463 9,367 - - -
Amortization of goodwill and intangible assets 17,251 17,667 422 81 -
In-process research and development - - 2,800 - -
--------- --------- --------- -------- ---------
Total operating expenses 201,493 255,540 139,522 77,916 42,069
--------- --------- --------- -------- ---------
Loss from operations (66,720) (117,840) (25,297) (2,208) (634)
Financing and other income (expense):
Interest income 2,171 3,158 2,174 1,028 94
Interest expense (5,401) (37) (144) (720) (333)
Loss on investments (3,603) (9,365) - - -
Reduction in (provision for) estimated cost of
litigation settlement 30,098 (89,729) - - -
Other (expense) income, net (2,139) 96 6 (14) (12)
--------- --------- --------- -------- ---------
Total financing and other income (expense) 21,126 (95,877) 2,036 294 (251)
--------- --------- --------- -------- ---------
Loss from continuing operations before income taxes (45,594) (213,717) (23,261) (1,914) (885)
Provision for income taxes 2,460 1,400 1,246 - -
--------- --------- --------- -------- ---------
Net loss from continuing operations (48,054) (215,117) (24,507) (1,914) (885)
--------- --------- --------- -------- ---------
Discontinued operations:
Loss from discontinued operations (30,739) (46,189) (9,236) (341) -
Loss from abandonment (2,075) - - - -
--------- --------- --------- -------- ---------
Loss from discontinued operations (32,814) (46,189) (9,236) (341) -
--------- --------- --------- -------- ---------
Net loss (80,868) (261,306) (33,743) (2,255) (885)
--------- --------- --------- -------- ---------
15
Years ended December 31,
-----------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ----------- ------------- ----------- ----------
Statements of Operations Data (Continued) (in thousands, except per share data)
Dividends on and accretion of series A, B, C, D
and E convertible preferred stock (10,353) (4,687) - - -
Net gain on refinancing of series A redeemable
convertible preferred stock 29,370 - - - -
Gain on early redemption of redeemable
convertible preferred stock of discontinued
operations 44,923 - - - -
Series A preferred stock beneficial conversion
feature -- (19,375) - - -
------------ ----------- ------------- ----------- ----------
Net loss attributable to common stockholders $(16,928) $(285,368) $(33,743) $ (2,255) $ (885)
============ =========== ============= =========== ==========
Basic and diluted earnings (loss) per share (1):
Continuing operations $ (0.34) $ (3.00) $ (0.32) $ (0.03) $ (0.02)
Discontinued operations $ 0.14 $ (0.58) $ (0.12) $ - -
------------ ----------- ------------- ----------- ----------
Net loss attributable to common stockholders $ (0.20) $ (3.58) $ (0.44) $ (0.03) $ (0.02)
============ =========== ============= =========== ==========
Weighted average shares outstanding used
in computing basic and diluted earnings
(loss) per share (1) 86,587 79,779 77,028 66,986 58,988
============ =========== ============= =========== ==========
As of December 31,
-----------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ---------- --------- ----------
(in thousands)
Balance Sheet Data
Cash and cash equivalents $ 38,409 $ 33,203 $25,941 $ 27,491 $ 3,506
Restricted cash 439 25,884 - - -
Net working (deficit) capital (2) (18,700) 19,396 53,622 23,919 (7,048)
Net assets of discontinued operations - 42,663 8,218 95 -
Total assets 103,632 240,994 203,368 76,571 27,052
Net liabilities of discontinued operations 4,479 - 513 - -
Long-term liabilities, excluding deferred
revenue and advance payments 76,444 102,388 - 1,928 2,428
Series A redeemable convertible preferred
stock 6,385 119,585 - - -
Series B redeemable convertible preferred
stock 32,343 - - - -
Series C redeemable convertible preferred
stock 25,937 - - - -
Series D convertible preferred stock 3,985 - - - -
Redeemable convertible preferred stock
of discontinued operations - 40,530 - - -
Total stockholders' equity (deficit) (138,007) (145,538) 101,816 37,775 (1,433)
(1) Share and per share amounts for all periods presented have been adjusted to
reflect the two-for-one stock split, which occurred in January 2000. The
computation of earnings (loss) per share is discussed further below under
"Critical Accounting Policies."
(2) Net working (deficit) capital is equivalent to current assets less current
liabilities, excluding net assets (liabilities) of discontinued operations,
but including deferred revenue and advance payments and contingency from
terminated contract.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We are a leading worldwide provider of business intelligence software that
enables companies to analyze the raw data stored across their enterprise to
reveal the trends and answers needed to manage their business effectively. Our
software delivers this critical insight to workgroups, the enterprise and
extranet communities via e-mail, web, wireless and voice communication channels.
Businesses can use our software platform to develop user-friendly solutions,
proactively optimize revenue-generating strategies, enhance cost-efficiency and
productivity and improve their customer relationships.
Our software platform enables users to query and analyze the most detailed,
transaction-level databases, turning data into business intelligence and
delivering reports and alerts about the users' business processes. Our web
architecture provides reporting, security, performance and standards that are
critical for web deployment. Within intranets, our products provide employees
with information to enable them to make better, more cost-effective business
decisions. In extranets, enterprises can use our MicroStrategy 7 software to
build stronger relationships by linking customers and suppliers via the
Internet. We also offer a comprehensive set of consulting, education and
technical support services for our customers and partners.
Towards the end of 2000 and throughout 2001, we have been affected by the global
economic slowdown which has resulted in a decrease in corporate spending on
information technology. These macro-economic factors have had an adverse impact
on our results of operations.
We adopted a restructuring plan during the second quarter of 2001 to better
align operating expenses with revenue expectations. The restructuring plan
includes a strategic decision to focus on the business intelligence market, the
elimination or reduction of speculative technology initiatives, a greater
emphasis on indirect sales, and a reduction of our workforce by 450 domestic and
international employees and 147 employees of our discontinued Strategy.com
subsidiary throughout all functional areas, or approximately 33% of our then
worldwide headcount. As a result of the reduction in headcount, we consolidated
our multiple Northern Virginia facilities into a single location in McLean,
Virginia.
During the third quarter of 2001, we adopted an additional restructuring plan to
effect a further reduction in our workforce as part of our ongoing measures to
better align operating expenses with revenues and further focus on our core
business intelligence software business. The restructuring plan adopted during
the third quarter of 2001 resulted in a reduction of our workforce by 229
additional domestic and international employees throughout all functional areas.
As a result of our second and third quarter restructuring plans, we recorded
restructuring and impairment charges from continuing operations of $27.3 million
during 2001 relating to severance costs and other benefits for terminated
employees, costs associated with exiting facilities, and fees incurred for
professional services directly related to the restructuring. As a result of the
various restructuring initiatives adopted during 2001 and 2000, we reduced
expenses from continuing operations by $115.6 million in 2001 compared to 2000
with expense reductions occurring across the following categories: cost of
revenues, sales and marketing, research and development, and general and
administrative. Additionally, management expects that these restructuring
initiatives will result in a reduction of operating expenses in 2002 by
approximately $31 million to $38 million as compared to actual operating
expenses in 2001. Additionally, during the fourth quarter of 2001, we concluded
that the products derived from our Teracube intangible asset would not generate
sufficient cash flow to support its carrying value and that its carrying value
exceeded its fair value. Accordingly, we recorded an impairment charge of $12.2
million relating to the write-down of the Teracube intangible asset to its fair
value.
On December 31, 2001, we discontinued the operations of our Strategy.com
subsidiary and shut down its services. As a result, we had a loss from
discontinued operations of $32.8 million for the year ended December 31, 2001,
including a loss from abandonment of discontinued operations of $2.1 million.
Our historical consolidated financial statements have been reclassified to
present Strategy.com as a discontinued operation for all periods presented.
17
Critical Accounting Policies
MicroStrategy's consolidated financial statements are prepared in conformity
with accounting principles generally accepted in the United States. For a
comprehensive discussion of our accounting policies, see note 2 in the
accompanying consolidated financial statements included in Item 14 of this
Annual Report on Form 10-K. MicroStrategy does not have any ownership interest
in any special purpose entities that are not wholly-owned and consolidated
subsidiaries of MicroStrategy. Additionally, MicroStrategy does not have any
material related party transactions as defined under Statement of Financial
Accounting Standards No. 57, "Related Party Disclosures." Pursuant to recent
guidance published by the SEC regarding disclosure about critical accounting
policies, we have identified the following accounting policies as critical to
the understanding of our results of operations.
Use of Estimates. The preparation of our consolidated financial statements, in
conformity with accounting principles generally accepted in the United States,
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities and equity and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. These estimates,
particularly estimates relating to the restructuring and impairment charges,
refinancing of preferred stock, discontinued operations, contingency from
terminated contract, litigation, and other contingencies, have a material impact
on our financial statements, and are discussed in detail throughout our analysis
of the results of operations as discussed below.
We are involved in patent infringement lawsuits with Business Objects, S.A. As
the actions relating to Business Objects are in a preliminary stage, we are
currently unable to estimate the potential range of gain or loss, if any, and as
such the outcome of this uncertainty is not presently determinable. Accordingly,
no provision for these matters has been made in the accompanying consolidated
financial statements. Additional information regarding these matters is included
below under "Risk Factors."
In addition to evaluating estimates relating to the items discussed above, we
also consider other estimates, including, but not limited to, those related to
bad debts, investments, goodwill and intangible assets, income taxes, and
financing operations. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets, liabilities and equity that are not readily
apparent from other sources. For example, our real estate lease loss included in
our restructuring and impairment charges includes estimates of sublease
commission costs, sub-tenant concession costs, sublease rental income, and the
length of time expected to sublease our idle space. Actual results could differ
from those estimates under different assumptions or conditions. Additional
information regarding risk factors that may impact our estimates is included
below under "Risk Factors".
Revenue Recognition. MicroStrategy's software revenue recognition policies are
in accordance with the American Institute of Certified Public Accountant's
Statement of Position ("SOP") 97-2, "Software Revenue Recognition," as amended.
In the case of software arrangements that require significant production,
modification, or customization of software, we follow the guidance in SOP 81-1,
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts." We also follow the guidance provided by the SEC's Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements," which provides
guidance on the recognition, presentation, and disclosure of revenue in the
financial statements filed with the SEC.
We recognize revenue from sales of software licenses to end users or resellers
upon persuasive evidence of an arrangement, as provided by agreements or
contracts executed by both parties, delivery of the software, and determination
that collection of a fixed or determinable fee is reasonably assured. When the
fees for software upgrades and enhancements, maintenance, consulting and
education are bundled with the license fee, they are unbundled using our
objective evidence of the fair value of the elements represented by our
customary pricing for each element in separate transactions. If such evidence of
fair value exists for all undelivered elements and there is no such evidence of
fair value established for delivered elements, revenue is first allocated to the
elements where evidence of fair value has been established and the residual
amount is allocated to the delivered elements. If evidence of fair value for any
undelivered element of the arrangement does not exist, all revenue from the
arrangement is deferred until such time that evidence of fair value exists for
undelivered elements or until all elements of the arrangement are delivered,
subject to certain limited exceptions set forth in SOP 97-2.
18
When the software license arrangement requires us to provide significant
production, customization or modification of the software, or when the customer
considers these services essential to the functionality of the software product,
both the product license revenue and consulting services revenue are recognized
in accordance with the provisions of SOP 81-1 using the percentage of completion
method. Under percentage of completion accounting, both product license and
consulting services revenue are recognized as work progresses based upon cost
inputs. Any expected losses on contracts in progress are expensed in the period
in which the losses become probable and reasonably estimable. Contracts
accounted for under the percentage of completion method represented
approximately 7.8%, 10.9% and 1.0% of total revenues during the years ended
December 31, 2001, 2000 and 1999, respectively.
If an arrangement includes acceptance criteria, revenue is not recognized until
we can objectively demonstrate that the software or service can meet the
acceptance criteria, or the acceptance period lapses, whichever is earlier. If
the software license arrangement obligates us to deliver unspecified future
products, then revenue is recognized on the subscription basis, ratably over the
term of the contract.
License revenue derived from sales to resellers or OEM's who purchase our
products for future resale or use and who are obligated for payment irrespective
of delivery to end users is recognized upon delivery to the reseller or OEM
provided all other revenue recognition criteria are met and otherwise is
recognized upon delivery to the ultimate end users.
Maintenance revenue, included in product support and other services revenue, is
derived from providing technical support and software updates and upgrades to
customers. Maintenance revenue is recognized ratably over the term of the
contract, which in most cases is one year. Revenue from consulting and education
services is recognized as the services are performed.
Amounts collected prior to satisfying the above revenue recognition criteria are
included in deferred revenue and advance payments in the accompanying
consolidated balance sheets.
MicroStrategy's ability to enter into revenue generating transactions and
recognize revenue in the future is subject to a number of business and economic
risks discussed below under "Risk Factors."
Discontinued Operations. During the second quarter of 2001, we substantially
curtailed operations of our Strategy.com subsidiary and reduced its workforce to
approximately 40 employees. During the third quarter of 2001, we further reduced
the Strategy.com workforce to approximately 6 employees and continued to review
our options with respect to the remaining assets of Strategy.com. On December
31, 2001, we discontinued the operations of Strategy.com and shut down its
services. Accordingly, we recorded a loss from abandonment of discontinued
operations of $2.1 million for the year ended December 31, 2001. The loss from
abandonment included remaining lease payments associated with abandoned computer
equipment, personal property taxes due under equipment leases, certain other
costs, and estimated results from operations from the measurement date of
December 31, 2001 through the expected disposal date in the first half of 2002.
The loss from abandonment is based on estimates and actual results could differ
under different assumptions or conditions.
Basic and Diluted Net Loss Per Share. We have issued preferred stock that is
convertible into class A common stock and will issue notes as part of a
litigation settlement that may be converted into class A common stock at our
option. The potential conversion of these securities into common stock would
significantly affect our basic and dilutive earnings per share if we were to
generate net income as described below. The weighted average basic and diluted
shares outstanding that will be included in the our earning (loss) per share
calculations for future periods, is dependent upon various factors and is
subject to a number of business and economic risks discussed below under "Risk
Factors."
We compute basic and diluted earnings (loss) per share in accordance with SFAS
No. 128, "Earnings per Share" and Emerging Issues Task Force ("EITF") Topic
D-72, "Effect of Contracts That May be Settled in Stock or Cash on the
Computation of Diluted Earnings per Share." Additionally, in accordance with
EITF Topic D-95, "Effect of Participating Convertible Securities in the
Computation of Basic Earnings Per Share," participating securities that are
convertible into common stock must be included in the computation of basic
income (loss) per share, while outstanding, if their effect is dilutive. Because
each series of our preferred stock has participation rights in our undistributed
earnings equivalent to those of common shareholders, each series of preferred
stock is considered a
19
participating convertible security and is therefore included in the computation
of basic earnings (loss) per share to the extent they are dilutive.
Basic net income or loss per share is determined by dividing the net income or
loss applicable to common stockholders (for continuing operations and
discontinued operations, as applicable) by the weighted average number of common
shares outstanding during the period. Diluted net income or loss per share is
determined by dividing the net income or loss applicable to common stockholders
(for continuing operations and discontinued operations, as applicable) by the
weighted average number of common shares and potential common shares outstanding
during the period. Potential common shares are included in the diluted net loss
per share calculation when dilutive. Potential common shares consisting of
common stock issuable upon exercise of outstanding common stock options and
warrants are computed using the treasury stock method. Potential common shares
also consist of common stock issuable upon the conversion of preferred stock.
The series A preferred stock, series B preferred stock, series C preferred
stock, and series D preferred stock were convertible into 17,141,683 shares of
class A common stock as of December 31, 2001, but have not been included in the
net loss per share calculation for the year ended December 31, 2001 because
their effect would be anti-dilutive. In determining the number of incremental
shares that would have been included in the calculation if MicroStrategy had
positive net income, the securities were converted using the share settlement
method or the if-converted method, depending upon which method would yield a
more dilutive result. The share settlement method assumes the securities are
converted at the end of the period using a volume weighted average stock price
based upon an option available to us to settle the securities in shares of
common stock at maturity. The if-converted method assumes the securities are
converted at the fixed conversion rate currently available to the holders of the
securities. Net loss used in the computation of basic and diluted earnings
(loss) per share of continuing operations was computed by adjusting the net loss
from continuing operations for dividends on and accretion of preferred stock,
net gain on refinancing of preferred stock, and preferred stock beneficial
conversion feature. Net income (loss) used in the computation of earnings (loss)
per share of discontinued operations was computed by adjusting the net loss from
discontinued operations by gain on early redemption of preferred stock of
discontinued operations.
In connection with the settlement of a securities lawsuit, we expect to issue
five-year unsecured subordinated promissory notes having an aggregate principal
amount of $80.5 million in the first half of 2002. We will have the option at
any time prior to the expiration of the five-year term of the notes to convert
the notes into a number of shares of class A common stock equal to the principal
amount of the notes being converted divided by 80% of the dollar volume-weighted
average trading price of the class A common stock over a ten day period
preceding our delivery of a notice of conversion, which could result in a
substantial number of shares of class A common stock being issued. Under EITF
Topic D-72, these promissory notes will be potentially dilutive securities and
may be included in our weighted average shares outstanding for purposes of
computing diluted earnings per share, when determined to be dilutive, and may
have a material impact on future diluted earnings per share calculations. For
example, if the conversion price of the notes were based on the dollar
volume-weighted average trading price of the class A common stock during the 10
trading days ending March 1, 2002, we would be obligated to issue 36,133,216
shares of class A common stock if we elected to convert the notes. In addition,
if we elect to convert the notes at prices that would result in the issuance of
shares with a market value in excess of the value of the notes reflected on our
balance sheet, we would incur a non-cash charge to earnings at the time of
conversion equal to the amount of such excess, and this charge could be
substantial. We do not have any current plans to convert any of these notes.
Additional information regarding this litigation settlement is discussed further
below under "Costs and Expenses" and "Risk Factors."
20
Results of Operations
The following table sets forth for the periods indicated the percentage of total
revenues represented by certain items reflected in our consolidated statements
of operations:
Years ended December 31,
-----------------------------
2001 2000 1999
------ ------ ------
Statements of Operations Data
Revenues:
Product licenses 40.3% 46.7% 56.7%
Product support and other services 59.7 53.3 43.3
------ ------ ------
Total revenues 100.0 100.0 100.0
------ ------ ------
Cost of revenues:
Product licenses 2.3 1.2 1.7
Product support and other services 23.0 34.8 22.8
------ ------ ------
Total cost of revenues 25.3 36.0 24.5
------ ------ ------
Gross profit 74.7 64.0 75.5
------ ------ ------
Operating expenses:
Sales and marketing 41.5 63.9 58.7
Research and development 18.2 20.4 16.0
General and administrative 20.6 21.9 15.4
Restructuring and impairment charges 21.9 4.3 -
Amortization of goodwill and intangible assets 9.5 8.2 0.3
In-process research and development - - 1.8
------ ------ ------
Total operating expenses 111.7 118.7 92.2
------ ------ ------
Loss from operations (37.0) (54.7) (16.7)
Financing and other income (expense):
Interest income 1.2 1.5 1.4
Interest expense (3.0) - (0.1)
Loss on investments (2.0) (4.3) -
Reduction in (provision for) estimated cost of
litigation settlement 16.7 (41.7) -
Other (expense) income, net (1.2) - -
------ ------ ------
Total financing and other income (expense) 11.7 (44.5) 1.3
------ ------ ------
Loss from continuing operations before income taxes (25.3) (99.2) (15.4)
Provision for income taxes 1.3 0.7 0.8
------ ------ ------
Net loss from continuing operations (26.6) (99.9) (16.2)
------ ------ ------
Discontinued operations:
Loss from discontinued operations (17.0) (21.5) (6.1)
Loss from abandonment (1.2) - -
------ ------ ------
Loss from discontinued operations (18.2) (21.5) (6.1)
------ ------ ------
Net loss (44.8) (121.4) (22.3)
------ ------ ------
Dividends on and accretion of series A, B, C, D
and E convertible preferred stock (5.7) (2.2) -
Net gain on refinancing of series A redeemable
convertible preferred stock 16.2 - -
Gain on early redemption of redeemable
convertible preferred stock of discontinued
operations 24.9 - -
Series A preferred stock beneficial conversion
feature - (9.0) -
------ ------ ------
Net loss attributable to common stockholders (9.4)% (132.6)% (22.3)%
====== ====== =======
21
Comparison of 2001, 2000, and 1999
Revenues. Total revenues consist of revenues derived from sales of product
licenses and product support and other services, including technical support,
education and consulting services. Total revenues increased from $151.3 million
in 1999 to $215.3 million in 2000, and decreased to $180.4 million in 2001,
representing an increase of 42.3% in 2000, and a decrease of 16.2% in 2001.
Based on the revenue recognition criteria established in SOP 97-2 and SOP 81-1,
revenue from certain large, multiple element arrangements have been recorded as
deferred revenue and advance payments, with both product license revenues and
product support and other services revenues recognized using the percentage of
completion method based on cost inputs as the work progresses. Contracts
accounted for under the percentage of completion method represented
approximately 7.8%, 10.9% and 1.0% of total revenues during the years ended
December 31, 2001, 2000 and 1999, respectively. If the arrangement includes
acceptance criteria, revenue is not recognized until we can demonstrate that the
software or service can meet the acceptance criteria. If the software license
arrangement obligates us to the delivery of unspecified future products, then
revenue is recognized on the subscription basis, ratably over the term of the
contract.
In the third quarter of 2001, we notified Exchange Applications, Inc. that it
was in material default in the performance of its obligations under the software
development and OEM agreement (the "OEM Agreement") that had been entered into
as of December 28, 1999. Exchange Applications responded by denying the default
of its obligations and alleging that we had breached our contractual
obligations. Exchange Applications also informed us that it may seek a
reimbursement of all amounts paid to us. Management believes that MicroStrategy
has not committed any breach of obligations alleged by Exchange Applications.
Accordingly, we responded to Exchange Applications by denying the claim and, in
the fourth quarter of 2001, sent a notice of termination to terminate the OEM
Agreement. As of December 31, 2001, Exchange Applications had not agreed to the
termination. Because we are no longer performing services under the OEM
Agreement, the remaining current and long-term deferred revenue associated with
the contract of $9.3 million and $7.8 million, respectively, or $17.1 million in
aggregate, has been reclassified to contingency from terminated contract in the
accompanying consolidated balance sheet as of December 31, 2001. The ultimate
resolution of this contract dispute will determine the final disposition of the
recorded amounts. The final resolution of this matter is currently uncertain;
however, we do not believe we will incur any additional liability related to
this contract dispute. During 2001, we recognized $724,000 of product license
revenue and $8.2 million of product support and other services revenue relating
to this contract.
During 2000, we agreed to restructure our relationship with a significant
customer. While we had been providing services to the customer throughout the
year, no revenue had been recognized in accordance with our revenue recognition
accounting policies. In view of changes in the customer's internal information
technology plans, we entered into an agreement with the customer in which we
agreed to discontinue our development efforts and deliver all existing work
product. Since we had no future obligations to this customer, all payments were
made prior to the end of the year, and all other revenue recognition criteria
were met, we recorded revenues of $4.4 million in 2000, with $4.0 million and
$377,000 recorded as product license revenues and product support and other
services revenues, respectively, and deferred an additional $1.2 million related
to ongoing technical support obligations.
Product License Revenues. Product license revenues increased from $85.8 million
in 1999 to $100.6 million in 2000, and decreased to $72.8 million in 2001,
resulting in an increase of 17.2% in 2000 and a decrease of 27.6% in 2001. The
increase in product license revenues during 2000 was due to increased customer
acceptance of our recently released products and the growth of the business
intelligence software market in general. Product license revenues in 2000 were
also positively affected by the restructuring of the customer relationship
described above which resulted in $4.0 million of product license revenue. The
overall decrease in product license revenues during 2001 was primarily
attributable to the economic slowdown, which led to decreased corporate spending
on information technology and, to a lesser extent, the effect of the September
11, 2001 terrorist attacks, which had an adverse effect on subsequent sales
efforts. We believe this decrease may also be caused, in part, by concerns of
potential new customers over our restatement of financial results and the
related litigation during 2000. We believe the settlement agreement relating to
these litigation matters which we entered into in late 2000, may alleviate these
concerns. We expect product license revenues as a percentage of total revenues
to fluctuate on a period-to-period basis and vary significantly from the
percentage of total revenues achieved in prior years.
22
Product Support and Other Services Revenues. Product support and other services
revenues increased from $65.5 million in 1999 to $114.7 million in 2000, and
decreased to $107.6 million in 2001, resulting in an increase of 75.2% in 2000,
and a decrease of 6.1% in 2001. The increase in product support and other
services revenues during 2000 was primarily due to a continuing increase in
large scale business intelligence applications which require significant
implementation and other consulting work. The overall decrease in product
support and other services revenues during 2001 was primarily attributable to a
decrease in demand for consulting and education services and the implementation
of restructuring plans under which we reduced our consulting, education and
technical support staffing levels. As a result of possible fluctuations in
product license revenues discussed above, product support and other services
revenues as a percentage of total revenues may fluctuate on a period-to-period
basis and vary significantly from the percentage of total revenues achieved in
prior years.
International Revenues. International revenues are included in the amounts
discussed above and are discussed separately within this paragraph.
International revenues increased from $36.4 million in 1999 to $55.8 million in
2000, and to $61.5 million in 2001, representing growth rates of 53.5% in 2000
and 10.3% in 2001. International product license revenues increased from $22.8
million in 1999 to $30.1 million in 2000, and decreased to $29.2 million in
2001, representing an increase of 32.0% in 2000 and a decrease of 3.0% in 2001.
International product support and other services revenues increased from $13.6
million in 1999 to $25.7 million in 2000, and to $32.3 million in 2001,
resulting in increases of 89.0% in 2000 and 25.7% in 2001. The overall increase
in international revenues is due to the expansion of our international
operations, new product offerings and growing international market acceptance of
our software products. In addition, we opened new sales offices in Argentina,
Switzerland, Mexico, Korea and Australia in 2000, in Brazil in 1999, and in
Canada, Italy, Austria, France, the Netherlands, Germany, United Kingdom and
Spain prior to 1999. During 2001, we closed our Switzerland and Austria offices.
As a percentage of total revenues, international revenues were 24.0% in 1999,
25.9% in 2000, and 34.1% in 2001. Although international revenues have increased
each year, the rate of increase has declined, and we experienced a decrease in
product license revenues during 2001. We believe that this is primarily
attributable to the economic slowdown, which led to decreased corporate spending
on information technology. Contributing to the decrease in international product
license revenues in 2001 were unusually high product license revenues of $4.0
million during 2000 resulting from the non-recurring transaction with a
significant customer that restructured its relationship with us as discussed
above. We anticipate that international revenues will continue to account for a
significant amount of total revenues, and management expects to continue to
commit significant time and financial resources to the maintenance and ongoing
development of direct and indirect international sales and support channels. In
the latter part of 2001, there was extensive economic turmoil in Argentina which
subsequently resulted in a significant devaluation of the Argentine peso.
Revenues from our operations in Argentina accounted for 2.2% of total revenues
in 2001. Management believes that our economic exposure in the region is not
significant.
Costs and Expenses
Cost of Product License Revenues. Cost of product license revenues consists
primarily of the costs of product manuals, media, amortization of capitalized
software expenses, and royalties paid to third party software vendors. Cost of
product license revenues were $2.6 million in 1999 and $2.6 million in 2000, and
increased to $4.2 million in 2001. As a percentage of product license revenues,
cost of product license revenues decreased from 3.0% in 1999 to 2.6% in 2000,
and increased to 5.7% in 2001. The decrease in cost of product license revenues
as a percentage of product license revenues from 1999 to 2000 was due to
economies of scale realized by producing larger volumes of product materials and
decreased materials and shipping costs due to an increase in the percentage of
customers reproducing product documentation at their sites. The increase in cost
of product license revenues as a percentage of product license revenues in 2001
was primarily due to increased software royalty arrangements with third-party
software vendors resulting from an increase in MicroStrategy software sold that
included third-party software. In the event that we enter into additional
software royalty arrangements with third-party software vendors in the future,
cost of product license revenues as a percentage of total product license
revenues may increase. Additionally, we expect cost of product license revenues
to increase by approximately $650,000 in 2002 as a result of the amortization of
software development costs capitalized in 2001 and early 2002.
Cost of Product Support and Other Services. Cost of product support and other
services consists of the costs of providing consulting services to customers and
partners, technical support and education. Cost of product support and other
services revenues increased from $34.4 million in 1999 to $75.0 million in 2000,
and decreased to $41.5
23
million in 2001. As a percentage of product support and other services revenues,
cost of product support and other services revenues was 52.6% in 1999, 65.4% in
2000 and 38.5% in 2001. The significant increase in total cost of product
support and other services revenues as a percentage of product support and other
services revenues ("services cost") in 2000 compared to 1999 was primarily
attributable to: a substantial increase in the use of third parties to perform
consulting services, an increase in consulting services revenues as a percentage
of total product support and other services revenues, which are at lower margins
than other product support revenues, the agreement to restructure a large
customer relationship which resulted in recognizing a significant amount of
services revenue at no margin, and excess capacity in consulting personnel. The
decrease in services costs in 2001 was primarily due to a decrease in our
consulting, technical support and education staffing levels by approximately 52%
in 2001 over 2000 in connection with the implementation of the 2001
restructuring plans discussed above. Additionally, the significant decrease in
services cost in 2001 compared to 2000 was also attributable to a decrease in
the use of third parties to perform consulting services, an increase in
maintenance revenues as a percentage of total product support and other services
revenues, which result in higher profit margins than other product support
revenues, such as consulting and educational services, and improved utilization
of consulting personnel due to the reduction in consulting personnel as part of
the 2001 restructuring plans.
Sales and Marketing Expenses. Sales and marketing expenses include domestic and
international personnel costs, commissions, office facilities, travel,
advertising, public relations programs and promotional events, such as trade
shows, seminars and technical conferences. Sales and marketing expenses
increased from $88.7 million in 1999 to $137.5 million in 2000, and decreased to
$74.8 million in 2001. As a percentage of total revenues, sales and marketing
expenses were 58.7% in 1999, 63.9% in 2000 and 41.5% in 2001. The increase in
sales and marketing expenses during 2000 was primarily the result of increased
staffing levels in the sales force prior to our 2000 restructuring plan,
increased commissions earned, increased promotional activities and advertising,
and increased general marketing efforts. Prior to the 2000 restructuring plan,
weighted average staffing levels for sales and marketing personnel had increased
by approximately 59% in 2000 over 1999. Additionally, during the first quarter
of 2000, we invested heavily in advertising, including a national television and
print advertising campaign and other marketing efforts in order to create better
market awareness of the value-added potential of our product suite and to seek
to acquire market share. These advertising programs were not continued in the
latter half of 2000 or in 2001. The decrease in sales and marketing expenses
during 2001 was primarily due to decreased staffing levels in the sales force as
a result of our 2001 restructuring plans, decreased commissions expense as a
result of lower product license revenues and decreased promotional activities
and advertising. Staffing levels for sales and marketing personnel decreased by
approximately 64% in 2001 over 2000. As part of the restructuring plans in the
second and third quarter of 2001, we have reduced overall spending on marketing
initiatives and advertising and have focused our marketing efforts solely on our
core business intelligence product line. While we intend to continue to market
our MicroStrategy 7 and 7i software platforms and other technology in our suite
of business intelligence products, we expect to continue to reduce our overall
advertising and marketing efforts as a percentage of revenues going forward in
order to better align our costs with anticipated revenues.
Research and Development Expenses. Research and development expenses consist
primarily of salaries and benefits of software engineering personnel,
depreciation of equipment, and other related costs. Research and development
expenses increased from $24.2 million in 1999 to $43.9 million in 2000, and
decreased to $32.8 million in 2001. As a percentage of total revenues, research
and development expenses increased from 16.0% in 1999 to 20.4% in 2000, and
decreased to 18.2% in 2001. The increase in research and development expenses
during 2000 was primarily due to hiring additional research and development
personnel to continue development of new products, product releases and business
intelligence technology. Weighted average staffing levels of research and
development personnel increased by approximately 59% in 2000 over 1999. During
2001, we focused our research and development efforts on enhancing our core
business intelligence product line and limited our initiatives on new product
development. As a result of this change in focus and our 2001 restructuring
plans, research and development expenses declined due to a reduction in staffing
levels and a decrease in the use of third-party consultants. Staffing levels of
research and development personnel decreased by approximately 36% in 2001 over
2000.
We are currently working on the development of MicroStrategy 7i and Narrowcast
Server 7.2, which are expected to be released in mid-2002. We are also currently
working on the development of Unix-based business intelligence products which
are expected to be available for general release during late 2002 and early
2003. As of December 31, 2001, our research and development engineering
resources were allocated to the following major projects: 63% to our
MicroStrategy 7i product, 12% to our Narrowcast Server 7.2 product, 12% to our
Unix products, and 13% to on-
24
going support of existing products and other research and development efforts.
The allocation of our research and development resources is expected to change
as project development efforts require, as current projects are completed, and
as new projects commence.
For the year ended December 31, 2001, in accordance with SFAS No. 86,
"Accounting for the Costs of Computer Equipment to be Sold, Leased, or Otherwise
Marketed," we capitalized $1.0 million and $606,000 of software development
costs associated with the development of MicroStrategy 7i and the release of
MicroStrategy's Narrowcast Server 7.1 software, respectively. For the year ended
December 31, 2000, we capitalized $990,000 and $430,000 of software development
costs associated with the release of the MicroStrategy 7.0 and MicroStrategy's
Narrowcast Server 7.0 software, respectively. These amounts represent software
development costs incurred from the time that technological feasibility was
reached until the general release of the respective software products. We
consider technological feasibility to be achieved when a product design and
working model of the software product has been completed. These capitalized
software costs are amortized over their respective useful lives of approximately
three years. Amortization expense related to software development costs was
$641,000, $771,000 and $600,000 for the years ended December 31, 2001, 2000 and
1999, respectively.
General and Administrative Expenses. General and administrative expenses include
domestic and international personnel and other costs of our finance, human
resources, information systems, administrative and executive departments as well
as third-party consulting, legal and other professional fees. General and
administrative expenses increased from $23.3 million in 1999 to $47.1 million in
2000, and decreased to $37.2 million in 2001. As a percentage of total revenues,
general and administrative expenses were 15.4% in 1999, 21.9% in 2000 and 20.6%
in 2001. The increase in general and administrative expenses during 2000 was the
result of increased staff levels, increased office occupancy costs, costs
associated with the growth of our business and an increase in legal and other
consultancy fees related to the litigation and related SEC investigations
associated with the restatement of our financial statements. The decrease in
general and administrative expenses during 2001 was primarily due to a reduction
in staff levels and office occupancy costs as a result of the restructuring
plans implemented during the second and third quarters of 2001, a decrease in
the use of external professional services, and a reduction in recruiting
efforts. Staffing levels for general and administrative personnel decreased by
approximately 36% in 2001 over 2000. General and administrative expenses may be
further reduced in future periods, if necessary, to better align expenses with
anticipated revenue levels.
Restructuring and Impairment Charges
(a) 2001 Restructuring Plans. During the second quarter of 2001, we adopted a
restructuring plan designed to focus our commercial activities. The
restructuring plan includes a strategic decision to focus operations on the
business intelligence market, the elimination or reduction of speculative
technology initiatives, a greater emphasis on indirect sales, and a reduction of
our workforce by 450 domestic and international employees and 147 Strategy.com
employees throughout all functional areas, or approximately 33% of our then
worldwide headcount. As a result of the reduction in headcount, we consolidated
our multiple Northern Virginia facilities into a single location in McLean,
Virginia.
During the third quarter of 2001, we adopted an additional restructuring plan to
effect a further reduction in our workforce as part of our ongoing measures to
better align operating expenses with revenues and further focus on our core
business intelligence software business. The restructuring plan adopted during
the third quarter of 2001 resulted in a reduction of our workforce by 229
additional domestic and international employees throughout all functional areas.
At December 31, 2001, all headcount reductions were completed.
As a result of the 2001 restructuring plans, we recorded restructuring and
impairment charges of $27.3 million during 2001 for severance costs and other
benefits for terminated employees, costs associated with exiting facilities, and
fees incurred for professional services directly related to the restructuring.
Amounts related to estimated sublease losses associated with exiting facilities
and terminations of computer and equipment leases will be paid over the
respective lease terms through February 2009. As a result of the restructuring,
we have approximately 213,000 square feet of vacant office space, of which
approximately 74,000 square feet has been subleased as of December 31, 2001. The
remaining vacant office space is currently being marketed for sublease. As of
December 31, 2001, we had $11.5 million accrued for our estimated computer and
real estate lease losses, representing $21.6 million in gross lease obligations,
$2.9 million of estimated commissions, concessions, and other costs, offset by
25
$13.0 million in estimated gross sublease income recoveries during the remaining
lease terms. If we are unable to obtain this level of estimated sublease income,
we will incur additional restructuring costs and our cash position would be
adversely affected. We are also considering terminating certain leases early. We
estimated sublease losses based upon current information available relating to
sublease commission costs, sub-tenant concession costs, sublease rental income,
and the length of time expected to sublease our idle space. Final actual amounts
could differ from current estimates once all vacant space has been entirely
sublet.
In connection with our periodic assessment of the carrying value of our
long-lived assets, we concluded that the products derived from our Teracube
intangible asset, which had been acquired in connection with the purchase of
intellectual property and other tangible and intangible assets relating to NCR
Corporation's (NCR) Teracube project, would not generate sufficient cash flow to
support its carrying value. Accordingly, we recorded an impairment charge of
$12.2 million during the fourth quarter of 2001 to write-down that intangible
asset to its fair value. See "Recent Accounting Pronouncements" below regarding
the issuance of SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." The following table sets forth a summary of the total
restructuring and impairment charges of $39.5 million for 2001 (in thousands):
Charges for Adjustments and Accrued
Second Quarter Charges for Total 2001 2001 Restructuring
and Third Fourth Charges for Non-cash Cash Costs at
Quarter 2001 Quarter 2001 2001 Charges Payments December 31, 2001
---------------- --------------- -------------- ------------ ------------- --------------------
Severance and other employee
termination benefits $ 4,772 $ 454 $ 5,226 $ - $ (5,154) $ 72
Write-down of impaired assets 6,443 12,116 18,559 (18,559) - -
Estimated sublease losses and
other facility closing costs 14,048 287 14,335 (22) (3,346) 10,967
Terminations of computer and
equipment leases 712 194 906 - (421) 485
Accrual for professional fees 423 14 437 - (268) 169
--------- --------- --------- --------- -------- --------
Total restructuring and
impairment charges $ 26,398 $ 13,065 $ 39,463 $ (18,581) $ (9,189) $ 11,693
========= ========= ========= ========= ======== ========
We anticipate the accrued restructuring costs will result in the following net
cash outflows (in thousands):
Termination
Leases Benefits Other Total
--------- -------------- --------- -----------
Year Ending December 31,
2002 $ 7,181 $ 72 $ 169 $ 7,422
2003 2,033 - 2,033
2004 660 - - 660
2005 628 - - 628
2006 329 - - 329
Thereafter 621 - - 621
--------- ------ ------- --------
Total estimated cash outflows $ 11,452 $ 72 $ 169 $ 11,693
========= ====== ======= ========
As a result of the various restructuring initiatives adopted during 2001 and
2000, we reduced expenses from continuing operations by $115.6 million in 2001
compared to 2000 with expense reductions occurring across the following
categories: cost of revenues, sales and marketing, research and development, and
general and administrative. Additionally, management expects that these
restructuring initiatives will result in a reduction of operating expenses in
2002 by approximately $31 million to $38 million as compared to actual operating
expenses in 2001. Except for our estimated sublease losses and other facility
closing costs and computer and equipment leases, we expect that the 2001
restructuring plans will be substantially completed by March 2002. We also
recorded additional restructuring and impairment charges of $19.4 million which
are included in loss from discontinued operations in the accompanying
consolidated statements of operations and are discussed more fully below.
26
(b) 2000 Restructuring Plan. In the third quarter of 2000, we adopted a
restructuring plan designed to bring costs more in line with revenues and
strengthen the financial performance of our business. The restructuring plan
included a reduction of our workforce by 211 domestic employees and 20
Strategy.com employees, or approximately 10% of our then worldwide headcount,
and the cancellation of a number of new job offers made to candidates who had
not yet commenced employment with us. All of these actions were completed prior
to September 30, 2000. As a result of the reduction in headcount, we
consolidated certain of our facilities located in the vicinity of our Northern
Virginia headquarters. In addition, we eliminated or reduced certain corporate
events and reduced expenditures on external consultants and contractors across
all functional areas.
In connection with the third quarter 2000 restructuring plan, we incurred
severance costs for terminated employees and costs for rescinded offers of
employment, accelerated the vesting provisions of certain stock option grants,
wrote-off certain assets that were no longer of service, and accrued related
professional fees. In addition, Michael J. Saylor, the chairman and CEO of the
Company, granted class A common stock to terminated employees from his personal
stock holdings. As Mr. Saylor is a principal shareholder of the Company, his
actions were deemed to be an action undertaken on behalf of the Company for
accounting purposes. Accordingly, we recognized an expense and a capital
contribution by Mr. Saylor of approximately $3.0 million, which represented the
fair value of the stock on the date of grant. The following table sets forth a
summary of these restructuring and impairment charges recorded during 2000 (in
thousands):
Consolidated
Non-cash Cash Charge for
Charges Payments 2000
------- -------- ----
Severance and rescinded employment offers $ - $ 1,848 $ 1,848
Stock grant and applicable payroll taxes 3,003 189 3,192
Compensation expense on accelerated stock options 1,483 - 1,483
Elimination of corporate events - 2,416 2,416
Write-off of impaired assets 329 - 329
Accrual for professional fees - 99 99
------- ------- -------
Total restructuring and impairment charges $ 4,815 $ 4,552 $ 9,367
======= ======= =======
Substantially all cash payments related to the restructuring plan adopted during
the third quarter of 2000 were made by December 31, 2000.
Amortization of Goodwill and Intangible Assets. We have recorded $422,000, $17.7
million, and $17.3 million in amortization expense for the years ended December
31, 1999, 2000, and 2001, respectively. As a result of the impairment charge
recorded to write-down the carrying value of our Teracube intangible asset to
its fair value, we expect our level of amortization expense to decline by $12.2
million over the next year. Additionally, see "Recent Accounting Pronouncements"
below regarding the issuance of SFAS No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets."
In-process Research and Development. In December 1999, in connection with the
purchase of intellectual property and other tangible and intangible assets
relating to NCR's Teracube project, we allocated $2.8 million of the $49.6
million purchase price to in-process research and development. In estimating the
fair value of the in-process research and development projects acquired, we
considered, among other factors, the stage of development of the Teracube
research and development projects at the time of the acquisition, projected
estimated cash flows from those projects when completed and the percentage of
the final products' cash flows that is attributed to our core technology and
that was already developed by NCR. Approximately 30% of the final products'
estimated cash in-flows were attributed to the acquired Teracube technology. We
used a discount rate of 35% when estimating the net present value of the
projected incremental cash flows.
Loss on Investments. In December 1999, we received 824,742 shares of stock
valued at $21.5 million of Exchange Applications, Inc., in consideration for the
sale of MicroStrategy software, technical support and consulting services. We
sold all of our economic interest in these shares for a net realized gain of
$1.5 million during the first two quarters of 2000.
27
During 2000, we received an additional 805,800 shares of Exchange Applications'
stock, valued at $13.1 million, in consideration for the sale of MicroStrategy
software, technical support and consulting services. Due to a significant
decrease in the market value of Exchange Applications' stock and because the
timing and amount of future recovery, if any, was uncertain, we determined that
the decline in value was other than temporary. Accordingly, we wrote down the
investment to its fair value at December 31, 2000, and recognized a loss of
$12.1 million during 2000. This loss was partially offset by a hedging
transaction that resulted in a gain of $1.4 million in the third quarter of
2000.
During the first two quarters of 2001, we received an additional 641,466 shares
of Exchange Applications' stock, valued at $1.2 million, pursuant to the
arrangement discussed above. Due to a subsequent decrease in the market value of
Exchange Applications' stock and because the timing and amount of future
recovery, if any, is uncertain, we wrote down the investment to its fair value
at the end of each quarterly period in 2001 and recognized an aggregate loss of
$1.4 million during 2001, of which a portion relates to shares that had been
received in 2000.
Additionally, during the first quarter of 2001, we recognized a loss of $840,000
related to a 5% interest we held in a voice portal technology company that was
acquired by a publicly-traded company for a combination of cash and common
stock. Due to a subsequent decrease in the market value of the publicly-traded
company's common stock and because the timing and amount of future recovery, if
any, is uncertain, we wrote down the investment to its fair value at December
31, 2001, and recognized an aggregate loss of $1.4 million during 2001.
We have concluded that all remaining unrealized losses on marketable equity
securities at December 31, 2001 are temporary in nature. Should any portion of
these unrealized losses subsequently be determined to be other than temporary,
we will record the related amount as a charge to current earnings.
Reduction in (Provision for) Estimated Cost of Litigation Settlement.
MicroStrategy and certain of its officers and directors were named as defendants
in a private securities class action lawsuit alleging that they had violated
Section 10(b) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), Rule 10b-5 promulgated thereunder, and Section 20(a) and Section 20A of
the Exchange Act in connection with various statements that were made with
respect to the 1999, 1998 and 1997 financial results. The action was
consolidated in the United States District Court for the Eastern District of
Virginia. In June 2000, purported holders of our common stock filed a
shareholder derivative lawsuit in the Delaware Court of Chancery seeking
recovery for various alleged breaches of fiduciary duties by certain of our
directors and officers relating to the restatement of financial results for
1999, 1998 and 1997.
In October 2000, we entered into agreements to settle these lawsuits. On January
19, 2001, the United States District Court authorized notice of the proposed
class action settlement that was sent to all putative class members. The notice
informed class members of their rights including their rights to object to the
proposed settlement and to pursue their claims separately. On April 2, 2001, the
United States District Court approved the class action settlement, and the
period from which an appeal could have been taken has expired. The settlement is
subject to various closing conditions. On March 12, 2002, the United States
District Court entered the final distribution order allowing distribution of the
settlement consideration. The Company expects that the consideration will be
issued to the class members in the second quarter of 2002 after the remaining
closing conditions have been met. At a hearing on August 7, 2001, the Chancery
Court approved the derivative settlement.
Under the class action settlement agreements, class members will receive: 1)
five-year unsecured subordinated promissory notes having an aggregate principal
amount of $80.5 million and bearing interest at 7.5% per year; 2) 2,777,778
shares of class A common stock; and 3) warrants to purchase 1,900,000 shares of
class A common stock at an exercise price of $40 per share, with the warrants
expiring five years from the date they are issued. As part of the derivative
settlement agreement described above and in satisfaction of a condition of the
class action settlement, certain officers tendered 1,683,504 shares of class A
common stock to the Company for no consideration in 2001 and we have cancelled
these shares. Accordingly, upon the completion of the distribution, we will have
effected a net issuance of 1,094,274 shares of class A common stock as part of
the class action settlement.
We will have the right, at any time, to prepay the promissory notes, or to
mandatorily convert the promissory notes into shares of class A common stock at
a conversion price equal to 80% of the dollar volume-weighted average
28
trading price per share for all round lot transactions in the stock on the
Nasdaq National Market for the ten trading days ending two days prior to the
date that written notice of conversion has been given. The warrants may be
exercised for cash or by tendering the related unsecured subordinated promissory
notes valued for the purpose of warrant exercise at 133% of their principal
amount plus accrued interest.
Based on the terms of the settlement agreements, we determined that a liability
related to these actions was probable and that the value was reasonably
estimable. Accordingly, during 2000, we established an estimate for the cost of
the litigation settlement of $89.7 million, net of insurance recoveries of $13.0
million. Subsequently, we have updated the estimated value of the settlement
during each successive financial reporting period based upon valuation
assumptions stemming from the settlement. During 2001, we separately evaluated
each element of the settlement agreements and updated the estimated value
assigned to each individual component of the settlement agreements. As a result
of the changes in the estimated value of each element of the securities
litigation settlement, we recorded an aggregate reduction in the provision for
the estimated cost of the litigation settlement of $30.1 million for 2001. The
(reduction in) provision for estimated cost of litigation settlement was
comprised of the following, (in thousands):
2001 2000
-------------- ---------------
Promissory notes to be issued $ (16,700) $ 69,200
Class A common stock to be issued (5,806) 16,500
Warrants to be issued (7,782) 13,034
Pending loss on additional settlement 190 -
Legal fees - 3,245
Administration costs - 750
-------------- ---------------
Total $ (30,098) $ 102,729
Less insurance recoveries - (13,000)
-------------- ---------------
(Reduction in) provision for
estimated cost of litigation settlement $ (30,098) $ 89,729
============== ===============
The final value of the settlement and each of its components may differ
significantly from the estimates currently recorded depending on a variety of
factors including the market value of our class A common stock when issued and
potential changes in market conditions affecting the valuation of the other
securities. Accordingly, we will revalue the estimate of the settlement on a
quarterly basis and at the time the securities are issued. Upon issuance of the
debt and equity securities, we will record such amounts as liabilities or
stockholders' equity based on the nature of the individual securities. Because
of the rights of the holders of the promissory notes to tender the notes in
satisfaction of the exercise price upon exercising the warrants, the warrants
meet the definition of a derivative under SFAS No. 133 and, accordingly, will be
revalued through earnings on a quarterly basis after issuance and until they are
exercised.
We are also involved in patent infringement lawsuits with Business Objects, S.A.
As the actions relating to Business Objects are in a preliminary stage, we are
currently unable to estimate the potential range of gain or loss, if any, and as
such the outcome of this uncertainty is not presently determinable. Accordingly,
no provision for these matters has been made in the accompanying consolidated
financial statements. Additional information regarding these matters is included
below under "Risk Factors."
We are also involved in other legal proceedings through the normal course of
business. Management believes that any unfavorable outcome related to these
other proceedings will not have a material effect on our financial position and
results of operations or cash flows.
Other (Expense) Income, net. Other (expense) income, net includes gains and
losses on foreign currency transactions and, in 2001, includes gains and losses
on certain legal and contract settlements.
Provision for Income Taxes. In 2001, 2000, and 1999, we recorded income tax
expense of $2.5 million, $1.4 million, and $1.2 million, respectively, primarily
related to foreign jurisdictions where we are profitable and withholding taxes
associated with international sales. The provision for income taxes may increase
as we become more profitable in certain foreign jurisdictions where we have
limited or no net operating losses to offset taxable income.
29
Loss from Discontinued Operations. On December 31, 2001, we discontinued the
operations of our Strategy.com subsidiary and shut down its services.
Accordingly, we recorded a loss from abandonment of discontinued operations of
$2.1 million for the year ended December 31, 2001. The loss from abandonment is
primarily due to future aggregate costs of $2.7 million relating to remaining
lease payments associated with abandoned computer equipment, personal property
taxes due under equipment leases, and certain other costs, and is offset by
estimated net income from operations of $635,000 from the measurement date of
December 31, 2001 through the expected disposal date in the first half of 2002.
Loss from discontinued operations for the year ended December 31, 2001,
including this loss from abandonment, was $32.8 million compared to $46.2
million for the year ended December 31, 2000. Included within the loss from
discontinued operations for the year ended December 31, 2001 are restructuring
and impairment charges of $19.4 million. The charge was comprised of a
write-down of impaired assets of $17.3 million and other restructuring costs
associated with severance and exiting facilities. Our historical consolidated
financial statements have been reclassified to present Strategy.com as a
discontinued operation for all periods presented. The loss from abandonment is
based on estimates and actual results could differ under different assumptions
or conditions.
Dividends on and Accretion of Series A, B, C, D and E Convertible Preferred
Stock. In 2001 and 2000, we recorded aggregate preferred stock dividends and
accretion of $10.4 million and $4.7 million, respectively. For the year ended
December 31, 2000, we paid preferred stock dividends valued at $4.1 million
through the issuance of 359,125 shares of class A common stock in lieu of cash
and had accrued preferred stock dividends of $599,000 as of December 31, 2000,
which are included in accrued interest and preferred dividends in the
accompanying consolidated balance sheet. For the year ended December 31, 2001,
we recorded accretion to the carrying value of the beneficial conversion feature
on the series D preferred stock and accretion of offering costs of $1.8 million
and paid aggregate preferred stock dividends valued at $6.2 million through the
issuance of 2,062,668 shares of class A common stock and 175.6 shares of series
D preferred stock. The 175.6 shares of series D preferred stock were deemed to
have been distributed as consideration for a portion of the dividends that had
accrued on the series A preferred stock prior to the June 2001 refinancing
transaction as discussed further below, the fair value of which approximated the
dividend owed. As of December 31, 2001, we had accrued preferred stock dividends
of $2.8 million which are included in accrued interest and preferred dividends
in the accompanying consolidated balance sheet.
Net Gain on Refinancing of Series A Redeemable Convertible Preferred Stock. In
connection with the June 2001 refinancing of our series A redeemable convertible
preferred stock for a combination of cash, common stock and series B, series C,
series D and series E preferred stock as described below, we determined that the
total fair value of the new series of preferred stock and the cash and fair
value of the common stock issued at closing were determined to be lower than the
carrying value of the series A preferred securities being refinanced.
Accordingly, as a result of the refinancing, we recorded a net gain to
additional paid-in capital of $29.4 million attributable to common stockholders.
This net gain represents the excess of the fair value of the total consideration
transferred to the holders of the series A preferred stock of $118.5 million
over the carrying value of those preferred securities of $107.5 million, or
$11.0 million, plus the pro-rata portion of the previously recognized beneficial
conversion feature on the series A preferred shares redeemed of $18.4 million.
The net gain of $29.4 million was recognized as an increase to net income
attributable to common stockholders in the accompanying consolidated statement
of operations for 2001 and was included in the determination of basic and
diluted earnings (loss) per share of continuing operations.
Gain on Early Redemption of Redeemable Convertible Preferred Stock of
Discontinued Operations. On August 29, 2001, we entered into an exchange
agreement pursuant to which MicroStrategy acquired all 16,536,049 shares of
Strategy.com's series A preferred stock in exchange for 3,500,000 shares of
MicroStrategy's class A common stock. Based on the closing price of our class A
common stock of $2.49 per share on the consummation date of the transaction and
the carrying value of Strategy.com's series A preferred stock of $53.6 million
on that same date, the early redemption resulted in a consolidated gain recorded
to additional paid-in capital of $44.9 million. This gain represents the excess
of the carrying value of Strategy.com's preferred stock over the fair value of
our class A common stock exchanged in the transaction. The gain of $44.9 million
was recognized as an increase to net income attributable to common stockholders
in the accompanying consolidated statements of operations and was included in
the determination of basic and diluted earnings (loss) per share of discontinued
operations.
Series A Preferred Stock Beneficial Conversion Feature. During the second
quarter of 2000, given our accumulated deficit, we recorded a $19.4 million
charge to additional paid-in capital attributable to the deemed dividend for the
30
beneficial conversion feature of the series A redeemable convertible preferred
stock. This deemed dividend was determined as the difference between the fair
market value of the class A common stock on the closing date of the private
placement and the effective conversion price. The charge of $19.4 million was
recognized as a decrease to net income attributable to common stockholders in
the accompanying consolidated statements of operations and was included in the
determination of basic and diluted earnings (loss) per share of continuing
operations.
Deferred Revenue and Advance Payments
Deferred revenue and advance payments represent product support and other
services fees that are collected in advance and recognized over the contract
service period and product license and product support and other services fees
relating to multiple element software arrangements for which the fair value of
each element cannot be established. Aggregate deferred revenue and advance
payments were $26.4 million as of December 31, 2001 compared to $68.3 million as
of December 31, 2000. The decline in deferred revenue and advance payments from
2000 to 2001 was primarily due to the following three factors: (1) during the
fourth quarter of 2001, we terminated our contract with Exchange Applications,
Inc. and reclassified the remaining deferred revenue and advance payments of
$17.1 million to contingency from terminated contract in the accompanying
consolidated balance sheet (2) as revenues on existing long-term, multiple
element contracts are recognized, the deferred revenue and advance payments
balance continues to decrease each period, and (3) during 2001, we executed
fewer contracts that contain multiple elements that require revenue deferral
than in prior periods. We expect to recognize approximately $21.0 million of
this deferred revenue and advance payments over the next 12 months; however, the
timing and ultimate recognition of our deferred revenue and advance payments
depends on our performance of various service obligations and the amount of
deferred revenue and advance payments at any date should not be considered
indicative of revenues for any succeeding period.
Liquidity and Capital Resources
Our principal source of liquidity is our cash, cash equivalents, short-term
investments, and on-going collection of our accounts receivable. On December 31,
2001 and 2000, we had $39.8 million and $60.2 million of cash, cash equivalents,
and short-term investments, respectively, of which $439,000 and $25.9 million
was restricted cash as of December 31, 2001 and 2000, respectively.
The following are our contractual obligations associated with our restructuring
plans, debt obligations, and lease commitments:
31
Year ending December 31,
-----------------------------------------------------------------
2002 2003 2004 2005 2006 Thereafter Total
----------- ------------ -------------- ------------ ------------ -------------- -------------
Restructuring-related
obligations:
Leases (1) $ 7,181 $ 2,033 $ 660 $ 628 $ 329 $ 621 $ 11,452
Other 241 - - - - - 241
----------- ------------ -------------- ------------ ------------ -------------- -------------
Restructuring-related
obligations, net 7,422 2,033 660 628 329 621 11,693
----------- ------------ -------------- ------------ ------------- ------------- -------------
Other Obligations:
Working capital
line of credit 1,212 - - - - - 1,212
Interest on working
capital line of credit 13 - - - - - 13
Interest on litigation
settlement
promissory notes (2) 10,566 6,038 6,038 6,038 6,038 1,509 36,227
Operating leases 15,194 11,392 10,031 9,331 6,842 19,330 72,120
----------- ------------ --------------------------- ------------ -------------- -------------
Other obligations 26,985 17,430 16,069 15,369 12,880 20,839 109,572
----------- ------------ --------------------------- ------------ -------------- -------------
Total contractual cash
obligations $ 34,407 $ 19,463 $ 16,729 $ 15,997 $ 13,209 $ 21,460 $ 121,265
=========== ============ ============== ============ ============ ============== =============
(1) Restructuring-related lease obligations include estimated concessions,
commission payments, and other costs associated with marketing our
idle space for sublease of $2.9 million and are reflected net of
estimated sublease income of $13.0 million. Total gross
restructuring-related lease obligations are $21.6 million. We may
incur additional charges and expend more cash than currently expected
if we are unable to sublet our idle space on the estimated terms.
(2) The interest obligation on the promissory notes to be issued in
connection with the securities class action litigation settlement may
be reduced if we exercise our right to convert the promissory notes
into shares of class A common stock prior to their maturity five years
after their issuance date. Additionally, the interest obligation
reflected in this table assumes an issuance date for the promissory
notes of April 1, 2002. Interest charges began accruing on the
settlement hearing date of April 2, 2001. As such, the interest
obligation in 2002 includes interest accrued in 2001 that is expected
to be paid in 2002.
In addition to the contractual cash obligations identified above, we have other
contractual obligations which may be settled in cash or common stock. These
additional contractual obligations, which are discussed more fully below,
include the promissory notes to be issued in connection with the litigation
settlement and our preferred stock.
We also have a credit facility which includes a $30 million line of credit,
subject to specified borrowing base limitations, outstanding letters of credit,
and a covenant to raise $10 million of additional financing. This credit
facility is discussed more fully below.
Operating Activities
Net cash used in operating activities was $27.5 million and $60.6 million for
2001 and 2000, respectively. The decrease in net cash used in operating
activities from 2000 to 2001 was primarily attributable to a decrease in our
operating losses, excluding the restructuring and impairment charges and changes
in the value of our securities litigation settlement recorded during 2001 and
2000, and an improvement in accounts receivable collections offset by an
increase in cash used for payment of accounts payable and accrued expenses.
During the latter part of 2000 and during the second and third quarters of 2001,
we have taken several actions to curtail our operating expenses including a
reduction in headcount, consolidation of facilities, reduction in the use of
consultants and reductions in marketing programs and advertising expenses.
32
Investing Activities
Net cash provided by investing activities was $26.4 million in 2001 as compared
to net cash used in investing activities of $19.0 million in 2000. As discussed
further below, net cash provided by investing activities consisted primarily of
the $25.4 million in restricted cash that was released in connection with the
termination of our prior credit facility. Additionally, we received $2.2 million
in cash relating to the sale of a 5% interest we held in a voice portal
technology company that was purchased by another company, in exchange for
approximately 50% in cash and 50% in publicly-traded common stock of the
acquiring entity. The remaining change in net cash provided by investing
activities from 2000 to 2001 is primarily attributable to a $26.8 million
reduction in capital expenditures. During the 2000 period, we received $39.8
million in proceeds from the sale of short-term investments which was offset by
a $25.9 million requirement to fund a restricted cash account in connection with
our previous credit facility.
Financing Activities
Net cash used in financing activities was $15.7 million and net cash provided by
financing activities was $128.0 million for 2001 and 2000, respectively. On June
19, 2000, we issued 12,500 shares of our series A redeemable convertible
preferred stock in a private placement to institutional investors for $119.6
million, net of offering costs of $5.4 million. On June 14, 2001, we refinanced
all but 650 shares of our series A redeemable convertible preferred stock with a
combination of cash, class A common stock and newly issued preferred stock. The
650 shares of the series A redeemable convertible stock that remain outstanding
have a stated value of $6.5 million. We redeemed or exchanged the remaining
11,850 shares of our series A redeemable convertible preferred stock as follows:
.. $12.5 million stated value of the series A redeemable convertible preferred
stock, or 1,250 shares, were redeemed for $12.5 million in cash;
.. $38.75 million stated value of the series A redeemable convertible
preferred stock and accrued dividends of $1.7 million on all series A
redeemable convertible preferred stock redeemed or exchanged were exchanged
for 5,568,466 shares of class A common stock and $16.3 million stated value
of series D redeemable convertible preferred stock, or 1,626.1 shares, with
a fixed conversion price of $5.00 per share;
.. $33.125 million stated value of the series A redeemable convertible
preferred stock were exchanged for an equivalent stated value of series B
redeemable convertible preferred stock, or 3,312.5 shares, with a fixed
conversion price of $12.50 per share, subject to adjustment at maturity if
we elect to mandatorily convert these shares into class A common stock;
.. $27.825 million stated value of the series A redeemable convertible
preferred stock were exchanged for an equivalent stated value of series C
redeemable convertible preferred stock, or 2,782.5 shares, with a fixed
conversion price of $17.50 per share, subject to adjustment at maturity if
we elect to mandatorily convert these shares into class A common stock; and
.. $6.3 million stated value of the series A redeemable convertible preferred
stock were exchanged for an equivalent stated value of series E redeemable
convertible preferred stock, or 630 shares.
The series B preferred stock and the series C preferred stock mature three years
after the date of issuance and accrue cumulative dividends at a rate of 12.5%
per annum, payable in cash or shares of class A common stock at our option,
subject to satisfaction of certain conditions. Prior to maturity, holders have
the right to convert their series B preferred stock and series C preferred stock
into shares of our class A common stock. At our option, the series B and series
C preferred stock may be redeemed at maturity at stated value plus accrued
dividends or mandatorily converted into class A common stock at a conversion
price of 95% of the average of the dollar volume-weighted average price of the
class A common stock during the 30 consecutive trading days immediately
preceding the maturity date.
The series D preferred stock matures three years after the date of issuance,
does not carry any dividend rate, and has a fixed conversion price of $5 per
share. At maturity, the series D preferred stock mandatorily converts into class
A
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common stock at the fixed conversion price of $5 per share. In addition, prior
to maturity, holders have the right to convert their series D preferred stock
into shares of our class A common stock. In November 2001, holders of the series
D preferred stock exercised their right to convert series D preferred stock and
converted 175 shares of series D preferred stock into shares of class A common
stock at the fixed conversion price of $5 per share. As a result of the
conversion, we issued 350,000 shares of class A common stock. The difference
between the carrying value of the 175 shares of series D preferred stock at the
time of conversion and the par value of the class A common stock was recorded as
an increase in additional paid-in capital.
We had the right to redeem the series E preferred stock prior to December 11,
2001 for 105% of the stated value plus accrued and unpaid dividends if redeemed
on or before October 27, 2001, 110% of the stated value plus accrued and unpaid
dividends if redeemed from October 28, 2001 through December 11, 2001, and at
120% of the stated value plus accrued dividends if redeemed thereafter. In
addition, the holders of the series E preferred stock had the right to require
us to redeem the series E preferred stock at specified prices upon specified
financing transactions or other events. Upon the closing of the Exchange
Agreement pursuant to which we acquired the outstanding Strategy.com series A
preferred stock, the series E holders exercised their redemption right and on
September 10, 2001 we paid $6.8 million in cash to redeem all 630 shares of the
series E preferred stock for 105% of the stated value of $6.3 million plus
accrued and unpaid dividends of $155,000. This cash redemption payment was
substantially equivalent to the carrying value of the series E preferred stock
on the date of redemption.
Each series of the preferred stock is also redeemable upon certain triggering
events as defined in the respective Certificate of Designations, Preferences and
Rights of each series. In the event of redemption upon a triggering event, the
preferred stock is redeemable, with respect to each series of preferred stock,
at the greater of 125% of the stated value of such shares of preferred stock
plus accrued and unpaid dividends or the product of the number of shares of
class A common stock into which each series of preferred stock is convertible
multiplied by the closing sale price of our class A common stock on the day
immediately before the triggering event occurs, except for the series D
preferred stock which is redeemable at the greater of 100% of its stated value
or such product. As of December 31, 2001, none of these triggering events had
occurred. In addition, upon a change of control of the Company, each holder of
series A, series B, and series C preferred stock shall have the right, at the
holder's option, to require us to redeem all or a portion of the preferred stock
at 125% of the stated value of such shares of preferred stock plus accrued and
unpaid dividends.
The remaining 650 shares of series A preferred stock with a $6.5 million stated
value accrue dividends at a rate of 7% per annum, payable in cash or shares of
class A common stock at our election. Following a conversion price reset
adjustment on July 5, 2001, the conversion price of the 650 remaining shares of
series A preferred stock was adjusted downward from $33.39 per share to $3.08
per share based on the average of the dollar-volume weighted average price of
the class A common stock during the ten trading days immediately preceding July
5, 2001. As a result of this adjustment to the conversion price, the series A
preferred stock is convertible, as of December 31, 2001, at the option of the
holders, into 2,108,247 shares of class A common stock, not including shares of
class A common stock that may be issuable as dividends on the series A preferred
stock. In addition, at our option, the 650 remaining shares of series A
preferred stock may be redeemed at its June 19, 2002 maturity at stated value
plus accrued dividends or mandatorily converted into class A common stock based
on a conversion price equal to 95% of the average of the dollar volume-weighted
average price of the class A common stock during the 30 consecutive trading days
immediately preceding the maturity date. Additionally, at our option, we may
extend the maturity of the series A preferred stock for up to an additional two
years. If we elect to extend the maturity of the series A preferred stock, the
conversion price may be adjusted based on the average of the dollar-volume
weighted average price the class A common stock on each trading day during the
ten days immediately following each anniversary of the original maturity, if
such adjustment would result in a lower conversion price. The preferred stock is
also redeemable upon certain triggering events as defined in the Certificate of
Designations, Preferences and Rights of the series A preferred stock. In the
event of redemption upon a triggering event, the series A preferred stock is
redeemable at the greater of 125% of the conversion amount or an agreed upon
formula. As of December 31, 2001, none of these triggering events had occurred.
In an initial closing in October 2000, Strategy.com issued 13,401,253 shares of
series A redeemable convertible preferred stock to a group of institutional and
accredited investors in exchange for $39.8 million, net of offering costs of
approximately $3.0 million. In January 2001, Strategy.com completed this round
of financing in a second closing and issued an additional 3,134,796 shares for
proceeds of $10.0 million. On August 29, 2001, we entered
34
into an exchange agreement pursuant to which MicroStrategy acquired all
16,536,049 shares of Strategy.com's series A preferred stock in exchange for
3,500,000 shares of MicroStrategy's class A common stock.
In March 1999, we entered into a line of credit agreement with a commercial bank
which provided for a $25.0 million unsecured revolving line of credit for
general working capital purposes. In May 2000, we entered into a modification of
the line of credit agreement, which, among other things, increased the aggregate
credit available to include an additional letter of credit, removed any
financial covenants and cured any financial covenant defaults. The line of
credit accrued interest at LIBOR plus 1.75%, included a 0.2% unused line of
credit fee, and required monthly payments of interest. At December 31, 2000, the
line of credit was secured by $25.9 million of cash and cash equivalents and, as
such, was classified as restricted cash in the accompanying consolidated balance
sheet. The cash was restricted through February 2001, at which time the line of
credit agreement was terminated upon the closing of a new credit facility
agreement described below.
On February 9, 2001, we entered into a loan and security agreement (the "New
Credit Facility") with Foothill Capital, a subsidiary of Wells Fargo Bank, which
provided for aggregate borrowing capacity of up to $30.0 million to be used for
general working capital purposes. The New Credit Facility consisted of a $10.0
million term loan and a revolving line of credit for up to $20.0 million,
subject to specified borrowing base limitations, and replaced the previous line
of credit agreement. During the first and second quarters of 2001, we repaid
$1.1 million of the term loan under the New Credit Facility through the use of
the revolving line of credit.
On June 14, 2001, we entered into an Amended and Restated Loan and Security
Agreement (the "Modified Credit Facility"), which replaced the New Credit
Facility. The Modified Credit Facility provides for aggregate borrowing capacity
of up to $30 million, including a $5 million maintenance receivables backed
sub-facility, subject to specified borrowing base limitations based on eligible
maintenance receivables. The maximum amount available under the maintenance
receivables backed sub-facility decreases by $278,000 per month until March
2002, at which time the then remaining balance of $2.5 million may remain
outstanding until maturity. Upon the closing of the Modified Credit Facility, we
also repaid $8.9 million of the term loan under the New Credit Facility and drew
$5.0 million under the Modified Credit Facility. During the third quarter of
2001, we repaid $5.2 million of the balance under the Modified Credit Facility.
At December 31, 2001, we had $1.2 million outstanding under the Modified Credit
Facility. After consideration of outstanding letters of credit of $5.8 million,
we have $23.0 million available for future drawdowns, subject to borrowing base
limitations discussed above. After taking into consideration these borrowing
base limitations, $1.9 million of additional borrowing capacity under the
Modified Credit Facility was available at December 31, 2001. Based upon recent
trends in the levels of our accounts receivable and borrowing base limitations,
we expect that our available borrowing capacity will continue to be
substantially lower than the maximum $30 million aggregate borrowing capacity
under the Modified Credit Facility. As of March 1, 2002, we were unable to
borrow against our line of credit because the outstanding letters of credit
exceeded our collateral requirements.
Borrowings under the Modified Credit Facility bear interest at a variable rate.
The borrowing rate in effect at December 31, 2001 was 6.25%. The Modified Credit
Facility also includes an annual 1.50% unused letter of credit fee. Monthly
principal payments are due to the extent that the balance outstanding exceeds
the borrowing base limitations or the maintenance receivables backed
sub-facility exceeds the maximum month-end amount available. The Modified Credit
Facility matures in February 2004 and is collateralized by substantially all of
our domestic assets. Under the terms of the Modified Credit Facility, we are
required to maintain compliance with various covenants, including certain
financial covenants, the most restrictive of which are achieving certain minimum
earnings amounts, maintaining certain cash balances domestically, and limiting
the amount of additional indebtedness that we may incur. At December 31, 2001,
we were in compliance with all covenants. Additionally, the Modified Credit
Facility included a covenant to raise $10.0 million of additional financing by
March 31, 2002 through equity financing, subordinated debt, or net proceeds from
the sale of non-core assets, as defined in the agreement. On February 28, 2002,
this covenant was modified to extend the date by which this additional financing
is required to June 30, 2002.
As part of the class action litigation settlement agreement, in addition to
issuing class A common stock, we will issue five-year unsecured subordinated
promissory notes having an aggregate principal amount of $80.5 million and
bearing interest at 7.5% per year. In connection with this arrangement, we
expect to pay approximately $6.0 million per year in interest charges that began
accruing on the settlement hearing date of April 2, 2001. We expect to issue
35
the promissory notes during the first half of 2002. Interest on the notes is
payable semi-annually with the first interest payment payable on the six month
anniversary of the issuance. Also as part of the settlement, we will issue
warrants to purchase 1,900,000 shares of class A common stock at an exercise
price of $40 per share, with the warrants expiring five years from the date they
are issued.
In November 1999, we signed a three-year master lease agreement to lease up to
$40.0 million of computer equipment, of which we leased approximately $17.8
million as of December 31, 2001. Amounts outstanding under the lease schedules
underlying the master lease bear interest at a rate equal to interest on
three-year U.S. treasury notes plus 1.5% to 2.0% and vary in terms from two to
three years. Future drawdowns and interest rates under the lease agreement are
subject to our credit worthiness. Currently, we are unable to draw down
additional amounts under the lease agreement. However, we expect only limited,
near-term, computer equipment purchase needs that we expect will be met through
cash on hand and other financial resources.
As discussed above, we have taken various actions to realign our cost structure
to better match our expected revenues including reducing our workforce, reducing
and limiting discretionary operating expenses, reducing capital expenditures,
and discontinuing the operations of Strategy.com. Additionally, we are exploring
alternative financing arrangements, which include credit facilities, the sale of
equity in MicroStrategy, or other alternative financing sources. Alternative
debt or equity financing may not be available on acceptable terms. If financing
is not available on acceptable terms and/or if we do not achieve revenues at
anticipated levels, we will need to take further actions to reduce costs in
order to minimize losses from operations. Management believes that existing
cash, cash generated internally by operations, if any, and the Modified Credit
Facility entered into in June 2001 will be sufficient to meet our working
capital requirements and anticipated capital expenditures through the end of
2002. Our liquidity and capital resources and ability to generate revenues are
subject to various business and economic risks discussed below under "Risk
Factors."
Recent Accounting Standards
We adopted SFAS No. 133 as of January 1, 2001. During 2001, the adoption of SFAS
No. 133 did not have a material effect on our financial position or results of
operations.
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations," which addresses the financial accounting and
reporting for business combinations and supersedes Accounting Principles Board
Opinion No. 16, "Business Combinations," and SFAS No. 38, "Accounting for
Preacquisition Contingencies of Purchased Enterprises," and is applicable to all
business combinations initiated after June 30, 2001. SFAS No. 141 requires
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting and broadens the criteria for recording
intangible assets separate from goodwill. Recorded goodwill and intangibles will
be evaluated against the new criteria and may result in certain intangibles
being reclassified to goodwill, or alternatively, amounts initially recorded as
goodwill may be separately identified and recognized apart from goodwill. We do
not expect that the adoption of SFAS No. 141 will have a material impact on our
consolidated financial statements.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which is effective beginning in fiscal year 2002. This statement
addresses financial accounting and reporting for intangible assets acquired
individually or with a group of other assets at acquisition. This statement also
addresses financial accounting and reporting for goodwill and other intangible
assets subsequent to their acquisition. Under SFAS No. 142, goodwill will not be
amortized. Instead, the statement requires that entities perform an initial
impairment assessment upon adoption and then again on at least an annual basis
or upon the occurrence of triggering events, if earlier, to identify potential
goodwill impairment and measure the amount of goodwill impairment loss to be
recognized, if any. An impairment loss is recognized when the carrying amount of
reporting unit goodwill exceeds the implied fair value of that goodwill. After a
goodwill impairment loss is recognized, the adjusted carrying amount of the
goodwill shall be its new accounting basis. We expect that amortization of
goodwill and intangible assets will not change substantially in connection with
the adoption of this standard on January 1, 2002. Additionally, transitional
impairments, if any, are not expected to be material; however, impairment
reviews may result in future periodic write-downs.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which is effective beginning in fiscal year
2002. SFAS No. 144 supersedes previous guidance for financial
36
accounting and reporting for the impairment or disposal of long-lived assets and
for segments of a business to be disposed of. SFAS No. 144 retains the
fundamental provisions of existing generally accepted accounting principles with
respect to recognition and measurement of long-lived asset impairment contained
in SFAS No. 121, "Accounting for the Impairment of Long Lived Assets and for
Long-Lived Assets to be Disposed Of." However, SFAS No. 144 provides new
guidance intended to address certain significant implementation issues
associated with SFAS No. 121, including expanded guidance with respect to
appropriate cash flows to be used, whether recognition of any long-lived asset
impairment is required, and if required, how to measure the amount of
impairment. SFAS No. 144 also requires that any net assets to be disposed of by
sale be reported at the lower of carrying value or fair market value less costs
to sell, and expands the reporting of discontinued operations to include any
component of an entity with operations and cash flows that can be clearly
distinguished from the rest of the company. We are currently assessing the
impact that the adoption of this statement will have on our consolidated
financial statements.
Risk Factors
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations.
If any of the following risks actually occur, our business, financial condition
or results of operations could be materially adversely affected. In such case,
the trading price of our class A common stock could decline and you may lose all
or part of your investment.
We have experienced losses in the past and expect future losses through at least
the first half of 2002
We have not achieved profitability and have incurred significant operating
losses in each of the last five years. We incurred net losses of $80.9 million,
$261.3 million and $33.7 million in the years ended December 31, 2001, 2000 and
1999, respectively. As of December 31, 2001, our accumulated deficit was $380.1
million. We expect our gross revenue to decline from the fiscal year ended
December 31, 2001 to the fiscal year ending December 31, 2002. In connection
with our April and September 2001 corporate restructurings, we recorded
restructuring and impairment charges of $39.5 million for the year ended
December 31, 2001, respectively.
We did not generate net income for the year ending December 31, 2001 and do not
expect to do so through at least the first half of 2002. Even if we are able to
generate net income, we may not be able to sustain or increase profitability on
a quarterly or annual basis in the future. If revenue declines more
significantly than we anticipate, or if operating expenses exceed our
expectations or cannot be adjusted accordingly, our business, results of
operations and financial condition will be materially and adversely affected.
Our quarterly operating results, revenues and expenses may fluctuate
significantly, which could have an adverse effect on the market price of our
stock
For a number of reasons, including those described below, our operating results,
revenues and expenses may vary significantly from quarter to quarter. These
fluctuations could have an adverse effect on the market price of our class A
common stock.
Fluctuations in Quarterly Operating Results. Our quarterly operating results may
fluctuate as a result of:
. the size, timing and execution of significant orders and shipments;
. the mix of products and services of customer orders, which can affect
whether we recognize revenue upon the signing and delivery of our
software products or whether revenue must be recognized as work
progresses or over the entire contract period;
. the timing of new product announcements;
. changes in our pricing policies or those of our competitors;
37
. market acceptance of business intelligence software generally and of new
and enhanced versions of our products in particular;
. the length of our sales cycles;
. changes in our operating expenses;
. personnel changes;
. our success in adding to our indirect distribution channels;
. utilization of our consulting personnel, which can be affected by delays
or deferrals of customer implementation of our software products and
consulting, education and support services;
. changes in foreign currency exchange rates; and
. seasonal factors, such as our traditionally lower pace of new sales in
the summer.
Limited Ability to Adjust Expenses. We base our operating expense budgets on
expected revenue trends. Many of our expenses, such as office and equipment
leases, are relatively fixed. We may be unable to adjust spending quickly enough
to offset any unexpected revenue shortfall. Accordingly, any shortfall in
revenue may cause significant variation in operating results in any quarter.
Based on the above factors, we believe that quarter-to-quarter comparisons of
our operating results are not a good indication of our future performance. It is
possible that in one or more future quarters, our operating results may be below
the expectations of public market analysts and investors. In that event, the
trading price of our class A common stock may fall.
We may lose sales, or sales may be delayed, due to the long sales and
implementation cycles for our products, which would reduce our revenues
To date, our customers have typically invested substantial time, money and other
resources and involved many people in the decision to license our software
products and purchase our consulting and other services. As a result, we may
wait nine months or more after the first contact with a customer for that
customer to place an order while they seek internal approval for the purchase of
our products and/or services. During this long sales cycle, events may occur
that affect the size or timing of the order or even cause it to be canceled. For
example, our competitors may introduce new products, or the customer's own
budget and purchasing priorities may change.
Even after an order is placed, the time it takes to deploy our products and
complete consulting engagements varies widely from one customer to the next.
Implementing our product can sometimes last several months, depending on the
customer's needs and may begin only with a pilot program. It may be difficult to
deploy our products if the customer has complicated deployment requirements,
which typically involve integrating databases, hardware and software from
different vendors. If a customer hires a third party to deploy our products, we
cannot be sure that our products will be deployed successfully.
Our recognition of deferred revenue and advance payments is subject to future
performance obligations and may not be representative of revenues for succeeding
periods
Our deferred revenue and advance payments were approximately $26.4 million as of
December 31, 2001. The timing and ultimate recognition of our deferred revenue
and advance payments depend on our performance of various service obligations.
Because of the possibility of customer changes in development schedules, delays
in implementation and development efforts and the need to satisfactorily perform
product support services, deferred revenue and advance payments at any
particular date may not be representative of revenue for any succeeding period.
38
We may need additional financing which could be difficult to obtain
We may require additional external financing through credit facilities, sale of
additional debt or equity securities in MicroStrategy or by obtaining other
financing facilities to support our operations. Obtaining additional financing
will be subject to a number of factors, including:
. market conditions;
. our operating performance; and
. investor sentiment.
These factors may make the timing, amount, terms and conditions of additional
financing unattractive to us. If we are unable to raise capital needed to fund
our operations, our business, operating results and financial condition may be
materially and adversely affected. Our credit facility contains a covenant
obligating us to obtain a minimum of $10 million in additional financing on or
before June 30, 2002. If we are unable to obtain a waiver or extension of this
covenant or are unable to obtain this financing on acceptable terms, this
covenant could have an adverse effect on our liquidity and financial condition.
We face litigation that could have a material adverse effect on our business,
financial condition and results of operations
We and certain of our directors and executive officers are named as defendants
in a private securities class action lawsuit and a shareholder derivative
lawsuit relating to the restatement of our 1999, 1998 and 1997 financial
results. Although we have entered into agreements to settle such lawsuits and
the settlements have received court approval, both settlements are subject to
various closing conditions. If the agreed upon settlements are not consummated,
it is possible that we may be required to pay substantial damages or settlement
costs which could have a material adverse effect on our financial condition or
results of operation.
The issuance of class A common stock as part of the proposed settlement of class
action litigation and the conversion of notes issued as part of the litigation
settlement could result in a substantial number of additional shares of class A
common stock being issued
The agreements we entered into to settle the private securities class action
lawsuit and the derivative suit relating to the restatement of our 1999, 1998
and 1997 financial results require us to issue to members of the class 2,777,778
shares of class A common stock. At the time of that issuance, some of our
officers will tender to us for no consideration 1,683,504 shares of class A
common stock for cancellation, resulting in a net issuance of 1,094,274 shares
of class A common stock. In addition, the settlement agreements require the
issuance of five-year unsecured subordinated promissory notes having an
aggregate principal amount of $80.5 million. We would have the option at any
time prior to the expiration of the five-year term of the notes to convert the
notes into a number of shares of class A common stock equal to the principal
amount of the notes being converted divided by 80% of the dollar volume-weighted
average trading price of the class A common stock over a ten day period
preceding our delivery of a notice of conversion, which could result in a
substantial number of shares of class A common stock being issued. For example,
if the conversion price of the notes were based on the dollar volume-weighted
average trading price of the class A common stock during the 10 trading days
ending March 1, 2002, we would be obligated to issue 36,133,216 shares of class
A common stock if we elected to convert the notes. In addition, if we elect to
convert the notes at prices that would result in the issuance of shares with a
market value in excess of the value of the notes reflected on our balance sheet,
we would incur a non-cash charge to earnings at the time of conversion equal to
the amount of such excess, and this charge could be substantial. The issuance of
a substantial number of shares of class A common stock as part of the litigation
settlement and future conversions of the notes issued in the litigation
settlement may result in substantial dilution to the interests of holders of
class A common stock and may result in downward pressure on the price of our
class A common stock.
The conversion of the shares of our preferred stock could result in substantial
numbers of additional shares of class A common stock being issued if our market
price declines during periods in which the conversion
39
price of the preferred stock may adjust
Our series B preferred stock, series C preferred stock and series D preferred
stock are convertible into shares of our class A common stock at conversion
prices currently equal to $12.50, $17.50 and $5.00 per share, respectively. The
outstanding shares of series B preferred stock, series C preferred stock and
series D preferred stock would currently convert into 7,142,200 shares of class
A common stock, plus a number of shares reflecting accrued but unpaid dividends
as of the conversion date. However, if the holders of the series B preferred
stock and series C preferred stock do not convert their shares into shares of
class A common stock prior to their maturity three years from the date of
issuance, and if we do not redeem their outstanding shares of series B preferred
stock and series C preferred stock at maturity, the conversion price for such
shares will be reset to a price equal to 95% of the dollar volume-weighted
average price of our class A common stock for the 30 trading days prior to the
maturity date. If the market price at maturity of our class A common stock is
less than the applicable conversion price, the number of shares of class A
common stock that we could be required to issue upon conversion of the series B
preferred stock and series C preferred stock would increase. For instance, if
the market price of our class A common stock on the maturity date of our series
B preferred stock and series C preferred stock were $2.72, the closing sale
price of our class A common stock as of March 1, 2002, the holders of the series
B preferred stock and series C preferred stock did not elect to convert any of
their shares prior to the maturity date and we did not redeem such shares on the
maturity date, we would be required to issue a total of 22,408,088 shares of our
class A common stock upon conversion of such shares at maturity plus a number of
shares reflecting accrued but unpaid dividends.
We currently have 650 shares of our series A preferred stock outstanding. As of
March 1, 2002, shares of series A preferred stock are convertible into 2,108,247
shares of class A common stock based on the current conversion price equal to
$3.08 per share. At our option, the series A preferred stock may be redeemed on
the maturity date of June 19, 2002 at stated value plus accrued dividends or
mandatorily converted into class A common stock based on a conversion price
equal to 95% of the average of the dollar volume-weighted average price of the
class A common stock during the 30 consecutive trading days immediately
preceding the maturity date. Additionally, at our option, we may extend the
maturity of the series A preferred stock for up to an additional two years. If
we elect to extend the maturity of the series A preferred stock, the conversion
price may be adjusted based on the average of the dollar-volume weighted average
price the class A common stock on each trading day during the ten days
immediately following each anniversary of the original maturity, if such
adjustment would result in a lower conversion price. The conversion price of the
series A preferred stock may also be adjusted upon the occurrence of various
events, including the failure to maintain the effectiveness of the registration
statement to which these shares relate and the issuance of certain equity
securities. As a result, the lower the price of our class A common stock at
these intervals, the greater the number of shares the holder will receive upon
conversion after any such adjustment.
To the extent the shares of our preferred stock are converted or dividends on
these shares are paid in shares of class A common stock rather than cash, a
significant number of shares of class A common stock may be sold into the
market, which could decrease the price of our class A common stock and encourage
short sales. Short sales could place further downward pressure on the price of
our class A common stock. In that case, we could be required to issue an
increasingly greater number of shares of our class A common stock upon future
conversions of the series A preferred stock, series B preferred stock and series
C preferred stock as a result of the annual and other adjustments described
above, sales of which could further depress the price of our class A common
stock.
The conversion of and the payment of dividends in shares of class A common stock
in lieu of cash on the preferred stock may result in substantial dilution to the
interests of other holders of our class A common stock. No holder may convert
its preferred stock if upon such conversion the holder together with its
affiliates would have acquired a number of shares of class A common stock during
the 60-day period ending on the date of conversion which, when added to the
number of shares of class A common stock held at the beginning of such 60-day
period, would exceed 9.99% of our then outstanding class A common stock,
excluding for purposes of such determination shares of class A common stock
issuable upon conversion of shares of preferred stock which have not been
converted. Nevertheless, a holder may still sell a substantial number of shares
in the market. By periodically selling shares into the market, an individual
holder could eventually sell more than 9.99% of our outstanding class A common
stock while never holding more than 9.99% at any specific time.
The conversion and other features of our preferred stock will have the effect of
reducing earnings per share if we were to generate net income in any future
period.
40
We may be required to pay substantial penalties to the holders of the preferred
shares if specific events occur
In accordance with the terms of the agreements relating to the issuance of our
redeemable convertible preferred stock, we are required to pay substantial
penalties to a holder of preferred stock under specified circumstances,
including, among others:
. nonpayment of dividends on the series A preferred stock, series B
preferred stock and series C preferred stock in a timely manner;
. failure to deliver shares of our class A common stock upon conversion of
the preferred shares after a proper request;
. nonpayment of the redemption price at maturity of any remaining series A
preferred stock, series B preferred stock, and series C preferred stock;
or
. the unavailability of the registration statement relating to the shares
of class A common stock issuable upon conversion of and in lieu of cash
dividends on the preferred stock to cover the resale of such shares for
more than brief intervals.
These penalties are generally paid in the form of interest payments, subject to
any restrictions imposed by applicable law. In the third quarter of 2000, we
incurred $578,000 in penalties as a result of a 14-day delay in the filing of a
registration statement registering the shares of class A common stock issuable
upon conversion of and in lieu of dividends on the series A preferred stock.
We have substantial real estate lease commitments for unoccupied space and if we
are unable to sublet this space on acceptable terms our operating results and
financial condition could be adversely affected
We are party to real estate leases relating to approximately 139,000 square feet
that are unoccupied. We have established a restructuring reserve of $11.0
million related to the costs of disposition of this space as of December 31,
2001. In establishing this reserve, we have assumed that we will be able to
sublet the available space and receive approximately $13.0 million of sublease
income relating to this space. We may not be able to sublet this space on the
assumed terms. If we are unable to do so, we would incur additional
restructuring costs relating to these leases and would expend more cash than
currently expected, which could have an adverse affect on our operating results
and financial condition.
We face intense competition, which may lead to lower prices for our products,
reduced gross margins, loss of market share and reduced revenue
The markets for business intelligence software, analytical applications and
narrowcast messaging technologies are intensely competitive and subject to
rapidly changing technology. In addition, many of our competitors in these
markets are offering, or may soon offer, products and services that may compete
with MicroStrategy products.
MicroStrategy's most direct competitors provide:
. business intelligence software;
. OLAP tools;
. query and reporting tools;
. web-based static reporting tools; and
. information delivery and proactive reporting.
41
Each of these markets is discussed more fully below.
Business Intelligence Software. Makers of business intelligence software provide
business intelligence capabilities designed for integration, customization and
application development. Leading analyst firms classify companies such as
Microsoft, Oracle, Hyperion Solutions, SAP AG, Computer Associates and SAS to be
leading providers of business intelligence software.
OLAP Tools. Companies that build software to perform online analytical
processing (OLAP) provide offerings competitive with the core MicroStrategy 7
platform. Whether web-based or client-server, these tools give end users the
ability to query underlying data sources without having to hand code structured
query language queries. Most OLAP tools allow users to build their own
calculations and specify report layouts and other options. Additionally, OLAP
tools provide users the ability to navigate throughout the underlying data in an
easy, graphical mode, often referred to as drilling. Providers of OLAP tools
include Cognos, Hyperion Solutions, Brio Software, IBM, Crystal Decisions and
Microsoft.
Query and Reporting Tools. Query and reporting tools allow large numbers of end
users to gain access to pre-defined reports for simple analysis. Often the end
users are able to specify some sort of run-time criteria that customizes the
result set for that particular person. Some limited drilling is also provided.
Companies which produce query and reporting tools include Business Objects,
Cognos, Oracle, Crystal Decisions, nQuire, Information Builders and Brio
Software.
Web-based Static Reporting Tools. Companies that offer software to deliver
pre-built reports for end user viewing and consumption can also compete with
MicroStrategy. These applications often lack the sophistication, robustness and
scalability of MicroStrategy's platform, but can be attractive for small,
departmental applications. Vendors in this category include Actuate, Business
Objects, Crystal Decisions, Microsoft and SAS.
Information Delivery and Proactive Reporting. Companies that focus on the
proactive delivery of information, via e-mail, website, or other medium can
compete with MicroStrategy's offerings. Typically, these tools serve to push out
compiled reports on a scheduled basis to sets of users based on job type.
MicroStrategy software has integrated this technology into the MicroStrategy 7
platform. Vendors of such technology include Actuate and Business Objects.
Many of our competitors have longer operating histories, significantly greater
financial, technical, marketing or other resources, and greater name recognition
than we do. In addition, many of our competitors have strong relationships with
current and potential customers and extensive knowledge of the business
intelligence industry. As a result, they may be able to respond more quickly to
new or emerging technologies and changes in customer requirements or devote
greater resources to the development, promotion and sale of their products than
we can. Increased competition may lead to price cuts, reduced gross margins and
loss of market share. We cannot be sure that we will be able to compete
successfully against current and future competitors or that the competitive
pressures we face will not have a material adverse effect on our business,
operating results and financial condition.
Current and future competitors may also make strategic acquisitions or establish
cooperative relationships among themselves or with others. By doing so, they may
increase their ability to meet the needs of our potential customers. Our current
or prospective indirect channel partners may establish cooperative relationships
with our current or future competitors. These relationships may limit our
ability to sell our products through specific distribution channels.
Accordingly, new competitors or alliances among current and future competitors
may emerge and rapidly gain significant market share. These developments could
harm our ability to obtain maintenance revenues for new and existing product
licenses on favorable terms.
If we are unable to recruit or retain skilled personnel, or if we lose the
services of any of our key management personnel, our business, operating results
and financial condition would be materially adversely affected
Our future success depends on our continuing ability to attract, train,
assimilate and retain highly skilled personnel. Competition for these employees
is intense. We may not be able to retain our current key employees or attract,
train, assimilate or retain other highly skilled personnel in the future. In the
second and third quarters of 2001, we
42
implemented corporate restructuring plans which included a reduction in our
worldwide workforce of approximately one-third. These reductions in force could
adversely impact our employee morale and our ability to attract and retain
employees. Our future success also depends in large part on the continued
service of key management personnel, particularly Michael J. Saylor, our
Chairman and Chief Executive Officer, and Sanju K. Bansal, our Vice Chairman,
Executive Vice President and Chief Operating Officer. If we lose the services of
one or both of these individuals or other key personnel, or if we are unable to
attract, train, assimilate and retain the highly skilled personnel we need, our
business, operating results and financial condition could be materially
adversely affected.
Our inability to develop and release product enhancements and new products to
respond to rapid technological change in a timely and cost-effective manner
would have a material adverse effect on our business, operating results and
financial condition
The market for our products is characterized by rapid technological change,
frequent new product introductions and enhancements, changing customer demands
and evolving industry standards. The introduction of products embodying new
technologies can quickly make existing products obsolete and unmarketable. We
believe that our future success depends largely on three factors:
. our ability to continue to support a number of popular operating systems
and databases;
. our ability to maintain and improve our current product line; and
. our ability to rapidly develop new products that achieve market
acceptance, maintain technological competitiveness and meet an expanding
range of customer requirements.
Business intelligence applications are inherently complex, and it can take a
long time to develop and test major new products and product enhancements. In
addition, customers may delay their purchasing decisions because they anticipate
that new or enhanced versions of our products will soon become available. We
cannot be sure that we will succeed in developing and marketing, on a timely and
cost-effective basis, product enhancements or new products that respond to
technological change, introductions of new competitive products or customer
requirements, nor can we be sure that our new products and product enhancements
will achieve market acceptance.
The emergence of new industry standards may adversely affect our ability to
market our existing products
The emergence of new industry standards in related fields may adversely affect
the demand for our existing products. This could happen, for example, if new web
standards and technologies emerged that were incompatible with customer
deployments of our products. Although the core database component of our
business intelligence solutions is compatible with nearly all enterprise server
hardware and operating system combinations, such as OS/390, AS/400, Unix and
Windows, our application server component currently runs only on the Windows NT
and Windows 2000 operating systems. Therefore, our ability to increase sales
currently depends on the continued acceptance of the Windows NT and Windows 2000
operating systems.
If the market for business intelligence software fails to grow as we expect, or
if businesses fail to adopt our products, our business, operating results and
financial condition would be materially adversely affected
Nearly all of our revenues to date have come from sales of business intelligence
software and related technical support, consulting and education services. We
expect these sales to account for a large portion of our revenues for the
foreseeable future. Although demand for business intelligence software has grown
in recent years, the market for business intelligence software applications is
still emerging. Resistance from consumer and privacy groups to increased
commercial collection and use of data on spending patterns and other personal
behavior may impair the further growth of this market, as may other
developments. We cannot be sure that this market will continue to grow or, even
if it does grow, that businesses will adopt our solutions. We have spent, and
intend to keep spending, considerable resources to educate potential customers
about business intelligence software in general and our solutions in particular.
However, we cannot be sure that these expenditures will help our products
achieve any additional market acceptance. If the market fails to grow or grows
more slowly than we currently expect, our business, operating results and
financial condition would be materially adversely affected.
43
Because of the rights of our two classes of common stock, and because we are
controlled by our existing holders of class B common stock, these stockholders
could transfer control of MicroStrategy to a third party without anyone else's
approval or prevent a third party from acquiring MicroStrategy
We have two classes of common stock: class A common stock and class B common
stock. Holders of our class A common stock generally have the same rights as
holders of our class B common stock, except that holders of class A common stock
have one vote per share while holders of class B common stock have ten votes per
share. As of March 1, 2002, holders of our class B common stock owned or
controlled 46,531,368 shares of class B common stock, or 91.0% of the total
voting power. Michael J. Saylor, our Chairman and Chief Executive Officer,
controlled 1,041,420 shares of class A common stock and 37,090,235 shares of
class B common stock, or 72.7% of total voting power, as of March 1, 2002.
Accordingly, Mr. Saylor is able to control MicroStrategy through his ability to
determine the outcome of elections of our directors, amend our certificate of
incorporation and bylaws and take other actions requiring the vote or consent of
stockholders, including mergers, going-private transactions and other
extraordinary transactions and their terms.
Our certificate of incorporation allows holders of class B common stock, almost
all of whom are current employees or former employees of our company or related
parties, to transfer shares of class B common stock, subject to the approval of
stockholders possessing a majority of the outstanding class B common stock. Mr.
Saylor or a group of stockholders possessing a majority of the outstanding class
B common stock could, without seeking anyone else's approval, transfer voting
control of MicroStrategy to a third party. Such a transfer of control could have
a material adverse effect on our business, operating results and financial
condition. Mr. Saylor will also be able to prevent a change of control of
MicroStrategy, regardless of whether holders of class A common stock might
otherwise receive a premium for their shares over the then current market price.
We rely on our strategic channel partners and if we are unable to develop or
maintain successful relationships with them, our business, operating results and
financial condition will suffer
In addition to our direct sales force, we rely on strategic channel partners,
such as value-added resellers, system integrators and original equipment
manufacturers to license and support our products in the United States and
internationally. In particular, for the years ended December 31, 2001, 2000 and
1999, channel partners accounted for, directly or indirectly, approximately
35.4%, 45.0% and 39.2% of our total product license revenues, respectively. Our
channel partners generally offer customers the products of several different
companies, including some products that compete with ours. Although we believe
that direct sales will continue to account for a majority of product license
revenues, we intend to increase the level of indirect sales activities through
our strategic channel partners. However, we may not be successful in our efforts
to continue to expand indirect sales in this manner. We may not be able to
attract strategic partners who will market our products effectively and who will
be qualified to provide timely and cost-effective customer support and service.
Our ability to achieve revenue growth in the future will depend in part on our
success in developing and maintaining successful relationships with those
strategic partners. If we are unable to develop or maintain our relationships
with these strategic partners, our business, operating results and financial
condition will suffer.
We have only limited protection for our proprietary rights in our software,
which makes it difficult to prevent third parties from infringing upon our
rights
We rely primarily on a combination of copyright, patent, trademark and trade
secret laws, customer licensing agreements, employee and third-party
nondisclosure agreements and other methods to protect our proprietary rights.
However, these laws and contractual provisions provide only limited protection.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain and use our products or technology. Policing
such unauthorized use is difficult, and we cannot be certain that we can prevent
it, particularly in countries where the laws may not protect our proprietary
rights as fully as in the United States.
Our products may be susceptible to claims by other companies that our products
infringe upon their proprietary rights, which could adversely affect our
business, operating results and financial condition
As the number of software products in our target markets increases and the
functionality of these products further overlaps, we may become increasingly
subject to claims by a third party that our technology infringes such party's
44
proprietary rights. Regardless of their merit, any such claims could be time
consuming and expensive to defend, may divert management's attention and
resources, could cause product shipment delays and could require us to enter
into costly royalty or licensing agreements. If successful, a claim of
infringement against us and our inability to license the infringed or similar
technology could have a material adverse effect on our business, operating
results and financial condition.
On October 2, 2001, we filed a lawsuit in the Virginia Circuit Court for Fairfax
County against two field employees of Business Objects, S.A. ("BO"). Our lawsuit
alleged that these employees, who previously worked for us, breached their
fiduciary and contractual obligations to us by, among other things,
misappropriating our trade secrets and confidential information and soliciting
our employees and customers. Our complaint sought injunctive relief and damages
of at least $3 million. On October 17, 2001, BO filed suit against us in the
United States District Court for the Northern District of California, claiming
that our software infringes a patent issued to BO relating to relational
database access. The suit seeks injunctive relief and unspecified monetary
damages. We intend to vigorously defend the case. On October 31, 2001, we filed
suit against BO in the United States District Court for the Eastern District of
Virginia, claiming that BO's software infringes two patents held by us relating
to asynchronous control of report generation using a web browser and a system
and method of adapting automatic output of OLAP reports to disparate user output
devices. On February 21, 2002, we filed a motion to amend our complaint against
BO to add claims for violations of the federal Computer Fraud and Abuse Act,
misappropriation of trade secrets, and tortious interference with contractual
relations. We are seeking monetary damages and injunctive relief. On March 13,
2002, we voluntarily dismissed without prejudice our lawsuit pending in the
Virginia Circuit Court for Fairfax County against the two field employees of BO.
Managing our international operations is complex and our failure to do so
successfully or in a cost-effective manner would have a material adverse effect
on our business, operating results and financial condition
International sales accounted for 34.1%, 25.9% and 24.0% of our total revenues
for the years ended December 31, 2001, 2000 and 1999, respectively. Our
international operations require significant management attention and financial
resources.
There are certain risks inherent in our international business activities,
including:
. changes in foreign currency exchange rates;
. unexpected changes in regulatory requirements;
. tariffs and other trade barriers;
. costs of localizing products for foreign countries;
. lack of acceptance of localized products in foreign countries;
. longer accounts receivable payment cycles;
. difficulties in managing international operations;
. tax issues, including restrictions on repatriating earnings;
. weaker intellectual property protection in other countries;
. economic weakness or currency related crises that may arise in different
countries or geographic regions; and
. the burden of complying with a wide variety of foreign laws.
These factors may have a material adverse effect on our future international
sales and, consequently, on our business, operating results and financial
condition.
The nature of our products makes them particularly vulnerable to undetected
errors, or bugs, which could cause problems with how the products perform and
which could in turn reduce demand for our products,
45
reduce our revenue and lead to product liability claims against us
Software products as complex as ours may contain errors or defects, especially
when first or subsequent versions are released. Although we test our products
extensively, we have in the past discovered software errors in new products
after their introduction. Despite testing by us and by our current and potential
customers, errors may be found in new products or releases after commercial
shipments begin. This could result in lost revenue or delays in market
acceptance, which could have a material adverse effect upon our business,
operating results and financial condition.
Our license agreements with customers typically contain provisions designed to
limit our exposure to product liability claims. It is possible, however, that
these provisions may not be effective under the laws of certain domestic or
international jurisdictions. Although there have been no product liability
claims against us to date, our license and support of products may involve the
risk of these claims. A successful product liability claim against us could have
a material adverse effect on our business, operating results and financial
condition.
The price of our stock may be extremely volatile
The market price for our class A common stock has historically been volatile and
could fluctuate significantly for any of the following reasons:
. quarter-to-quarter variations in our operating results;
. developments or disputes concerning proprietary rights;
. technological innovations or new products;
. governmental regulatory action;
. general conditions in the software industry;
. increased price competition;
. changes in revenue or earnings estimates by analysts;
. any change in the actual or expected amount of dilution attributable to
issuances of additional shares of class A common stock upon conversion of
our preferred stock or as a result of the litigation settlement; or
. other events or factors.
Many of the above factors are beyond our control.
The stock market has recently experienced extreme price and volume fluctuations.
These fluctuations have particularly affected the market price of many software
companies, often without regard to their operating performance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about our market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. We are exposed to the impact of
interest rate changes and foreign currency fluctuations.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to
our cash equivalents and short-term investments. We invest our excess cash in
short-term, fixed income financial instruments. These fixed rate
46
investments are subject to interest rate risk and may fall in value if market
interest rates increase. If market interest rates were to increase immediately
and uniformly by 10% from the levels at December 31, 2001, the fair market value
of the portfolio would decline by an immaterial amount. We have the ability to
hold our fixed income investments until maturity and, therefore, we do not
expect our operating results or cash flows to be materially affected by a sudden
change in market interest rates on our investment portfolio.
Foreign Currency Risk
We face exposure to adverse movements in foreign currency exchange rates. Our
international revenues and expenses are denominated in foreign currencies,
principally the Euro and the British pound sterling. The functional currency of
each of our foreign subsidiaries is the local currency. Our international
business is subject to risks typical of an international business, including,
but not limited to differing tax structures, other regulations and restrictions,
and foreign exchange rate volatility. Based on our overall currency rate
exposure at December 31, 2001, a 10% change in foreign exchange rates would have
had an immaterial effect on our financial position, results of operations and
cash flows. As a percentage of total revenues, international revenues grew from
24.0% in 1999 to 25.9% in 2000 and to 34.1% in 2001, and we anticipate that
international revenues will continue to account for a significant amount of
total revenues. To date, we have not hedged the risks associated with foreign
exchange exposure. Although we may do so in the future, we cannot be sure that
any hedging techniques we may implement will be successful or that our business,
results of operations, financial condition and cash flows will not be materially
adversely affected by exchange rate fluctuations. In the latter part of 2001,
there was extensive economic turmoil in Argentina which subsequently resulted in
a significant devaluation of the Argentine peso. Revenues from our operations in
Argentina accounted for 2.2% of total revenues in 2001. We believe that our
economic exposure in the region is not significant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements, together with the related notes and the
report of independent accountants, are set forth on the pages indicated in Item
14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
47
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers and directors and their ages and positions as of March 1,
2002 are as follows:
Name Age Title
---- --- -----
Michael J. Saylor ............ 37 Chairman and Chief Executive Officer
Sanju K. Bansal .............. 36 Vice Chairman, Executive Vice President & Chief Operating Officer
Eric F. Brown ................ 36 President and Chief Financial Officer
Jonathan F. Klein ............ 35 Vice President, Law and General Counsel
Jeffrey A. Bedell ............ 33 Vice President, Technology and Chief Technology Officer
Eduardo S. Sanchez ........... 45 Vice President, Worldwide Sales and Services
F. David Fowler (1) .......... 68 Director
Jonathan J. Ledecky .......... 44 Director
Jay H. Nussbaum .............. 58 Director
Stuart B. Ross (1)(2) ........ 64 Director
John W. Sidgmore ............. 50 Director
Ralph S. Terkowitz (1)(2) .... 51 Director
___________
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Set forth below is certain information regarding the professional experience of
each of the above-named persons.
Michael J. Saylor has served as chief executive officer and chairman of the
board of directors since founding MicroStrategy in November 1989, and as
president from November 1989 to November 2000. 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 and has served as vice chairman since
November 2000. 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.
Eric F. Brown has served as president and chief financial officer since November
2000. Mr. Brown originally joined the Company as chief financial officer of the
Strategy.com subsidiary in February 2000. Prior to that, Mr. Brown served as
division chief financial officer and then chief operating officer of Electronic
Arts from October 1998 until February 2000. Prior to that, Mr. Brown was
co-founder and chief financial officer of DataSage, Inc. from 1995 until October
1998. Mr. Brown also held several senior financial positions with Grand
Metropolitan from 1990 until 1995. Mr. Brown received his M.B.A. from the Sloan
School of Management of Massachusetts Institute of Technology and a B.S. in
Chemistry 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. From
September 1993 to June 1997, 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.
Jeffrey A. Bedell has served as vice president, technology and chief technology
officer since April 2001, as vice president, platform technology from 1999 to
2001, and as senior program manager and director of technology programs from
1992 to 1999. Mr. Bedell received a B.A. in Religion from Dartmouth College.
48
Eduardo S. Sanchez has served as vice president, worldwide sales and services
since April 2001, as vice president, worldwide sales from 2000 to 2001, as vice
president, international operations from 1998 to 2000, as vice president,
European operations from 1996 to 1998, as managing director, European operations
from 1994 to 1996, and as consulting manager, US operations from 1992 to 1994.
Mr. Sanchez received a bachelor's degree in Electrical Engineering from the
University of LaPlata in Argentina and a master's degree in Systems Engineering
from George Mason University. Prior to joining MicroStrategy, Mr. Sanchez worked
as a consultant in Europe, the United States, South America and Japan,
developing and deploying large-scale optimization systems for the manufacturing
and power utility sector. In this capacity, he was engaged in significant
projects with companies such as Mitsubishi, Groupe Saint Gobain, ABB, Siemens
and Xerox.
F. David Fowler has been a member of the board of directors of MicroStrategy
since June 2001. Mr. Fowler was the dean of the School of Business and Public
Management at The George Washington University from July 1992 until his
retirement in June 1997 and a member of KPMG LLP from 1963 until his retirement
in June 1992. As a member of KPMG, Mr. Fowler served as managing partner of the
Washington, DC office from 1987 until 1992, as partner in charge of human
resources for the firm in New York City, as a member of the firm's board of
directors, operating committee and strategic planning committee and as chairman
of the KPMG Foundation and the KPMG personnel committee. Mr. Fowler currently
serves as a member of the board of directors for the mutual funds of FBR Funds
and Rushmore Funds, both located in Bethesda, Maryland. Mr. Fowler received a
B.A./B.S. in Business from the University of Missouri at Columbia in 1955.
Jonathan J. Ledecky has been a member of the board of directors of MicroStrategy
since June 1998. Mr. Ledecky is currently chairman of The Ledecky Foundation, a
non-profit philanthropic organization implementing educational programs for
inner-city youth, a position he has held since January 1999. From July 1999
until June 2001, Mr. Ledecky served as vice chairman of Lincoln Holdings LLC,
which owns the Washington Capitals, the Washington Wizards and the Washington
Mystics sports teams. Mr. Ledecky founded U.S. Office Products Company in
October 1994 and served as its chairman of the board and chief executive officer
from inception through November 1997 and thereafter as a director until May
1998. In February 1997, Mr. Ledecky founded Building One Services Corp., now
Encompass Services Corporation, and served as its chairman until February 2000
and chief executive officer until June 1999. Mr. Ledecky is also a director of
publicly traded School Specialty, Inc. and a Commissioner of the National
Commission on Entrepreneurship.
Jay H. Nussbaum has been a member of the board of directors of MicroStrategy
since January 2002. Mr. Nussbaum is currently executive vice president for
managed services and enterprise solutions of KPMG Consulting, a position he has
held since January 2002. From February 1992 through December 2001, Mr. Nussbaum
served as executive vice president of Oracle Services Industries, an enterprise
software company. Mr. Nussbaum is also a member of the board of directors of
Northrop Grumman Corporation.
Stuart B. Ross has been a member of the board of directors of MicroStrategy
since June 2001. Mr. Ross held various positions with the Xerox Corporation from
1966 until December 1999, including corporate executive vice president, senior
vice president of finance and chief financial officer, vice president/corporate
controller and chairman and chief executive officer of Xerox Financial Services.
Mr. Ross is currently a trustee for the Hansberger Institutional Series, a
mutual fund, a member of the board of directors of The World Affairs Forum and a
member of the International Executive Service Corporation Advisory Council. Mr.
Ross received his B.S. in Accounting from New York University in 1958 and his
M.B.A. from Bernard Baruch College of the City College of New York in 1966. Mr.
Ross has been a C.P.A. in the State of New York since 1963.
John W. Sidgmore has been a member of the board of directors of MicroStrategy
since February 2000. Mr. Sidgmore is currently the vice chairman of the board of
directors of WorldCom, Inc., a provider of long distance, Internet and
telecommunications services, where he has served in such position since December
1994. Since June 2001, Mr. Sidgmore also has been the chairman and chief
executive officer of eCommerce Industries, Inc., a provider of information
technology solutions to the office products industry and adjacent industries,
including industrial paper and janitorial/sanitary products, computer
consumables, and MRO and oilfield supplies. From December 1996 until September
1998, Mr. Sidgmore also served as chief operating officer of WorldCom. Mr.
Sidgmore was the president and chief executive officer of UUNET Technologies,
Inc., a provider of worldwide Internet services, from June 1994 until December
1996. Prior to joining UUNET, Mr. Sidgmore was president and
49
chief executive officer of Intelicom Solutions, now CSC Intelicom, a
telecommunications software company. Mr. Sidgmore is also a member of the board
of directors of WorldCom and eCommerce Industries. Mr. Sidgmore received his
B.A. in Economics from the State University of New York in 1973.
Ralph S. Terkowitz has been a member of the board of directors of MicroStrategy
since September 1997. Mr. Terkowitz is currently chief technology officer for
The Washington Post Company, a position he has held since April 2001. From 1992
until April 2001, Mr. Terkowitz was vice president, technology for The
Washington Post Company. Until February 1996, Mr. Terkowitz was chief executive
officer, president and publisher of Digital Ink, an Internet publishing venture
that launched, among other ventures, WashingtonPost.com and PoliticsNow. In
1998, he was co-chief executive officer of HireSystems and instrumental in the
formation of BrassRing.com. Mr. Terkowitz is a director of BigStep.com and
OutTask. Mr. Terkowitz received an A.B. in Chemistry from Cornell University and
an M.S. in Chemical Physics from the University of California, Berkeley.
Involvement in Certain Legal Proceedings
On December 14, 2000, Mr. Saylor and Mr. Bansal each entered into a settlement
with the SEC in connection with the restatement of our financial results for
1999, 1998 and 1997. In the settlement, each of Mr. Saylor and Mr. Bansal
consented, without admitting or denying the allegations in the SEC's complaint,
to the entry of a judgment enjoining him from violating the antifraud and
recordkeeping provisions of the federal securities laws and ordering him to pay
disgorgement and a civil penalty.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our
directors, executive officers and holders of more than 10% of our class A common
stock to file with the SEC initial reports of ownership of our class A common
stock and other equity securities on a Form 3 and reports of changes in such
ownership on a Form 4 or Form 5. Officers, directors and holders of 10% of our
class A common stock are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms they file. To our knowledge, based solely on a
review of our records and representations made by of our officers and directors
regarding their filing obligations, all Section 16(a) filing requirements were
satisfied with respect to the fiscal year ended December 31, 2001 ("Fiscal Year
2001").
ITEM 11. EXECUTIVE COMPENSATION
The compensation information set forth in this Item 11 relates to compensation
paid by MicroStrategy to its chief executive officer and our five other most
highly compensated executive officers who were serving as our executive officers
during Fiscal Year 2001 (collectively, the "Named Executive Officers").
Option awards relating to the class A common stock of Strategy.com Incorporated,
our majority-owned subsidiary that ceased its operations in December 2001, are
designated in the tables set forth below in this Item 11 by the term "SDC."
Unless so designated, all option information set forth in this Item 11 refers to
option awards relating to the class A common stock of MicroStrategy.
50
The following table sets forth certain information concerning the compensation
of the Named Executive Officers for each of the last three fiscal years:
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
-------------------------------------- ----------------
Number of Shares
Fiscal Other Annual Underlying
Name and Principal Position Year Salary Bonus Compensation Options
---- -------- -------- ------------- ----------------
Michael J. Saylor ....................................... 2001 $150,000 -- -- --
Chairman of the Board and Chief Executive 2000 150,000 -- -- --
Officer 1999 150,000 50,000 -- --
Sanju K. Bansal ......................................... 2001 115,000 -- -- --
Vice Chairman of the Board, Executive Vice 2000 115,000 -- -- --
President, and Chief Operating Officer 1999 115,000 40,000 -- --
Eric F. Brown (1) ....................................... 2001 200,000 75,000 -- 250,000
President and Chief Financial Officer 2000 131,250 10,000 96,962(2) 500,000
100,000 (SDC)
Jonathan F. Klein ....................................... 2001 159,000 75,000 -- 135,000
Vice President, Law and General Counsel 2000 135,417 60,000 -- 75,000
75,000 (SDC)
1999 115,000 30,000 -- 30,000
Jeffrey A. Bedell (3) ................................... 2001 128,333 40,962 -- 250,000
Vice President, Technology and Chief
Technology Officer
Eduardo S. Sanchez (4) .................................. 2001 250,000 88,752 -- 250,000
Vice President, Worldwide Sales and Services
__________
(1) Mr. Brown joined MicroStrategy in February 2000 as chief financial officer
of Strategy.com, our business unit at the time, and became our chief
financial officer and president in August 2000 and November 2000,
respectively. Accordingly, the 2000 information for Mr. Brown is for the
period from February 2000 to December 31, 2000.
(2) This amount represents relocation expenses paid by MicroStrategy.
(3) Mr. Bedell joined MicroStrategy in December 1992 and became vice president,
technology and chief technology officer in April 2001.
(4) Mr. Sanchez joined MicroStrategy in November 1992 and became vice
president, worldwide sales and services in September 2001.
51
Option Grants Table
The following table contains information concerning grants of stock options made
to each of the Named Executive Officers during Fiscal Year 2001:
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
Number of
Shares of Class % of Total Potential Realizable Value at
A Common Options Assumed Annual Rates of
Stock Granted Stock Price Appreciation for
Underlying to Exercise Option Term(3)
Options Employees Price Per Expiration --------------
Name Granted(1) in 2001 Share(2) Date 5% 10%
---- ---------- ------- -------- ---- ------- -------
Michael J. Saylor..... -- --% $ -- -- $ -- $ --
Sanju K. Bansal....... -- -- -- -- -- --
Eric F. Brown......... 250,000 2.6 2.48 4/18/2011 389,915 988,120
Jonathan F. Klein..... 135,000 1.4 2.48 4/18/2011 210,554 533,585
Jeffrey A. Bedell..... 250,000 2.6 2.48 4/18/2011 389,915 988,120
Eduardo S. Sanchez.... 250,000 2.6 2.48 4/18/2011 389,915 988,120
_________
(1) These options generally vest over a five-year period and expire on the
tenth anniversary of the date of grant.
(2) The exercise price of options of MicroStrategy may be paid in cash or in
shares of our class A common stock, valued at fair market value on the
exercise date. All stock options were granted with an exercise price equal
to the fair market value of such stock as determined by our board of
directors on the grant date.
(3) The potential realizable value is calculated based on the term of the
option at its time of grant (ten years). It is calculated assuming that the
fair market value of our class A common stock on the date of grant
appreciates at the indicated annual rate compounded annually for the entire
term of the option and that the option is exercised and sold on the last
day of its term for the appreciated stock price.
52
Option Exercises and Holdings
The following table sets forth information concerning each exercise of a stock
option during Fiscal Year 2001 by each of the Named Executive Officers and the
number and value of unexercised options held by each of the Named Executive
Officers on December 31, 2001.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
Number of Shares of
Number of Class A Common Stock Value of Unexercised In-
Shares Underlying Unexercised the-Money Options at
Acquired on Value Options at Fiscal Year-End Fiscal Year-End(2)
Name Exercise Realized(1) Exercisable/Unexercisable Exercisable/Unexercisable
---- ----------- ---------- ------------------------- -------------------------
Michael J. Saylor ........... -- $ -- -- /-- $ --/ $ --
Sanju K. Bansal ............. -- -- -- /-- -- / --
Eric F. Brown ............... -- -- 100,000 / 650,000 -- / 342,500
20,000(SDC) / 80,000(SDC) -- / --
Jonathan F. Klein ........... -- -- 56,299 / 244,201 52,610 / 255,690
15,000(SDC) / 60,000(SDC) -- /--
Jeffrey A. Bedell ........... 18,400 56,960 94,709 / 382,402 141,440 / 377,860
7,500(SDC) / 30,000(SDC) -- /--
Eduardo S. Sanchez .......... -- -- 228,400 / 381,600 411,840 / 398,660
10,000(SDC) / 40,000(SDC) -- /--
----------
(1) Represents the difference between the exercise price and the fair market
value of our class A common stock on the date of exercise.
(2) Value of unexercised options is determined by subtracting the exercise
price per share from the fair market value per share for the underlying
shares as of December 31, 2001, multiplied by the number of shares
underlying the options. The fair market value of our class A common stock
is based upon the last reported sale price as reported on the Nasdaq
National Market on December 31, 2001 ($3.85 per share). No public market
for the shares underlying the SDC options existed as of December 31, 2001,
and accordingly no value in excess of the exercise price has been
attributed to these options.
Directors' Compensation
Directors do not receive any fees or other cash compensation for serving on our
board of directors or any committee thereof. Directors who are not employees of
MicroStrategy or any subsidiary ("Outside Directors") are entitled to receive
options to purchase shares of class A common stock.
In 2001, options for 515,000 shares of class A common stock were granted to
Outside Directors under our Amended and Restated 1999 Stock Option Plan ("1999
Stock Option Plan"). Pursuant to this plan, (i) each Outside Director is granted
an option to purchase 100,000 shares of class A common stock upon his or her
initial election or appointment to the board of directors ("First Options") and
(ii) each Outside Director is granted an option to purchase 30,000 shares of
class A common stock on the day immediately following each annual meeting of
stockholders ("Subsequent Options"). Each option granted to an Outside Director
under the 1999 Stock Option Plan has an exercise price equal to the last
reported sale price of the class A common stock as reported on the Nasdaq
National Market for the most recent trading day prior to the date of grant.
First Options granted under the 1999
53
Stock Option Plan become exercisable in equal annual installments over a
five-year period and Subsequent Options are exercisable in full upon grant. In
the event of a merger of MicroStrategy with or into another corporation or
another qualifying acquisition event, each option will be assumed or an
equivalent option will be substituted by the successor corporation. If the
successor corporation does not assume outstanding options or such options are
not otherwise exchanged, the exercisability of all outstanding options will
accelerate.
Employment Agreements
Our employees, including our executive officers, are generally required to enter
into confidentiality agreements prohibiting the employees from disclosing any of
our confidential or proprietary information. In addition, the agreements
generally provide that upon termination, an employee will not provide
competitive products or services and will not solicit our customers and
employees for a period of one year. At the time of commencement of employment,
our employees also generally sign offer letters specifying certain basic terms
and conditions of employment. Otherwise, our employees are generally not subject
to written employment agreements.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of our common stock, as
of January 31, 2002 unless otherwise indicated, by (i) each person who is known
by us to beneficially own more than 5% of any class of our common stock, (ii)
each director or nominee for director, (iii) each of the Named Executive
Officers, and (iv) all directors and executive officers as a group:
Percentage of
Number of Shares Shares
Beneficial Owner(1) Benefically Owned(2)(3) Outstanding(3)(4)
------------------ ---------------------- -----------------
Michael J. Saylor (5) ............................................... 38,670,476 41.8
Sanju K. Bansal (6) ................................................. 8,374,495 9.1
Eric F. Brown (7) ................................................... 200,000 *
Jonathan F. Klein (8) ............................................... 115,045 *
Jeffrey A. Bedell (9) ............................................... 177,752 *
Eduardo S. Sanchez (10) ............................................. 971,645 1.0
F. David Fowler (11) ................................................ 30,000 *
Jonathan J. Ledecky (12) ............................................ 106,000 *
Jay H. Nussbaum (13) ................................................ 0 *
Stuart B. Ross (14) ................................................. 30,000 *
John W. Sidgmore (15) ............................................... 83,000 *
Ralph S. Terkowitz (16) ............................................. 106,000 *
Angelo, Gordon & Co., L.P. (17) ..................................... 2,991,292 3.2
Citadel Limited Partnership (18) .................................... 4,661,461 4.9
HFTP Investment, L.L.C. (19) ........................................ 2,532,336 2.7
Weiss, Peck & Greer L.L.C. (20) ..................................... 3,680,700 4.0
All directors and executive officers as a group (12 persons) (21) ... 48,864,413 52.3
----------
* Less than 1%
(1) Each person named in the table above (except as otherwise indicated in the
footnotes below) has an address in care of MicroStrategy Incorporated, 1861
International Drive, McLean, Virginia 22102.
(2) The shares of the Company listed in this table include shares of class A
common stock and class B common stock, as set forth in the footnotes to
this table.
(3) The inclusion of any shares of common stock deemed beneficially owned does
not constitute an admission of beneficial ownership of those shares. In
accordance with the rules of the SEC, each stockholder is deemed to
54
beneficially own any shares subject to stock options that are currently
exercisable or exercisable within 60 days after January 31, 2002 and any
shares that are currently issuable upon conversion of convertible
securities or are issuable upon conversion of convertible securities within
60 days after January 31, 2002. Any reference below to shares subject to
outstanding stock options or issuable upon conversion of convertible
securities held by the person in question refers only to such stock options
or convertible securities. Under the certificate of designations for each
series of our preferred stock, no stockholder of such may convert such
preferred stock into shares of class A common stock to the extent such
conversion would cause such stockholder, together with its affiliates, to
have acquired a number of shares of class A common stock during the 60-day
period ending on the date of conversion which, when added to the number of
shares of class A common stock held at the beginning of such 60-day period,
would exceed 9.99% of our then outstanding class A common stock, excluding
for purposes of such determination shares of class A common stock issuable
upon conversion of the preferred shares which have not been converted. The
number of shares beneficially owned and the percentage of shares
outstanding reflect this limitation.
(4) Percentages in the table have been calculated based on the aggregate number
of shares of class A common stock and class B common stock outstanding or
deemed outstanding as of January 31, 2002. As of January 31, 2002,
44,350,997 shares of class A common stock and 48,183,868 shares of class B
common stock were outstanding. In addition, for the purpose of calculating
each person's percentage of shares outstanding, any shares of common stock
(i) subject to outstanding stock options held by such person exercisable
within 60 days after January 31, 2002, or (ii) issuable upon conversion of
preferred stock held by such person within 60 days after January 31, 2002,
are deemed outstanding.
(5) Mr. Saylor's holdings of common stock consist of 37,881,556 shares of class
B common stock held beneficially by Mr. Saylor as a result of his
beneficial ownership in Alcantara LLC, 400,000 shares of class B common
stock held in trust (approximately 79.5% of the class B common stock
outstanding), 76,320 shares of class A common stock held beneficially by
Mr. Saylor as a result of his beneficial ownership in Alcantara LLC and
312,600 shares of class A common stock held beneficially by Mr. Saylor in a
foundation (an aggregate of approximately 0.9% of the class A common stock
outstanding).
(6) Mr. Bansal's holdings of common stock consist of 7,390,873 shares of class
B common stock held beneficially by Mr. Bansal as a result of his
beneficial ownership in Shangri-La LLC, 383,046 shares of class B common
stock held in trust, 23,576 shares of class B common stock held in his own
name (approximately 16.2% of the class B common stock outstanding), 19,000
shares of class A common stock held beneficially by Mr. Bansal as a result
of his beneficial ownership in Shangri-La LLC, 500,000 shares of class A
common stock held in trust and 58,000 shares of class A common stock held
beneficially by Mr. Bansal in a foundation (an aggregate of approximately
1.3% of the class A common stock outstanding).
(7) Mr. Brown's holdings of common stock consist of options exercisable within
60 days after January 31, 2002 for 200,000 shares of class A common stock.
(8) Mr. Klein's holdings of common stock consist of 42,646 shares of class A
common stock and options exercisable within 60 days after January 31, 2002
for 72,399 shares of class A common stock.
(9) Mr. Bedell's holdings of common stock consist of 80,966 shares of class A
common stock and options exercisable within 60 days after January 31, 2002
for 96,786 shares of class A common stock.
(10) Mr. Sanchez's holdings of common stock consist of 18,429 shares of class A
common stock (approximately 0.6% of the class A common stock outstanding),
724,816 shares of class B common stock (approximately 1.5% of the class B
common stock outstanding) and options exercisable within 60 days after
January 31, 2002 for 228,400 shares of class A common stock.
(11) Mr. Fowler's holdings of common stock consist of options exercisable within
60 days after January 31, 2002 for 30,000 shares of class A common stock.
(12) Mr. Ledecky's holdings of common stock consist of 2,000 shares of class A
common stock and options exercisable within 60 days after January 31, 2002
for 104,000 shares of class A common stock.
(13) Mr. Nussbaum was elected as a director on January 21, 2002.
(14) Mr. Ross's holdings of common stock consist of options exercisable within
60 days after January 31, 2002 for 30,000 shares of class A common stock.
(15) Mr. Sidgmore's holdings of common stock consist of options exercisable
within 60 days after January 31, 2002 for 83,000 shares of class A common
stock.
(16) Mr. Terkowitz's holdings of common stock consist of 2,000 shares of class A
common stock held beneficially by Mr. Terkowitz in trust and options
exercisable within 60 days after January 31, 2002 for 104,000 shares of
class A common stock.
55
(17) Angelo, Gordon & Co., L.P. is a general partner of Leonardo, L.P. and
consequently has voting control and investment discretion over securities
held by Leonardo, L.P. Angelo Gordon disclaims beneficial ownership of the
shares held by Leonardo, L.P. Mr. John M. Angelo, the chief executive
officer of Angelo Gordon, and Mr. Michael L. Gordon, the chief operating
officer of Angelo Gordon, are the sole general partners of AG Partners,
L.P., the sole general partner of Angelo Gordon. As a result, Mr. Angelo
and Mr. Gordon may be considered beneficial owners of any shares deemed to
be beneficially owned by Angelo Gordon. Leonardo, L.P. is not a registered
broker-dealer. Leonardo, L.P., however, is under common control with, and
therefore an affiliate of, a registered broker-dealer. The shares
beneficially held by such entities and individual consist of 1,355,863
shares of class A common stock, 954,000 shares of class A common stock
immediately acquirable upon conversion of 1,192.5 shares of series B
convertible preferred stock and 681,429 shares of class A common stock
immediately acquirable upon conversion of 1,192.5 shares of series C
convertible preferred stock (an aggregate of approximately 6.5% of the
class A common stock outstanding as of January 31, 2002). The address of
Leonardo, L.P., Angelo Gordon and Messrs. Angelo and Gordon is 245 Park
Avenue, 26th Floor, New York, New York 10167.
(18) Information regarding the number of shares of common stock
beneficially owned by Citadel Limited Partnership includes shares
beneficially owned by affiliates GLB Partners, L.P., Citadel Investment
Group, L.L.C., Kenneth Griffin, Wellington Partners Limited Partnership,
Wingate Capital Ltd., Kensington Global Strategies Fund, Ltd., Fisher
Capital Ltd., Citadel Trading Group, L.L.C. and Aragon Investments, Ltd.,
and is based on the most recent Schedule 13G of such entities and
individual received by us, which reported such ownership as of December 31,
2001. The shares beneficially held by such entities and individual consist
of 1,192,260 shares of class A common stock, 567,001 shares of class A
common stock immediately acquirable upon conversion of 1,590 shares of
series B convertible preferred stock and 2,902,200 shares of class A common
stock immediately acquirable upon conversion of 1,451.1 shares of series D
convertible preferred stock (an aggregate of approximately 9.9% of the
class A common stock outstanding as of December 31, 2001). The address of
Citadel Investment Group, L.L.C. is 225 W. Washington, 9th Floor, Chicago,
Illinois 60606.
(19) Information regarding the number of shares of common stock beneficially
owned by HFTP Investment, L.L.C. includes shares beneficially owned by
affiliates of Promethean Asset Management, L.L.C., James F. O'Brien, Jr.,
Promethean Investment Group, L.L.C., HFTP Managers LLC, Heracles Fund,
Promethean Managers LLC, Themis Managers LLC and Themis Partners, L.P., and
is based on the most recent Schedule 13G of such entities and individual
received by us, which reported such ownership as of December 31, 2001. The
shares beneficially held by such entities and individual consist of
2,108,336 shares of class A common stock immediately acquirable upon
conversion of 650 shares of series A convertible preferred stock and
424,000 shares of class A common stock immediately acquirable upon
conversion of 530 shares of series B convertible preferred stock (an
aggregate of approximately 5.5% of the class A common stock outstanding as
of December 31, 2001). The address of HFTP Investment, L.L.C. is 750
Lexington Avenue, 22nd Floor, New York, New York 10022.
(20) Information regarding the number of shares of common stock beneficially
owned by Weiss, Peck & Greer L.L.C. is based on the most recent Schedule
13G of such entity received by us, which reported such ownership as of
December 31, 2001. All shares beneficially held by Weiss, Peck & Greer
L.L.C. consist of class A common stock (approximately 8.5% of the class A
common stock outstanding as of December 31, 2001) held by Weiss, Peck &
Greer L.L.C. in discretionary accounts for certain clients. Weiss, Peck &
Greer L.L.C. expressly disclaims beneficial ownership of such shares. The
address of Weiss, Peck & Greer L.L.C. is One New York Plaza, New York, New
York 10004.
(21) Shares held by the directors and executive officers as a group include
options to purchase 948,585 shares of class A common stock that are
exercisable within 60 days after January 31, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 30, 1999, we entered into a business alliance agreement with
Wheelhouse Corporation, a company for which Frank A. Ingari (a former director
of MicroStrategy who resigned on October 25, 2001) is a founding stockholder and
chairman of the board of directors. Pursuant to the agreement, Wheelhouse
acquired certain development software and training technology from us and
received the right to offer our products in the marketplace as a sales agent. In
addition, Wheelhouse is entitled to a finders fee of 1.5% of the license fees
paid to us by any company referred to us by Wheelhouse. From January 1, 2001
through March 1, 2002, we recognized $50,000 of revenue attributable to
Wheelhouse, relating to license and support fees and education services in
56
connection with the development software acquired from us under the agreement
and have collected $25,000 from Wheelhouse related to these fees and services
during the same period. Also, from January 1, 2001 through March 1, 2002, we
paid $103,000 to Wheelhouse for consulting services which were unrelated to the
business alliance agreement.
On December 1, 2000, we entered into a series of agreements with CVent, Inc., a
company in which Sanju K. Bansal, our vice chairman, executive vice president
and chief operating officer, holds an equity interest of approximately 10% and
is a member of the board of directors. Under these agreements, we provide
software licenses, consulting services and maintenance services to CVent. In
exchange, we received (i) a 3% equity interest in CVent on the date of the
agreement and are entitled to an additional 2% equity interest as of the first
anniversary of the agreement and (ii) the right to receive payments for services
provided by us under the agreements. From January 1, 2001 through March 1, 2002,
we billed CVent $145,000 for such services and recognized $70,000 in product
maintenance revenues and, as of March 1, 2002, we had a deferred revenue balance
of $96,000. From January 1, 2001 through March 1, 2002, we received aggregate
payments of $237,000 from CVent in connection with such services, some of which
were attributed to services rendered during 2000. Also under these agreements,
CVent provides licenses to us, for which we paid CVent approximately $75,000
from January 1, 2001 through March 1, 2002.
57
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements
Page
----
Report of Independent Accountants .......................... 59
Consolidated Financial Statements:
Balance Sheets ....................................... 60
Statements of Operations ............................. 62
Statements of Stockholders' Equity (Deficit) ......... 63
Statements of Cash Flows ............................. 65
Notes to Consolidated Financial Statements ................. 68
2. Consolidated Financial Statement Schedule
Schedule II--Valuation and Qualifying Account .............. 100
3. Exhibits ................................................... 101
(b) Reports on Form 8-K
On October 1, 2001, the Company filed a Current Report on Form 8-K dated
September 28, 2001 to report that it had adopted a plan to effect a reduction in
its workforce as part of ongoing measures to better align operating expenses
with revenues and further focus on its core business intelligence software
business.
On October 15, 2001, the Company filed a Current Report on Form 8-K dated
October 11, 2001 to furnish corrective and clarifying information regarding
certain information about its current cash position and expectations with
respect to financial performance in 2002 provided in an online seminar for
certain customers, analysts and others held on October 11, 2001.
On November 1, 2001, the Company filed a Current Report on Form 8-K dated
October 30, 2001 to report that it had issued a press release announcing its
financial results for the quarter ended September 30, 2001, and providing
additional outlook and financial guidance information.
(c) Exhibits
We hereby file as part of this Form 10-K the exhibits listed in the Index
to Exhibits.
(d) Financial Statement Schedule
The following financial statement schedule is filed herewith:
Schedule II--Valuation and Qualifying Account
All other items included in an Annual Report on Form 10-K are omitted because
they are not applicable or the answers thereto are none.
58
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
MicroStrategy Incorporated
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and Item 14(a)(2) on page 58 present fairly, in
all material respects, the financial position of MicroStrategy Incorporated and
its subsidiaries at December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
McLean, Virginia
January 25, 2002
59
MICROSTRATEGY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 31,
-------------------------------
2001 2000
------------- -------------
Assets
Current assets:
Cash and cash equivalents $ 38,409 $ 33,203
Restricted cash 439 25,884
Short-term investments 904 1,085
Accounts receivable, net 22,281 47,921
Prepaid expenses and other current assets 5,902 9,249
Net assets of discontinued operations -- 24,615
------------- -------------
Total current assets 67,935 141,957
------------- -------------
Property and equipment, net 26,506 39,425
Long-term investments -- 5,271
Goodwill and intangible assets, net 5,402 34,300
Deposits and other assets 3,789 1,993
Net assets of discontinued operations -- 18,048
------------- -------------
Total assets $103,632 $240,994
============= =============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable and accrued expenses $ 18,935 $ 30,968
Accrued compensation and employee benefits 13,654 24,155
Accrued interest and preferred dividends 7,351 599
Accrued restructuring costs 7,422 --
Deferred revenue and advance payments 20,987 42,224
Contingency from terminated contract 17,074 --
Working capital line of credit 1,212 --
Net liabilities of discontinued operations 4,479 --
------------- -------------
Total current liabilities 91,114 97,946
------------- -------------
Deferred revenue and advance payments 5,431 26,083
Accrued litigation settlement 68,637 99,484
Other long-term liabilities 3,536 2,904
Accrued restructuring costs 4,271 --
------------- -------------
Total liabilities 172,989 226,417
------------- -------------
Commitments and contingencies (Note 12)
Series A redeemable convertible preferred stock, par value $0.001 per share,
18 shares authorized, 1 and 13 shares issued and
outstanding, respectively 6,385 119,585
Series B redeemable convertible preferred stock, par value $0.001
per share, 3 shares authorized, 3 and 0 shares issued and
outstanding, respectively 32,343 --
Series C redeemable convertible preferred stock, par value $0.001
per share, 3 shares authorized, 3 and 0 shares issued and
outstanding, respectively 25,937 --
Series D convertible preferred stock, par value $0.001 per share,
2 shares authorized, 1 and 0 shares issued and outstanding,
respectively 3,985 --
The accompanying notes are an integral part of these
Consolidated Financial Statements.
60
MICROSTRATEGY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(Continued)
December 31,
---------------------------
2001 2000
------------- -----------
Redeemable convertible preferred stock of discontinued operations par value
$0.001 per share, 47,884 shares authorized,
0 and 13,401 shares issued and outstanding, respectively -- 40,530
Stockholders' Equity (Deficit):
Preferred stock undesignated, par value $0.001 per share, 4,973 shares
authorized, no shares issued or outstanding
Class A common stock, par value $0.001 per share, 330,000 shares
authorized, 43,689 and 28,736 shares issued and outstanding,
respectively 44 29
Class B common stock, par value $0.001 per share, 165,000 shares
authorized, 48,233 and 52,033 shares issued and outstanding,
respectively 48 52
Additional paid-in capital 239,580 152,821
Deferred compensation (99) (624)
Accumulated other comprehensive income 2,547 1,443
Accumulated deficit (380,127) (299,259)
---------- ----------
Total stockholders' equity (deficit) (138,007) (145,538)
---------- ----------
Total liabilities, convertible preferred stock and stockholders'
equity (deficit) $ 103,632 $ 240,994
========== ==========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
61
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years ended December 31,
--------------------------------------------
2001 2000 1999
--------- ---------- ---------
Revenues:
Product licenses $ 72,781 $ 100,582 $ 85,797
Product support and other services 107,635 114,679 65,461
-------- ---------- ---------
Total revenues 180,416 215,261 151,258
-------- ---------- ---------
Cost of revenues:
Product licenses 4,170 2,600 2,597
Product support and other services 41,473 74,961 34,436
-------- ---------- ---------
Total cost of revenues 45,643 77,561 37,033
-------- ---------- ---------
Gross profit 134,773 137,700 114,225
-------- ---------- ---------
Operating expenses:
Sales and marketing 74,792 137,534 88,733
Research and development 32,819 43,890 24,225
General and administrative 37,168 47,082 23,342
Restructuring and impairment charges 39,463 9,367 -
Amortization of goodwill and intangible assets 17,251 17,667 422
In-process research and development - - 2,800
-------- ---------- ---------
Total operating expenses 201,493 255,540 139,522
-------- ---------- ---------
Loss from operations (66,720) (117,840) (25,297)
Financing and other income (expense):
Interest income 2,171 3,158 2,174
Interest expense (5,401) (37) (144)
Loss on investments (3,603) (9,365) -
Reduction in (provision for) estimated cost of
litigation settlement 30,098 (89,729) -
Other (expense) income, net (2,139) 96 6
-------- ---------- ---------
Total financing and other income (expense) 21,126 (95,877) 2,036
-------- ---------- ---------
Loss from continuing operations before income taxes (45,594) (213,717) (23,261)
Provision for income taxes 2,460 1,400 1,246
-------- ---------- ---------
Net loss from continuing operations (48,054) (215,117) (24,507)
-------- ---------- ---------
Discontinued operations:
Loss from discontinued operations (30,739) (46,189) (9,236)
Loss from abandonment (2,075) - -
-------- ---------- ---------
Loss from discontinued operations (32,814) (46,189) (9,236)
-------- ---------- ---------
Net loss (80,868) (261,306) (33,743)
-------- ---------- ---------
Dividends on and accretion of series A, B, C, D and E
convertible preferred stock (10,353) (4,687) -
Net gain on refinancing of series A redeemable convertible
preferred stock 29,370 - -
Gain on early redemption of redeemable convertible
preferred stock of discontinued operations (Note 15) 44,923 - -
Series A preferred stock beneficial conversion feature - (19,375) -
-------- ----------- ---------
Net loss attributable to common stockholders $(16,928) $ (285,368) $ (33,743)
======== ========== =========
Basic and diluted earnings (loss) per share:
Continuing operations $ (0.34) $ (3.00) $ (0.32)
Discontinued operations $ 0.14 $ (0.58) $ (0.12)
-------- ---------- ---------
Net loss attributable to common stockholders $ (0.20) $ (3.58) $ (0.44)
======== ========== =========
Weighted average shares outstanding used in computing basic
and diluted earnings (loss) per share 86,587 79,779 77,028
======== ========== =========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
62
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
Class A Class B
Common Stock Common Stock Treasury Stock Additional
--------------------- --------------------- --------------------- Paid-in
Shares Amount Shares Amount Shares Amount Capital
--------- ---------- ---------- --------- ---------- --------- ------------
Balance at December 31, 1998 10,104 $ 11 61,266 $ 61 - $ - $ 42,183
--------- ---------- ---------- --------- ---------- --------- ------------
Net loss - - - - - - -
Change in unrealized gain (loss) on investments,
net of applicable taxes - - - - - - -
Foreign currency translation adjustment - - - - - - -
Comprehensive loss - - - - - - -
Issuance of class A common stock in connection
with offering, net of offering costs 3,170 3 - - - - 40,046
Conversion of class B to class A common stock 5,399 5 (5,399) (5) - - -
Issuance of class A common stock under stock
option and purchase plans 3,145 3 - - - - 7,018
Issuance of class A common stock related to
purchase of NCR's Teracube assets 566 - - - - - 49,557
Issuance of class A common stock warrants - - - - - - 139
Amortization of deferred stock compensation - - - - - - -
--------- ---------- ---------- --------- ---------- --------- ------------
Balance at December 31, 1999 22,384 $ 22 55,867 $ 56 - $ - $ 138,943
--------- ---------- ---------- --------- ---------- --------- ------------
Net loss - - - - - - -
Change in unrealized gain (loss) on investments,
net of applicable taxes - - - - - - -
Foreign currency translation adjustment - - - - - - -
Comprehensive loss - - - - - - -
Conversion of class B to class A common stock 3,834 4 (3,834) (4) - - -
Issuance of class A common stock under stock
option and purchase plans 2,102 2 - - - - 8,392
Issuance of class A common stock in connection
with agreement with software integrator 57 - - - - - 1,600
Capital contribution related to stockholder stock
grant - - - - - - 3,003
Acceleration of vesting provisions on stock
options - - - - - - 1,483
Allocation of investment proceeds to series A
preferred stock beneficial conversion feature - - - - - - 19,375
Deemed dividend for series A preferred stock
beneficial conversion feature - - - - - - (19,375)
Preferred stock dividends - - - - - - (4,687)
Payment of preferred stock dividends in shares of
class A common stock 359 1 - - - - 4,087
Amortization of deferred stock compensation - - - - - - -
--------- ---------- ---------- --------- ---------- --------- ------------
Balance at December 31, 2000 28,736 $ 29 52,033 $ 52 - - $ 152,821
--------- ---------- ---------- --------- ---------- --------- ------------
Net loss - - - - - - -
Change in unrealized gain (loss) on investments,
net of applicable taxes - - - - - - -
Foreign currency translation adjustment - - - - - - -
Comprehensive loss - - - - - - -
Conversion of class B to class A common stock 3,800 4 (3,800) (4) - - -
Issuance of class A common stock under stock
option and purchase plans 1,439 1 - - - - 4,223
Issuance of class A common stock in connection
with agreement with software integrator 260 - - - - - 603
Preferred stock dividends - - - - - - (8,581)
Payment of preferred stock dividends in shares
of class A common stock 2,062 2 - - - - 5,321
Issuance of class A common stock in exchange
for redeemable convertible preferred stock of
discontinued operations 3,500 4 - - - - 8,711
Gain on early redemption of redeemable
convertible preferred stock of discontinued
operations - - - - - - 44,923
Contribution of shares from officers - - - - 1,684 (4,377) 4,317
Cancellation of treasury stock (1,684) (2) - - (1,684) 4,377 (4,375)
Issuance of class A common stock in connection
with refinancing of series A preferred stock 5,226 5 - - - - 18,652
Gain of refinancing of series A preferred stock - - - - - - 29,370
Redemption of pro-rata portion of beneficial
conversion feature - - - - - - (18,375)
Series D beneficial conversion feature - - - - - - 3,764
Conversion of series D preferred stock to class A
common stock 350 1 - - - - 477
Gain on series E preferred stock redemption - - - - - - 30
Accretion of redeemable convertible preferred
stock - - - - - - (1,802)
Deferred compensation adjustment for terminated
employees - - - - - - (499)
Amortization of deferred stock compensation - - - - - - -
--------- ---------- ---------- --------- ---------- --------- ------------
Balance at December 31, 2001 43,689 $ 44 48,233 $ 48 - $ - $ 239,580
========= ========== ========== ========= ========== ========= ============
The accompanying notes are an integral part of these Consolidated Financial
Statements.
63
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
(Continued)
Accumulated Other
Comprehensive
Income (Loss)
-------------------------------
Unrealized Foreign
Gain (Loss) Currency
on Short-term Translation Accumulated Deferred
Investments Adjustment Deficit Compensation Total
-------------- -------------- --------------- --------------- -----------
Balance at December 31, 1998 $ - $ 894 $ (4,210) $ (1,164) $ 37,775
-------------- -------------- --------------- --------------- -----------
Net loss - - (33,743) - (33,743)
Change in unrealized gain (loss)
on investments, net of applicable taxes 1,367 - - - 1,367
Foreign currency translation adjustment - (618) - - (618)
----------
Comprehensive loss - - - - (32,994)
Issuance of class A common stock in
connection with offering, net of
offering costs - - - - 40,049
Conversion of class B to class A common stock - - - - -
Issuance of class A common stock under stock
option and purchase plans - - - - 7,021
Issuance of class A common stock related to
purchase of NCR's Teracube assets - - - - 49,557
Issuance of class A common stock warrants - - - - 139
Amortization of deferred stock compensation - - - 269 269
-------------- -------------- --------------- --------------- -----------
Balance at December 31, 1999 $ 1,367 $ 276 $ (37,953) $ (895) $ 101,816
-------------- -------------- --------------- --------------- -----------
Net loss - - (261,306) - (261,306)
Change in unrealized gain (loss) on investments,
net of applicable taxes (1,400) - - - (1,400)
Foreign currency translation adjustment - 1,200 - - 1,200
-----------
Comprehensive loss - - - - (261,506)
Conversion of class B to class A common stock - - - - -
Issuance of class A common stock under stock
option and purchase plans - - - - 8,394
Issuance of class A common stock in connection
with agreement with software integrator - - - - 1,600
Capital contribution related to stockholder
stock grant - - - - 3,003
Acceleration of vesting provisions on stock
options - - - - 1,483
Allocation of investment proceeds to series A
preferred stock beneficial conversion feature - - - - 19,375
Deemed dividend for series A preferred stock
beneficial conversion feature - - - - (19,375)
Preferred stock dividends - - - - (4,687)
Payment of preferred stock dividends in shares of
class A common stock - - - - 4,088
Amortization of deferred stock compensation - - - 271 271
-------------- -------------- --------------- --------------- -----------
Balance at December 31, 2000 $ (33) $ 1,476 $ (299,259) $ (624) $ (145,538)
-------------- -------------- --------------- --------------- -----------
Net loss - - (80,868) - (80,868)
Change in unrealized gain (loss) on investments,
net of applicable taxes 111 - - - 111
Foreign currency translation adjustment - 993 - - 993
-----------
Comprehensive loss - - - - (79,764)
Conversion of class B to class A common stock - - - - -
Issuance of class A common stock under stock
option and purchase plans - - - - 4,224
Issuance of class A common stock in connection
with agreement with software integrator - - - - 603
Preferred stock dividends - - - - (8,581)
Payment of preferred stock dividends in shares
of class A common stock - - - - 5,323
Issuance of class A common stock in exchange for
redeemable convertible preferred stock of
discontinued operations - - - - 8,715
Gain on early redemption of redeemable convertible
preferred stock of discontinued operations - - - - 44,923
Contribution of shares from officers - - - - (60)
Cancellation of treasury stock - - - - -
Issuance of class A common stock in connection with
refinancing of series A preferred stock - - - - 18,657
Gain of refinancing of series A preferred stock - - - - 29,370
Redemption of pro-rata portion of beneficial
conversion feature - - - - (18,375)
Series D beneficial conversion feature - - - - 3,764
Conversion of series D preferred stock to class A
common stock - - - - 478
Gain on series E preferred stock redemption - - - - 30
Accretion of redeemable convertible preferred stock - - - - (1,802)
Deferred compensation adjustment for
terminated employees - - - 387 (112)
Amortization of deferred stock compensation - - - 138 138
-------------- -------------- --------------- --------------- -----------
Balance at December 31, 2001 $ 78 $ 2,469 $ (380,127) $ (99) $ (138,007)
============== ============== =============== =============== ===========
The accompanying notes are an integral part of these Consolidated
Financial Statements.
64
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years ended December 31,
--------------------------------------
2001 2000 1999
----------- ----------- ----------
Operating activities:
Net loss from continuing operations $ (48,054) $ (215,117) $ (24,507)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 29,560 29,622 6,839
Bad debt expense 4,014 10,129 1,877
Acquired in-process research and development - - 2,800
Net realized loss on sale and write-down of short-term investments 3,603 9,365 -
Non-cash portion of restructuring and impairment charges 18,581 4,815 -
(Decrease) increase in estimated cost of litigation settlement (30,098) 99,484 -
Non-cash charges and fees on Credit Facility 637 - -
Other, net 718 271 269
Changes in operating assets and liabilities:
Accounts receivable 21,654 (19,257) (14,598)
Prepaid expenses and other current assets 4,074 6,436 (10,318)
Deposits and other assets (1,628) (667) (1,054)
Accounts payable and accrued expenses, compensation and employee benefits,
interest and preferred dividends (18,180) 27,346 9,784
Accrued restructuring costs 11,693 - -
Deferred revenue and advance payments, net of reclass on contingency from
terminated contract (24,707) (15,891) 36,720
Other long-term liabilities 632 2,904 -
---------- ---------- ----------
Net cash (used in) provided by operating activities (27,501) (60,560) 7,812
---------- ---------- ----------
Investing activities:
Purchases of property and equipment (1,884) (28,714) (14,610)
Purchases of intangible assets - (3,168) -
Purchases of short-term investments (1,940) (1,496) (24,491)
Purchases of long-term investments - (5,021) -
Maturities of short-term investments 1,935 5,500 5,000
Proceeds from sales of short-term investments 2,800 39,763 -
Decrease (increase) in restricted cash 25,445 (25,884) -
---------- ---------- ----------
Net cash provided by (used in) investing activities 26,356 (19,020) (34,101)
---------- ---------- ----------
The accompanying notes are an integral part of these Consolidated
Financial Statements.
65
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Continued)
Years ended December 31,
---------------------------------------
2001 2000 1999
---------- ---------- ----------
Financing activities:
Proceeds from sale of class A common stock and exercise of stock options, net
of offering costs 4,224 8,394 47,197
Proceeds from issuance of series A redeemable convertible preferred stock, net
of offering costs - 119,585 -
Proceeds from term loan in connection with the New Credit Facility 10,000 - -
Cash repayment of term loan (10,000) - -
Net cash advances under the Modified Credit Facility 866 - -
Debt issuance costs (765) - -
Redemption of series A redeemable convertible preferred stock, including
offering costs of $513 (13,013) - -
Redemption of series E redeemable convertible preferred stock (6,770) - -
Cash dividends for series E redeemable convertible preferred stockholders (192) - -
Payment of dividend notes payable - - (5,000)
---------- ---------- ----------
Net cash (used in) provided by financing activities (15,650) 127,979 42,197
Effect of foreign exchange rate changes on cash and cash equivalents (634) (520) (612)
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents from continuing operations (17,429) 47,879 15,296
Net cash received from (advanced to) discontinued operations 22,635 (40,617) (16,846)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 5,206 7,262 (1,550)
Cash and cash equivalents, beginning of period 33,203 25,941 27,491
---------- ---------- ----------
Cash and cash equivalents, end of period $ 38,409 $ 33,203 $ 25,941
========== ========== ==========
Supplemental disclosure of noncash investing and financing activities:
Stock received in exchange for products and services $ 1,153 $ 13,058 $ 21,546
========== ========== ==========
Public stock received in exchange for stock in private company $ 2,017 $ - $ -
========== ========== ==========
Issuance of class A common stock related to purchase of Teracube assets $ - $ - $ 49,557
========== ========== ==========
Issuance of class A common stock related to consulting services agreement $ 603 $ 1,600 $ -
========== ========== ==========
Issuance of class A common stock warrants $ 414 $ - $ 139
========== ========== ==========
Payment of series A redeemable convertible preferred stock dividends through the
issuance of class A common stock and series D convertible preferred stock $ 6,176 $ 4,088 $ -
========== ========== ==========
Fair value of class A common stock and series B, series C, series D, and series
E redeemable convertible preferred stock issued in connection with
refinancing transaction $ 90,385 $ - $ -
========== ========== ==========
Carrying value of series A redeemable convertible preferred stock redeemed and
exchanged in connection with refinancing transaction $(113,880) $ - $ -
========== ========== ==========
Conversion of series D redeemable convertible preferred stock through the
issuance of class A common stock $ 478 $ - $ -
========== ========== ==========
Early redemption of redeemable convertible preferred stock of discontinued
operations $ (53,638) $ - $ -
========== ========== ==========
Issuance of class A common stock exchanged for redeemable convertible
preferred stock of discontinued operations $ 8,715 $ - $ -
========== ========== ==========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
66
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Continued)
Years ended December 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 631 $ 33 $ 87
========== ========== ==========
Cash paid during the year for income taxes $ 1,306 $ 515 $ 2,113
========== ========== ==========
The accompanying notes are an integral part of these
Consolidated Financial Statements.
67
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization
MicroStrategy Incorporated (the "Company" or "MicroStrategy") is a leading
worldwide provider of business intelligence software that enables companies to
analyze the raw data stored across their enterprise to reveal the trends and
answers needed to manage their business effectively. MicroStrategy software
delivers this critical insight to workgroups, the enterprise and extranet
communities via e-mail, web, wireless and voice communication channels.
Businesses can use the Company's software platform to develop user-friendly
solutions, proactively optimize revenue-generating strategies, enhance
cost-efficiency and productivity and improve their customer relationships.
The MicroStrategy software platform enables users to query and analyze the most
detailed, transaction-level databases, turning data into business intelligence
and delivering reports and alerts about the users' business processes. The web
architecture provides reporting, security, performance and standards that are
critical for web deployment. Within intranets, MicroStrategy's products provide
employees with information to enable them to make better, more cost-effective
business decisions. In extranets, enterprises can use MicroStrategy 7 software
to build stronger relationships by linking customers and suppliers via the
Internet. The Company also offers a comprehensive set of consulting, education
and technical support services for its customers and partners.
The Company has incurred substantial losses for each of the three years in the
period ended December 31, 2001. For the year ended December 31, 2001, the
Company incurred a loss from operations of $66.7 million and negative cash flows
from operations of $27.5 million. As of December 31, 2001, the Company had an
accumulated deficit of $380.1 million and a working capital deficit of $18.7
million. The Company has taken several actions to realign its cost structure to
better match its expected revenues, including reducing its workforce, reducing
and limiting discretionary operating expenses, reducing capital expenditures,
and discontinuing the operations of Strategy.com. Additionally, the Company is
exploring alternative financing arrangements, which include credit facilities,
the sale of equity in MicroStrategy, or other alternative financing sources for
the Company. Alternative debt or equity financing may not be available on
acceptable terms. If financing is not available on acceptable terms and/or if
the Company does not achieve revenues at anticipated levels, it will need to
take further actions to reduce costs in order to minimize its losses from
operations. Management believes that existing cash, cash generated internally by
operations, if any, and the modified credit facility entered into in June 2001
(Note 9) will be sufficient to meet the Company's working capital requirements
and anticipated capital expenditures through the end of 2002.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
(b) Use of Estimates
The preparation of the consolidated financial statements, in conformity with
accounting principles generally accepted in the United States, requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities and equity and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. On an on-going basis, the
Company evaluates its estimates, including, but not limited to, those related to
bad debts, investments, goodwill and intangible assets, income taxes, financing
operations, restructuring and impairment charges, contingency from terminated
contract, discontinued operations, and other contingencies. The Company bases
its estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis
68
MICROSTATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for making judgments about the carrying value of assets and liabilities that are
not readily apparent from other sources. Actual results could differ from those
estimates under different assumptions or conditions.
(c) Reclassification
Certain prior year amounts in the consolidated financial statements have been
reclassified to conform to the current year presentation.
(d) Discontinued Operations
The historical consolidated financial statements of the Company have been
reclassified to present its subsidiary, Strategy.com, as a discontinued
operation for all periods presented (Note 4).
(e) Cash and Cash Equivalents and Restricted Cash
Cash equivalents include money market instruments and commercial paper. The
Company considers all highly liquid investments with an original maturity of
three months or less, when purchased, to be cash equivalents. Restricted cash
consists of compensating cash balances for contractual obligations that do not
meet the definition of cash equivalents.
(f) Investments
Investments are comprised of readily marketable equity securities, non-publicly
traded equity securities, and debt securities with original maturities of more
than three months when purchased. Where the original maturity of marketable debt
securities is more than one year, the marketable debt securities are classified
as short-term investments if the Company's intention is to convert them to cash
within one year. Marketable debt securities are classified in one of three
categories: trading, available-for-sale, or held-to-maturity. Marketable equity
securities are classified as either trading or available-for-sale.
Held-to-maturity securities are those debt securities, which the Company has the
ability and intent to hold until maturity. All other marketable securities not
included in trading and held-to-maturity are classified as available-for-sale.
Management determines the appropriate classification of marketable securities at
the time of purchase and re-evaluates such designation as of each balance sheet
date. All of the Company's marketable securities are available-for-sale as of
December 31, 2001.
Available-for-sale marketable securities are reported at fair value. Unrealized
holding gains and losses, net of applicable taxes, on available-for-sale
marketable securities are reported in accumulated other comprehensive income in
stockholders' equity until realized. On a quarterly basis, management evaluates
individual securities to determine whether a decline in fair value is other than
temporary. If the decline in fair value is considered to be other than
temporary, the cost basis of the individual security is written down to fair
value as a new cost basis and the amount of the write-down is included in
operations. Interest income is recognized when earned. Realized gains and losses
for marketable securities are derived using the specific identification method
for determining the cost of the securities sold.
(g) Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, as follows: three years for computer equipment and
software and five to ten years for furniture and equipment. Leasehold
improvements are amortized using the straight-line method over the estimated
useful lives of the improvements or the term of the lease, whichever is shorter.
Expenditures for maintenance and repairs are charged to expense as incurred.
Expenditures for major renewals and betterments that extend the useful lives of
property and equipment are capitalized and depreciated over the remaining useful
lives of the asset. When assets are retired or sold, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the results of operations.
69
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Included in property and equipment is the cost of internally developed software.
In accordance with Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use," eligible
internally developed software costs incurred are capitalized subsequent to the
completion of the preliminary project stage. Such costs include external direct
material and service costs, employee payroll and payroll-related costs. After
all substantial testing and deployment is completed and the software is ready
for its intended use, internally developed software costs are amortized using
the straight-line method over the estimated useful life of the software,
generally up to three years.
(h) Goodwill and Intangible Assets
Goodwill was acquired principally in connection with the purchase of the
minority interest in the Company's foreign subsidiaries. Intangible assets
consist of intangible assets acquired in connection with the purchase of the
Teracube assets of NCR Corporation ("NCR"), trade names, customer lists,
assembled work force, domain names and agreement with software integrator.
Goodwill and intangible assets are amortized on the straight-line basis over
their respective useful lives ranging from 1 to 20 years with an aggregate
weighted average useful life of approximately three years. Goodwill and
intangible assets, net of accumulated amortization, are $5.4 million and $34.3
million at December 31, 2001 and 2000, respectively. Accumulated amortization is
$23.3 million and $18.2 million at December 31, 2001 and 2000, respectively. For
the years ended December 31, 2001, 2000, and 1999, respectively, the Company
recorded amortization expense on goodwill and intangible assets of $17.3
million, $17.7 million, and $422,000. Additionally, during 2001, the Company
recorded an impairment charge of $12.2 million for the write-down of its
Teracube intangible asset (Note 3). During 2001, the Company capitalized an
additional $603,000 as an intangible asset in connection with an installment
payment made in conjunction with an asset purchase agreement with a software
integrator that became due in 2001 as a result of activity in 2001 (Note 16).
(i) Impairment of Long-Lived Assets
The Company reviews long-lived assets, including goodwill and intangible assets,
for impairment whenever events or changes in business circumstances indicate
that the carrying amount of the assets may not be fully recoverable or that the
useful lives of these assets are no longer appropriate. Each impairment test is
based on a comparison of the undiscounted cash flows to the recorded value of
the asset. If impairment is indicated, the asset is written down by the amount
in which the carrying value of the asset exceeds the related fair value of the
asset. In connection with the restructuring plans adopted during 2001 and a
periodic assessment of the carrying value of long-lived assets, certain assets
were deemed to be impaired. Accordingly, the Company recorded an impairment
charge of $18.6 million during 2001 (Note 19).
(j) Software Development Costs
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed," software development costs are expensed as incurred until
technological feasibility has been established, at which time such costs are
capitalized until the product is available for general release to customers.
Capitalized software development costs include direct labor costs and fringe
benefit costs attributed to programmers, software engineers, quality control and
field certifiers working on products after they reach technological feasibility
but before they are generally available to customers for sale. Technological
feasibility is considered to be achieved when a product design and working model
of the software product has been completed. Capitalized costs are amortized over
the estimated product life of two to three years, using the greater of the
straight-line method or the ratio of current product revenues to the total of
current period and projected future revenues. Capitalized software development
costs, net of accumulated amortization, are $2.3 million and $1.3 million at
December 31, 2001 and 2000, respectively, and are included in deposits and other
assets in the accompanying consolidated balance sheets. Amortization expense
related to software development costs was $641,000, $771,000 and $600,000 for
the years ended December 31, 2001, 2000, and 1999, respectively, and is included
in cost of product license revenues. The Company capitalized software
development costs of $1.6 million and $1.4 million during 2001 and 2000,
respectively.
70
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(k) Legal Costs
The Company accrues legal costs in the period in which expenses are incurred,
except in the event of a loss contingency that is believed to be probable and
can be reasonably estimated, whereby the Company accrues the legal costs
estimated to be incurred through the expected settlement of the contingent
matter. As events evolve during the administration and litigation process and
additional information becomes known, the Company reassesses its estimates
related to accrued legal costs.
(l) Deferred Revenue and Advance Payments
Deferred revenue and advance payments related to product support and other
services result from payments received prior to the performance of services for
software development, consulting, education and maintenance. Deferred revenue
and advance payments related to product licenses result primarily from multiple
element arrangements that include development and other customized services,
which may also include subsequent hosting services, or other arrangements with
future deliverables. Certain of these services significantly alter features or
functionality of the software. Deferred revenue has been classified as either
deferred product revenue or deferred product support and other services revenue
based on the estimated fair value of the multiple elements of the arrangement.
Non-current deferred revenue and advance payments are expected to be recognized
as revenue in one to three years. The Company offsets its accounts receivable
and deferred revenue for any billed and unpaid items included in deferred
revenue and advance payments.
(m) Revenue Recognition
Product license revenue is derived from sales of software licenses. Product
support and other services revenue consists of revenue derived from maintenance
services, customer and partner education, consulting, and other services. The
Company's revenue recognition policies are in accordance with SOP 97-2,
"Software Revenue Recognition," as amended, which is the authoritative guidance
for recognizing revenue on software transactions. In the case of software
arrangements which require significant production, modification, or
customization of software, the Company follows the guidance in SOP 81-1,
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts."
SOP 97-2 requires that revenue recognized from software arrangements be
allocated to each element of the arrangement based on the relative fair values
of the elements, such as software products, maintenance services, installation,
training, or other elements. Under SOP 97-2, the determination of fair value is
based on objective evidence that is specific to the vendor. If such evidence of
fair value for any undelivered element of the arrangement does not exist, all
revenue from the arrangement is deferred until such time that evidence of fair
value does exist or until all elements of the arrangement are delivered, subject
to certain limited exceptions set forth in SOP 97-2. SOP 97-2 was amended in
February 1998 by SOP 98-4, "Deferral of the Effective Date of a Provision of SOP
97-2" and was amended again in December 1998 by SOP 98-9, "Modification of SOP
97-2, Software Revenue Recognition, with Respect to Certain Transactions." Those
amendments deferred and then clarified, respectively, the specification of what
was considered vendor specific objective evidence of fair value for the various
elements in a multiple element arrangement. The Company adopted the provisions
of SOP 97-2 and SOP 98-4 as of January 1, 1998. SOP 98-9 is effective for all
transactions entered into by the Company in fiscal year 2000 and thereafter. The
adoption of this statement did not have a material impact on the Company's
operating results, financial position or cash flows.
In December 1999, the Securities and Exchange Commission ("SEC") released Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in the financial statements filed with the SEC. SAB No.
101 was effective in fiscal year 2000. The implementation of SAB No. 101 did not
have a material impact on the Company's financial position or results of
operations.
71
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's revenue recognition policy is as follows:
Product license revenue: The Company recognizes revenue from sales of software
licenses to end users or resellers upon persuasive evidence of an arrangement
(as provided by agreements or contracts executed by both parties), delivery of
the software, and determination that collection of a fixed or determinable fee
is reasonably assured. When the fees for software upgrades and enhancements,
maintenance, consulting and education are bundled with the license fee, they are
unbundled using the Company's objective evidence of the fair value of the
elements represented by the Company's customary pricing for each element in
separate transactions. If such evidence of fair value exists for all undelivered
elements and there is no such evidence of fair value established for delivered
elements, revenue is first allocated to the elements where evidence of fair
value has been established and the residual amount is allocated to the delivered
elements. If evidence of fair value for any undelivered element of the
arrangement does not exist, all revenue from the arrangement is deferred until
such time that evidence of fair value exists for undelivered elements or until
all elements of the arrangement are delivered, subject to certain limited
exceptions set forth in SOP 97-2. When the software license arrangement requires
the Company to provide significant production, customization or modification of
the software, or when the customer considers these services essential to the
functionality of the software product, both the product license revenue and
consulting services revenue are recognized in accordance with the provisions of
SOP 81-1, using the percentage of completion method. Under percentage of
completion method accounting, both product license and consulting services
revenue are recognized as work progresses based on cost inputs. Contracts
accounted for under the percentage of completion method under SOP 81-1
represented approximately 7.8%, 10.9% and 1.0% of total revenues during the
years ended December 31, 2001, 2000 and 1999, respectively. Expected losses on
contracts in progress are expensed in the period in which the losses become
probable and reasonably estimable. As of December 31, 2001, the Company has not
incurred any losses on contracts in progress. If the arrangement includes
acceptance criteria, revenue is not recognized until the Company can objectively
demonstrate that the software or service can meet the acceptance criteria, or
the acceptance period lapses, whichever is earlier. If the software license
arrangement obligates the Company to deliver unspecified future products, then
revenue is recognized on the subscription basis, ratably over the term of the
contract.
License revenue derived from sales to resellers or original equipment
manufacturers ("OEM") who purchase our products for future resale or use and who
are obligated for payment irrespective of delivery to end users is recognized
upon delivery to the reseller or OEM provided all other revenue recognition
criteria are met and otherwise is recognized upon delivery to the ultimate end
users.
Product support and other services revenue: Maintenance revenue is derived from
providing technical support and software updates and upgrades to customers.
Maintenance revenue is recognized ratably over the term of the contract, which
in most cases is one year. Revenue from consulting and education services is
recognized as the services are performed.
Amounts collected prior to satisfying the above revenue recognition criteria are
included in deferred revenue and advance payments in the accompanying
consolidated balance sheets.
Cost of product licenses consists of the costs to distribute the product,
including the costs of the media on which it is delivered, shipping and handling
costs and royalty payments to third party vendors, as well as amortization of
software development costs. Cost of product support and other services consists
primarily of consulting and support personnel salaries and related costs.
Research and development costs are excluded from the cost of revenue.
The Company has historically entered into a limited number of barter
arrangements involving the exchange of both products and services. Such
transactions were recorded at the estimated fair value of the products or
services received or given where significant objective evidence of this value
existed. In the absence of sufficient objective evidence of fair value, the
acquired assets were recorded at the book value of the surrendered assets. The
Company did not enter into any barter arrangements during 2001.
72
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(n) Advertising Costs
Advertising production costs are expensed the first time the advertisement takes
place. Media placement costs are expensed in the month the advertising appears.
Advertising costs were $1.4 million, $8.8 million and $1.6 million for the years
ended December 31, 2001, 2000 and 1999, respectively. As of December 31, 2001
and 2000, the Company had no prepaid advertising costs.
(o) Income Taxes
The Company is subject to federal and state income taxes and recognizes deferred
taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." This
statement provides for a liability approach under which deferred income taxes
are provided based upon enacted tax laws and rates applicable to the periods in
which the taxes become payable. The Company provides a valuation allowance to
reduce deferred tax assets to their estimated realizable value.
(p) Basic and Diluted Net Loss Per Share
The Company computes basic and diluted net loss per share in accordance with
SFAS No. 128, "Earnings per Share" and Emerging Issues Task Force ("EITF") Topic
D-72, "Effect of Contracts That May be Settled in Stock or Cash on the
Computation of Diluted Earnings per Shares". Additionally, in accordance with
EITF Topic D-95, "Effect of Participating Convertible Securities in the
Computation of Basic Earnings Per Share," participating securities that are
convertible into common stock must be included in the computation of basic loss
per share, while outstanding, if their effect is dilutive. Because each series
of our preferred stock has participation rights in the undistributed earnings of
the Company equivalent to those of common shareholders, each series of preferred
stock is considered a participating convertible security and is therefore
included in the computation of basic loss per share to the extent they are
dilutive.
Basic net loss per share is determined by dividing the net loss applicable to
common stockholders (for continuing operations and discontinued operations, as
applicable) by the weighted average number of common shares outstanding during
the period. Diluted net loss per share is determined by dividing the net loss
applicable to common stockholders (for continuing operations and discontinued
operations, as applicable) by the weighted average number of common shares and
potential common shares outstanding during the period. Potential common shares
are included in the diluted net loss per share calculation when dilutive.
Potential common shares consisting of common stock issuable upon exercise of
outstanding common stock options and warrants are computed using the treasury
stock method. Potential common shares also consist of common stock issuable upon
the conversion of preferred stock. The Company's net loss per share calculation
for basic and diluted is based on the weighted average number of common shares
outstanding. There are no reconciling items in the numerator and denominator of
the Company's net loss per share calculation. Employee stock options and
warrants of 2,966,640, 7,724,964, and 9,369,358 for the years ended December 31,
2001, 2000, and 1999, respectively, have been excluded from the net loss per
share calculation because their effect would be anti-dilutive. Additionally,
series A preferred stock, series B preferred stock, series C preferred stock,
and series D preferred stock which were convertible into 17,141,683, 4,429,521,
and 0 shares of class A common stock, have been excluded from the net loss per
share calculation for the years ended December 31, 2001, 2000, and 1999,
respectively, because their effect would be anti-dilutive. In determining the
number of incremental shares that would have been included in the calculation if
the Company had positive net income, the securities were converted using the
share settlement method or the if-converted method, depending upon which method
would yield a more dilutive result. The share settlement method assumes the
securities are converted at the end of the period using a volume weighted
average stock price based upon an option available to the Company to settle the
securities in shares of common stock at maturity. The if-converted method
assumes the securities are converted at the fixed conversion rate currently
available to the holders of the securities. Net loss used in the computation of
basic and diluted earnings (loss) per share of continuing operations was
computed by adjusting the net loss from continuing operations for dividends on
and accretion of preferred stock, net gain on refinancing of preferred stock,
and preferred stock beneficial conversion feature. Net income (loss) used in the
computation of earnings (loss) per share of discontinued operations was computed
by adjusting the net loss from discontinued operations by gain on early
redemption of preferred stock of discontinued operations.
73
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(q) Foreign Currency Translation
The functional currency of the Company's international operations is the local
currency. Accordingly, all assets and liabilities of these subsidiaries are
translated using exchange rates in effect at the end of the period and revenue
and costs are translated using weighted average exchange rates for the period.
The related translation adjustments are reported in accumulated other
comprehensive income (loss) in stockholders' equity (deficit). Transaction gains
and losses arising from transactions denominated in a currency other than the
functional currency of the entity involved are included in the consolidated
statement of operations.
(r) Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash, cash equivalents, and accounts
receivable. The Company places its cash equivalents with high credit-quality
financial institutions and invests its excess cash primarily in money market
instruments. The Company has established guidelines relative to credit ratings
and maturities that seek to maintain safety and liquidity. The Company sells
products and services to various companies across several industries throughout
the world in the ordinary course of business. The Company routinely assesses the
financial strength of its customers and maintains allowances for anticipated
losses. For the year ended December 31, 2001, no individual customer accounted
for 10% or more of net accounts receivable. For the year ended December 31,
2000, one customer accounted for 10.8% of net accounts receivable.
(s) Fair Value of Financial Instruments
The carrying amounts of the Company's cash, cash equivalents, accounts
receivable, accounts payable, and working capital line of credit approximate
fair value. The fair market value for short-term and long-term marketable
securities is based on quoted market prices where available. The series A, B, C,
and D redeemable convertible preferred stock were recorded at their respective
fair values when issued and the carrying value approximates fair value. The
carrying value of long-term debt, common stock, and warrants to be issued in
connection with the settlement of the class action litigation is based upon the
fair value of the instruments to be issued. See factors for determining the fair
value of these instruments discussed in Note 13.
(t) Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issue to Employees," and related interpretations,
in accounting for its employee stock options rather than the alternative fair
value accounting under SFAS No. 123, "Accounting for Stock-Based Compensation."
APB No. 25 provides that the compensation expense relative to the Company's
employee stock options is measured based on the intrinsic value of the stock
options at the measurement date. SFAS No. 123 requires companies that continue
to follow APB No. 25 to provide pro forma disclosure of the impact of applying
the fair value method of SFAS No. 123.
(u) Comprehensive Income (Loss)
Other comprehensive income (loss) recorded by the Company is comprised of
accumulated currency translation adjustments and unrealized gains and losses on
available-for-sale marketable securities, net of related tax effects.
(v) Recent Accounting Standards
The Company adopted SFAS No. 133 as of January 1, 2001. During 2001, the
adoption of SFAS No. 133 did not have a material effect on the financial
position or results of operations of the Company.
74
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations," which addresses the financial accounting and
reporting for business combinations and supersedes Accounting Principles Board
Opinion No. 16, "Business Combinations," and SFAS No. 38, "Accounting for
Preacquisition Contingencies of Purchased Enterprises," and is applicable to
business combinations initiated after June 30, 2001. SFAS No. 141 requires
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting and broadens the criteria for recording
intangible assets separate from goodwill. Recorded goodwill and intangibles will
be evaluated against the new criteria and may result in certain intangibles
being reclassified to goodwill, or alternatively, amounts initially recorded as
goodwill may be separately identified and recognized apart from goodwill. The
Company does not expect that the adoption of this statement will have a material
impact on its consolidated financial statements.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which is effective for the Company beginning in fiscal year 2002. This
statement addresses financial accounting and reporting for intangible assets
acquired individually or with a group of other assets at acquisition. This
statement also addresses financial accounting and reporting for goodwill and
other intangible assets subsequent to their acquisition. Under SFAS No. 142,
goodwill will not be amortized. Instead, the statement requires that entities
perform an initial impairment assessment upon adoption and then again on at
least an annual basis or upon the occurrence of triggering events, if earlier,
to identify potential goodwill impairment and measure the amount of goodwill
impairment loss to be recognized, if any. An impairment loss is recognized when
the carrying amount of reporting unit goodwill exceeds the implied fair value of
that goodwill. After a goodwill impairment loss is recognized, the adjusted
carrying amount of the goodwill shall be its new accounting basis. The Company
expects that amortization of goodwill and intangible assets will not change
substantially in connection with the adoption of this standard on January 1,
2002. Additionally, transitional impairments, if any, are not expected to be
material; however, impairment reviews may result in future periodic write-downs.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which is effective for the Company beginning in
fiscal year 2002. SFAS No. 144 supersedes previous guidance for financial
accounting and reporting for the impairment or disposal of long-lived assets and
for segments of a business to be disposed of. SFAS No. 144 retains the
fundamental provisions of existing generally accepted accounting principles with
respect to recognition and measurement of long-lived asset impairment contained
in SFAS No. 121, " Accounting for the Impairment of Long Lived Assets and for
Long-Lived Assets to be Disposed Of." However, SFAS No. 144 provides new
guidance intended to address certain significant implementation issues
associated with SFAS No. 121, including expanded guidance with respect to
appropriate cash flows to be used, whether recognition of any long-lived asset
impairment is required, and if required, how to measure the amount of
impairment. SFAS No. 144 also requires that any net assets to be disposed of by
sale be reported at the lower of carrying value or fair market value less costs
to sell, and expands the reporting of discontinued operations to include any
component of an entity with operations and cash flows that can be clearly
distinguished from the rest of the Company. The Company is currently assessing
the impact that the adoption of this statement will have on its consolidated
financial statements.
(3) Acquisitions
In December 1999, the Company purchased the intellectual property and other
tangible and intangible assets, including the assembled workforce relating to
NCR's Teracube project in exchange for 566,372 shares of class A common stock,
valued at $49.6 million, based on the price of the Company's stock on the
closing date. The Company developed the Teracube assets in concert with its
existing proprietary technology to create an offering for its business
intelligence platform that allows non-MicroStrategy products to access the
MicroStrategy platform. The Company's allocation of the $49.6 million purchase
price was $2.8 million for in-process research and development and $46.8 million
for tangible and intangible assets including core technology, computer
equipment, and assembled workforce. The Company is amortizing the tangible and
intangible assets over their estimated useful lives, ranging from one to three
years.
75
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In estimating the fair value of the in-process research and development projects
acquired, the Company considered, among other factors, the stage of development
of the Teracube research and development projects at the time of the acquisition
and projected estimated cash flows from those projects when completed and the
percentage of the final products cash flows that is attributed to core
technology of the Company and that was already developed by NCR. Approximately
30% of the final products' estimated cash in-flows were attributed to the
acquired Teracube technology. The Company used a discount rate of 35% when
estimating the net present value of the acquired technology.
At the end of 1999, the Company estimated additional expenditures of
approximately $900,000 to complete development; however, due to expansion of
project scope, the Company incurred expenses of $1.6 million and $280,000 during
2000 and 2001, respectively, in order to complete development. Those development
efforts were focused on completing the development of certain sub-products of
Teracube that would maximize efficiencies in the operation of certain of the
Company's business intelligence products. Development was completed at the end
of the first quarter of 2001 and a MicroStrategy product that included certain
Teracube technology was released and made available for sale.
In connection with periodic assessments of the carrying value of the Teracube
intangible asset during 2001, the Company determined that the product would
probably not generate sufficient cash flow to support the carrying value of the
intangible asset. Accordingly, the Company recorded an impairment charge of
$12.2 million based upon the difference between the carrying value of the
intangible asset of $14.8 million and its estimated fair value of $2.6 million.
Prior to recording the impairment charge, the Company recorded amortization
expense relating to these intangible assets of $15.1 million, $16.4 million, and
$341,000 during the years ended December 31, 2001, 2000 and 1999, respectively.
(4) Discontinued Operations
During the second quarter of 2001, the Company substantially curtailed
operations of its subsidiary, Strategy.com, and reduced its workforce to
approximately 40 employees. During the third quarter of 2001, the Company
further reduced the Strategy.com workforce to approximately 6 employees and
continued to review its options with respect to the remaining assets of
Strategy.com. On December 31, 2001, the Company discontinued the operations of
Strategy.com and shut down its services. Accordingly, the Company recorded a
loss from abandonment of its discontinued operations of $2.1 million. The loss
from abandonment included remaining lease payments associated with abandoned
computer equipment, personal property taxes due under equipment leases, certain
other costs, and estimated results from operations from the measurement date of
December 31, 2001 through the expected disposal date in the first half of 2002.
The historical consolidated financial statements of the Company have been
reclassified to present Strategy.com as a discontinued operation for all periods
presented. Strategy.com revenues were $8.9 million, $8.7 million, and $0 for
2001, 2000, and 1999 respectively. The net loss from Strategy.com was $32.8
million, $46.2 million, and $9.2 for 2001, 2000, and 1999, respectively.
Included within Strategy.com's net loss for the year ended December 31, 2001 are
restructuring and impairment charges of $19.4 million. The charge was comprised
of a write-down of impaired assets of $17.3 million and other restructuring
costs associated with severance and exiting facilities. The loss from
abandonment is based on estimates and actual results could differ under
different assumptions or conditions. The net assets and liabilities of
Strategy.com included within net assets and liabilities of discontinued
operations in the accompanying consolidated balance sheets consist of the
following, as of December 31, (in thousands):
76
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2001 2000
------------- ------------
Current assets (liabilities):
Cash and cash equivalents $ - $ 34,482
Accounts receivable, net 25 1,140
Prepaid expenses and other current assets 272 1,908
Accounts payable and accrued expenses (4,307) (2,062)
Accrued compensation and employee benefits (100) (2,774)
Accrued restructuring costs (300) -
Deferred revenue and advance payments (3) (8,079)
Other liabilities (66) -
----------- ------------
Net current (liabilities) assets of discontinued operations $ (4,479) $ 24,615
----------- ------------
Property and equipment, net $ - $ 21,984
Deposits and other assets - 1,241
Deferred revenue and advance payments - (5,177)
----------- ------------
Net (liabilities) assets of discontinued operations $ - $ 18,048
----------- ------------
----------- ------------
Redeemable convertible preferred stock of discontinued operations $ - $ 40,530
=========== ============
(5) Investments
The following summarizes by major security type the fair market value and cost
of the Company's investments as of December 31, (in thousands):
2001 2000
----------------- -------------------
Fair Fair
Value Cost Value Cost
-------- -------- --------- ----------
Marketable equity securities $ 904 $ 826 $1,085 $1,118
Non-publicly traded equity securities - - 5,271 5,271
------- -------- ------- -------
$ 904 $ 826 $6,356 $6,389
======= ======== ======= =======
Classified as:
Short-term investments $ 904 $1,085
Long-term investments - 5,271
------- -------
$ 904 $6,356
======= =======
In December 1999, the Company received 824,742 shares of Exchange Applications,
Inc. ("Exchange Applications") stock originally valued at $21.5 million, in
consideration for the sale of MicroStrategy software, technical support and
consulting services. The Company sold all of its economic interest in these
shares for a net realized gain of $1.5 million during 2000.
During 2000, the Company received an additional 805,800 shares of Exchange
Applications' stock, originally valued at $13.1 million, in consideration for
the sale of MicroStrategy software, technical support and consulting services.
Due to a significant decrease in the market value of Exchange Applications'
stock and because the timing and amount of future recovery, if any, is
uncertain, the Company wrote down the investment to its fair value at December
31, 2000, and recognized a loss of $12.1 million during 2000. This loss was
partially offset by a hedging transaction that resulted in a gain of $1.4
million in the third quarter of 2000.
During 2001, the Company received an additional 641,466 shares of Exchange
Applications' stock, valued at $1.2 million, pursuant to the arrangement
discussed above. Due to a subsequent decrease in the market value of Exchange
Applications' stock and because the timing and amount of future recovery, if
any, is uncertain, the Company wrote down the investment to its fair value at
the end of each quarterly period in
77
MICROSTRATEGY INCORPORAYED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2001 and recognized an aggregate loss of $1.4 million during 2001, of which a
portion relates to shares that had been received in 2000.
In August 2000, the Company invested $5.0 million in exchange for an approximate
5% interest in a private voice portal technology company. In February 2001, this
voice portal technology company was acquired by a publicly-traded company for a
combination of cash and common stock. In consideration for its interest in the
voice portal technology company, MicroStrategy received $2.2 million in cash and
454,503 shares of common stock valued at $2.0 million. In connection with the
transaction, MicroStrategy recorded a loss of $840,000 during the first quarter
of 2001 based on the difference between its original basis in its investment and
the fair value of the consideration received. Due to a subsequent decrease in
the market value of the publicly-traded company's common stock and because the
timing and amount of future recovery, if any, is uncertain, the Company wrote
down the investment to its fair value at December 31, 2001, and recognized a
loss of $1.4 million during 2001.
At December 31, 2001, the Company had net unrealized gains of $78,000 and at
December 31, 2000, the Company had net unrealized losses of $33,000 included in
accumulated other comprehensive income (loss) in the accompanying consolidated
statements of stockholders' equity (deficit).
(6) Accounts Receivable
Accounts receivable, net of allowances, consist of the following, as of December
31, (in thousands):
2001 2000
----------- ----------
Billed and billable $ 41,997 $ 77,568
Less: billed and unpaid deferred revenue (12,607) (20,003)
----------- ----------
29,390 57,565
Less: allowance for doubtful accounts (7,109) (9,644)
----------- ----------
$ 22,281 $ 47,921
=========== ==========
The Company offsets its accounts receivable and deferred revenue for any billed
and unpaid items included in deferred revenue and advance payments.
(7) Property and Equipment
Property and equipment consist of the following, as of December 31, (in
thousands):
2001 2000
-------- --------
Computer equipment and software $ 24,632 $ 26,374
Furniture and equipment 11,991 16,661
Leasehold improvements 10,396 12,022
Internally developed software 5,000 5,048
-------- --------
52,019 60,105
Less: accumulated depreciation and amortization (25,513) (20,680)
-------- ---------
$ 26,506 $ 39,425
======== =========
Depreciation and amortization expense related to property and equipment was
$11.7 million, $11.2 million, $5.6 million for the years ended December 31,
2001, 2000 and 1999, respectively.
In connection with the restructuring plans adopted during 2001, the Company
recorded an impairment charge of $6.3 million to write down its property and
equipment to be disposed of to fair value (Note 19).
78
MICRROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) Contingency from Terminated Contract
In third quarter of 2001, the Company notified Exchange Applications, Inc. that
it was in material default in the performance of its obligations under the
software development and OEM agreement (the "OEM Agreement") that the companies
had entered into as of December 28, 1999. The Company advised Exchange
Applications that it must use commercially reasonable efforts to cure the
defaults by paying the Company approximately $23.3 million plus interest.
Exchange Applications responded by denying the default of its obligations and
alleging that the Company had breached its contractual obligations. Exchange
Applications also informed the Company that it may seek a reimbursement of all
amounts paid to MicroStrategy, including a refund of $10.0 million and the
return of 2,592,741 shares of common stock of Exchange Applications, 320,733
shares of which were received by the Company in January 2002. Management
believes that the Company has not committed any breach of obligations alleged by
Exchange Applications. Accordingly, the Company responded to Exchange
Applications by denying the claim and, in the fourth quarter of 2001, sent a
notice of termination to terminate the OEM Agreement. As of December 31, 2001,
Exchange Applications had not agreed to the termination. Because the Company is
no longer performing services under the OEM Agreement, the remaining current and
long-term deferred revenue associated with the contract of $9.3 million and $7.8
million, respectively, or $17.1 million in aggregate, has been reclassified to
contingency from terminated contract in the accompanying consolidated balance
sheet as of December 31, 2001. The ultimate resolution of this contract dispute
will determine the final disposition of the recorded amounts. The final
resolution of this matter is currently uncertain, however, the Company does not
believe it will incur any additional liabilities related to this contract
dispute.
(9) Borrowings
In March 1999, the Company entered into a line of credit agreement with a
commercial bank which provided for a $25.0 million unsecured revolving line of
credit for general working capital purposes. In May 2000, the Company entered
into a modification of the line of credit agreement, which, among other things,
increased the aggregate credit available to include an additional letter of
credit, removed any financial covenants and cured any financial covenant
defaults. The line of credit accrued interest at LIBOR plus 1.75%, included a
0.2% unused line of credit fee, and required monthly payments of interest. The
line of credit was secured by $25.9 million of cash and cash equivalents, which
is classified as restricted cash in the accompanying consolidated balance sheet
as of December 31, 2000. The cash was restricted through February 2001, at which
time the agreement was terminated upon the closing of a new credit facility
agreement described below. As of December 31, 2000, there were no outstanding
amounts under this line of credit.
On February 9, 2001, the Company entered into a loan and security agreement (the
"New Credit Facility") with Foothill Capital, a subsidiary of Wells Fargo Bank,
which provided for aggregate borrowing capacity of up to $30.0 million to be
used for general working capital purposes. The New Credit Facility consisted of
a $10.0 million term loan and a revolving line of credit for up to $20.0
million, subject to specified borrowing base limitations and replaced the
previous line of credit agreement. During the first and second quarters of 2001,
the Company repaid $1.1 million of the term loan under the New Credit Facility
through the use of the revolving line of credit.
On June 14, 2001, the Company entered into an Amended and Restated Loan and
Security Agreement (the "Modified Credit Facility"), which replaced the New
Credit Facility. The Modified Credit Facility provides for aggregate borrowing
capacity of up to $30 million, including a $5 million maintenance receivables
backed sub-facility, subject to specified borrowing base limitations based on
eligible maintenance receivables. The maximum amount available under the
maintenance receivables backed sub-facility decreases by $278,000 per month
until March 2002, at which time the then remaining balance of $2.5 million may
remain outstanding until maturity. Upon the closing of the Modified Credit
Facility, the Company also repaid $8.9 million of the term loan under the New
Credit Facility and drew $5.0 million under the Modified Credit Facility. During
the third quarter of 2001, the Company repaid $5.2 million of the balance under
the Modified Credit Facility.
79
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Borrowings under the Modified Credit Facility bear interest at a variable rate.
The Company's borrowing rate in effect at December 31, 2001 was 6.25%. The
Modified Credit Facility also includes an annual 1.50% unused letter of credit
fee. Monthly principal payments are due to the extent that the balance
outstanding exceeds the borrowing base limitations or the maintenance
receivables backed sub-facility exceeds the maximum month-end amount available.
The Modified Credit Facility matures in February 2004 and is collateralized by
substantially all of the Company's domestic assets. Under the terms of the
Modified Credit Facility, the Company is required to maintain compliance with
various covenants, including certain financial covenants, the most restrictive
of which are achieving certain minimum earnings amounts, maintaining certain
cash balances domestically, and limiting the amount of additional indebtedness
that the Company may incur. At December 31, 2001, the Company was in compliance
with all covenants. Additionally, the Modified Credit Facility included a
covenant to raise $10.0 million of additional financing by March 31, 2002
through equity financing, subordinated debt, or net proceeds from the sale of
non-core assets, as defined in the agreement. On February 28, 2002, this
covenant was modified to extend the date by which this additional financing is
required to June 30, 2002.
In addition to the interest and other fees on borrowings under the New Credit
Facility, the Company granted the lender warrants to purchase 50,000 shares of
the Company's class A common stock at an exercise price of $14.825 per share,
subject to adjustment as set forth therein. The fair value of the warrants of
$414,000 was accounted for as debt issuance costs and will be amortized as
interest expense through the expiration of the Modified Credit Facility.
Interest expense related to the amortization of the initial value of the warrant
was $122,000 during 2001. The warrants may be exercised by tendering cash,
executing a cashless exercise using the value of the warrants, or by tendering
principal outstanding under the Modified Credit Facility. Because the warrants
meet the definition of a derivative under SFAS No. 133, the value of the
warrants will be adjusted for subsequent changes in fair value on a quarterly
basis with the change being recorded as interest expense. During 2001, fair
value was determined using the Black-Scholes pricing model with the following
assumptions used for the calculation: volatility factor of 120%, risk free
interest rate of 4.5%, expected life of 5 years, and no dividend yield. As a
result of a decline in the fair value of the warrants as of December 31, 2001,
the Company recorded reductions in the carrying value of its warrant liability
and a decrease in interest expense in the amount of $291,000 in 2001.
At December 31, 2001, the Company had $1.2 million outstanding under the
Modified Credit Facility. After consideration of outstanding letters of credit
of $5.8 million, the Company has $23.0 million available for future drawdowns,
subject to borrowing base limitations. As a result of the borrowing base
limitations, $1.9 million of additional borrowing capacity under the Modified
Credit Facility was available at December 31, 2001.
(10) Deferred Revenue and Advance Payments
Deferred revenue and advance payments from customers consist of the following,
as of December 31, (in thousands):
80
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2001 2000
-------- --------
Current:
Deferred product revenue $ 2,587 $ 17,232
Deferred product support and other services revenue 30,480 43,247
-------- --------
33,067 60,479
Less: billed and unpaid deferred revenue (12,080) (18,255)
-------- -------
$ 20,987 $ 42,224
======== ========
Non-current:
Deferred product revenue $ 709 $ 8,424
Deferred product support and other services revenue 5,249 19,407
-------- --------
5,958 27,831
Less: billed and unpaid deferred revenue (527) (1,748)
-------- --------
$ 5,431 $ 26,083
======== ========
The Company offsets its accounts receivable and deferred revenue for any billed
and unpaid items included in deferred revenue and advance payments.
In connection with the cancellation of the OEM Agreement during the fourth
quarter of 2001, the Company reclassified current and non-current deferred
revenue of $9.3 million and $7.8 million, respectively, to contingency from
terminated contract (Note 8).
(11) Income Taxes
U.S. and international components of loss from continuing operations before
income taxes were, for the years ended December 31, (in thousands):
2001 2000 1999
---------- ----------- -----------
U.S. $(44,831) $(189,514) $(19,009)
Foreign (763) (24,203) (4,252)
---------- ----------- -----------
Total $(45,594) $(213,717) $(23,261)
========== =========== ===========
The provision for income taxes from continuing operations consists of the
following, for the years ended December 31, (in thousands):
2001 2000 1999
---------- ----------- -----------
Current:
Federal $ 81 $ 175 $ -
State - - -
Foreign 2,379 1,225 1,246
---------- ----------- -----------
$ 2,460 $ 1,400 $ 1,246
========== =========== ===========
The provision for income taxes from discontinued operations is $0. The tax
benefit related to losses generated and other temporary differences from
discontinued operations is fully offset by a valuation allowance.
The provision for income taxes differs from the amount computed by applying the
federal statutory income tax rate to the Company's loss from continuing
operations before income taxes as follows, for the years ended December 31, (in
thousands):
81
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2001 2000 1999
---------- ---------- ----------
Income tax benefit at federal statutory rate $ (15,502) $ (72,664) $ (7,909)
Goodwill amortization and other permanent differences (716) (10,534) 351
Restructuring and impairment charges - 1,422 -
Impact of international operations 3,315 (10,860) (200)
Adjustment for tax method change - - 1,016
S Corporation income - - (180)
Research and development tax credit (1,879) - (40)
Change in valuation allowance 17,242 94,036 8,208
---------- ---------- ----------
$ 2,460 $ 1,400 $ 1,246
========== ========== ==========
Significant components of the Company's deferred tax assets and liabilities are
as follows, as of December 31, (in thousands):
2001 2000
---------- ----------
Deferred tax assets, net:
Allowances and reserves $ 6,515 $ 6,095
Reserve for litigation settlement 23,817 37,804
Net operating loss carryforwards 82,833 59,044
Deferred revenue adjustment 14,410 14,577
Investment valuation differences 3,516 4,608
Amortization 18,886 7,864
Federal, state, and other tax credit carryforwards 6,803 4,487
Restructuring 4,647 -
---------- ----------
161,427 134,479
Valuation allowance (151,628) (124,159)
---------- ----------
Deferred tax assets, net of valuation allowance 9,799 10,320
---------- ----------
Deferred tax liabilities:
Prepaid assets 356 187
Depreciation 4,996 2,464
Capitalized software development costs 1,897 540
Internally developed software costs 1,900 4,272
Deferred costs - 1,459
Unbilled receivables 650 650
Cash to accrual conversion - 748
---------- ----------
Total deferred tax liabilities 9,799 10,320
---------- ----------
Total net deferred taxes $ - $ -
========== ==========
The Company recorded a net $27.5 million increase in the valuation allowance for
the year ended December 31, 2001 related to deferred tax assets. As of December
31, 2001 management has concluded that a full valuation allowance is required on
the deferred tax assets based on its assessment that the realization of deferred
tax assets does not meet the "more likely than not" criteria under SFAS No. 109.
The Company has foreign net operating loss carryforwards of $19.8 million of
which $432,000, $70,500, $653,000, $3.8 million and $2.0 million will expire in
2003, 2005, 2006, 2007 and 2008, respectively. The remaining foreign net
operating losses of $12.8 million can be carried forward indefinitely. The
Company has domestic net operating loss carryforwards of $207.6 million, of
which $11.0 million, $103.7 million and $92.9 million will expire in 2019, 2020
and 2021, respectively. Of the $207.6 million of domestic net operating loss
carryforwards, the amount related to discontinued operations is $26.7 million,
of which $7.5 million and $19.2 million will expire in 2020 and 2021,
respectively. The Company has research and development tax credit carryforwards
of $5.9 million expiring in 2018, 2019, 2020, 2021, and 2022.
For the years ended December 31, 2001, 2000 and 1999, the Company recorded a
total tax provision of $2.5 million, $1.4 million and $1.2 million,
respectively.
82
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) Commitments and Contingencies
The Company leases office space and computer and other equipment under operating
lease agreements expiring at various dates through 2010. In addition to base
rent, the Company is responsible for certain taxes, utilities, and maintenance
costs and several leases include options for renewal or purchase. Future minimum
payments under noncancellable operating leases and agreements with initial terms
of greater than one year consist of the following (in thousands):
2002 $22,461
2003 16,442
2004 12,557
2005 11,825
2006 8,851
Thereafter 21,581
-------
$93,717
=======
Included within the commitments table above are gross restructuring-related
lease obligations of $21.6 million (Note 19).
Total rental expense for the years ended December 31, 2001, 2000 and 1999 was
approximately $20.7 million, $23.7 million and $12.1 million, respectively.
As of December 31, 2001, future minimum lease commitments included $4.7 million
in commitments for computer software and equipment.
The Company subleases office space under operating lease agreements expiring at
various dates through 2005. The total future minimum rentals to be received
under these noncancellable sublease agreements are $2.5 million in 2002, $1.9
million in 2003, $1.4 million in 2004 and $1.4 million in 2005.
(13) Litigation
(a) Securities Litigation
The Company and certain of its officers and directors were named as defendants
in a private securities class action lawsuit alleging that they had violated
Section 10(b) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), Rule 10b-5 promulgated thereunder, and Section 20(a) and Section 20A of
the Exchange Act in connection with various statements that were made with
respect to its 1999, 1998 and 1997 financial results. The action was
consolidated in the United States District Court for the Eastern District of
Virginia. In June 2000, purported holders of the Company's common stock filed a
shareholder derivative lawsuit in the Delaware Court of Chancery seeking
recovery for various alleged breaches of fiduciary duties by certain directors
and officers of the Company relating to the restatement of financial results for
1999, 1998 and 1997.
In October 2000, the Company entered into agreements to settle these lawsuits.
On January 19, 2001, the United States District Court authorized notice of the
proposed class action settlement that was sent to all putative class members.
The notice informed class members of their rights including their rights to
object to the proposed settlement and to pursue their claims separately. On
April 2, 2001, the United States District Court approved the class action
settlement, and the period from which an appeal could have been taken has
expired. On March 12, 2002, the United States District Court entered the final
distribution order allowing distribution of the settlement consideration. The
Company expects that the consideration will be issued to the class members in
the second quarter of 2002 after the remaining closing conditions have been met.
At a hearing on August 7, 2001, the Chancery Court approved the derivative
settlement. The settlement is still subject to various closing conditions.
83
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the class action settlement agreements, class members will receive: 1)
five-year unsecured subordinated promissory notes issued by the Company having
an aggregate principal amount of $80.5 million and bearing interest at 7.5% per
year; 2) 2,777,778 shares of the Company's class A common stock; and 3) warrants
issued by the Company to purchase 1,900,000 shares of the Company's class A
common stock at an exercise price of $40 per share, with the warrants expiring
five years from the date they are issued. As part of the derivative settlement
agreement described below and in satisfaction of a condition of the class action
settlement, certain officers of the Company tendered to the Company for no
consideration an aggregate of 1,683,504 shares of class A common stock during
the fourth quarter of 2001 for cancellation. Accordingly, upon completion of the
distribution, the Company will have effected a net issuance of 1,094,274 shares
of class A common stock as part of the class action settlement.
The Company will have the right, at any time, to prepay the promissory notes, or
to mandatorily convert the promissory notes into shares of the Company's class A
common stock at a conversion price equal to 80% of the dollar volume-weighted
average trading price per share for all round lot transactions in the Company's
stock on the Nasdaq National Market for the ten trading days ending two days
prior to the date that written notice of conversion has been given. The warrants
may be exercised for cash or by tendering the related unsecured subordinated
promissory notes valued for the purpose of warrant exercise at 133% of their
principal amount plus accrued interest.
Under the derivative settlement agreement, the Company was required to add a new
independent director with finance experience to the audit committee of its Board
of Directors and to ensure continued adherence with applicable legal and
regulatory requirements regarding the independence of audit committee members
and trading by insiders. On June 11, 2001, the Company announced the addition of
two new independent directors to the audit committee of its Board of Directors.
In addition, prior to the distribution of the securities to be issued as part of
the class action settlement, Michael J. Saylor, Chairman of the Board of
Directors and Chief Executive Officer, Sanju K. Bansal, Vice Chairman, Executive
Vice President and Chief Operating Officer, and Mark S. Lynch, former Chief
Financial Officer and current Vice President of Business Affairs, were required
to tender to the Company for no consideration an aggregate of 1,683,504 shares
of class A common stock for cancellation. On November 7, 2001, Mr. Saylor, Mr.
Bansal, and Mr. Lynch contributed 1,683,504 shares of class A common stock to
the Company. Since Mr. Saylor and Mr. Bansal are principal shareholders of the
Company, their actions are deemed to be actions undertaken on behalf of the
Company for accounting purposes. Accordingly, the Company recognized a capital
contribution for the shares received from Mr. Saylor and Mr. Bansal for
approximately $4.3 million, which represents the fair value of the stock on the
date of the contribution, and a corresponding increase in treasury stock for
that same amount. Upon receipt, the Company immediately canceled the contributed
shares.
Based on the terms of the settlement agreements, the Company determined that a
liability related to these actions was probable and that the value was
reasonably estimable. Accordingly, during 2000, the Company established an
estimate for the cost of the litigation settlement of $89.7 million, net of
insurance recoveries of $13.0 million. Subsequently, the Company has updated the
estimated value of the settlement during each successive financial reporting
period based upon valuation assumptions stemming from the settlement. During
2001, the Company separately evaluated each element of the settlement agreements
and updated the estimated value assigned to each individual component of the
settlement agreements. As a result of the changes in the estimated value of each
element of the securities litigation settlement above, the Company recorded an
aggregate reduction in the provision for the litigation settlement of $30.1
million during the year ended December 31, 2001. The provision for (reduction
in) estimated cost of litigation settlement was comprised of the following (in
thousands):
84
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2001 2000
-------- --------
Promissory notes to be issued $(16,700) $ 69,200
Class A common stock to be issued (5,806) 16,500
Warrants to be issued (7,782) 13,034
Pending loss on additional settlement 190 -
Legal fees - 3,245
Administration costs - 750
-------- --------
Total $(30,098) $102,729
Less insurance recoveries - (13,000)
-------- --------
(Reduction in) provision for
estimated cost of litigation settlement $(30,098) $ 89,729
======== ========
The fair value of the promissory notes was based on the present value of future
cash flows discounted at borrowing rates currently assumed to be available for
debt with similar terms and maturities. Based on the terms of the debt
instrument and the market conditions in existence at the time, the fair value of
the promissory notes was initially estimated during 2000 assuming a market
borrowing rate of 12%. Based on an estimated market borrowing rate of 12%, an
expected discount of $11.3 million was initially computed on the unsecured
subordinated promissory notes during 2000. Due to changes in market conditions
since the settlement, the fair value of the promissory notes was revalued
utilizing an estimated market borrowing rate of 20%. Based on an estimated
market borrowing rate of 20%, the expected discount on the unsecured
subordinated promissory notes was increased to $28.0 million. As a result of the
change in the estimated fair value of the promissory notes, the Company recorded
a $16.7 million reduction in the provision for the litigation settlement during
2001. Upon the issuance of these promissory notes, the discount will be
amortized to interest expense over the five-year term of the promissory notes.
Prior to the approval of the United States District Court on April 2, 2001, the
Company was obligated to issue the greater of 550,000 shares of common stock or
a number of shares of common stock with a value of $16.5 million based upon the
per share price of the stock on the date of the settlement hearing. Because the
number of shares and share price were not fixed, the Company recorded the full
amount of the $16.5 million value of the common stock portion of the settlement.
As a result of the court's approval during the second quarter of 2001, the
number of shares of common stock was fixed at 2,777,778 shares based upon a per
share price of $5.94. As a result of a decline in the Company's class A common
stock price to $3.85 per share as of December 31, 2001, the value of the common
stock to be issued under the settlement agreement was reduced by $5.8 million to
$10.7 million during 2001.
The fair value of the warrants to be issued in connection with the litigation
settlement was initially computed utilizing the Black-Scholes pricing model with
the following assumptions used for the calculation: volatility factor of 119%,
risk free interest rate of 6.0%, expected life of 5 years, and no dividend
yield. Based on these assumptions, a fair value of $13.0 million was initially
computed on the warrants during 2000. Due to changes in market conditions, the
fair value of the warrants to be issued was recomputed utilizing the
Black-Scholes pricing model with the following assumptions used for the
calculation: volatility factor of 120%, risk free interest rate of 4.5%,
expected life of 5 years, and no dividend yield. As a result of changes in the
estimated fair value of the warrants during 2001, the Company recorded a
reduction in the provision for the litigation settlement of $7.8 million during
the year ended December 31, 2001.
The final value of the overall settlement and each of its components may differ
significantly from the estimates currently recorded depending on a variety of
factors including the market value of the Company's class A common stock when
issued and potential changes in market conditions affecting the valuation of the
other securities. Accordingly, the Company will revalue the estimate of the
settlement on a quarterly basis and at the time the securities are issued. Upon
issuance of the debt and equity securities, the Company will record such amounts
as liabilities or stockholders' equity based on the nature of the individual
securities. Because of the rights of the holders of the promissory notes to
tender the notes in satisfaction of the exercise price upon exercising the
warrants, the warrants meet the definition of a derivative under SFAS No. 133
and, accordingly, will be revalued through earnings on a quarterly basis after
issuance.
85
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The details of the accrued litigation settlement consist of the following, as of
December 31, (in thousands):
2001 2000
------------------------------------------------- ----------------------------------------------
Accounts Accrued Accounts Accrued
Payable and Litigation Total Payable and Litigation Total
Accrued Expenses Settlement Accrual Accrued Expenses Settlement Accrual
-------------------- -------------- ----------- -------------------- -------------- ----------
Promissory notes to be issued $ - $ 52,500 $ 52,500 $ - $ 69,200 $ 69,200
Class A common stock to be issued - 10,695 10,695 - 16,500 16,500
Warrants to be issued - 5,252 5,252 - 13,034 13,034
Pending loss on additional
settlement - 190 190 - - -
Legal fees 331 - 331 2,055 - 2,055
Administration costs 409 - 409 - 750 750
--------------------- -------------- ----------- -------------------- -------------- ----------
Total accrual $ 740 $ 68,637 $ 69,377 $ 2,055 $ 99,484 $101,539
===================== ============== =========== ==================== ============== ==========
(b) Business Objects Litigation
On October 2, 2001, the Company filed a lawsuit in the Virginia Circuit Court
for Fairfax County against two field employees of Business Objects, S.A. ("BO").
The lawsuit alleged that these employees, who previously worked for the Company,
breached their fiduciary and contractual obligations to the Company by,
among other things, misappropriating the Company's trade secrets and
confidential information and soliciting the Company's employees and customers.
The Company's complaint sought injunctive relief and damages of at least $3
million. On October 17, 2001, BO filed suit against the Company in the United
States District Court for the Northern District of California, claiming that the
Company's software infringes a patent issued to BO relating to relational
database access. The suit seeks injunctive relief and unspecified monetary
damages. The Company intends to vigorously defend the case. On October 31, 2001,
the Company filed suit against BO in the United States District Court for the
Eastern District of Virginia, claiming that BO's software infringes two patents
held by the Company relating to asynchronous control of report generation using
a web browser and a system and method of adapting automatic output of OLAP
reports to disparate user output devices. On February 21, 2002, the Company
filed a motion to amend its complaint against BO to add claims for violations of
the federal Computer Fraud and Abuse Act, misappropriation of trade secrets, and
tortious interference with contractual relations. The Company is seeking
monetary damages and injunctive relief. On March 13, 2002, the Company
voluntarily dismissed without prejudice its lawsuit pending in the Virginia
Circuit Court for Fairfax County against the two field employees of BO. As these
actions are in a preliminary stage, the Company is currently unable to estimate
the potential range of gain or loss, if any, and as such the outcome of this
uncertainty is not presently determinable. Accordingly, no provision for these
matters has been made in the accompanying consolidated financial statements.
(c) Other Matters
The Company is also involved in other legal proceedings through the normal
course of business. Management believes that any unfavorable outcome related to
these other proceedings will not have a material effect on the Company's
financial position, results of operations, or cash flows.
(14) Redeemable Convertible Preferred Stock
On June 19, 2000, the Board of Directors of the Company authorized the issuance
of 17,500 shares of series A redeemable convertible preferred stock with a par
value of $0.001 per share. Upon adoption of this resolution, the Company issued
12,500 shares of its series A redeemable convertible preferred stock in a
private placement to institutional investors for $119.6 million, net of offering
costs of $5.4 million. In connection with the transaction, the Company recorded
a $19.4 million charge to additional paid-in capital attributable to the
beneficial conversion feature of the series A redeemable convertible preferred
stock. On June 14, 2001, the Company refinanced all but 650 shares of its series
A redeemable convertible preferred stock with a combination of cash, class A
common stock and newly issued preferred stock. The 650 shares of the series A
redeemable convertible stock that remain outstanding have a stated value of $6.5
million. The Company redeemed or exchanged the remaining 11,850 shares of its
series A redeemable convertible preferred stock as follows:
86
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
.. $12.5 million stated value of the series A redeemable convertible preferred
stock, or 1,250 shares, were redeemed for $12.5 million in cash;
.. $38.75 million stated value of the series A redeemable convertible
preferred stock and accrued dividends of $1.7 million on all series A
redeemable convertible preferred stock redeemed or exchanged were exchanged
for 5,568,466 shares of class A common stock and $16.3 million stated value
of series D convertible preferred stock, or 1,626.1 shares, with a fixed
conversion price of $5.00 per share;
.. $33.125 million stated value of the series A redeemable convertible
preferred stock were exchanged for an equivalent stated value of series B
redeemable convertible preferred stock, or 3,312.5 shares, with a fixed
conversion price of $12.50 per share, subject to adjustment at maturity if
the Company elects to mandatorily convert these shares into class A common
stock;
.. $27.825 million stated value of the series A redeemable convertible
preferred stock were exchanged for an equivalent stated value of series C
redeemable convertible preferred stock, or 2,782.5 shares, with a fixed
conversion price of $17.50 per share, subject to adjustment at maturity if
the Company elects to mandatorily convert these shares into class A common
stock; and
.. $6.3 million stated value of the series A redeemable convertible preferred
stock were exchanged for an equivalent stated value of series E redeemable
convertible preferred stock, or 630 shares.
The series B preferred stock and the series C preferred stock mature three years
after the date of issuance and accrue cumulative dividends at a rate of 12.5%
per annum, payable in cash or shares of class A common stock at the option of
the Company, subject to satisfaction of certain conditions. Prior to maturity,
holders have the right to convert their series B preferred stock and series C
preferred stock into shares of the Company's class A common stock. At the option
of the Company, the series B and series C preferred stock may be redeemed at
maturity at stated value plus accrued dividends or mandatorily converted into
class A common stock at a conversion price of 95% of the average of the dollar
volume-weighted average price of the class A common stock during the 30
consecutive trading days immediately preceding the maturity date.
The series D preferred stock matures three years after the date of issuance,
does not carry any dividend rate, and has a fixed conversion price of $5 per
share. At maturity, the series D preferred stock mandatorily converts into class
A common stock at the fixed conversion price of $5 per share. In addition, prior
to maturity, holders have the right to convert their series D preferred stock
into shares of the Company's class A common stock. In November 2001, holders of
the series D preferred stock exercised their right to convert series D preferred
stock and converted 175 shares of series D preferred stock into shares of class
A common stock at the fixed conversion price of $5 per share. As a result of the
conversion, the Company issued 350,000 shares of class A common stock. The
difference between the carrying value of the 175 shares of series D preferred
stock at the time of conversion and the par value of the class A common stock
was recorded as an increase in additional paid-in capital.
The Company had the right to redeem the series E preferred stock prior to
December 11, 2001 for 105% of the stated value plus accrued and unpaid dividends
if redeemed on or before October 27, 2001, 110% of the stated value plus accrued
and unpaid dividends if redeemed from October 28, 2001 through December 11,
2001, and at 120% of the stated value plus accrued dividends if redeemed
thereafter. In addition, the holders of the series E preferred stock had the
right to require the Company to redeem the series E preferred stock at specified
prices upon specified financing transactions or other events. Upon the closing
of the Exchange Agreement pursuant to which the Company acquired the outstanding
series A preferred stock of Strategy.com (Note 15), the series E holders
exercised this redemption right, and on September 10, 2001 the Company paid $6.8
million in cash to redeem all 630 shares of the series E preferred stock for
105% of the stated value of $6.3 million plus accrued and unpaid dividends of
$155,000. This cash redemption payment was substantially equal to the carrying
value of the series E preferred stock on the date of redemption.
87
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Each series of preferred stock is also redeemable upon certain triggering events
as defined in the respective Certificate of Designations, Preferences and Rights
of each series. In the event of redemption upon a triggering event, the
preferred stock is redeemable, with respect to each series of preferred stock,
at the greater of 125% of the stated value of such shares of preferred stock
plus accrued and unpaid dividends or the product of the number of shares of
class A common stock into which each series of preferred stock is convertible
multiplied by the closing sale price of the Company's class A common stock on
the day immediately before the triggering event occurs, except for the series D
preferred stock which is redeemable at the greater of its stated value or such
product. As of December 31, 2001, none of these triggering events have occurred.
In addition, upon a change of control of the Company, each holder of series A,
series B, and series C preferred stock shall have the right, at the holder's
option, to require the Company to redeem all or a portion of the preferred stock
at 125% of the stated value of such shares of preferred stock plus accrued and
unpaid dividends.
Other than as required by law, holders of each series of preferred stock have no
voting rights, except that the consent of at least two-thirds of the outstanding
shares of the applicable series of preferred stock would be required to effect
any change in either the Company's Amended and Restated Certificate of
Incorporation or Certificates of Designation that would change any of the rights
of the applicable series of preferred stock or to issue any other additional
shares of such series of preferred stock. Each series of preferred stock ranks
senior to common stock with respect to distribution and payments upon the
liquidation or dissolution of the Company and to resolutions made by the Board
of Directors. Each series of preferred stock has a liquidation preference of
$10,000 per share plus accrued and unpaid dividends. Additionally, holders of
each series of preferred stock are entitled to participate in dividends and
distributions on common stock, if any, to the same extent as if they held shares
of common stock on the record date for such dividends and distributions.
In accordance with the terms of the agreements relating to the issuance of
redeemable convertible preferred stock, the Company may be required to pay
substantial penalties to a holder of preferred stock under specified
circumstances, including nonpayment of dividends on series A, series B, and
series C preferred stock, failure to deliver shares of class A common stock upon
the conversion of preferred shares, nonpayment of the redemption price at
maturity of any remaining series A, series B, and series C preferred stock, and
the unavailability of the registration statement relating to the shares of class
A common stock issuable upon conversion of and in lieu of cash dividends on the
preferred stock to cover the resale of such shares for more than brief
intervals. Such penalties are generally paid in the form of interest payments,
subject to any restrictions imposed by applicable law. In the third quarter of
2000, the Company incurred $578,000 in penalties as a result of a 14-day delay
in the filing of a registration statement registering the shares of class A
common stock issuable upon conversion of and in lieu of dividends on the series
A redeemable convertible preferred stock.
In connection with the refinancing of the Company's series A redeemable
convertible preferred stock in June 2001, the Company determined that the total
fair value of the new series of preferred stock and the actual value of the
common stock issued at closing were determined to be lower than the carrying
value of the series A securities being refinanced. Accordingly, the Company
recorded a net gain attributable to common stockholders on the refinancing of
the series A preferred stock of $29.4 million during the second quarter of 2001.
This net gain represents the excess of the fair value of the consideration
transferred to the holders of the series A preferred stock of $118.5 million
over the carrying value of those preferred securities of $107.5 million, or
$11.0 million, plus the pro-rata portion of the previously recognized beneficial
conversion feature on the series A preferred shares redeemed of $18.4 million.
The net gain of $29.4 million was recognized as a reduction to net loss
attributable to common stockholders in the accompanying consolidated statement
of operations for the year ended December 31, 2001.
Based on the valuation of the series D preferred stock, the Company determined
that the effective conversion price of the series D preferred stock was less
than the fair value of the Company's class A common stock on the date of
issuance. As a result, the Company recorded a beneficial conversion feature in
the amount of $3.8 million based on the difference between the fair market value
of the Company's class A common stock on the closing date and the effective
conversion price of the series D preferred stock. The beneficial conversion
feature has been recorded as a discount on the value of the series D preferred
stock
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MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and an increase in additional paid-in capital and will be accreted using the
effective interest method over the three-year term of the series D preferred
stock. For the year ended December 31, 2001, accretion to the carrying value of
the beneficial conversion feature was $504,000.
The remaining 650 shares of series A preferred stock with a $6.5 million stated
value accrue dividends at a rate of 7% per annum, payable in cash or shares of
class A common stock at the election of the Company. Following a conversion
price reset adjustment on July 5, 2001, the conversion price of the 650
remaining shares of series A preferred stock was adjusted downward from $33.39
per share to $3.08 per share based on the average of the dollar-volume weighted
average price of the Company's class A common stock during the ten trading day
immediately preceding July 5, 2001. As a result of this adjustment to the
conversion price, the series A preferred stock is convertible, as of December
31, 2001, at the option of the holders, into 2,108,247 shares of class A common
stock, not including shares of class A common stock that may be issuable as
dividends on the series A preferred stock. At the option of the Company, the 650
remaining shares of series A preferred stock may be redeemed at its June 19,
2002 maturity at stated value plus accrued dividends or mandatorily converted
into class A common stock based on a conversion price equal to 95% of the
average of the dollar volume-weighted average price of the class A common stock
during the 30 consecutive trading days immediately preceding the maturity date.
Additionally, the Company, at its option, may extend the maturity of the series
A preferred stock for up to an additional two years. If the Company elects to
extend the maturity of the series A preferred stock, the conversion price may be
adjusted based on the average of the dollar-volume weighted average price the
Company's class A common stock on each trading day during the ten days
immediately following each anniversary of the original maturity, if such
adjustment would result in a lower conversion price. The preferred stock is also
redeemable upon certain triggering events as defined in the Certificate of
Designations, Preferences and Rights of the series A convertible preferred
stock. In the event of redemption upon a triggering event, the series A
preferred stock is redeemable at the greater of 125% of the conversion amount or
an agreed upon formula. As of December 31, 2001, none of these triggering events
have occurred.
The Company has recorded each series of preferred stock issued in June 2001 at
its fair value, net of offering costs of $513,000. The offering costs were
allocated ratably to each series of preferred stock based on the respective fair
value of each series. The Company is accreting the carrying value of the series
B and series C preferred stock to its stated value over the three-year term of
each series of preferred stock. For the year ended December 31, 2001, accretion
to the carrying value of the preferred stock was $1.3 million. Because the
series D preferred stock requires share settlement at maturity and does not have
a mandatory cash redemption requirement, except upon a triggering event, the
Company will not accrete the carrying value of the series D preferred stock to
its stated value.
For the year ended December 31, 2001 and 2000, the Company accrued total
dividends of $8.6 million and $4.7 million, respectively, on all of its series
of preferred stock. During the year ended December 31, 2001, the Company paid
aggregate dividends of $6.2 million through the issuance of 2,062,668 shares of
class A common stock and 175.6 shares of series D preferred stock in lieu of
cash. The 175.6 shares of series D preferred stock were deemed to have been
distributed as consideration for a portion of the dividends that had accrued on
the series A preferred stock prior to the refinancing transaction, the fair
value of which approximated the dividends owed. During the year ended December
31, 2000, the Company paid aggregate dividends of $4.1 million through the
issuance of 359,125 shares of class A common stock. As of December 31, 2001 and
2000, the Company has accrued dividends of $2.8 million and $599,000,
respectively, which are included in accrued interest and preferred dividends in
the accompanying consolidated balance sheets.
(15) Redeemable Convertible Preferred Stock of Discontinued Operations
In October 2000, the Board of Directors of Strategy.com authorized the issuance
of 47,884,011 shares of series A redeemable convertible preferred stock with a
par value of $0.001. Dividends are accreted at a rate of $0.2552 per annum. The
preferred stock was automatically convertible into class A common stock of
Strategy.com, at the then effective conversion rate, at the time of an initial
public offering resulting in at least $30.0 million of net proceeds to
Strategy.com. The preferred shares were mandatorily redeemable for
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MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$3.19 per share plus any dividends accrued or declared but unpaid thereon at
mandatory redemption dates of October 17, 2005, 2006 and 2007, with the maximum
redemption portions at each date being 33%, 50% and 100%, respectively. Each
holder of outstanding shares of series A redeemable convertible preferred stock
of Strategy.com was entitled to the number of votes equal to the number of whole
shares of Strategy.com common stock into which the shares of series A redeemable
convertible preferred stock held by such holder are convertible as of the record
date for determining stockholders entitled to vote on such matters.
Additionally, the preferred stock had a liquidation preference of $3.19 per
share plus any dividends accrued or declared but unpaid thereon.
In an initial closing in October 2000, Strategy.com issued 13,401,253 shares of
series A redeemable convertible preferred stock to a group of institutional and
accredited investors in exchange for $39.8 million, net of offering costs of
approximately $3.0 million. In January 2001, Strategy.com completed this round
of financing in a second closing and issued an additional 3,134,796 shares for
proceeds of $10.0 million.
On August 29, 2001, the Company entered into an exchange agreement (the
"Exchange Agreement") pursuant to which MicroStrategy acquired all 16,536,049
shares of Strategy.com's series A preferred stock in exchange for 3,500,000
shares of MicroStrategy's class A common stock. Based on the closing price of
the Company's class A common stock of $2.49 per share on the date of the closing
and the carrying value of Strategy.com's series A preferred stock of $53.6
million on that same date, the early redemption resulted in a consolidated gain
of $44.9 million. This gain represents the excess of the carrying value of
Strategy.com's preferred stock over the fair value of the Company's class A
common stock exchanged in the transaction. The gain of $44.9 million was
recognized as an increase to net income attributable to common stockholders in
the accompanying consolidated statement of operations.
Prior to entering into the Exchange Agreement, offering costs were being
accreted using the straight-line method based on the mandatory redemption dates
and redemption portions of the preferred stock of Strategy.com. During the years
ended December 31, 2001 and 2000, respectively, the Company accreted offering
costs and dividends of $3.1 million and $713,000 on the preferred stock of
Strategy.com. The accretion of offering costs and dividends on Strategy.com's
preferred stock until the date of redemption was previously classified as
minority interest and has now been reclassified to loss from discontinued
operations in the accompanying consolidated statements of operations.
(16) Stockholders' Equity
(a) Public Offerings
On February 10, 1999, the Company sold to the public 3,170,000 shares of class A
common stock for approximately $40.1 million, net of offering costs of $2.7
million. In addition, certain holders of class B common stock converted 830,000
shares of class B common stock to class A common stock in connection with their
sale of such shares in the public offering. Class B common stock shares are
convertible to class A common stock shares on a one-to-one basis at the election
of the stockholder.
The holders of class A common stock generally have rights identical to those of
holders of class B common stock, except that holders of class A common stock are
entitled to one vote per share while holders of class B common stock are
entitled to ten votes per share on all matters submitted to a vote of
stockholders.
(b) Stock Split
In January 2000, the Company's Board of Directors approved a two-for-one split
of the Company's common stock effected in the form of a stock dividend. The
stock dividend was distributed on January 26, 2000 to stockholders of record as
of January 20, 2000. Stockholders' equity has been restated to give retroactive
recognition to the split for all periods presented by reclassifying the par
value of the additional shares arising from the split from paid-in capital to
common stock. All references to share and per share amounts for all periods
presented have been restated to reflect this stock split.
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MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(c) Stock Plans
In February 1996, MicroStrategy adopted the 1996 Stock Plan in order to provide
an incentive to eligible employees and officers of MicroStrategy. A total of
12,282,664 shares of class A common stock are reserved under the 1996 Stock
Plan, as amended. As of December 31, 2001, options to purchase 15,337,838 shares
have been granted, of which 5,929,975 have been canceled. As of December 31,
2001, 2,874,801 shares are available for grant under the 1996 Stock Plan. The
Company is no longer issuing options under this plan.
In March 1997, MicroStrategy adopted the 1997 Stock Option Plan for French
Employees, which provides for the granting of options on the Company's class A
common stock to employees of MicroStrategy France SARL, the Company's French
subsidiary. A total of 800,000 shares of class A common stock are reserved under
the 1997 Stock Option Plan for French Employees, as amended. As of December 31,
2001, options to purchase 558,868 shares have been granted, of which 135,807
have been canceled. As of December 31, 2001, 376,939 shares are available for
grant under the 1997 Stock Option Plan for French Employees.
In September 1997, MicroStrategy adopted the 1997 Director Option Plan, which
provides for grants of nonqualified stock options to non-employee directors of
MicroStrategy. A total of 440,000 shares of class A common stock are reserved
under the 1997 Director Option Plan, as amended. As of December 31, 2001,
options to purchase 440,000 shares have been granted, of which none have been
canceled. As of December 31, 2001, no shares are available for grant under the
1997 Director Option Plan. The Company is no longer issuing options under this
plan.
In April 1999, MicroStrategy adopted the 1999 Stock Option Plan, which provides
for grants of stock options to eligible employees and officers of MicroStrategy.
A total of 23,500,000 shares of class A common stock are reserved under the 1999
Stock Option Plan, as amended. As of December 31, 2001, options to purchase
22,385,748 shares have been granted, of which 8,369,139 have been canceled. As
of December 31, 2001, 9,483,391 shares are available for grant under the 1999
Stock Option Plan.
Shares of class A common stock will be issued upon exercise of any of the stock
options granted under the stock plans. Stock options granted to date generally
vest ratably over five years from the date of grant and expire ten years after
grant. The stock option exercise price of incentive options under
MicroStrategy's stock option plans may not be less than the determined fair
market value at the date of grant.
91
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the MicroStrategy's stock option plans is presented
(in thousands, except per share data):
Price per Share Options Exercisable
-------------------------- ----------------------------
Weighted
Weighted Number Average
Shares Range Average of Shares Exercise Price
------ -------------- -------- --------- --------------
Balance, December 31, 1996 4,919 $0.25 - 0.63 $ 0.42
Granted 5,321 0.75 - 2.00 1.22
Exercised - - -
Canceled (416) 0.25 - 1.25 0.55
------- -------------- --------
Balance, December 31, 1997 9,824 0.25 - 2.00 0.85 913 $ 0.41
Granted 3,753 2.00 - 21.25 7.14
Exercised (700) 0.25 - 2.00 0.53
Canceled (726) 0.25 - 19.13 1.98
------- -------------- --------
Balance, December 31, 1998 12,151 0.25 - 21.25 2.73 2,292 $ 1.04
Granted 5,245 7.75 - 115.66 28.42
Exercised (2,513) 0.25 - 20.00 1.26
Canceled (2,065) 0.25 - 48.31 4.38
------- -------------- --------
Balance, December 31, 1999 12,818 0.25 - 115.66 13.07 2,128 $ 4.11
Granted 9,929 10.50 - 313.00 40.48
Exercised (1,968) 0.25 - 22.09 2.41
Canceled (3,537) 0.25 - 313.00 36.24
------- -------------- --------
Balance, December 31, 2000 17,242 0.25 - 313.00 25.70 2,976 $ 12.60
Granted 9,561 1.89 - 15.81 3.37
Exercised (1,155) 0.25 - 14.31 1.15
Canceled (7,681) 0.25 - 313.00 24.48
------- -------------- --------
Balance, December 31, 2001 17,967 $0.25 - 313.00 $ 15.97 5,342 $ 20.39
=======
Options Exercisable
Options Outstanding at December 31, 2001 at December 31, 2001
------------------------------------------------------------------ ---------------------------
Weighted Average
Remaining Weighted Weighted
Range of Exercise Number of Contractual Life Average Number of Average
Prices Shares (Years) Exercise Price Shares Exercise Price
----------------- --------- ---------------- --------------- --------- --------------
$ 0.25 - 0.75 405 3.7 $ 0.55 356 $ 0.53
0.76 - 2.25 1,544 5.4 1.42 932 1.35
2.26 - 3.50 7,306 9.1 2.52 340 3.05
3.51 - 7.00 589 6.2 4.99 246 5.82
7.01 - 14.00 1,507 6.2 11.05 794 10.99
14.01 - 22.00 3,775 7.1 20.21 1,673 20.27
22.01 - 35.00 546 7.0 27.69 191 27.61
35.01 - 70.00 1,567 7.1 42.61 506 43.19
70.01 - 140.00 524 6.3 101.10 229 98.03
140.01 - 313.00 204 6.6 174.47 75 174.94
--------- ---------------- --------------- --------- --------------
17,967 7.6 $ 15.97 5,342 $ 20.39
========= ========= ==============
92
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1998, MicroStrategy adopted the 1998 Employee Stock Purchase Plan and
reserved 800,000 shares, subject to annual increases. As of December 31, 2001, a
total of 1,400,000 shares of common stock were reserved. The Purchase Plan
became effective upon the completion of the MicroStrategy's initial public
offering. The Purchase Plan permits eligible employees to purchase common stock,
through payroll deductions of up to 10%, not to exceed $15,000 per year, of the
employee's compensation, at a price equal to 85% of the fair market value of the
common stock at either the beginning or the end of each offering period,
whichever is lower. As of December 31 2001, 1,034,397 shares have been issued
under the plan.
If compensation expense had been recorded based on the fair value at the grant
dates for awards under the stock option and purchase plans as set forth in SFAS
No. 123, "Accounting for Stock-based Compensation," the Company's net loss
attributable to common stockholders would have been adjusted to the pro forma
amounts presented below, for the years ended December 31, (thousands, except per
share data):
2001 2000 1999
---------- ---------- ----------
Net loss attributable to common stockholders:
As reported $ (16,928) $ (285,368) $ (33,743)
Pro forma $ (29,046) $ (349,414) $ (42,358)
Basic and diluted net loss per share, as reported $ (0.20) $ (3.58) $ (0.44)
Pro forma basic and diluted net loss per share $ (0.34) $ (4.38) $ (0.55)
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
option grants under MicroStrategy's stock option plans issued during 2001, 2000
and 1999, respectively: volatility factors of 120%, 119% and 95%, risk-free
interest rates of 5%, 6% and 6%, weighted-average expected life of 5 years, and
no dividend yields.
The following assumptions were used for shares issued during 2001, 2000 and
1999, respectively, under the Employee Stock Purchase Plan: volatility factors
of 120%, 119% and 95%, risk free interest rates of 5%, 6% and 6%,
weighted-average expected life of 6 months, and no dividend yields. The pro
forma amounts for options granted prior to the MicroStrategy's initial public
offering are based on the minimum value method proscribed by SFAS No. 123.
The weighted average fair value of grants made under MicroStrategy's stock
option plans during 2001, 2000 and 1999 are $2.82, $32.58 and $21.44,
respectively.
During the year ended December 31, 1998, MicroStrategy granted options to
purchase 3,753,380 shares of class A common stock, of which options to purchase
1,071,670 shares of class A common stock were granted at exercise prices below
fair market value. The Company is amortizing $1.4 million of compensation
expense related to these options ratably over the five-year vesting period. For
the years ended December 31, 2001, 2000 and 1999, the Company recorded
compensation expense of $138,000, $271,000, and $269,000, respectively. During
2001, deferred compensation was adjusted by $387,000 for the unvested portion of
options granted to employees that were terminated.
As a result of the curtailment of Strategy.com operations during the second
quarter of 2001 and subsequent discontinuation of operations on December 31,
2001, substantially all of the options to purchase Strategy.com class A common
stock under the 2000 Strategy.com Stock Option Plan were canceled and, as such,
are not included the pro forma table above.
(d) Stock Warrants
In addition to the warrants issued to the lender in connection with obtaining
the New Credit Facility (Note 9), the Company issued warrants to a customer, in
June 1999, to purchase 14,000 shares of class A common stock at $12.47 per
share, which immediately vested and were exercisable upon issuance. The fair
value of the warrants of $139,000 was recorded as a reduction of revenue at the
date of grant. Fair value was determined using the Black-Scholes option-pricing
model with the following assumptions: volatility
93
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
factor of 80%, weighted average expected life of 8 years, risk-free interest
rate of 6%, and no dividend yield. As of December 31, 2000, the customer had
exercised all 14,000 warrants in its possession.
In December 1998, the Company issued warrants to a customer to purchase 100,000
shares of class A common stock at $11.75 per share, which become exercisable
ratably over the five-year vesting period. As of December 31, 2001, the customer
had exercised 21,666 warrants in its possession.
(e) Distribution to S Corporation Stockholders
In 1998, the Company declared a $10.0 million dividend to the existing
stockholders of the S corporation in the form of short-term one-year notes prior
to the termination of the Company's S corporation election, which occurred
immediately prior to the initial public offering. The notes issued to the
existing stockholders of the Company bore interest at the applicable federal
rate for short-term obligations and were repaid in 1999.
(f) Other Stock-Related Transaction
In June 2000, the Company entered into an agreement with the controlling
stockholder of a software integrator. The primary purpose of the agreement was
to grant the Company the right to hire certain employees of the software
integrator. In exchange, the Company issued, in a first installment, 57,143
shares of class A common stock to the controlling stockholder, which had a value
of $1.6 million as of the consummation date and were not registered with the
SEC. In September 2001, the Company issued, in a second installment, an
additional 259,889 shares of unregistered class A common stock to the
controlling stockholder which had a value of $603,000. The Company may issue up
to $2.5 million in additional shares of unregistered class A common stock over
the next year at the then current market price of the class A common stock on
the date of issuance contingent upon certain revenue and attrition criteria
stipulated in the agreement. The Company recorded the two installments of common
stock as an intangible asset in the aggregate amount of $2.2 million. For the
years ended December 31, 2001 and 2000, respectively, the Company has recognized
$1.1 million and $451,000 of amortization expense on the intangible asset. The
Company is amortizing the intangible asset over its estimated period of benefit
of two years.
(g) Litigation Settlement
In connection with the class action litigation settlement agreements, the
Company will issue shares of class A common stock, stock warrants, and
promissory notes which are convertible into class A common stock at the
Company's option (Note 13).
(17) Employee Benefit Plan
The Company sponsors a benefit plan to provide retirement and incidental
benefits for its employees, known as the MicroStrategy, Incorporated 401(k)
Savings Plan (the "Plan"). Participants may make voluntary contributions to the
Plan of up to 20% of their annual base pre-tax compensation, cash bonuses and
commissions not to exceed the federally determined maximum allowable
contribution. The Plan permits for discretionary company contributions; however,
no contributions were made for the years presented.
(18) Segment Information
On December 31, 2001, the Company discontinued the operations of Strategy.com
and shut down its services. Accordingly, the historical consolidated financial
statements of the Company have been reclassified to present Strategy.com as a
discontinued operation for all periods presented (Note 4). Prior to this, the
Company had two operating segments and had begun operating its business as such
in the latter part of 1999. As a result of the shutting down of Strategy.com
operations, the Company operates in one significant business segment - business
intelligence.
94
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summary discloses total revenues and long-lived assets, excluding
long-term deferred tax assets, long-term investments and long-term net assets of
discontinued operations, relating to the Company's geographic regions (in
thousands):
Domestic International Consolidated
-------- ------------- ------------
Year ended December 31, 2001
Total license and service revenues $ 118,895 $ 61,521 $ 180,416
Long-lived assets 33,067 2,630 35,697
Year ended December 31, 2000
Total license and service revenues $ 159,469 $ 55,792 $ 215,261
Long-lived assets 72,378 3,340 75,718
Year ended December 31, 1999
Total license and service revenues $ 114,907 $ 36,351 $ 151,258
Long-lived assets 69,941 2,028 71,969
Transfers relating to intercompany software license royalties from international
to domestic operations of $9.7 million, $12.7 million, and $8.3 million for
2001, 2000 and 1999, respectively, have been excluded from the above tables and
eliminated in the consolidated financial statements.
For the years ended December 31, 2001, 2000 and 1999, no one customer accounted
for 10% or more of consolidated total revenue.
(19) Restructuring and Impairment Charges
(a) 2001 Restructuring Plans
During the second quarter of 2001, the Company adopted a restructuring plan
designed to focus its commercial activities. The restructuring plan included a
strategic decision to focus operations on the business intelligence market, the
elimination or reduction of speculative technology initiatives, a greater
emphasis on indirect sales, and a reduction of the Company's workforce by 450
domestic and international employees and 147 Strategy.com employees throughout
all functional areas, or approximately 33% of the Company's worldwide headcount.
As a result of the reduction in headcount, the Company consolidated its multiple
Northern Virginia facilities into a single location in McLean, Virginia.
During the third quarter of 2001, the Company adopted an additional
restructuring plan to effect a further reduction in its workforce as part of its
ongoing measures to better align operating expenses with revenues and further
focus on its core business intelligence software business. The restructuring
plan adopted during the third quarter of 2001 resulted in a reduction of the
Company's workforce by 229 additional domestic and international employees
throughout all functional areas. At December 31, 2001, all headcount reductions
were completed.
As a result of these restructuring plans, the Company recorded restructuring and
impairment charges during 2001 for severance costs and other benefits for
terminated employees, costs associated with exiting facilities, and fees
incurred for professional services directly related to the restructuring. Costs
associated with exiting facilities included estimated sublease losses,
representing the excess of lease costs over sublease income, estimated sublease
commissions and concessions, and other facility closing costs including rent
expense while the office space is vacant.
The Company reviews long-lived assets, including goodwill and other intangible
assets, for impairment whenever events or changes in business circumstances
indicate that the carrying amount of the assets may not be fully recoverable or
that the useful lives of these assets are no longer appropriate. Each impairment
test is based on a comparison of the undiscounted cash flows to the recorded
value of the asset. If
95
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
impairment is indicated, the asset is written down by the amount in which the
carrying value of the asset exceeds the related fair value of the asset. In
connection with the restructuring plans adopted during 2001, the Company
analyzed its property and equipment and other long-lived assets, primarily
consisting of furniture and fixtures, computer equipment and software, leasehold
improvements, and internally developed software for such impairment. Certain
assets to be disposed of were written down to fair value which was estimated
based on current market values less disposal costs. Additionally, in connection
with a periodic assessment of the carrying value of long-lived assets, the
Company concluded that the products derived from its Teracube intangible asset
would not generate sufficient cash flow to support to its carrying value.
Accordingly, the Company recorded an impairment charge to write-down that
intangible asset to its fair value. As follows is a summary of the impairment
charges record during 2001 (in thousands):
Leasehold Furniture and Intangible Computers and
Improvements Fixtures Assets Equipment Total
------------- -------------- ------------- --------------- ------------
Net book value of assets
impaired before impairment $ 1,887 $ 5,002 $ 14,818 $ 346 $ 22,053
Impairment charge (1,887) (4,296) (12,236) (140) (18,559)
Disposals during 2001 -- (334) -- (66) (400)
Adjusted net book value at ------------- -------------- -------------- -------------- ------------
December 31, 2001 $ -- $ 372 $ 2,582 $ 140 $ 3,094
============= ============== ============== ============== ============
Certain assets held for sale, which are classified in prepaid expenses and
other current assets in the accompanying consolidated balance sheet, were
written down to their fair value of $912,000. During 2001, the Company sold
approximately $400,000 of these assets held for sale. The Company expects to
dispose of the remaining assets held for sale within the next six months.
The following table sets forth a summary of the restructuring and impairment
charges for 2001 (in thousands):
Charges for Adjustments and Accrued
Second Quarter Charges for Total 2001 2001 Restructuring
and Third Fourth Charges for Non-cash Cash Costs at
Quarter 2001 Quarter 2001 2001 Charges Payments December 31, 2001
-------------- ---------------- ----------- ----------- ---------- -----------------
Severance and other employee
termination benefits $ 4,772 $ 454 $ 5,226 $ -- $ (5,154) $ 72
Write-down of impaired assets 6,443 12,116 18,559 (18,559) -- --
Estimated sublease losses and
other facility closing costs 14,048 287 14,335 (22) (3,346) 10,967
Terminations of computer and
equipment leases 712 194 906 -- (421) 485
Accrual for professional fees 423 14 437 -- (268) 169
-------------- ---------------- ------------- ----------- ----------- ---------------
Total restructuring and
impairment charges $ 26,398 $ 13,065 $ 39,463 $ (18,581) $ (9,189) $ 11,693
============== ================ ============= =========== =========== ===============
As of December 31, 2001, unpaid amounts of $7.4 million and $4.3 million have
been classified as current and long-term accrued restructuring costs,
respectively, in the accompanying consolidated balance sheet. Remaining cash
expenditures relating to severance costs and fees incurred for professional
services will be substantially paid during the first quarter of 2002. Amounts
related to the estimated sublease losses associated with exiting facilities and
terminations of computer and equipment leases will be paid over the respective
lease terms through February 2009. As a result of the restructuring, the Company
has approximately 213,000 square feet of vacant office space, of which 74,000
square feet has been subleased as of December 31, 2001. The remaining vacant
office space is currently being marketed for sublease. The accrual for estimated
computer and real estate losses of $11.5 million at December 31, 2001 represents
$21.6 million in gross lease obligations, $2.9 million of estimated commissions,
concessions, and other costs, offset by $13.0 million in estimated gross
sublease income recoveries during the remaining lease terms. The Company is also
considering terminating certain leases early. The Company estimated its
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MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
sublease losses based upon current information available relating to sublease
commission costs, sub-tenant concession costs, sublease rental income, and the
length of time expected to sublease excess space. Final amounts could differ
from current estimates once all vacant office space has been entirely sublet.
Except for its estimated sublease losses and other facility closing costs and
computer and equipment leases, the Company expects that the 2001 restructuring
plans will be substantially completed by March 2002. We also recorded additional
restructuring and impairment charges of $19.4 million which are included in loss
from discontinued operations in the accompanying consolidated statements of
operations and are discussed above (Note 4).
(b) 2000 Restructuring Plan
In the third quarter of 2000, the Company adopted a restructuring plan designed
to bring costs more in line with revenues and strengthen the financial
performance of its business. The restructuring plan included a reduction of the
Company's workforce by 211 domestic employees and 20 Strategy.com employees, or
approximately 10% of the worldwide headcount and the cancellation of a number of
new job offers made to candidates who had not yet commenced employment with the
Company. All of these actions were completed prior to September 30, 2000. As a
result of the reduction in headcount, the Company consolidated certain of its
operations in the vicinity of its Northern Virginia headquarters. In addition,
the Company reduced or eliminated certain corporate events. Finally, the Company
reduced expenditures on external consultants and contractors across all
functional areas.
In connection with this restructuring plan, the Company incurred severance costs
for terminated employees and costs for rescinded offers of employment,
accelerated the vesting provisions of certain stock option grants, wrote-off
certain assets that were no longer of service, and accrued related professional
fees. In addition, Michael J. Saylor, the chairman and CEO of the Company, made
grants of the Company's class A common stock to terminated employees from his
personal stock holdings. As Mr. Saylor is a principal shareholder of the
Company, his actions were deemed to be an action undertaken on behalf of the
Company for accounting purposes. Accordingly, the Company recognized an expense
and a capital contribution by Mr. Saylor of approximately $3.0 million, which
represented the fair value of the stock on the date of grant.
The following table sets forth a summary of these restructuring and impairment
charges recorded during the third quarter of 2000 (in thousands):
Consolidated
Non-cash Cash Charge for
Charges Payments 2000
-------- -------- ------------
Severance and rescinded employment offers $ - $1,848 $1,848
Stock grant and applicable payroll taxes 3,003 189 3,192
Compensation expense on accelerated stock options 1,483 -- 1,483
Elimination of corporate events -- 2,416 2,416
Write-off of impaired assets 329 -- 329
Accrual for professional fees -- 99 99
------- --------- ----------
Total restructuring and impairment charges $4,815 $4,552 $9,367
======= ========= ==========
Substantially all cash payments relating to the restructuring plan during the
third quarter of 2000 were made by December 31, 2000.
(20) Selected Quarterly Financial Data (Unaudited)
The following tables contain unaudited Statement of Operations information for
each quarter of 2001 and 2000. The Company believes that the following
information reflects all normal recurring adjustments necessary for a fair
presentation of the information for the periods presented. The operating results
for any quarter are not necessarily indicative of results for any future period.
97
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Quarter Ended
----------------------------------------------------------------------------
March 31 June 30 September 30 December 31 Year
----------- ------------- --------------- ------------- ------------
(in thousands, except per share data)
2000
Revenues $ 50,502 $ 49,200 $ 59,539 $ 56,020 $ 215,261
Gross profit 34,343 28,214 39,291 35,852 137,700
Net (loss) income from continuing
operations (21,372) (40,216) (154,360) 831 (215,117)
Loss from discontinued operations (11,478) (11,926) (13,868) (8,917) (46,189)
Net loss (32,850) (52,142) (168,228) (8,086) (261,306)
Net loss attributable to common
stockholders (32,850) (71,829) (170,416) (10,273) (285,368)
Basic and diluted earnings (loss)
per share
Continuing operations (0.27) (0.75) (1.96) (0.02) (3.00)
Discontinued operations (0.15) (0.15) (0.17) (0.11) (0.58)
Net loss attributable to common
stockholders (0.42) (0.90) (2.13) (0.13) (3.58)
Weighted average shares
outstanding used in computing
basic and diluted earnings
(loss) per share 78,926 79,757 79,975 80,393 79,779
2001
Revenues $ 48,949 $ 47,160 $ 41,072 $ 43,235 $ 180,416
Gross profit 33,018 35,802 30,724 35,229 134,773
Net loss from continuing operations (11,338) (7,521) (6,092) (23,103) (48,054)
(Loss) income from discontinued
operations (9,233) (25,777) 93 2,103 (32,814)
Net loss (20,571) (33,298) (5,999) (21,000) (80,868)
Net (loss) income attributable to
common stockholders (22,729) (6,292) 36,135 (24,042) (16,928)
Basic and diluted earnings (loss)
per share
Continuing operations (0.17) 0.23 (0.09) (0.28) (0.34)
Discontinued operations (0.11) (0.31) 0.45 0.02 0.14
Net loss attributable to common
stockholders (0.28) (0.08) 0.36 (0.26) (0.20)
Weighted average shares
outstanding used in computing
basic and diluted earnings
(loss) per share 81,269 83,253 99,097 92,157 86,587
98
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of McLean,
Commonwealth of Virginia, on this 18th day of March, 2002.
Microstrategy Incorporated
(Registrant)
By: /s/ Michael J. Saylor
------------------------------------------------
Name: Michael J. Saylor
Title: Chairman of the Board of Directors and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Name Position Date
---- -------- ----
/s/ Michael J. Saylor Chairman of the Board of Directors and March 18, 2002
-------------------------------------- Chief Executive Officer (Principal
Michael J. Saylor Executive Officer)
/s/ Eric F. Brown President and Chief Financial Officer March 18, 2002
-------------------------------------- (Principal Financial and
Eric F. Brown Accounting Officer)
/s/ Sanju K. Bansal Vice Chairman of the Board of March 18, 2002
-------------------------------------- Directors, Executive Vice
Sanju K. Bansal President and Chief Operating
Officer
/s/ F. David Fowler Director March 18, 2002
--------------------------------------
F. David Fowler
Director March 18, 2002
--------------------------------------
Jonathan J. Ledecky
/s/ Jay H. Nussbaum Director March 18, 2002
--------------------------------------
Jay H. Nussbaum
/s/ Stuart B. Ross Director March 18, 2002
--------------------------------------
Stuart B. Ross
/s/ John W. Sidgmore Director March 18, 2002
--------------------------------------
John W. Sidgmore
/s/ Ralph S. Terkowitz Director March 18, 2002
--------------------------------------
Ralph S. Terkowitz
99
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNT
For the years ended December 31, 1999, 2000 and 2001
(in thousands)
Allowance for doubtful accounts
Balance at the Balance at
beginning of the end of
the period Additions (1) Deductions the period
----------------- ------------ ----------- ------------
31-Dec-99 $ 1,585 $ 4,625 $ (2,881) $ 3,329
31-Dec-00 3,329 10,129 (3,814) 9,644
31-Dec-01 9,644 4,014 (6,549) 7,109
(1) Reductions in/charges to revenues and expenses
100
INDEX TO EXHIBITS
Exhibit
Number Description
------- -----------
3.1 Amended and Restated Certificate of Incorporation of the registrant,
as amended (filed as Exhibit 3.1 to the registrant's Registration
Statement on Form S-1 (Registration No. 333-49899) and incorporated by
reference herein).
3.2 Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of the registrant (filed as Exhibit 3.2 to the
registrant's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2000 (File No. 000-24435) and incorporated by reference
herein).
3.3 Certificate of Designations, Preferences and Rights of the Series A
Convertible Preferred Stock (filed as Exhibit 3.1 to the registrant's
Current Report on Form 8-K (File No. 000-24435) filed on June 19, 2000
and incorporated by reference herein).
3.4 Certificate of Designations, Preferences and Rights of the Series B
Convertible Preferred Stock. (filed as Exhibit 4.1 to the registrant's
Current Report on Form 8-K (File No. 000-24435) filed on June 18,
2001, and incorporated by reference herein).
3.5 Certificate of Designations, Preferences and Rights of the Series C
Convertible Preferred Stock (filed as Exhibit 4.2 to the registrant's
Current Report on Form 8-K (File No. 000-24435) filed on June 18,
2001, and incorporated by reference herein).
3.6 Certificate of Designations, Preferences and Rights of the Series D
Convertible Preferred Stock (filed as Exhibit 4.3 to the registrant's
Current Report on Form 8-K (File No. 000-24435) filed on June 18,
2001, and incorporated by reference herein).
3.7 Restated By-Laws of the registrant (filed as Exhibit 3.2 to the
registrant's Registration Statement on Form S-1 (Registration No.
333-49899) and incorporated by reference herein).
4.1 Form of Certificate of Class A Common Stock of the registrant (filed
as Exhibit 4.1 to the registrant's Registration Statement on Form S-1
(Registration No. 333-49899) and incorporated by reference herein).
10.1 Amended and Restated 1996 Stock Plan of the registrant (filed as
Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1998 (File No. 000-24435) and
incorporated by reference herein).
10.2 Amended and Restated 1997 Stock Option Plan for French Employees of
the registrant (filed as Exhibit 10.1 to the registrant's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2001
(File No. 000-24435) and incorporated by reference herein).
10.3 1997 Director Option Plan of the registrant, as amended by Amendment
No. 1 thereto (filed as Exhibit 10.3 to the registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1999 (File No.
000-24435) and incorporated by reference herein).
10.4 Amendment No. 2 to the registrant's 1997 Director Option Plan (filed
as Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 2001 (File No. 000-24435) and
incorporated by reference herein).
10.5 1998 Employee Stock Purchase Plan of the registrant (filed as Exhibit
10.4 to the registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998 (File No. 000-24435) and incorporated by
reference herein).
101
Exhibit
-------
Number Description
------ -----------
10.6 Amended and Restated 1999 Stock Option Plan of the registrant (filed
as Exhibit 10.2 to the registrant's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 2001 (File No. 000-24435) and
incorporated by reference herein).
10.7 Master Lease Agreement No. VAC180, dated November 1, 1999, between MLC
Group, Inc. and the registrant (filed as Exhibit 10.8 to the
registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 (File No. 000-24435) and incorporated by reference
herein).
10.8 Letter Agreement, dated December 1, 1999, between ePlus, Inc. (f/k/a
MLC Group, Inc.) and the registrant (filed as Exhibit 10.9 to the
registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 (File No. 000-24435) and incorporated by reference
herein).
10.9 DSS Partner MicroStrategy Incorporated OEM Agreement, between the
registrant and NCR Corporation (filed as Exhibit 10.14 to the
registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 (File No. 000-24435) and incorporated by reference
herein).
10.10 Deed of Lease, dated January 7, 2000, between Tysons Corner Property
LLC and the registrant (filed as Exhibit 10.18 to the registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1999
(File No. 000-24435) and incorporated by reference herein.
10.11 First Amendment to Lease, dated August 9, 2000, between Tysons Corner
Property LLC and the registrant.
10.12 Stipulation of Settlement regarding the settlement of the class action
lawsuit, dated as of January 11, 2001 (filed as Exhibit 10.29 to the
registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000 (File No. 000-24435) and incorporated by reference
herein).
10.13 Amended and Restated Loan and Security Agreement by and among Foothill
Capital Corporation, the registrant and MicroStrategy Services
Corporation, dated as of June 14, 2001 (filed as Exhibit 10.1 to the
registrant's Current Report on Form 8-K (File No. 000-24435) filed on
June 20, 2001 and incorporated by reference herein).
10.14 Consent and Amendment Number One, dated as of August 29, 2001, to
Amended and Restated Loan and Security Agreement by and among Foothill
Capital Corporation, the registrant and MicroStrategy Services
Corporation (filed as Exhibit 10.3 to the registrant's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 2001
(File No. 000-24435) and incorporated by reference herein).
10.15 Waiver, Consent and Agreement, dated December 31, 2001, by and among
Foothill Capital Corporation, the registrant, MicroStrategy Services
Corporation, MicroStrategy Capital Corporation and Strategy.com
Incorporated.
10.16 Amendment No. 2 to Amended and Restated Loan and Security Agreement,
dated February 28, 2002, by and among Foothill Capital Corporation,
the registrant and MicroStrategy Services Corporation.
10.17 Amended and Restated General Continuing Guaranty, dated as of August
29, 2001, by and among the registrant, Aventine Incorporated,
MicroStrategy Capital Corporation, MicroStrategy Management
Corporation and Strategy.com Incorporated, in favor of Foothill
Capital Corporation (filed as Exhibit 10.4 to the registrant's
Quarterly Report on Form 10-Q for the quarterly period ended September
30, 2001 (File No. 000-24435) and incorporated by reference herein).
10.18 Security Agreement by and among the registrant, Aventine Incorporated,
MicroStrategy Capital Corporation, MicroStrategy Management
Corporation and Foothill Capital Corporation, dated as of February 9,
2001 (filed as Exhibit 10.3 to the registrant's Current Report on Form
8-K (File No. 000-24435) filed on February 15, 2001 and incorporated
by reference herein).
102
Exhibit
-------
Number Description
------ -----------
10.19 Warrant to Purchase Class A Common Stock of the registrant, dated
February 9, 2001, issued to Foothill Capital Corporation (filed as
Exhibit 10.4 to the registrant's Current Report on Form 8-K (File No.
000-24435) filed on February 15, 2001 and incorporated by reference
herein).
10.20 Registration Rights Agreement by and between the registrant and
Foothill Capital Corporation, dated as of February 9, 2001 (filed as
Exhibit 10.5 to the registrant's Current Report on Form 8-K (File No.
000-24435) filed on February 15, 2001 and incorporated by reference
herein).
10.21 Amended and Restated Registration Rights Agreement, dated as of April
June 14, 2001, by and among the registrant, Fisher Capital Ltd. and
Wingate Capital Ltd. (filed as Exhibit 10.4 to the registrant's
Current Report on Form 8-K (File No. 000-24435) filed on June 18, 2001
and incorporated by reference herein).
10.22 Amended and Restated Registration Rights Agreement, dated as of June
14, 2001, by and between the registrant and HFTP Investment L.L.C.
(filed as Exhibit 10.5 to the registrant's Current Report on Form 8-K
(File No. 000-24435) filed on June 18, 2001 and incorporated by
reference herein).
10.23 Amended and Restated Registration Rights Agreement, dated as of June
14, 2001, by and between the registrant and Leonardo, L.P. (filed as
Exhibit 10.6 to the registrant's Current Report on Form 8-K (File No.
000-24435) filed on June 18, 2001 and incorporated by reference
herein).
21.1 Subsidiaries of the registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
99.1 Software Development and OEM Agreement, dated December 28, 1999,
between the registrant and Exchange Applications, Inc. (filed as
Exhibit 10.10 to the registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999 (File No. 000-24435) and
incorporated by reference herein).
103