<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 22, 1998
REGISTRATION NO. 333- 49899
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO.1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MICROSTRATEGY INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7372 51-0323571
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
--------------
8000 TOWERS CRESCENT DRIVE
VIENNA, VIRGINIA 22182
(703) 848-8600
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
--------------
MR. MICHAEL J. SAYLOR
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MICROSTRATEGY INCORPORATED
8000 TOWERS CRESCENT DRIVE
VIENNA, VIRGINIA 22182
(703) 848-8600
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------
COPIES TO:
ALLEN L. MORGAN, ESQ. DAVID C. CHAPIN, ESQ.
JOHN D. WATSON, ESQ. ALISON T. BOMBERG, ESQ.
WILLIAM M. SHIELDS, ESQ.
BRIAN L. SALIMAN, ESQ.
LATHAM & WATKINS ROPES & GRAY
1001 PENNSYLVANIA AVENUE, N.W., ONE INTERNATIONAL PLACE
SUITE 1300 WASHINGTON, D.C. 20004 BOSTON, MA 02110
(202) 637-2200 (617) 951-7000
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
--------------
If any of the securities on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: [_]
--------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SHARES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED (1) PER SHARE (2) OFFERING PRICE REGISTRATION FEE(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock,
par
value $0.001 per share.. 4,600,000 shares $10.00 $46,000,000 $13,570
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Includes 600,000 shares of Class A Common Stock issuable upon the exercise
of an option granted to the Underwriters solely to cover over-allotments,
if any.
(2)Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457.
(3)Of this amount, $10,620 has been previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MIRCROSTRATEGY'S PRODUCTS
<TABLE>
Windows Off-the-Shelf Custom Applications World Wide Web Consumer Devices
<S> <C> <C> <C>
Report Executive SpreadSheets Vertical-Statistics Data HTML Java Activexs Pager & Fax & E-mail &
Information Sys. Applications Mining Phone Printer Web
DSS Agent DSS Objects DSS Web DSS Broadcaster*
DSS Server
DSS Architect Query Engine DSS Administrator
RDBMS Optimized for VLDB
Oracle Sybase Informix DB2 Teradata Red Tandem SQL
Brick Server
</TABLE>
DSS Agent is an object-based DSS application development environment as well as
a power user discovery tool. Users can create sophisticated metrics, reports,
alerts, and intelligent agents without programming. DSS Agent reports can also
be embedded into easy-to-navigate graphical executive information systems.
Spreadsheet users can build custom VBA applications integrating the best
features of both products and maintaining their familiar user interface.
DSS Objects allows serious application developers to integrate DSS Agent objects
into their own custom applications, substituting proprietary algorithms &
interfaces, yet leveraging MicroStrategy's Toolset for DSS. Data mining,
statistical analysis, and closed-loop vertical applications are all supported
via this interface.
DSS Web allows DSS Agent reports to be deployed to their clients over the web,
while taking advantage of the features of DSS Server, Architect, &
Administrator. Applications run unchanged, simultaneously in Client/Server & Web
mode. Users can drill-down, surf the database, and build new reports via Web
browsers. These applications can be customized using dynamic HTML, Java, and/or
ActiveX. Thus, developers get the benefits of an off-the shelf feature set,
along with flexibility to tailor their application to the needs of a particular
user group.
DSS Broadcaster, currently in beta testing, the industry's first information
broadcast server, designed to enable automated and personalized distribution of
business analysis-based messages via E-mail, Fax, Pager, and Mobile Phone. It is
designed to support, publish & subscribe via the Web, and enables the creation
of DSS solutions integrating both active and passive reporting components.
DSS Server provides 3 Tier DSS services to all of our interfaces, including load
balancing, triage, caching, scheduling, data mart management, and asynchronous
query execution.
DSS Architect allows Data Warehouse designers to map the RDBMS to an end-user
friendly, multi-dimensional view. It then automatically generates the metadata
necessary to maintain and optimize the DW tables.
DSS Administrator automatically monitors usage of all deployed DSS applications
at the lowest level of detail. It also supports centralized maintenance &
application management, providing the tuning, deployment, and administrative
capabilities necessary to implement decision support services on a broad scale.
The Query Engine contains the intelligence necessary to convert an end-user
question into the high-fidelity, high-performance relational & vector execution
plans. The Query Engine supports cubic, star, and relational query types,
allowing the full range of analysis against the world's largest transaction
level databases, many containing terabytes of detail and thousands of
attributes.
High Performance Drivers optimize Query Engine output for a given RDBMS and
database schema. These drivers translate our logical query plan into SQL syntax
that is optimized for the target database platform and reflect the DSS tuning
insight that we have developed through hundreds of man-years of experience
building and maintaining data warehouse applications for the largest companies
in the world.
* Currently in beta testing.
[LOGO OF MICROSTRATEGY APPEARS HERE]
<PAGE>
MicroStrategy's Vision: Any Question, Any Time, Anywhere
IMAGINE: You made $3,750 in the stock market today. Twenty minutes after the
market closed, this information was broadcast from your broker to your Pager.
Someone is trying to complete an electronic funds transfer of $56,000 from your
domestic bank to a numbered Swiss account. Since this is unprecedented and
potentially fraudulent, a notification has been forwarded to your Two-way Pager,
along with a request for permission.
A detailed breakdown of every check either clearing or deposited to your account
will be sitting on your Fax machine at the end of the day.
Your Voicemail has 8 messages: one from your wife, five from workers, and two
from your credit card provider's computer. Concert tickets are about to go on
sale for your favorite musician, and its database has placed two seats on hold
for 48 hours. Do you want them? By the way, someone is gambling on your credit
line in Vegas...a digital sentinel thought that you might like to know.
At work, your Printer has a 25 page report detailing all significant customer
transactions in your territory year-to-date.
Every month, you receive a credit report from your bank via surface Mail. It
details the current financial status of every one of your customers & suppliers
and provides interesting business analytics by weighting their financial
statistics with transactions from your check log. Your average customer grew 24%
this year.
A performance summary for each saleperson reporting to you appears on your
Personal Digital Assistant, updated every four hours. Backup information is
available on demand.
Your customer sends inventory replenishment requests and purchase order codes
directly to your Mobile Phone, taking advantage of the digital messaging
capabilities of the new PCS units. In the event of a stock-out situation, you
will know within minutes. When things are running smoothly, your phone remains
silent.
Your Email inbox has your factory's weekly flash report, summarizing latest
production, demand, inventory forecast, and quality observations. This message
contains a URL link launching your Web Browser, allowing you to drill-down
through the data in order to isolate problems and identify opportunities.
At the end of each week, you launch a Windows Program that serves as your
analytical window into your business --- surfing the database, filtering out
anomalies, comparing performance across time periods and business units, and
plotting future strategy.
When budgeting time arrives, a Spreadsheet model is automatically populated with
last year's performance statistics. You tweak some growth & cost parameters and
back it goes to the CFO.
You are the modern cyber-warrior. Facts find you when it is mission-critical for
you to be informed - answers to any question, any time, anywhere. You have no
blind spots. Arthur C. Clarke once said "Any sufficiently advanced technology is
indistinguishable from magic." To a 1980's business person, brought forward to
your era, you would appear telepathic and omniscient.
In your world, information flows like water
[LOGO OF MICROSTRATEGY APPEARS HERE]
<PAGE>
[GRAPHIC ART OF MICRO COMPUTER HARDWARE AND SOFTWARE APPEARS HERE]
Pager Two-Way Pager
Spreadsheet Pager Fax
Windows Program LAN Relational Telephone Voice Mail
Databases
Publishing
Insurance
Credit Cards
Retail
Government
Pharmaceutical
Telecommunications
Banking
Web Browser Internet Print Printer
Email Cellular Mail
Mobile Phone Personal Digital
Assistant
The applications described above represent Microstrategy's vision for future DSS
applications. Not all of these applications are currently commercially available
and some of these applications may not become commercially available in the
future.
Information Like Water(TM)
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED MAY 22, 1998
PROSPECTUS
4,000,000 SHARES
LOGO
CLASS A COMMON STOCK
-----------
Of the 4,000,000 shares of Class A Common Stock of MicroStrategy
Incorporated, a Delaware corporation ("MicroStrategy" or the "Company"),
offered hereby (the "Offering"), 3,840,000 shares are being sold by the Company
and 160,000 shares are being sold by certain stockholders of the Company (the
"Selling Stockholders"). See "Principal and Selling Stockholders." The Company
will not receive any of the proceeds from the sale of shares by the Selling
Stockholders. Upon completion of the Offering, the Company's existing
stockholders immediately prior to the date of this Prospectus (the "Existing
Stockholders") will own 100% of the outstanding Class B Common Stock of the
Company, which represents approximately 88.5% of the economic interest in the
Company (approximately 87.0% if the Underwriters' over-allotment option is
exercised in full). Each holder of Class B Common Stock is currently an
employee of the Company.
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. Holders of Class A Common Stock and Class B Common Stock
generally vote together as a single class on all matters presented to the
stockholders for their vote or approval, except as may be required by Delaware
law. Class B Common Stock may be converted into Class A Common Stock at any
time on a one-for-one basis. Following the Offering, the shares of Class B
Common Stock will represent approximately 98.7% of the combined voting power of
the Company (approximately 98.5% if the Underwriters' over-allotment option is
exercised in full). See "Description of Capital Stock."
Prior to the Offering, there has been no public market for the Class A Common
Stock. It is currently estimated that the initial public offering price will be
between $8.00 and $10.00 per share. For factors to be considered in determining
the initial public offering price, see "Underwriting."
Application has been made to have the Class A Common Stock approved for
quotation on the Nasdaq National Market under the symbol "MSTR."
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR CERTAIN CONSIDERATIONS RELEVANT TO
AN INVESTMENT IN THE CLASS A COMMON STOCK.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share....................... $ $ $ $
- --------------------------------------------------------------------------------
Total(3)........................ $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of $900,000 payable by the Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 600,000 shares of Class A Common Stock at the initial
offering price per share, less the underwriting discount, solely to cover
over-allotments. If such option is exercised in full, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
-----------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York,
on or about , 1998, against payment therefor in immediately available
funds.
-----------
MERRILL LYNCH & CO.
HAMBRECHT & QUIST
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
-----------
The date of this Prospectus is , 1998.
<PAGE>
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR IN-
CORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTA-
TIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SO-
LICITATION OF AN OFFER TO BUY THE CLASS A COMMON STOCK IN ANY JURISDICTION
WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICI-
TATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN
ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Termination of S Corporation Election and S Corporation Distribution..... 18
Dilution................................................................. 19
Capitalization........................................................... 20
Selected Consolidated Financial Data..................................... 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 32
Management............................................................... 54
Certain Transactions..................................................... 60
Principal and Selling Stockholders....................................... 62
Description of Capital Stock............................................. 63
Shares Eligible for Future Sale.......................................... 65
Underwriting............................................................. 67
Legal Matters............................................................ 68
Experts.................................................................. 68
Additional Information................................................... 68
Index to Consolidated Financial Statements............................... F-1
Glossary of Terms........................................................ G-1
</TABLE>
----------------
THROUGH AND INCLUDING , 1998 (THE 25TH DAY AFTER THE DATE OF THIS PROSPEC-
TUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER
OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PRO-
SPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PRO-
SPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOT-
MENTS OR SUBSCRIPTIONS.
"MicroStrategy," "Quick Strike," "EISToolkit" and "Strategy System" are
registered trademarks of the Company and "DSS Server," "DSS Agent," "DSS Web,"
"DSS Objects," "DSS Architect," "DSS Administrator," "DSS Executive," "DSS
Office," "DSS Broadcaster," "Query Tone," "Information Like Water," and
"QuickPilot" are trademarks of the Company. This Prospectus also contains
trademarks and registered trademarks of companies other than MicroStrategy
Incorporated.
The Company intends to distribute to its stockholders annual reports
containing audited financial statements and will make available copies of
quarterly reports containing unaudited interim financial information for the
first three quarters of each fiscal year of the Company.
----------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS
IN SUCH SECURITIES AND THE IMPOSITION OF A PENALTY BID IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
3
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements and
Notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated herein, all information in this Prospectus assumes (i) no exercise of
the over-allotment option granted to the Underwriters and (ii) completion of a
series of transactions in which, prior to consummation of the Offering, the
Company's Existing Stockholders will, among other things, exchange all of their
shares of the Company's Class A Common Stock for an identical number of shares
of Class B Common Stock.
MicroStrategy is a leading worldwide provider of enterprise decision support
system ("DSS") software and related services. The Company's suite of products
("DSS Suite") enables both active and passive delivery of information from
large-scale databases, providing Global 2000 enterprise and other user
communities with timely answers to mission-critical questions. MicroStrategy's
decision support platform enables users to query and analyze the most detailed,
transaction-level databases, turning data into business intelligence. In
addition to supporting internal enterprise users, MicroStrategy's products
extend DSS beyond corporate boundaries to customers, partners and supply chain
constituencies through a broad range of pull and push technology such as the
Internet, e-mail, telephones, pagers and other wireless communications
devices.
The growth of DSS applications has been driven by the demand for better
competitive business intelligence, improvements in the price/performance of
computers and increases in electronic data capture and storage. In addition,
the emergence of the Internet and other communications technologies has enabled
cost-effective access to and delivery of information to remote users throughout
the world. Potential users of such information also include those outside of
the organization such as suppliers, customers and consumers, which increasingly
enables companies to transform their organizational information from under-
utilized data to revenue-generating assets. Due to these factors, the overall
market for DSS is projected to grow substantially. According to Forrester
Research, the decision support component of the data warehouse market is
projected to grow from $1.1 billion in 1997 to $3.6 billion by 2001. In
addition, International Data Corporation ("IDC") projects that the market for
Internet-related DSS applications will grow from $43 million in 1996 to $2.3
billion by 2001.
MicroStrategy's DSS Suite, which includes DSS Server, DSS Web, DSS Agent, DSS
Architect and DSS Administrator, along with its newest product in Beta testing,
DSS Broadcaster, addresses the needs of the entire enterprise community, from
end-users to the managers of the information technology infrastructure. DSS
Suite provides the infrastructure and products used to implement three
categories of applications: (i) internal corporate information solutions; (ii)
business-to-business information solutions; and (iii) business-to-consumer
information solutions. The Company also offers a comprehensive set of
consulting, training and support services for its customers and partners.
MicroStrategy's objective is to become the world's leading provider of DSS
products. The Company believes that the future of DSS is "Query Tone." Query
Tone is universal knowledge enablement--the ability of any user, anywhere, to
ask any question, at any time. Just as dial tone makes telecommunications
services universally available, the Company believes that Query Tone will make
knowledge a ubiquitous utility. The Company intends to establish its DSS
platform as the standard enabling technology for Query Tone.
The Company has over 500 customers across such diverse industries as retail,
telecommunications, finance, insurance, healthcare, pharmaceuticals and
consumer packaged goods. MicroStrategy's customers use the Company's decision
support platform to perform mission-critical activities such as: customer
segmentation and profitability analysis; supply chain management; one-to-one
customer marketing; financial analysis; customer acquisition, retention, and
churn analysis; merchandising and inventory analysis; product category
management; and customer risk profiling. MicroStrategy customers include A.C.
Nielsen, Bank of America, CVS Pharmacy, General Motors, Hallmark, Kmart, MCI,
Merck/Medco, The SABRE Group, USAA and Xerox.
MicroStrategy has approximately 700 employees and markets its software and
services primarily through its direct sales force with offices located in major
cities throughout the U.S. and Europe. The Company is represented by
distributors in countries where it does not have a direct sales force and has
also entered into relationships with more than 80 system integration,
application development and platform partners, including Acxiom, Andersen
Consulting, IBM, Intrepid Systems, NCR, Oracle and Price Waterhouse.
MicroStrategy was founded in 1989 by its President, CEO and Chairman, Michael
J. Saylor. The Company is incorporated in Delaware, and its worldwide
headquarters are located at 8000 Towers Crescent Drive, Vienna, Virginia 22182.
The Company's telephone number is (703) 848-8600, and its website is
www.strategy.com. The information on the Company's website is not part of this
Prospectus.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
THE OFFERING
Class A Common Stock
offered:
By the Company.......... 3,840,000 shares
By the Selling
Stockholders............ 160,000 shares
Common Stock to be
outstanding after the
Offering:
Class A Common Stock.... 4,000,000 shares(1)
Class B Common Stock.... 30,735,514 shares(2)
Total Common Stock... 34,735,514 shares(1)
Proposed Nasdaq National
Market Symbol.............. "MSTR"
Use of Proceeds.............
For general corporate purposes, including working
capital, capital expenditures, repayment of bank
borrowings under the Company's business loan
facility (the "Business Loan") and other
indebtedness and possible acquisitions or
investments. See "Use of Proceeds."
Voting Rights............... 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. Holders of
Class A Common Stock and Class B Common Stock
generally vote together as a single class on all
matters presented to the stockholders for their
vote or approval, except as may be required by
Delaware law. Class B Common Stock may be
converted into Class A Common Stock at any time
on a one-for-one basis. Following the Offering,
the shares of Class B Common Stock will represent
approximately 98.7% of the combined voting power
of the Company (approximately 98.5% if the
Underwriters' over-allotment option is exercised
in full). See "Description of Capital Stock."
- --------
(1) Excludes 5,414,018 shares of Class A Common Stock issuable upon exercise of
employee and director stock options outstanding at March 31, 1998 with
exercise prices ranging from $0.50 to $6.00 per share and with a weighted
average exercise price of $1.99 per share. The Class A Common Stock and the
Class B Common Stock are referred to herein collectively as "Common Stock."
See "Management--Stock Option Plans" and Note 8 of "Notes to Consolidated
Financial Statements."
(2) In connection with the Offering, the Selling Stockholders will convert
160,000 shares of Class B Common Stock into an identical number of shares
of Class A Common Stock. The resulting 160,000 shares of Class A Common
Stock will be offered by the Selling Stockholders.
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------- ----------------------------------
1993 1994 1995 1996 1997(1) 1997 1998(1)
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues................ $ 4,102 $ 4,980 $ 9,777 $ 22,603 $ 53,557 $ 8,137 $ 19,895
Income (loss) from
operations............. 710 (3) 77 (2,290) 372 (941) 711
Net income (loss)....... 761 (61) 48 (2,375) 121 (1,003) 542
Basic net income (loss)
per share.............. $ 0.03 $ 0.00 $ 0.00 $ (0.08) $ 0.00 $ 0.00 $ 0.02
Shares used in computing
basic net income (loss)
per share.............. 24,640,000 27,988,000 28,896,622 29,493,873 29,493,873 29,493,873 30,895,514
Diluted net income
(loss) per share....... $ 0.03 $ 0.00 $ 0.00 $ (0.08) $ 0.00 $ 0.00 $ 0.02
Shares used in computing
diluted net income
(loss) per share....... 24,640,000 27,988,000 28,896,622 29,493,873 32,256,323 29,493,873 35,040,308
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
------ ------------ --------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................. $2,304 $ 2,304 $24,628
Working capital (deficit).................. (5,824) (15,824) 12,896
Total assets............................... 30,592 30,592 52,916
Notes payable, long-term portion........... 2,636 2,636 115
Total stockholders' (deficit) equity....... 1,187 (8,813) 22,428
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED(4)
-------------------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1996 1996 1996 1997 1997 1997 1997 1998
-------- ------------- ------------ --------- -------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues................ $5,553 $6,370 $6,594 $8,137 $11,875 $14,751 $18,794 $19,895
Income (loss) from
operations............. 242 (538) (1,989) (941) 199 498 616 711
Net income (loss)....... 218 (674) (1,897) (1,003) 122 486 516 542
</TABLE>
- -------
(1) During each of the periods presented, the Company was an S corporation, and
accordingly, was not liable for corporate income taxes. See "Termination of
S Corporation Election and S Corporation Distribution." On a pro forma
basis, had the Company been a tax-paying entity, the Company would have
recorded an income tax provision of approximately $489,000 and a net loss
of approximately $368,000 for the year ended December 31, 1997, and would
have recorded an income tax provision of approximately $206,000 and net
income of $336,000 for the three months ended March 31, 1998. Pro forma
basic and diluted loss per share would have been $0.01 for the year ended
December 31, 1997 and pro forma basic and diluted income per share would
have been $0.01 for the three months ended March 31, 1998. See Note 1 to
"Notes to Consolidated Financial Statements" for basis of computing pro
forma basic and diluted net loss per share.
(2) Pro forma for the effect of a $10.0 million dividend (the "S Corporation
Dividend") to be paid to the Existing Stockholders in the form of short-
term notes (the "Dividend Notes") prior to the termination of the Company's
S corporation election, which is expected to occur shortly prior to
consummation of the Offering. See "Termination of S Corporation Election
and S Corporation Distribution" and "Dividend Policy."
(3) As adjusted to reflect the sale by the Company of 3,840,000 shares of Class
A Common Stock offered hereby at an assumed public offering price of $9.00
per share, after deducting the underwriting discount, the estimated
offering expenses payable by the Company and the repayment of bank
borrowings as of March 31, 1998.
(4) The operating results for any quarter are not necessarily indicative of
results for any future period. See "Risk Factors--Potential Fluctuations in
Quarterly Operating Results" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Quarterly Financial
Results." During each of the quarters presented, the Company was an S
corporation and, accordingly, was not liable for corporate income taxes.
Net income (loss) for the quarters presented does not reflect any income
tax provision (benefit). See Note 1 above.
- --------------------------------------------------------------------------------
6
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RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should consider carefully the following risk factors in evaluating
the Company and its business before purchasing the Class A Common Stock
offered hereby. This Prospectus contains forward-looking statements that are
based largely on the Company's current expectations and that are subject to a
number of risks and uncertainties. The Company's actual results could differ
materially from the results discussed in "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Prospectus.
LIMITED OPERATING HISTORY; UNCERTAINTY OF FUTURE OPERATING RESULTS
The Company did not begin shipping DSS Agent, the first product in the
Company's current product family, until 1994, and a number of the Company's
products were first introduced in 1995. Accordingly, the Company's prospects
must be considered in light of the risks and difficulties frequently
encountered by companies in the early stage of development, particularly
companies in new and rapidly evolving markets. The Company's limited operating
history makes the prediction of future operating results difficult, if not
impossible. In addition, the Company has experienced net losses and losses
from operations for the fiscal years ended December 31, 1996 and December 31,
1994, and was only marginally profitable for the fiscal years ended December
31, 1997 and December 31, 1995. While the Company has experienced significant
percentage growth in revenues in recent periods, prior percentage growth rates
should not be considered as necessarily indicative of future growth rates or
operating results.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's operating results have in the past and are likely in the
future to vary significantly from quarter to quarter as a result of a number
of factors, including the size and timing of significant orders, the timing of
new product announcements, changes in pricing policies by the Company and its
competitors, market acceptance of decision support software generally and of
new and enhanced versions of the Company's products in particular, the length
of the Company's sales cycles, changes in operating expenses, personnel
changes, the Company's success in expanding its direct sales force and
indirect distribution channels, the pace and success of international
expansion, delays or deferrals of customer implementation and foreign currency
exchange rates. Fluctuations in quarterly operating results may in turn
produce fluctuations in annual revenues and operating results.
The Company's product revenues are not predictable with any significant
degree of certainty. Historically, the Company has typically recognized a
substantial portion of its revenues in the last month of a quarter, with these
revenues frequently concentrated in the last two weeks of a quarter. Even
minor delays in booking orders may have a significant adverse impact on
revenues for a particular quarter. To the extent that delays are incurred in
connection with orders of significant size, the impact will be correspondingly
greater. Moreover, the Company currently operates with virtually no order
backlog because its software products typically are shipped shortly after
orders are received. As a result, product license revenues in any quarter are
substantially dependent on orders booked and shipped in that quarter. Product
license revenues are also difficult to forecast because the market for the
Company's products is rapidly evolving, and sales cycles, which may last many
months, vary substantially from customer to customer. The sales cycle is
subject to a number of factors over which the Company has little or no
control, including customers' budgetary constraints, the timing of budget
cycles, concerns about the introduction of new products by the Company or its
competitors and potential downturns in general economic conditions, which may
be associated with reductions in demand for management information systems.
See "--Lengthy Sales and Implementation Cycles." Product support revenues
depend in substantial part on maintenance revenues from existing customers,
and to the extent that existing customers do not require ongoing maintenance,
revenues would be adversely affected. Seasonal factors may also impact revenue
trends as, for example, European sales may tend to be relatively lower during
the summer months than during other periods.
In light of the planned expansion of the Company's business, the Company
anticipates substantial increases in operating costs and expenses, including
costs and expenses to be incurred in connection with expansion of its
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<PAGE>
technical support, research and development and sales and marketing
organizations. Substantial resources are also expected to be devoted to the
expansion of indirect sales channels and international operations. The
Company's operating expenses are budgeted on anticipated revenue trends, and
achieving expense reductions (or even reductions in the rate of expense
growth) may not be possible in the short term, irrespective of whether actual
revenue growth is commensurate with the budgeted growth on which expense
levels are based. As a result, variations in the timing and amounts of revenue
could have a material adverse effect on the Company's quarterly operating
results.
Based upon all of the factors described above, the Company believes that its
quarterly revenues, expenses and operating results are likely to vary
significantly in the future, that period-to-period comparisons of its
operating results are not necessarily meaningful and that, in any event, such
comparisons should not be relied upon as indications of future performance.
Furthermore, it is possible that in some future quarters the Company's
operating results will fall below the expectations of the Company, market
analysts and investors. In such event, the price of the Class A Common Stock
would likely be materially and adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
LENGTHY SALES AND IMPLEMENTATION CYCLES
The licensing of the Company's software products is often an enterprise-wide
decision by prospective customers and generally involves a significant
commitment of capital and other resources. The period of time between initial
customer contact and an actual sales order may therefore span six months or
more as customers seek approval within their organizations for large capital
expenditures and implementation of mission-critical technology. During the
course of this sales cycle, the competitive environment in which the Company
operates may change significantly, due, for example, to the introduction of
new products by other industry participants. Customers' budgetary and
purchasing priorities may also change significantly during the course of the
sales cycle. These factors may in turn have a significant impact on the
duration or magnitude of a customer's planned purchasing program. In addition,
the time required to deploy the Company's products can vary significantly with
the needs of each customer and the complexity of the customer's data
warehousing requirements. The deployment process generally extends for several
months and may involve a pilot implementation of the Company's software
products. The complexity of customer requirements, typically involving
integration of databases, hardware and software provided by multiple vendors,
may also cause the Company on occasion to experience difficulty implementing
its products. There can be no assurance that the Company will not experience
delays in the implementation of orders in the future or that third-parties
will be able to successfully install the Company's products. Any delays in the
implementation of the Company's products could have a material adverse effect
on the Company's business, operating results and financial condition. See "--
Potential Fluctuations in Quarterly Operating Results," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business--Sales and Marketing" and "Professional Services and Customer
Support."
COMPETITION
The markets for decision support and Internet-based information services are
intensely competitive and subject to rapidly changing technology. The
Company's most direct competitors in these markets are providers of decision
support software, push products, browsers with webcasting functionality,
electronic and Internet commerce systems, vertical Internet information
systems, wireless communications products, on-line service providers ("OSPs")
and event-driven technology. Many of these competitors are offering (or may
soon offer) products and services that may compete with the Company's
information analysis and soon-to-be-released information broadcasting
products. The bases of competition in these markets include volume and type of
information accessed, timeliness of information delivery, degree of
personalization, range of information delivery media, quality of presentation,
price/performance sophistication of notification events and ease of
implementation.
The Company's competitors in the decision support market fall generally into
the following categories: (i) vendors of relational online analytical
processing ("ROLAP") software such as Information Advantage, Inc.
8
<PAGE>
and Platinum Technologies Corporation; (ii) vendors of desktop on-line
analytical processing ("OLAP") software such as Business Objects S.A. and
Cognos Incorporated; and (iii) vendors of multidimensional OLAP software such
as Oracle Corporation, Arbor Software Corporation (which has entered into a
strategic relationship with International Business Machines ("IBM")), Seagate
Software, Inc. ("Seagate") and SAS Institute Incorporated ("SAS"). The Company
anticipates continued growth and competition in the decision support software
market and the entrance of new competitors into this market in the future.
Such new competitors may include Microsoft Corporation ("Microsoft"), which
has indicated that it may introduce certain products in 1998 that may overlap
to some extent with the functionality of the Company's products.
Push product vendors such as PointCast Incorporated ("PointCast"), Marimba,
Inc. ("Marimba") and BackWeb Technologies Inc. ("BackWeb") offer technologies
that deliver information over the Internet to recipients via Web-browsers and
proprietary interfaces. Vendors of push products are focused generally on the
delivery of text-based information, such as news and sports, but often include
some level of numeric information such as stock price updates. Moreover,
Marimba has entered into technology partnerships that will extend the scope of
its offering to include the delivery of information and analysis from
relational data sources, which could provide the Company with increased
competition.
Web-browsers with channels or webcasting functionality, such as Microsoft
Internet Explorer and Netscape Navigator, provide an infrastructure for
automatically updating a set of information on a recipient's computer.
Although this infrastructure is used by the Company to enhance the
functionality of its DSS Web product line, webcasting and desktop channels
offer an alternative information delivery infrastructure to the Company's DSS
Broadcaster product line.
Products and turn-key solutions for electronic commerce, Internet commerce
and electronic business, such as those provided by IBM, Open Market Inc.,
USWEB Corp. ("U.S. Web"), Silicon Valley Internet Partners ("SVIP") and Sun
Microsystems ("Sun"), provide a set of functionality that could be used to
implement Internet-based information services. To the extent that these
information products sell information and analysis from relational databases
they will compete with the Company's products.
Vertical Internet information systems, including Microsoft Expedia,
Microsoft Investor, StockBoss, Microsoft CarPoint, Mercury Mail, TechWeb,
ESavers (US Airways, Inc.), C.O.O.L. (Continental Airlines, Inc.), and
Internet Travel Network, have developed custom applications and products for
the commercialization, analysis and delivery of specific information via the
Internet. These systems are generally tailored to a particular application and
built in a fashion that is difficult to leverage into other applications.
These systems represent competition, in that they provide similar
functionality to applications developed using the Company's products.
Wireless communications and messaging providers, such as AT&T Corp.
("AT&T"), Nextel Communications ("Nextel"), Sprint Corporation ("Sprint"), MCI
Communications Corporation ("MCI"), WorldCom, Inc. ("WorldCom"), Tridium Corp.
("Tridium"), PageNet, Inc. ("PageNet") and SkyTel Corp. ("SkyTel"), offer a
variety of alpha enabled mobile phones and pagers. It is possible that these
companies will implement custom-developed information services for consumers
of their mobile phones and pagers that will compete with applications using
the Company's products and services.
OSPs include companies such as America Online, Inc. ("America Online"),
Microsoft's Microsoft Network ("MSN"), Prodigy, Inc. ("Prodigy"), @ Home
Network ("@Home") and WebTV Networks, Inc. ("WebTV") (acquired by Microsoft)
that provide text-based content, such as news and sports, over the Internet
and on proprietary online services. The potential exists for these companies
to implement applications that overlap with the functionality provided by the
Company.
Providers of event notification systems include companies such as TIBCO
Finance Technology Inc. ("TIBCO"), which markets a product that monitors stock
tickers and notifies subscribers when preset thresholds are crossed; Clarify
Inc. ("Clarify"), which handles loan applications with a financial system
developed by SAP AG; BEA Systems, Inc. ("BEA Systems"), which provides
middleware; and Vitria Technology Inc. ("Vitria
9
<PAGE>
Technology") which provides event-based workflow software. The systems for
event-driven notification provided by these companies at present and in the
future may result in technology that overlaps with that provided by the
Company.
The Company believes that it differentiates itself from other industry
participants by offering comprehensive support for all significant relational
database platforms. If a single vendor wins a substantial share of the
relational database market, the Company may find it more difficult to
differentiate its offerings from its competitors, which may materially
adversely affect the Company's business, operating results and financial
condition.
Many of the Company's competitors have longer operating histories,
significantly greater financial, technical, marketing or other resources, or
greater name recognition than the Company. In addition, many of the Company's
competitors have well established relationships with current and potential
customers and extensive knowledge of the data warehouse industry. As a result,
these competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products, than can
the Company. Increased competition may result in price reductions, reduced
gross margins and loss of market share. There can be no assurance that the
Company will be able to compete successfully against current and future
competitors or that competitive pressures faced by the Company will not
materially adversely affect its business, operating results and financial
condition. See "Business--Competition."
Current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties,
thereby increasing their ability to address the needs of the Company's
prospective customers. The Company's current or future indirect channel
partners may establish cooperative relationships with current or potential
competitors of the Company, thereby limiting the Company's ability to sell its
products through particular distribution channels. Accordingly, it is possible
that new competitors or alliances among current and new competitors may emerge
and rapidly gain significant market share. Such competition could have a
material adverse effect on the Company's margins and its ability to obtain
maintenance revenues for new and existing product licenses on favorable terms.
MANAGEMENT OF GROWTH
The Company is experiencing rapid expansion in all areas of its operations,
and the Company anticipates that this expansion will continue. The total
number of Company employees grew from 59 on January 1, 1995 to 676 on March
31, 1998, and further significant increases in the number of employees are
anticipated. The Company's growth has placed, and is expected to continue to
place, significant demands on its administrative, operational, financial, and
personnel resources. In particular, the Company expects that current and
planned expansion of international operations will lead to increased financial
and administrative demands, such as increased operational complexity
associated with expanded facilities, administrative burdens associated with
managing an increasing number of relationships with foreign partners, and
expanded treasury functions to manage foreign currency risks. The Company may
also be required to expand its support organization significantly to further
develop indirect distribution channels that penetrate different and broader
markets and to accommodate growth in the Company's installed customer base.
The failure of the Company to manage its expansion effectively could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business--Sales and Marketing" and
"Management."
NEED TO RECRUIT ADDITIONAL SKILLED PERSONNEL; DEPENDENCE ON KEY PERSONNEL
The Company's future success depends upon its continuing ability to attract,
train, assimilate and retain highly qualified personnel. Competition for such
personnel in the software industry is intense, and there can be no assurance
that the Company will be able to retain its key employees or that it can
attract, train, assimilate or retain other highly qualified personnel in the
future. The Company's success also depends in large part on the
10
<PAGE>
continued service of its key management personnel, particularly Michael J.
Saylor, the Company's President and Chief Executive Officer, and Sanju K.
Bansal, the Company's Executive Vice President and Chief Operating Officer.
The loss of the services of one or more of these individuals or other key
personnel could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business--Employees" and
"Management."
DEPENDENCE ON NEW VERSIONS, NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE
The market for the Company's products is characterized by rapid
technological change, frequent new product introductions and enhancements,
uncertain product life cycles, changing customer demands and evolving industry
standards. The introduction of products embodying new technologies and the
emergence of new industry standards can render existing products obsolete and
unmarketable. Emergence of new standards in related fields may also have an
adverse effect on existing products. This could be the case, for example, if
new Web protocols were to emerge that were incompatible with deployment of the
Company's DSS applications over the Web. Although the Company's DSS solutions
allow the core database component to reside on nearly all enterprise server
hardware and operating system combinations (Mainframe, AS/400, Unix, Windows
NT, Windows), the Company's application server component currently runs only
on the Windows NT operating system. Therefore, the Company's ability to
increase sales of its products may depend on the continued acceptance of the
Windows NT operating system. To the extent that potential customers use Unix
operating systems as their application server, the Company would be precluded
from addressing that segment of the DSS application market. The development of
a Unix product would require a substantial investment of resources by the
Company and there is no assurance that such a product could be introduced on a
timely or cost effective basis or at all.
The Company believes that its future success will depend in large part on
its ability to continue to support a number of popular operating systems and
databases, and on its ability to maintain and improve its current product line
and to develop new products on a timely basis that achieve market acceptance,
maintain technological competitiveness and meet an expanding range of customer
requirements. As a result of the complexities inherent in DSS applications,
major new products and product enhancements can require long development and
testing periods. In addition, customers may delay their purchasing decisions
in anticipation of the general availability of new or enhanced versions of the
Company's products. Moreover, to date the Company has had only a limited
number of customers who have deployed its products in environments that
involve terabytes of data and thousands of active users, and widespread
deployment in these complex environments may create unexpected delays or other
difficulties. As a result, significant delays in the general availability of
such new releases or significant problems in the installation or
implementation of such new releases could have a material adverse effect on
the Company's business, operating results and financial condition. There can
be no assurance that the Company will be successful in developing and
marketing, on a timely and cost effective basis, product enhancements or new
products that respond to technological change, evolving industry standards or
customer requirements, that the Company will not experience difficulties that
could delay or prevent the successful development, introduction or marketing
of these enhancements or that the Company's new products and product
enhancements will achieve market acceptance. See "Business--Research and
Product Development."
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Company currently is not subject to direct regulation by any
governmental agency, other than laws and regulations generally applicable to
businesses. However, certain U.S. laws and laws of other countries restricting
the use of consumers' personal information may apply to the Company. Due to
the increasing popularity and use of the Internet and the dramatically
increased access to personal information enabled by technologies such as those
offered by the Company, it is possible that laws and regulations may be
adopted in the U.S. and abroad to limit access to personal information over
the Internet and other public data networks. In response to consumer
pressures, legislation applicable to the Company in areas such as privacy
protection has been proposed in the U.S. Congress and various state
legislatures, and it is possible that some such legislation may become law.
Moreover, the applicability to the Company of existing laws governing issues
such as personal privacy over the Internet or other public data networks is
uncertain. The majority of such laws were adopted before the
11
<PAGE>
widespread use and commercialization of the Internet and other public data
networks and, as a result, do not contemplate or address the unique issues
presented by such media. Any new law or regulation or any expanded
governmental enforcement of existing regulations may limit the Company's
growth or increase the Company's legal exposure, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON GROWTH OF MARKET FOR DECISION SUPPORT SOFTWARE
All of the Company's revenues have been attributable to the sale of decision
support software and related maintenance, consulting and training services,
and such software and services are expected to account for the Company's
revenues for the foreseeable future. Although demand for decision support
software has grown in recent years, the market for decision support software
applications is still emerging. Further development of the market may be
impaired by, among other factors, resistance from consumer and privacy groups
to increased commercial collection and use of data regarding spending and
other personal behavior patterns. There can be no assurance that the market
will continue to grow or that, even if the market does grow, businesses will
adopt the Company's solutions. The Company has spent, and intends to continue
to spend, considerable resources educating potential customers about decision
support software generally and the Company's solutions in particular. However,
there can be no assurance that such expenditures will enable the Company's
products to achieve any additional degree of market acceptance and, if the
market fails to grow or grows more slowly than the Company currently
anticipates, the Company's business, operating results and financial condition
would be materially adversely affected.
CONTROL BY EXISTING STOCKHOLDERS; ANTI-TAKEOVER EFFECT OF DUAL CLASSES OF
COMMON STOCK
Holders of the Company's Class A Common Stock are entitled to one vote per
share and holders of the Company's Class B Common Stock are entitled to ten
votes per share. Upon completion of the Offering, the existing stockholders
immediately prior to termination of the Company's S corporation election (the
"Existing Stockholders") will own or control 30,735,514 shares of Class B
Common Stock representing 98.7% of the voting power of the Company. Michael J.
Saylor, the Company's Chairman, President and Chief Executive Officer, through
his sole ownership and control of Alcantara LLC, will control 22,574,662
shares of Class B Common Stock representing 72.5% of the voting power of the
Company. Accordingly, Mr. Saylor will be able to control the Company through
his ability to determine the outcome of elections of the Company's directors,
amend the Company's Certificate of Incorporation and Bylaws and take certain
other actions requiring the vote or consent of stockholders, including
mergers, going private transactions and other extraordinary transactions and
the terms thereof.
The Company's Certificate of Incorporation permits holders of Class B Common
Stock to transfer shares of Class B Common Stock, subject to approval of the
holders of a majority of the outstanding Class B Common Stock. See
"Description of Capital Stock." Mr. Saylor or a group of stockholders
possessing a majority of the outstanding Class B Common Stock could, without
seeking other approval, transfer voting control of the Company to a third
party. Transfer of voting control to such a transferee could have a material
adverse effect on the Company's business prospects and financial condition.
Mr. Saylor will also be able to prevent a change of control of the Company,
regardless of whether holders of Class A Common Stock might otherwise receive
a premium for their shares over the then-current market price.
RELIANCE ON CHANNEL PARTNERS
In addition to its direct sales force, the Company relies on channel
partners such as original equipment manufacturers ("OEMs") and value added
resellers ("VARs") for licensing and support of its products in the United
States and internationally. In particular, for the fiscal year ended December
31, 1997 and for the three months ended March 31, 1998, channel partners
accounted for, directly or indirectly, 27.5% and 23.2%, respectively, of the
Company's total revenues. The Company's channel partners generally offer
products of several different companies, including, in some cases, products
that compete with the Company's products. The
12
<PAGE>
Company intends to expand its relationships with strategic partners and to
increase the proportion of the Company's customers licensed through these
indirect channels. The Company is currently investing, and intends to
increasingly invest in the future, significant resources to develop these
channels, which could adversely affect the Company's operating results if the
Company's efforts do not generate significant license revenues. There can be
no assurance that the Company will be able to attract strategic partners that
will be able to market the Company's products effectively and will be
qualified to provide timely and cost-effective customer support and service.
The Company's ability to achieve revenue growth in the future will depend in
part on its success in recruiting strategic partners and maintaining
successful relationships with those partners on a going-forward basis. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview" and "Business--Sales and Marketing."
RISKS ASSOCIATED WITH INTELLECTUAL PROPERTY
The Company regards its software products as proprietary and relies
primarily on a combination of statutory and common law copyright, trademark
and trade secret laws, customer licensing agreements, employee and third-party
nondisclosure agreements and other methods to protect its proprietary rights.
These laws and contractual provisions provide only limited protection of the
Company's proprietary rights. The Company has no patents or patent
applications pending and has no registered trademarks (other than
MicroStrategy, QuickStrike, EISToolkit and Strategy System) or registered
copyrights (other than the EISToolkit 2.0 reference manual). Despite the
Company's efforts to protect its proprietary rights, it may be possible for a
third party to copy or otherwise obtain and use the Company's technology
without authorization or to develop similar technology independently.
Furthermore, the laws of certain countries in which the Company sells its
products do not protect the Company's software and intellectual property
rights to the same extent as do the laws of the United States. If unauthorized
copying or misuse of the Company's products were to occur to any substantial
degree, the Company's business, results of operations and financial condition
could be materially adversely affected. There can be no assurance that the
Company's means of protecting its proprietary rights will be adequate or that
the Company's competitors will not independently develop similar technology.
There can be no assurance in the future that a third party will not claim
that the Company's technology infringes its proprietary rights. As the number
of software products in the Company's target market increases and the
functionality of these products further overlap, the Company believes that
software developers may become increasingly subject to infringement claims.
Any such claims, whether with or without merit, can be time consuming and
expensive to defend. There can be no assurance that third parties will not
assert infringement claims against the Company in the future with respect to
its current or future products or that any such assertion will not require the
Company to enter into royalty arrangements or litigation that could be costly
to the Company. See "Business--Intellectual Property and Licenses."
INTERNATIONAL OPERATIONS
International sales accounted for 20.9%, 26.6%, 11.1%, and 11.3% of the
Company's total revenue for the three months ended March 31, 1998 and for the
fiscal years ended December 31, 1997, 1996 and 1995, respectively. The Company
intends to continue to expand its international operations and enter
additional international markets. Such expansion will require significant
management attention and financial resources and could adversely affect the
Company's business, operating results or financial condition. In order to
expand international sales successfully in 1998 and subsequent periods, the
Company must establish additional foreign operations, hire additional
personnel and recruit additional international resellers and distributors.
There can be no assurance that the Company will be able to do so in a timely
manner, which may limit the Company's growth in international sales. In
addition, there can be no assurance that the Company will be able to maintain
or increase international market demand for the Company's products. In
addition to the foreign currency risks described below, other risks inherent
in the Company's international business activities generally include
unexpected changes in regulatory requirements, tariffs and other trade
barriers, costs of localizing products for foreign
13
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countries, lack of acceptance of localized products in foreign countries,
longer accounts receivable payment cycles, difficulties in managing
international operations, potentially adverse tax consequences including
restrictions on the repatriation of earnings, weaker intellectual property
protection and the burden of complying with a wide variety of foreign laws.
Such factors may have a material adverse effect on the Company's future
international sales and, consequently, the Company's results of operations.
See "Currency Fluctuations," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Sales and
Marketing."
CURRENCY FLUCTUATIONS
The Company's international revenues and expenses are denominated in foreign
currencies (principally the British Pound Sterling and the German Deutsche
Mark). The functional currency of the Company's foreign subsidiaries is each
subsidiary's local currency. Fluctuations in exchange rates between the U.S.
Dollar and such currencies may have a material adverse effect on the Company's
business, results of operations and financial condition, particularly its
operating margins, although foreign currency translation gains and losses have
been immaterial to date. The impact of future exchange rate fluctuations on
the Company's results of operations cannot be accurately predicted. To date,
the Company has not sought to hedge the risks associated with fluctuations in
exchange rates but may undertake such transactions in the future. There can be
no assurance that any hedging techniques implemented by the Company in the
future would be successful or that the Company's business, results of
operations and financial condition will not be materially adversely affected
by exchange rate fluctuations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISK OF SOFTWARE DEFECTS; POTENTIAL PRODUCT LIABILITY FOR SOFTWARE DEFECTS
Software products as internally complex as those offered by the Company may
contain errors or defects, especially when first introduced or when new
versions are released. Despite extensive product testing, the Company has in
the past discovered software errors in certain of its new products after their
introduction. Although the Company has not experienced material adverse
effects resulting from any such errors to date, there can be no assurance
that, despite testing by the Company and by current and potential customers,
errors will not be found in new products or releases after commencement of
commercial shipments, resulting in loss of revenue or delay in market
acceptance, which could have a material adverse effect upon the Company's
business, operating results and financial condition. See "Business--Products."
The Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims. It is possible, however, that the limitation of liability
provisions contained in the Company's license agreements may not be effective
under the laws of certain domestic or international jurisdictions. Although
the Company has not experienced product liability claims to date, the license
and support of products by the Company may entail the risk of such claims. A
successful product liability claim brought against the Company could have a
material adverse effect on the Company's business, operating results and
financial condition.
BENEFITS TO EXISTING STOCKHOLDERS
The Existing Stockholders will realize substantial benefits in connection
with the Offering. For example, prior to the termination of the Company's S
corporation status, which is expected to occur shortly prior to consummation
of the Offering, the Company expects to pay the S Corporation Dividend to the
Existing Stockholders. Moreover, the Company will use a portion of the net
proceeds of the Offering to repay all indebtedness outstanding under the
Business Loan. Upon consummation of the Offering, a personal guarantee of
certain amounts due under the Business Loan given by the Company's President
and Chief Executive Officer, Michael J. Saylor, will terminate. See "Certain
Transactions." The Existing Stockholders, who paid substantially less for
their stock on a per share basis than the assumed public offering price per
share, may, following expiration of a 180-day lock-up period, also have the
benefit of an active trading market for the Company's shares that did not
exist prior to consummation of the Offering. See "Dilution" and "Shares
Eligible for Future Sale."
14
<PAGE>
YEAR 2000 ISSUES; POTENTIAL IMPACT ON CUSTOMERS
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than two years, computer systems and
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements. The Company has designed its products to be capable
of handling four digit dates, and therefore the Company believes that the
direct impact of the Year 2000 problem on the Company's products will not be
significant. Year 2000 issues, however, may significantly affect the
purchasing patterns of customers and potential customers. Many companies are
expending significant resources to correct or patch their current software
systems for Year 2000 compliance. These expenditures may result in reduced
funds available to purchase software products such as those offered by the
Company, which could result in a material adverse effect on the Company's
business, operating results and financial condition.
NO PRIOR PUBLIC MARKET
Prior to the Offering, there has been no public market for the Class A
Common Stock. Accordingly, there can be no assurance that an active trading
market will develop or be sustained upon completion of the Offering or that
the market price of the Class A Common Stock will not decline below the
initial public offering price. The initial public offering price of the Class
A Common Stock will be determined by negotiations between the Company and the
representatives of the Underwriters and may not be indicative of the prices
that will prevail in the public market. See "Underwriting."
The trading prices of the Class A Common Stock could be subject to wide
fluctuations in response to quarter-to-quarter variations in the Company's
operating results, developments or disputes concerning intellectual property
rights, technological innovations or new products, governmental regulatory
action, general conditions in the software industry, increased price
competition, changes in earnings estimates by analysts or other events or
factors, many of which are beyond the Company's control. In addition, the
stock market has experienced extreme price and volume fluctuations, which have
particularly affected the market prices of many computer software companies
and which have often been unrelated to the operating performance of such
companies.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of Class A Common Stock could adversely affect the market price
of the Class A Common Stock. Several of the Company's principal stockholders
hold a significant portion of the outstanding Class B Common Stock, and a
decision by one or more of these stockholders to convert such shares into
Class A Common Stock (which conversion may take place at any time) and sell
their shares could adversely affect the market price of the Class A Common
Stock. The 4,000,000 shares of Class A Common Stock offered hereby (plus any
shares issued upon exercise of the Underwriters' over-allotment option) will
be freely tradeable without restriction in the public market as of the date of
this Prospectus, except for shares purchased by "affiliates" of the Company.
See "Shares Eligible For Future Sale." The holders of all the shares of Class
B Common Stock that will be outstanding upon the completion of the Offering
(which may be converted into Class A Common Stock at any time) have agreed to
enter into agreements with the Underwriters (the "Lock-up Agreements") which
will provide that, until the expiration of 180 days after the date of this
Prospectus, they will not offer, sell, contract to sell or otherwise dispose
of any shares of Class A Common Stock (other than the shares of Class A Common
Stock offered by the Selling Stockholders) or securities of the Company which
are substantially similar to the shares of Class A Common Stock or which are
convertible into or exchangeable for, or represent the right to receive,
shares of Class A Common Stock without the prior written consent of the
representatives of the Underwriters. Upon the expiration of the Lock-up
Agreements, a substantial majority of the shares covered by the Lock-up
Agreements will be eligible for sale pursuant to Rule 144.
The Company intends to file a Registration Statement on Form S-8 as soon as
practicable after the date of this Prospectus to register the 8,000,000,
300,000 and 200,000 shares of Class A Common Stock that are issuable
15
<PAGE>
upon the exercise of stock options either outstanding or available for grant
pursuant to the Company's 1996 Stock Plan ("1996 Stock Plan"), 1997 Stock
Option Plan for French Employees ("French Plan") and 1997 Director Option Plan
("Director Option Plan," and together with the 1996 Stock Plan and the French
Plan, the "Company Stock Plans"), respectively. Such registration statement is
expected to become effective immediately upon filing; however, consistent with
the terms of the Company Stock Plans, holders of options will be unable to
sell any shares of Class A Common Stock received upon the exercise of options
granted thereunder until the expiration of 180 days after the date of this
Prospectus. Options granted under the 1997 Director Option Plan do not
generally begin to vest until October 1998. Following effectiveness, shares
covered by the Registration Statement on Form S-8 will be eligible for sale in
the public markets, subject to Rule 144 limitations applicable to affiliates
as well as to the limitations on sale and vesting described above. See
"Management--Stock Option Plans."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Class A Common Stock offered hereby will incur immediate
and substantial dilution in net tangible book value per share. To the extent
options to purchase the Company's Class A Common Stock are exercised, there
will be further dilution. See "Dilution."
16
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of Class A
Common Stock offered hereby are estimated to be approximately $31,240,000
($36,262,800 if the Underwriters' over-allotment option is exercised in full)
based on an assumed initial public offering price of $9.00 per share and after
deducting the estimated underwriting discount and offering expenses payable by
the Company.
The principal purposes of the Offering are to increase the Company's equity
capital, to create a public market for the Class A Common Stock, to enhance
the Company's visibility and credibility with present and prospective
customers and employees and to facilitate future access to public equity
markets.
The Company currently intends to use the net proceeds of the Offering for
general corporate purposes, including working capital, increased sales and
marketing expenditures, capital expenditures, repayment of bank borrowings
outstanding under the Company's Business Loan, and, to the extent that other
sources are insufficient for this purpose, repayment of the Dividend Notes.
For information regarding the terms of the indebtedness expected to be repaid,
see "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources." Furthermore, the Company may
acquire or invest in other businesses, products, technologies or securities,
and a portion of the net proceeds may be used for these purposes. The Company
has no plans, commitments or agreements with respect to any material
acquisitions or investments as of the date of this Prospectus, and there can
be no assurance that any such acquisitions or investments will be made.
Accordingly, the Company's management will retain broad discretion as to the
allocation of a substantial portion of the net proceeds from the Offering.
Pending such uses, the Company plans to invest the net proceeds in interest-
bearing, investment-grade securities.
The Company will not receive any of the proceeds from the sale of Class A
Common Stock by the Selling Stockholders. See "Principal and Selling
Stockholders."
DIVIDEND POLICY
The Company expects to declare and pay the S Corporation Dividend to the
Existing Stockholders in the form of the Dividend Notes prior to the
termination of the Company's S corporation election, which is expected to
occur shortly prior to consummation of the Offering. The Business Loan
includes certain covenants restricting the Company's ability to incur
additional indebtedness (including the Dividend Notes) or to make any advances
to third parties outside the normal course of business. The Company has
obtained a waiver under the Business Loan to allow it to declare the S
Corporation Dividend and issue the Dividend Notes, subject to consummation of
the Offering. The Dividend Notes may be prepaid without penalty at any time at
the option of the Company. See "Termination of S Corporation Election and S
Corporation Distribution" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
The Company anticipates that following completion of the Offering, future
earnings, if any, will be retained for the development of its business, and
the Company does not anticipate paying any cash dividends on the Common Stock
in the foreseeable future.
17
<PAGE>
TERMINATION OF S CORPORATION ELECTION
AND S CORPORATION DISTRIBUTION
Effective January 1, 1992, the Company elected to be treated as an S
corporation for federal and state income tax purposes. As a result, the
Company currently pays no federal or state income tax, and all of the earnings
of the Company are subject to federal and state income taxation directly at
the stockholder level. The Company's S corporation status will terminate prior
to consummation of the Offering, at which time the Company will become subject
to corporate income taxation under Subchapter C of the Internal Revenue Code
(the "Code") of 1986, as amended. See Note 6 of "Notes to Consolidated
Financial Statements" for information regarding pro forma federal income tax
provisions as if the Company had been a C corporation under the Code during
the relevant periods.
The Company has entered into a tax indemnification agreement (the "Tax
Indemnification Agreement") with the Existing Stockholders. The Tax
Indemnification Agreement provides for, among other things, the
indemnification of the Company by such stockholders for any federal and state
income taxes (including interest and penalties) incurred by the Company if for
any reason the Company is deemed to be treated as a C corporation during any
period for which it reported its taxable income as an S corporation. The tax
indemnification obligation of the Existing Stockholders is limited to the
lesser of (i) the amount of any reduction in their tax liability as a result
of any such determination or (ii) the aggregate amount received in
distributions from the Company from January 1, 1990 until the S corporation
termination date. The Tax Indemnification Agreement also provides for the
cross-indemnification by the Company of each Existing Stockholder for any
losses or liabilities with respect to certain additional taxes (including
interest and penalties) resulting from the Company's operations during the
period in which it was an S corporation. Purchasers of Class A Common Stock in
the Offering who are not Existing Stockholders will not be parties to the Tax
Indemnification Agreement.
The Company expects to pay the S Corporation Dividend to the Existing
Stockholders in the form of the Dividend Notes, prior to termination of the
Company's S corporation election, which is expected to occur shortly prior to
consummation of the Offering. The Dividend Notes (i) have a term of one year;
(ii) bear interest at the applicable federal rate for debt obligations having
a maturity of one year, which was 5.29% as of March 31, 1998; and (iii) are
payable in four equal quarterly installments. The Dividend Notes may be
prepaid without penalty at any time at the option of the Company. See
"Dividend Policy" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
18
<PAGE>
DILUTION
The pro forma net tangible book (deficit) value of the Company at March 31,
1998, as adjusted to reflect the payment of the S Corporation Dividend to the
Existing Shareholders in the form of the Dividend Notes, was ($11.6) million,
or ($0.37) per share of Common Stock. Pro forma net tangible book value per
share represents the amount of total tangible assets of the Company reduced by
the amount of its total liabilities divided by the total number of shares of
Common Stock outstanding. After giving effect to the sale by the Company of
3,840,000 shares of Class A Common Stock in the Offering at an assumed initial
public offering price of $9.00 per share, and after deducting the underwriting
discount and estimated offering expenses payable by the Company, the pro forma
net tangible book value of the Company at March 31, 1998 would have been $24.7
million, or $0.71 per share of Common Stock. This represents an immediate
increase in pro forma net tangible book value of $1.08 per share to the
Company's existing stockholders and an immediate dilution in pro forma net
tangible book value of $8.29 per share to new investors purchasing shares of
Class A Common Stock in the Offering. The following table illustrates this per
share dilution in net tangible book value to new investors:
<TABLE>
<S> <C> <C>
Initial public offering price per share....................... $9.00
Net tangible book (deficit) value per share of Class A
Common Stock before the Offering........................... $(0.37)
Increase per share attributable to new investors............ $ 1.08
Pro forma net tangible book (deficit) value per share after
the Offering................................................. $0.71
-----
Dilution per share to new investors........................... $8.29
=====
</TABLE>
The following table sets forth, as of March 31, 1998, the differences in the
number of shares of Class B Common Stock purchased from the Company, the
consideration paid to the Company and the average price per share paid by the
Existing Stockholders and by the new investors purchasing shares of Class A
Common Stock in the Offering (assuming no exercise of the Underwriters' over-
allotment option and without giving effect to the underwriting discount and
estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 30,895,514 89% $ 1,262,291 4% $0.04
New investors........... 3,840,000 11 34,560,000 96 9.00
---------- --- ----------- ---
Total................... 34,735,514 100% $35,822,291 100%
========== === =========== ===
</TABLE>
The preceding table assumes no exercise of any stock options outstanding at
March 31, 1998. At March 31, 1998, there were director and employee stock
options outstanding to purchase a total of 5,414,018 shares of Class A Common
Stock with a weighted average exercise price of $1.99 per share. To the extent
that such options are exercised, there will be further dilution to new
investors. See "Management--Stock Option Plans" and Note 8 of "Notes to
Consolidated Financial Statements."
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998 (i) on an actual basis and (ii) as adjusted to reflect (a) the
exchange by the Existing Stockholders of 30,895,514 shares of Class A Common
Stock outstanding at March 31, 1998 into an identical number of shares of
Class B Common Stock, (b) the payment of the S Corporation Dividend to the
Existing Stockholders in the form of Dividend Notes prior to the termination
of the Company's S corporation election, (c) repayment of all of the
indebtedness outstanding under the Business Loan and (d) the sale of 3,840,000
shares of Class A Common Stock by the Company and the conversion of 160,000
shares of Class B Common Stock into Class A Common Stock and the ensuing sale
of 160,000 shares of Class A Common Stock by the Selling Stockholders in the
Offering at an assumed initial public offering price of $9.00 per share, after
deduction of the underwriting discount and estimated offering expenses payable
by the Company.
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------
ACTUAL AS ADJUSTED
---------- -------------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Line of credit....................................... $ 5,376 $ --
Dividend Notes payable............................... -- 10,000
Other notes payable, including current portion....... 3,751 210
Stockholders' equity:
Preferred stock, par value $0.001 per share,
5,000,000 shares authorized, no shares issued and
outstanding....................................... -- --
Common Stock, par value $0.001 per share,
50,000,000 shares authorized, 30,895,514 shares
issued and outstanding, actual; no shares issued
and outstanding, as adjusted...................... 31 --
Class A Common Stock, par value $0.001 per share,
100,000,000 shares authorized, no shares issued
and outstanding; 4,000,000 shares issued and
outstanding, as adjusted.......................... -- 4
Class B Common Stock, par value $0.001 per share,
100,000,000 shares authorized, no shares issued
and outstanding, actual; 30,735,514 shares issued
and outstanding, as adjusted...................... -- 31
Additional paid-in capital......................... 1,086 32,323
Accumulated other comprehensive income............. 162 162
Accumulated deficit................................ (92) (10,092)
---------- ----------
Total stockholders' (deficit) equity............. 1,187 22,428
---------- ----------
Total capitalization............................. $ 10,314 $ 32,638
========== ==========
</TABLE>
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the "Consolidated Financial Statements," the
"Notes to Consolidated Financial Statements" and the other financial
information included elsewhere in this Prospectus. The statement of operations
data for the years ended December 31, 1995, 1996 and 1997, and the balance
sheet data as of December 31, 1996 and 1997, are derived from audited
financial statements included elsewhere in this Prospectus. The statement of
operations data for the year ended December 31, 1994 and the balance sheet
data as of December 31, 1994 and 1995 is derived from audited financial
statements not included herein. The statement of operations data for the year
ended December 31, 1993 and for the three months ended March 31, 1997 and 1998
and the balance sheet data as of December 31, 1993 and as of March 31, 1998
have been derived from the Company's unaudited consolidated financial
statements, which, in management's opinion, reflect all adjustments necessary
to fairly present this information when read in conjunction with the
Consolidated Financial Statements and the Notes thereto included elsewhere in
the Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------------- -----------------------------------
1993 1994 1995 1996 1997(1) 1997 1998(1)
------------------------ ----------- ----------- ----------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Product licenses... $ 676 $ 622 $ 4,077 $ 15,873 $ 36,601 $ 4,731 $ 14,282
Product support.... 3,426 4,358 5,700 6,730 16,956 3,406 5,613
------------ ----------- ----------- ----------- ----------- ---------- ----------
Total revenues.... 4,102 4,980 9,777 22,603 53,557 8,137 19,895
------------ ----------- ----------- ----------- ----------- ---------- ----------
Costs and expenses:
Cost of revenues... 1,502 2,057 2,458 5,257 11,116 2,156 3,701
Sales and
marketing......... 274 771 2,992 13,054 30,468 5,292 10,828
Research and
development....... 153 200 1,855 2,840 5,049 735 2,092
General and
administrative.... 1,463 1,955 2,395 3,742 6,552 895 2,563
------------ ----------- ----------- ----------- ----------- ---------- ----------
Total costs and
expenses......... 3,392 4,983 9,700 24,893 53,185 9,078 19,184
------------ ----------- ----------- ----------- ----------- ---------- ----------
Income (loss) from
operations......... 710 (3) 77 (2,290) 372 (941) 711
Interest income
(expense), net..... 6 (34) (40) (105) (239) (61) (190)
Other income
(expense), net..... 45 (24) 11 20 (12) (1) 21
------------ ----------- ----------- ----------- ----------- ---------- ----------
Net income (loss)... $ 761 $ (61) $ 48 $ (2,375) $ 121 $ (1,003) $ 542
============ =========== =========== =========== =========== ========== ==========
Basic net income
(loss) per
share(2)........... $ 0.03 $ 0.00 $ 0.00 $ (0.08) $ 0.00 $ 0.00 $ 0.02
Shares used in
computing basic net
income (loss) per
share(2)........... 24,640,000 27,988,000 28,896,622 29,493,873 29,493,873 29,493,873 30,895,514
Diluted net income
(loss) per share... $ 0.03 $ 0.00 $ 0.00 $ (0.08) $ 0.00 $ 0.00 $ 0.02
Shares used in
computing diluted
net income (loss)
per share(2)....... 24,640,000 27,988,000 28,896,622 29,493,873 32,256,323 29,493,873 35,040,308
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1998
------------------------------------- --------------------------------------------
PRO FORMA
1993 1994 1995 1996 1997 ACTUAL PRO FORMA(3) AS ADJUSTED(4)
------ ------ ------ ------- ------- ------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash and cash
equivalents............ $ 141 $ 249 $ 643 $ 1,686 $ 3,506 $ 2,304 $ 2,304 $24,628
Working capital
(deficit).............. 1,752 848 1,343 (2,237) (5,761) (5,824) (15,824) 12,896
Total assets............ 2,352 3,209 5,838 13,004 30,065 30,592 30,592 52,916
Notes payable, long-term
portion................ 323 193 600 460 2,658 2,636 2,636 115
Total stockholders'
(deficit) equity....... 1,564 1,446 1,546 (793) (427) 1,187 (8,813) 22,428
</TABLE>
- -------
(1) During each of the periods presented, the Company was an S corporation,
and accordingly was not liable for corporate income taxes. See
"Termination of S Corporation Election and S Corporation Distribution." On
a pro forma basis, had the Company been a tax-paying entity, the Company
would have recorded an income tax provision of approximately $489,000 and
a net loss of approximately $368,000 for the year ended December 31, 1997
and would have recorded an income tax provision of approximately $206,000
and net income of $336,000 for the three months ended March 31, 1998. Pro
forma basic and diluted loss per share would have been $0.01 for the year
ended December 31, 1997 and pro forma basic and diluted income per share
would have been $0.01 for the three months ended March 31, 1998. See Note
1 of "Notes to Consolidated Financial Statements" for the basis of
computing pro forma basic and diluted net loss per share.
(2) The basis for the determination of shares used in computing net income per
share is described in Note 1 of "Notes to Consolidated Financial
Statements."
(3) Pro forma for the effect of the S Corporation Dividend, which is expected
to occur shortly prior to consummation of the Offering. See "Termination
of S Corporation Election and S Corporation Distribution" and "Dividend
Policy."
(4) As adjusted to reflect the sale by the Company of 3,840,000 shares of
Class A Common Stock offered hereby at an assumed public offering price of
$9.00 per share, after deducting the underwriting discount and the
estimated offering expenses payable by the Company and the repayment of
bank borrowings as of March 31, 1998.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operation
of the Company should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto, and the other financial information
included elsewhere in this Prospectus.
OVERVIEW
The primary business of the Company following its incorporation in 1989 was
to provide software consulting services for customers to help them build
custom decision support systems. The Company's activities during 1994 and 1995
increasingly focused on the development and sale of software products,
culminating in the release of a full complement of DSS products in 1995. Since
this time, the Company has continued to focus significant resources on the
development of additional functionality and features to its DSS software
products. As a result, the Company has transitioned its primary business from
that of a provider of services to a provider of software products.
Since 1995, the Company has significantly increased its sales and marketing,
service and support, research and development and general and administrative
staffs. The Company has more than doubled its headcount each year since 1995.
At January 1, 1995, the Company had 59 employees, and at March 31, 1998, it
had 676 employees. Although the Company's revenues have significantly
increased in each of the last eight quarters, the Company experienced
fluctuating operating margins during 1996, 1997 and the first quarter of 1998
primarily as a result of increases in staff levels. The Company expects to
continue to increase staffing levels and incur additional associated costs in
future periods. If the Company is unable to achieve corresponding substantial
revenue growth, the Company could suffer operating losses in one or more
fiscal quarters and may be unable to forecast such losses prior to the end of
any given fiscal quarter. In addition, the Company has experienced net losses
and losses from operations for the fiscal years ended December 31, 1996 and
December 31, 1994, and was only marginally profitable for the fiscal years
ended December 31, 1997 and December 31, 1995. While the Company has
experienced significant percentage growth in revenues in recent periods and
currently expects substantial, although potentially lower, percentage growth
in revenues throughout 1998, prior percentage revenue growth rates should not
be considered as necessarily indicative of future growth rates or operating
results, and there are a number of factors that could materially affect
expected revenue and operating results for fiscal 1998 and subsequent periods.
See "Risk Factors--Limited Operating History; Uncertainty of Future Operating
Results," "--Potential Fluctuations in Quarterly Operating Results," "--
Lengthy Sales and Implementation Cycles," "--Competition," "Management of
Growth," "--Need to Recruit Additional Skilled Personnel; Dependence on Key
Personnel," and "Dependence on New Versions, New Products and Rapid
Technological Change."
The Company's revenues are derived from two principal sources (i) product
licenses and (ii) fees for maintenance, technical support, training and
consulting services (collectively, "product support"). Prior to December 15,
1997 the Company recognized revenue in accordance with Statement of Position
91-1, "Software Revenue Recognition." Subsequent to December 31, 1997, the
Company began recognizing revenue in accordance with Statement of Position 97-
2, "Software Revenue Recognition." Product license revenues are generally
recognized upon the execution of a contract and shipment of the related
software product, provided that no significant vendor obligations remain
outstanding and the resulting receivable is deemed collectible by management.
Maintenance revenues are derived from customer support agreements generally
entered into in connection with initial product license sales and subsequent
renewals. Fees for the Company's maintenance and support plans are recorded as
deferred revenue when billed to the customer and recognized ratably over the
term of the maintenance and support agreement, which is typically one year.
Fees for the Company's training and consulting services are recognized at the
time the services are performed. For the year ended December 31, 1997 and for
the first three months ended March 31, 1998, no single customer accounted for
more than 3.5% of the Company's revenues.
The sales cycle for the Company's products may span six months or more.
Historically, the Company has typically recognized a substantial portion of
its revenues in the last month of a quarter, with these revenues
22
<PAGE>
frequently concentrated in the last two weeks of a quarter. Even minor delays
in booking orders may have a significant adverse impact on revenues for a
particular quarter. To the extent that delays are incurred in connection with
orders of significant size, the impact will be correspondingly greater.
Moreover, the Company currently operates with virtually no order backlog
because its software products typically are shipped shortly after orders are
received. Product license revenues in any quarter are substantially dependent
on orders booked and shipped in that quarter. As a result of these and other
factors, the Company's quarterly results have varied significantly in the past
and are likely to fluctuate significantly in the future. Accordingly, the
Company believes that quarter-to-quarter comparisons of its results of
operations are not necessarily indicative of the results to be expected for
any future period. See "Quarterly Financial Results" and "Risk Factors--
Potential Fluctuations in Quarterly Operating Results."
The Company licenses its software through its direct sales force and
increasingly through, or in conjunction with, VARs and OEMs. Channel partners
accounted for, directly or indirectly, approximately 23.2%, 27.5%, 9.0% and
0.1% of the Company's revenues for the three months ended March 31, 1998 and
for the years ended 1997, 1996 and 1995, respectively. Although the Company
believes that direct sales will continue to account for a majority of product
license revenues, the Company intends to increase the level of indirect sales
activities. As a result, the Company expects that sales of its product
licenses through sales alliances, distributors, resellers and other indirect
channels will increase as a percentage of product license revenues. However,
there can be no assurance that the Company's efforts to continue to expand
indirect sales will be successful. The Company also intends to continue to
expand its international operations and has committed, and continues to
commit, significant management time and financial resources to developing
direct and indirect international sales and support channels. See "Risk
Factors--International Operations" and "--Reliance on Channel Partners."
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
total revenues represented by certain items reflected in the Company's
consolidated statements of operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------- ---------------------
1995 1996 1997 1997 1998
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Product licenses......... 41.7% 70.2% 68.3% 58.1% 71.8%
Product support.......... 58.3 29.8 31.7 41.9 28.2
------- ------- ------- --------- ---------
Total revenues......... 100.0 100.0 100.0 100.0 100.0
------- ------- ------- --------- ---------
Cost of revenues:
Product licenses......... 2.6 4.5 3.1 4.4 2.7
Product support.......... 22.5 18.7 17.7 22.1 15.9
------- ------- ------- --------- ---------
Total cost of
revenues.............. 25.1 23.2 20.8 26.5 18.6
------- ------- ------- --------- ---------
Gross margin............... 74.9 76.8 79.2 73.5 81.4
------- ------- ------- --------- ---------
Operating expenses:
Sales and marketing...... 30.6 57.8 56.9 65.0 54.4
Research and
development............. 19.0 12.6 9.4 9.0 10.5
General and
administrative.......... 24.5 16.6 12.2 11.0 12.9
------- ------- ------- --------- ---------
Total operating
expenses.............. 74.1 87.0 78.5 85.0 77.8
Income (loss) from
operations................ 0.8 (10.2) 0.7 (11.5) 3.6
Interest income............ 0.2 0.1 0.2 -- 0.2
Interest expense........... (0.6) (0.6) (0.7) ( 0.7) (1.2)
Other income, net.......... 0.1 0.1 -- -- 0.1
------- ------- ------- --------- ---------
Net income (loss).......... 0.5% (10.6)% 0.2% (12.2)% 2.7%
======= ======= ======= ========= =========
</TABLE>
23
<PAGE>
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
REVENUES. Total revenues increased to $53.6 million in 1997 from $22.6
million in 1996 and from $9.8 million in 1995, representing increases of
136.9% and 131.2%, respectively. Total revenues consist of revenues derived
from sales of software product licenses, services and maintenance. There can
be no assurance that total revenues will continue to increase at the rates
experienced in prior periods, if at all.
Product License Revenues. Product license revenues increased to $36.6
million in 1997 from $15.9 million in 1996 and from $4.1 million in 1995,
representing increases of 130.6% and 289.3%, respectively. Product license
revenues constituted 68.3%, 70.2% and 41.7% of total revenues for 1997, 1996
and 1995, respectively. The significant increases in the dollar amount of
product license revenues were due to growing market acceptance of the
Company's software products and continued expansion of the Company's sales and
marketing organization. The significant increases in product licenses as a
percentage of total revenues from 1995 through 1997 were primarily attributed
to the transition of the Company's business during that period from a provider
of consulting services to a provider of software products. The increase in
product license revenues from 1996 to 1997 was primarily attributable to the
introduction and release of new versions of DSS Administrator, DSS Web and DSS
Agent which were released during 1997. These new product releases and
enhancements included significant new features and functionality offered to a
broader corporate customer base. These factors contributed to increases in the
number and average contract dollar amount of DSS licenses sold. To date, sales
of product licenses have principally been derived from direct sales to
customers.
Product Support Revenues. Product support revenues increased to $17.0
million in 1997 from $6.7 million in 1996 and from $5.7 million in 1995,
representing increases of 151.9% and 18.1%, respectively. Product support
revenues constituted 31.7%, 29.8%, and 58.3% of total revenues for 1997, 1996
and 1995, respectively. The increases in the dollar amount of product support
revenues were primarily due to the increase in the number of DSS licenses
sold. However, product support revenues significantly decreased as a
percentage of total revenues during these periods primarily due to the
transition of the Company's business from a provider of consulting services to
a provider of software products. Notwithstanding the foregoing, the Company
expects product support revenues as a percentage of total revenues to continue
to fluctuate on a period to period basis but generally not to vary
significantly from the percentage of total revenues achieved in 1997. However,
an element of the Company's sales and marketing strategy is to leverage third-
party implementation services to enable it to more rapidly penetrate its
target market. To the extent that such efforts are successful, the Company's
product support revenues could continue to decline as a percentage of total
revenues.
International Revenues. The Company recognized $14.3 million, $2.5 million
and $1.1 million of international revenues in 1997, 1996 and 1995,
respectively, representing approximately 26.6%, 11.1% and 11.3% of total
revenues, respectively. The Company opened sales offices in Australia, Canada
and Italy in 1998; in Austria, France and the Netherlands in 1997; in Germany
in 1996; in the United Kingdom in 1995; and in Spain in 1994. The Company
expects to open additional international sales offices in 1998. International
sales are subject to a number of risks. See "Risk Factors--International
Operations" and "--Currency Fluctuations."
COSTS AND EXPENSES
Cost of Product License Revenues. Cost of product license revenues
consists primarily of the costs of product manuals, media, amortization of
capitalized software and shipping paid to third parties. Cost of product
license revenues was $1.6 million, $1.0 million and $0.3 million in 1997, 1996
and 1995, respectively, representing 4.5%, 6.4% and 6.3% of total product
license revenues, respectively. The increases in dollar amounts of the
Company's cost of product licenses are directly attributable to the increases
in the Company's product license revenues. The total cost of product license
revenues as a percentage of revenues decreased during 1997 from 1996, due to
economies of scale realized by producing larger volumes of product materials
and an increasing number of customers reproducing licenses at their sites. The
Company anticipates that the cost of product license revenues will increase in
dollar amount as license fee revenues increase, but remain relatively constant
as a percentage of product license revenues. However, in the event that the
Company enters into any
24
<PAGE>
royalty arrangements in the future, cost of product license revenues as a
percentage of total product license revenues may increase.
Cost of Product Support Revenues. Cost of product support revenues
consists of the costs of providing telephone support, training and consulting
services to customers and partners. Cost of product support revenues was $9.5
million, $4.2 million and $2.2 million in 1997, 1996 and 1995, respectively,
representing 55.9%, 63.0% and 38.6% of total product support revenues,
respectively. The increase in cost of product support revenues, both in dollar
amount and as a percentage of 1996 product support revenues, was primarily due
to the increase in the number of personnel providing consulting, training, and
telephone support to customers and to the training and related costs
associated with increasing personnel levels. Despite the increases in
personnel and other costs in 1997, the total cost of product support revenues
decreased as a percentage of revenues during 1997 from 1996, primarily due to
increases in maintenance revenues without proportional increases in the cost
of product support revenues. The Company expects to continue to increase the
number of training and implementation consultants in the future, as well as
technical support personnel. To the extent that the Company's product support
revenues do not increase at anticipated rates, the hiring of additional
consultants and technical support personnel could increase the cost of product
support revenues as a percentage of product support revenues.
Sales and Marketing Expenses. Sales and marketing expenses include
personnel costs, commissions, office facilities, travel, promotional events
such as trade shows, seminars and technical conferences, advertising and
public relations programs. Sales and marketing expenses were $30.5 million,
$13.1 million and $3.0 million in 1997, 1996 and 1995, respectively,
representing 56.9%, 57.8% and 30.6% of total revenues, respectively. The
significant increase in sales and marketing expenses in dollar amounts in 1997
was primarily due to increased staffing as the Company established new
domestic and international sales offices and expanded its existing direct
sales force, and to a lesser extent, increased commissions to sales
representatives as a result of increased sales of software licenses and
increased promotional activities relating to the announcement of certain
product enhancements or releases. The increase in sales and marketing expenses
in 1996 was primarily attributable to increased costs associated with the
development of a direct sales force, increased commissions to Company sales
representatives due to increased sales of product licenses and increased
marketing activities. The Company believes that it is critically important to
gain market share among high-end customers. The Company has invested and will
continue to invest heavily in sales and marketing in order to create better
market awareness of the value-added potential of DSS products and to acquire
market share. The Company believes that the dollar amount of sales and
marketing expenses will continue to increase, but should probably decrease
over time as a percentage of total revenues from the levels experienced in
1997 and 1996.
Research and Development Expenses. Research and development expenses
consist primarily of salaries and benefits of software engineering personnel,
payments to contract programmers, depreciation of equipment and expendable
equipment purchases. See Note 1 of "Notes to Consolidated Financial
Statements." Research and development expenses were $5.1 million, $2.8 million
and $1.9 million in 1997, 1996 and 1995, respectively, representing 9.4%,
12.6% and 19.0% of total revenues, respectively. The increases in research and
development expenses were primarily due to additional hiring of research and
development personnel. In 1997, in accordance with SFAS No. 86, the Company
began to capitalize research and development costs due to the significant
increase in product development activities associated with the version 5.0
release of the Company's DSS software product line. As a result, the Company
capitalized $1.9 million of research and development costs in 1997.
Expenditures for research and development costs prior to capitalizing software
were $7.0 million in 1997.
General and Administrative Expenses. General and administrative expenses
include the personnel and other costs of the finance, human resources,
information systems, administrative and executive departments of the Company
as well as outside professional fees. General and administrative expenses were
$6.6 million, $3.7 million and $2.4 million in 1997, 1996 and 1995,
respectively, representing 12.2%, 16.6% and 24.5% of total revenues,
respectively. The increases in the dollar amount of general and administrative
expenses were primarily the result of increased staff levels and related costs
associated with the growth of the Company's business during these periods. The
decreases in general and administrative expenses as a percentage of total
revenues in 1997
25
<PAGE>
and 1996 were primarily due to the substantial increase in total revenues.
Although the Company expects that the dollar amount of general and
administrative expenses will continue to increase in the foreseeable future,
such expenses are not expected to significantly vary as a percentage of total
revenues in the future.
Provision for Income Taxes. The Company has elected to be treated as a
Subchapter S corporation for federal and state income tax purposes. Under
Subchapter S, the Company's income has been allocated and taxable to the
Company's individual stockholders rather than to the Company. Accordingly, no
federal or state income taxes have been provided for in the financial
statements. The Company's S corporation status will terminate shortly prior to
consummation of the Offering, at which time the Company will become subject to
federal and state corporate income taxation as a Subchapter C corporation.
Upon termination of the Company's S corporation status, the Company will
account for income taxes in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Had the Company been taxed
as a C corporation, the Company would have recorded a net deferred tax
liability of approximately $0.4 million as of December 31, 1997. As of
December 31, 1997 the Company would have recorded a valuation allowance of
$1.8 million, primarily against the net operating loss carryforwards in
foreign jurisdictions. Management has concluded that no valuation allowance is
required on the domestic net deferred tax assets based on its assessment that
current and expected future levels of taxable income are sufficient to realize
domestic deferred tax assets. See Note 6 of Notes to Consolidated Financial
Statements.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 AND 1997
REVENUES. Total revenues increased 144.5% to $19.9 million for the three
months ended March 31, 1998 from $8.1 million for the three months ended March
31, 1997.
Product License Revenues. Product license revenues increased 201.9% to
$14.3 million for the three months ended March 31, 1998 from $4.7 million for
the three months ended March 31, 1997, representing 71.8% and 58.1% of total
revenues for the three months ended March 31, 1998 and 1997, respectively. The
significant increases in product license revenues were due to growing market
acceptance of the Company's software products and continued expansion of the
Company's sales and marketing organization.
Product Support Revenues. Product support revenues increased 64.8% to $5.6
million for the three months ended March 31, 1998 from $3.4 million for the
three months ended March 31, 1997, representing 28.2% and 41.9% of total
revenues for the three months ended March 31, 1998 and 1997, respectively. The
increase in the dollar amount of product support revenues was primarily due to
the increase in the number of DSS licenses sold. However, product support
revenues decreased as a percentage of total revenues during these periods
primarily due to the transition of the Company's business from a provider of
consulting services to a provider of software products.
International Revenues. The Company recognized $4.2 million and $1.3
million of international revenues in the three months ended March 31, 1998 and
March 31, 1997, representing approximately 20.9% and 16.3% of total revenues,
respectively.
COSTS AND EXPENSES
Cost of Product License Revenues. Cost of product license revenues
increased to $0.5 million for the three months ended March 31, 1998 from $0.4
million for the same period ended March 31, 1997, representing 3.8% and 7.5%
of total product license revenues, respectively. The increase in the Company's
cost of product licenses was directly attributable to the increases in the
Company's product license revenue, coupled with the amortization of
capitalized software. The total cost of product license revenues as a
percentage of revenues decreased during the first quarter of 1998 from the
same period in 1997, due to economies of scale realized by producing larger
volumes of product materials and an increasing number of customers reproducing
licenses at their sites.
26
<PAGE>
Cost of Product Support Revenues. Cost of product support revenues
increased to $3.2 million for the three months ended March 31, 1998 from $1.8
million for the same period ended March 31, 1997, representing 56.3% and 52.8%
of total product support revenues, respectively. The increase in the Company's
cost of product support revenues in 1998 was primarily due to the increase in
the number of personnel providing consulting, training, and telephone support
to customers and to the training and related costs associated with increasing
personnel levels.
Sales and Marketing Expenses. Sales and marketing expenses increased to
$10.8 million for three months ended March 31, 1998 from $5.3 million for the
same period ended March 31, 1997, representing 54.4% and 65.0% of total
revenues, respectively. The increase in sales and marketing expenses in 1998
was primarily due to increased staffing as the Company established new
international sales offices and expanded its existing direct sales force, and
to a lesser extent, increased commissions to sales representatives as a result
of increased sales of software licenses and increased promotional activities
relating to the announcement of certain product enhancements or releases. The
Company believes that in light of the relatively long sales cycle associated
with decision support solutions and the recent emergence of the industry, it
is critically important to gain market share among high-end customers. The
Company has invested and will continue to invest heavily in sales and
marketing in order to create better market awareness of the value-added
potential of DSS products and to acquire market share.
Research and Development Expenses. Research and development expenses
increased to $2.1 million for the three months ended March 31, 1998 from $0.7
million for the same period ended March 31, 1997, representing 10.5% and 9.0%
of total revenues, respectively. The increases in research and development
expenses were primarily due to additional hiring of research and development
personnel. The Company expects that research and development expenses will
continue to increase in dollar amount as the Company continues to invest in
developing new products, applications and product enhancements. In 1997, in
accordance with SFAS No. 86, the Company capitalized research and development
costs due to the significant increase in product development activities
associated with the version 5.0 release of the Company's DSS software product
line. As a result, the Company capitalized $0.4 million of research and
development costs during the three months ended March 31, 1997. During the
three months ended March 31, 1998, in accordance with SFAS No. 86, the costs
incurred between the establishment of technological feasibility and general
availability of the Company's products were not material and therefore have
not been capitalized.
General and Administrative Expenses. General and administrative expenses
increased to $2.6 million for the three months ended March 31, 1998 from $0.9
million for the same period ended March 31, 1997, representing 12.9% and 11.0%
of total revenues, respectively. The increase in the dollar amount of general
and administrative expenses was primarily the result of increased staffing and
related costs associated with the growth of the Company's business during
these periods.
Provision for Income Taxes. The Company has elected to be treated as a
Subchapter S corporation for federal and state income tax purposes. Under
Subchapter S, the Company's income has been allocated and taxable to the
Company's individual stockholders rather than to the Company. Accordingly, no
federal or state income taxes have been provided in the financial statements.
The Company's S corporation status will terminate shortly prior to
consummation of the Offering, at which time the Company will become subject to
federal and state corporate income taxation as a Subchapter C corporation.
Upon termination of the Company's S corporation status, the Company will
account for income taxes in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes."
RECENTLY ISSUED ACCOUNTING STANDARDS
As of March 31, 1998, the Company has adopted SFAS No. 130, "Reporting
Comprehensive Income," which requires additional disclosures with respect to
certain changes in assets and liabilities that previously were not required to
be reported as results of operations for the period, and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
establishes standards for the manner in which public companies report
information about operating segments in annual and interim financial
statements.
27
<PAGE>
QUARTERLY FINANCIAL RESULTS
The following tables set forth the unaudited consolidated statement of
operations data for the eight quarters ended March 31, 1998, as well as such
data expressed as a percentage of the Company's total revenues for the periods
indicated. This data has been derived from unaudited interim consolidated
financial statements that, in the opinion of management, have been prepared on
a basis consistent with Consolidated Financial Statements contained elsewhere
herein and include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such information when read
in conjunction with the Consolidated Financial Statements and Notes thereto.
The operating results for any quarter are not necessarily indicative of
results for any future period. See "Risk Factors--Potential Fluctuations in
Quarterly Operating Results."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1996 1996 1996 1997 1997 1997 1997 1998
-------- ------------- ------------ --------- -------- ------------- ------------ ---------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues:
Product licenses....... $3,975 $4,500 $ 4,696 $ 4,731 $8,134 $10,545 $13,191 $14,282
Product support........ 1,578 1,870 1,898 3,406 3,741 4,206 5,603 5,613
------ ------ ------- ------- ------ ------- ------- -------
Total revenues......... 5,553 6,370 6,594 8,137 11,875 14,751 18,794 19,895
------ ------ ------- ------- ------ ------- ------- -------
Cost of revenues:
Product licenses....... 233 269 333 357 396 434 454 538
Product support........ 1,008 1,151 1,195 1,799 2,059 2,462 3,155 3,163
------ ------ ------- ------- ------ ------- ------- -------
Total cost of
revenues.............. 1,241 1,420 1,528 2,156 2,455 2,896 3,609 3,701
------ ------ ------- ------- ------ ------- ------- -------
Gross margin............ 4,312 4,950 5,066 5,981 9,420 11,855 15,185 16,194
Operating expenses:
Sales and marketing.... 2,789 3,634 4,663 5,292 7,036 7,872 10,268 10,828
Research and
development........... 617 874 910 735 915 1,487 1,912 2,092
General and
administrative........ 664 980 1,482 895 1,270 1,998 2,389 2,563
------ ------ ------- ------- ------ ------- ------- -------
Total operating
expenses.............. 4,070 5,488 7,055 6,922 9,221 11,357 14,569 15,483
Income (loss) from
operations............. 242 (538) (1,989) (941) 199 498 616 711
Interest income......... -- 1 11 -- 17 37 40 47
Interest expense........ (24) (20) (56) (61) (93) (48) (131) (237)
Other income (expense),
net.................... -- (117) 137 (1) (1) (1) (9) 21
------ ------ ------- ------- ------ ------- ------- -------
Net income (loss)....... $ 218 $ (674) $(1,897) $(1,003) $ 122 $ 486 $ 516 $ 542
====== ====== ======= ======= ====== ======= ======= =======
PERCENT OF TOTAL
REVENUES:
Revenues:
Product licenses....... 71.6% 70.6% 71.2% 58.1% 68.5% 71.5% 70.2% 71.8%
Product support........ 28.4 29.4 28.8 41.9 31.5 28.5 29.8 28.2
------ ------ ------- ------- ------ ------- ------- -------
Total revenues......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------ ------ ------- ------- ------ ------- ------- -------
Cost of revenues:
Product licenses....... 4.2 4.2 5.1 4.4 3.3 2.9 2.4 2.7
Product support........ 18.2 18.1 18.1 22.1 17.3 16.7 16.8 15.9
------ ------ ------- ------- ------ ------- ------- -------
Total cost of
revenues.............. 22.4 22.3 23.2 26.5 20.6 19.6 19.2 18.6
------ ------ ------- ------- ------ ------- ------- -------
Gross margin............ 77.6 77.7 76.8 73.5 79.4 80.4 80.8 81.4
Operating expenses:
Sales and marketing.... 50.2 57.0 70.7 65.0 59.3 53.4 54.6 54.4
Research and
development........... 11.1 13.7 13.8 9.0 7.7 10.1 10.2 10.5
General and
administrative........ 12.0 15.4 22.5 11.0 10.7 13.5 12.7 12.9
------ ------ ------- ------- ------ ------- ------- -------
Total operating
expenses.............. 73.3 86.1 107.0 85.0 77.7 77.0 77.5 77.8
Income (loss) from
operations............. 4.3 (8.4) (30.2) (11.5) 1.7 3.4 3.3 3.6
Interest income......... -- -- 0.2 -- 0.1 0.2 0.2 0.2
Interest expense........ (0.4) (0.3) (0.8) (0.7) (0.8) (0.3) (0.7) (1.2)
Other income (expense),
net.................... -- (1.8) 2.1 -- -- -- -- 0.1
------ ------ ------- ------- ------ ------- ------- -------
Net income (loss)....... 3.9% (10.5)% (28.7)% (12.2)% 1.0% 3.3% 2.8% 2.7%
====== ====== ======= ======= ====== ======= ======= =======
</TABLE>
28
<PAGE>
The Company's operating results have in the past and are likely in the
future to vary significantly from quarter to quarter as a result of a number
of factors, including the size and timing of significant orders, the timing of
new product announcements, changes in pricing policies by the Company and its
competitors, market acceptance of decision support software generally and of
new and enhanced versions of the Company's products in particular, the length
of the Company's sales cycles, changes in operating expenses, personnel
changes, the Company's success in expanding its direct sales force and
indirect distribution channels, the pace and success of international
expansion, delays or deferrals of customer implementation and foreign currency
exchange rates. Fluctuations in operating results may in turn produce
fluctuations in annual revenues and operating results.
The Company's product revenues are not predictable with any significant
degree of certainty. Historically, the Company has typically recognized a
substantial portion of its revenues in the last month of a quarter, with these
revenues frequently concentrated in the last two weeks of a quarter. Even
minor delays in booking orders may have a significant adverse impact on
revenues for a particular quarter. To the extent that delays are incurred in
connection with orders of significant size, the impact will be correspondingly
greater. Moreover, the Company currently operates with virtually no order
backlog because its software products typically are shipped shortly after
orders are received. As a result, product license revenues in any quarter are
substantially dependent on orders booked and shipped in that quarter. Product
license revenues are also difficult to forecast because the market for the
Company's products is rapidly evolving, and the sales cycles, which may last
many months, vary substantially from customer to customer. The sales cycle is
subject to a number of factors over which the Company has little or no
control, including customers' budgetary constraints, the timing of budget
cycles, concerns about the introduction of new products by the Company or its
competitors and potential downturns in general economic conditions, which may
be associated with reductions in demand for management information systems.
See "Risk Factors--Lengthy Sales and Implementation Cycles." Product support
revenues depend in substantial part on maintenance revenues from existing
customers, and to the extent that existing customers do not require ongoing
maintenance, revenues would be adversely affected. Seasonal factors may also
impact revenue trends as, for example, European sales may tend to be
relatively lower during the summer months than during other periods.
In light of the planned expansion of the Company's business, the Company
anticipates substantial increases in operating costs and expenses, including
costs and expenses to be incurred in connection with expansion of its
technical support, research and development and sales and marketing
organizations. Substantial resources are also expected to be devoted to
expansion of indirect sales channels and international operations. The
Company's operating expenses are budgeted on anticipated revenue trends, and
achieving expense reductions (or even reductions in the rate of expense
growth) may not be possible in the short term, irrespective of whether actual
revenue growth is commensurate with the budgeted growth on which expense
levels are based. As a result, variations in the timing and amounts of revenue
could have a material adverse effect on the Company's quarterly operating
results.
Based upon all of the factors described above, the Company believes that its
quarterly revenues, expenses and operating results are likely to vary
significantly in the future, that period-to-period comparisons of its
operating results are not necessarily meaningful and that, in any event, such
comparisons should not be relied upon as indications of future performance.
Furthermore, it is possible that in some future quarters the Company's
operating results will fall below the expectations of the Company, market
analysts and investors. In such event, the price of the Class A Common Stock
would likely be materially and adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has primarily financed its operations and
met its capital expenditure requirements through cash flows from operations
and short- and long-term borrowings. At March 31, 1998 and December 31, 1997,
the Company had $2.3 million and $3.5 million, respectively, of cash and cash
equivalents.
Cash flows provided (used) by operations were $5.0 million, $0.9 million and
$(0.3) million in 1997, 1996 and 1995, respectively. The increase in cash
provided by operations in fiscal 1997 and 1996 was primarily due
29
<PAGE>
to an increase in deferred revenue and accounts payable, offset by an increase
in accounts receivable and a net operating loss in 1996. The decrease in cash
from operations in 1995 was due to an increase in accounts receivable offset
by an increase in deferred revenue. Cash used by operating activities for the
three months ended March 31, 1998 was $0.9 million as compared to cash
provided by operating activities for the three months ended March 31, 1997
which was $0.2 million. The cash used by operating activities for the three
months ended March 31, 1998 was primarily due to decreases in accounts payable
and accrued liabilities.
The Company's investing activities used cash of $7.9 million, $1.7 million
and $0.5 million in 1997, 1996 and 1995, respectively. For the three months
ended March 31, 1998 and 1997, cash used for investing activities was $1.4
million and $1.0 million, respectively. The principal use of cash in investing
activities was for capital expenditures related to the acquisition of computer
equipment required to support expansion of the Company's operations.
The Company's financing activities provided cash of $4.6 million, $1.8
million and $1.1 million in 1997, 1996 and 1995, respectively. For the three
months ended March 31, 1998 and 1997, cash provided (used) from the Company's
financing activities was $1.1 million and $(0.2) million, respectively. The
principal source of cash from financing activities has been net borrowings
from commercial lending institutions. In December 1996, the Company entered
into the Business Loan with a commercial bank. Pursuant to the Business Loan,
the Company originally had available a $6.4 million revolving line of credit
for general working capital purposes, a $2.0 million revolving line of credit
for equipment and, since November 1997, a $2.0 million term loan for
equipment. On March 31, 1998, the Company increased the revolving working
capital line of credit by $3.0 million to $9.4 million, increased the
equipment term loan by $2.0 million to $4.0 million and amended certain of its
debt covenants. Borrowings under the Business Loan may not exceed 80% of
eligible accounts receivable for the revolving working capital line of credit
and 80% of the cost of the asset for the revolving equipment line of credit.
The borrowings bear interest at (i) the lender's prime rate or LIBOR plus
2.75% for the revolving line of credit and (ii) for the equipment lines of
credit (revolving and term) at the lender's prime rate plus 0.5% or a rate
equal to the yield of U.S. Treasury Bonds plus 2.65% for loans with the three-
year maturity or 2.85% for loans with a four-year maturity. In addition,
borrowings under the Business Loan are collateralized by substantially all of
the Company's assets and are partially guaranteed by a stockholder and officer
of the Company for up to $2.0 million for all amounts borrowed under the
Business Loan in excess of $2.0 million. As of March 31, 1998, $8.9 million
were outstanding under the Business Loan. Subsequent to March 31, 1998, the
Company had additional net borrowings of $2.6 million under the Business Loan.
The Business Loan requires the Company to maintain certain financial ratios
and to comply with certain other covenants, including financial ratios
relating to the following: (i) total liabilities less deferred revenue to
consolidated tangible net worth; (ii) cash flow coverage; and (iii) funded
debt to earnings before interest, taxes, depreciation and amortization. As of
December 31, 1996 the Company was not in compliance with these financial
ratios. The Company has received from the lender a waiver for non-compliance
with these covenants for 1996 and for each fiscal quarter of 1997. Since
December 31, 1997, under the amended Business Loan, the Company has been in
compliance with the revised covenants, and the Company expects that it will
continue to be in compliance with such covenants in the future. The Company
intends to repay all indebtedness outstanding under the Business Loan using a
portion of the net proceeds of the Offering; however, in order to preserve
flexibility, the Company does not intend to terminate the commitment for the
Business Loan. The Company also intends, following completion of the Offering,
to enter into negotiations with the lender to amend certain provisions of the
Business Loan on more favorable terms. No assurance can be given that the
Company will be able to renegotiate more favorable terms of the Business Loan.
The Company expects to declare and pay the S Corporation Dividend to the
Existing Shareholders in the form of the Dividend Notes prior to the
termination of the Company's S corporation election, which is expected to
occur prior to the consummation of the Offering. The Dividend Notes have (i) a
term of one year; (ii) bear
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interest at the applicable federal rate for debt obligations having a maturity
of one year, which was 5.29% as of March 31, 1998, and (iii) are payable in
four equal quarterly installments. The Dividend Notes may be prepaid without
penalty at any time at the option of the Company. The Company intends to repay
the Dividend Notes from cash flows generated from operations, current
available cash and cash equivalents, bank borrowings under the Company's
Business Loan, and, to the extent that other sources are insufficient for this
purpose, from the proceeds of the Offering. See "Dividend Policy."
The Company believes that the proceeds generated by the sale of Class A
Common Stock offered by the Company in the Offering, the available borrowings
under the Business Loan and the cash generated internally by operations will
satisfy the Company's working capital requirements for the foreseeable future.
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BUSINESS
The following description of the Company's business should be read in
conjunction with the information included elsewhere in this Prospectus. This
description contains certain forward-looking statements that are based largely
on the Company's current expectations and are subject to a number of risks and
uncertainties. The Company's actual results could differ significantly from
the results discussed in the forward-looking statements as a result of certain
of the factors set forth below and elsewhere in this Prospectus.
OVERVIEW
MicroStrategy is a leading worldwide provider of enterprise DSS software
applications and related services. The Company's DSS Suite enables both active
and passive delivery of information from large-scale databases, providing
Global 2000 enterprise user communities with timely answers to mission-
critical questions. MicroStrategy's decision support platform enables users to
query and analyze the most detailed, transaction-level databases, turning data
into business intelligence. In addition to supporting internal enterprise
users, MicroStrategy's products extend DSS beyond corporate boundaries to
customers, partners, and supply chain constituencies through a broad range of
pull and push technology such as the Internet, e-mail, telephones, pagers and
other wireless communications devices.
INDUSTRY BACKGROUND
ONLINE TRANSACTION PROCESSING; CONSTRUCTION OF DATA WAREHOUSES. The
development of the DSS industry has been made possible by the widespread
implementation over the past ten years of online transaction processing
("OLTP") systems which create large volumes of transaction-oriented data. OLTP
applications include standardized resource planning packages from vendors such
as SAP AG, The Baan Company, Peoplesoft, Inc., Oracle and J.D. Edwards, as
well as custom and semi-custom systems which have been created to process
transactions such as securities trading, bank deposit withdrawals, airline
reservations, mortgage payments, wire transfers, retail sales, credit card
payments and telephone billing.
The transactional data created by OLTP systems is typically detailed and
updated regularly, and has a short utility time horizon. In contrast, data
required by decision support analysts are typically detailed, summarized and
have a lengthy utility time horizon. In order to provide data to decision
support analysts, relevant transactional data must often be extracted from
OLTP systems, cleansed, encoded, summarized and uploaded into a database known
as a data warehouse. Data warehouses have been developed in order to store the
vast historical logs of transaction details generated from one or more OLTP
applications. Data warehouses are substantially larger than the OLTP
databases, as data warehouses contain a broader scope of transaction data
spanning longer periods of time. The majority of Global 2000 enterprises have
constructed or are constructing data warehouses to serve as an information
foundation for analyzing and optimizing their business operations. According
to Forrester Research, the size of the decision support component of the data
warehouse market will grow at a 35% compound annual rate from $1.1 billion in
1997 to $3.6 billion in 2001.
THE ENTERPRISE DSS MARKET OPPORTUNITY. The construction of data warehouses
from OLTP applications has created the market opportunity for scalable,
sophisticated and maintainable DSS applications that are capable of extracting
from data warehouses highly useful business information. The mission of DSS
applications is different but complementary to that of OLTP applications--
while OLTP enables companies to "do business" by processing transactions that
are similar in nature, cost, frequency and complexity, DSS enables companies
to "do business better" by allowing rapid, effective and comprehensive data
analysis. Using OLTP applications, companies may mail proposals to prospects,
bill customers, reverse fraudulent charges or book airline seats. In contrast,
using DSS applications, companies may select prospect lists to receive direct
mail, allocate inventory to sell to customers, identify potentially fraudulent
charges or allocate airline seats among various travel routes. Business
analysts often employ DSS applications to translate business questions into
database-interpretable queries. DSS applications mathematically process query
results to provide the business analyst with insightful answers to their
questions. "Enterprise DSS" refers to applications designed to answer
questions at all levels of
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detail, ranging from minute, operational questions to large-scale strategic
assessments, targeted at all types of decision makers within an enterprise.
Enterprise DSS applications help users address critical uncertainties
affecting their business by answering highly focused performance questions.
These questions vary by industry and examples include:
Retail. What products or groups of products should be sold? Where? At what
price? How much shelf space should be allocated for specific products? How
much promotion should each product receive? Which products sell well together?
How much inventory should be carried? What are the primary customer
characteristics?
Banking & Finance. Who should be targeted for direct marketing efforts?
What products are most likely to appeal to existing customers? How profitable
are existing customers? Which customer groups are credit risks? What is the
proper pricing strategy for a given set of financial products? How much
fraudulent activity is occurring? How efficiently are underwriters and credit
officers performing?
Healthcare. What is the range of outcomes for a given treatment? How
frequently is this treatment prescribed? Which drugs, hospitals, doctors,
healthplans are most effective? Which patient groups are most at risk? How
efficient and effective is a given technique for treating a specific illness?
The promise of Enterprise DSS is to offer decision makers across a broad
range of industries the opportunity to ask and answer mission-critical
questions about their businesses using transactional data assets that have
been captured but not exploited to their fullest extent.
FACTORS DRIVING ENTERPRISE DSS DEVELOPMENT. Despite the significant promise
of Enterprise DSS applications, until recently a number of technical and cost
constraints had impaired development of the DSS market. The increase in
electronically captured and stored transactional data, together with recent
advances in software, hardware and networking, have converged to help resolve
these technical and cost constraints. Factors driving Enterprise DSS
development include:
Increased Electronic Capture of Transactional Data. Electronically-
captured data is critical to Enterprise DSS. In industries such as retail,
telecommunications, financial services and healthcare, an increasing
percentage of customer and supply chain transactions are captured and stored
electronically. The rapid growth in the electronic capture of business
transactions and the increased availability of related profile data on the
parties or products involved in each transaction are providing a rich data
foundation for the growth of Enterprise DSS.
Improved RDBMS Software. Relational database management system ("RDBMS")
technology has become accepted as the primary data storage and access platform
for Enterprise DSS applications. Traditionally optimized for OLTP applications
only, RDBMS technology has been improved specifically for DSS applications.
Such improvements have removed many of the database size, manageability and
query performance constraints that have traditionally made Enterprise DSS
development difficult.
Improved Price/Performance of Computing and Storage Hardware. The
widespread availability of scalable hardware from a variety of server vendors
has produced significant improvements in server price and performance. In the
early 1990's, building and managing databases of one to five gigabytes of
stored data was considered typical. Over the past four years, symmetric multi-
processing ("SMP") servers running Unix have achieved commercial acceptance,
providing RDBMS vendors with the first non-proprietary hardware platforms
capable of supporting enterprise-scale databases which considerably exceed
five gigabytes. Based on a survey of 60 companies in the Fortune 1,000
published by Forrester Research, the average data warehouse was 132 gigabytes
in 1997 and is expected to grow to 259 gigabytes by 1999. SMP servers have
provided the capacity to store, index, aggregate, query and manage these large
data volumes, and, because no one hardware vendor controls the market for
these servers, the capacity is available on a cost-effective basis. Further
developments such as massively parallel processing ("MPP") servers are
expected to provide substantial improvements in
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performance over SMP servers, and are also now becoming commercially available
from a wide variety of hardware vendors.
Improved Networking Protocols and Infrastructure. The emergence of
protocols such as TCP/IP, HTML, ActiveX and Java, combined with commercially
available servers and browsers supporting these protocols (collectively
comprising the infrastructure of the Web), bandwidth, security products,
authoring tools, administrative suites, access devices and third party
expertise have substantially decreased the cost of deploying multi-user
applications such as Enterprise DSS. The corresponding advances in usability,
reliability, maintainability and connectivity have accelerated the commercial
acceptance of Enterprise DSS by making such deployment less risky, less
expensive and less time-consuming for information systems organizations.
THE EMERGENCE OF NEW DSS APPLICATIONS. Synergies produced by the combination
of improved database software, abundant computing power and efficiently
connected networks are resulting in a dramatic increase in overall DSS market
potential and growth rate. According to IDC, the market for Internet-related
Enterprise DSS will grow from $43 million in 1996 to $2.3 billion in 2001, and
based on its survey of 60 Fortune 1,000 companies, Forrester Research
estimates that 80% of the survey sample will have Web access to the databases
by 1999. As these advances converge, the value of DSS applications (and
therefore the size of information technology budgets which support their
development) is being enhanced by increasing the number of users, the
frequency of use and the importance of the information obtained and by
transforming under-utilization data into revenue-generating assets, not simply
measures for cost control. These advances are also increasing the size of the
market by enabling entirely new types of applications to be deployed to new
constituencies from the same central data warehouse. In particular, three new
classes of DSS applications are becoming factors in the growth of the DSS
market.
Remote DSS. The purpose of Remote DSS applications is to provide
information to operational professionals throughout an enterprise and enable
them to improve performance on a routine basis. Potential users include
managers and other professional staff throughout the sales, marketing,
manufacturing, logistics, finance, human resources and technology functions
regardless of their geographic location. Although an enterprise rarely has
more than a few hundred centralized analysts and executives for any given DSS
application, the same enterprise may have thousands of remote enterprise
users, spread across dozens, hundreds or even thousands of locations. For
example, a Remote DSS application that profiles customers and provides
relevant sales information allows account executives located across a business
organization to identify problem accounts, discern abnormal trends in their
territory and proactively manage sales calls.
Supply Chain DSS. The purpose of Supply Chain DSS applications is to allow
and encourage trading partners to give preferential treatment to one another
in exchange for greater certainty and visibility up and down their value
chains. In order to obtain the information that enables this visibility and
certainty, partners may want to offer more favorable terms, invest more in co-
marketing, make available increased levels of supplies, provide more shelf-
space or pay higher prices. Potential users include a firm's vendors,
distributors, partners, outsourcers, resellers and financing sources. The
number of potential Supply Chain DSS users can range from hundreds to tens of
thousands. For example, a DSS application that provides access to retail sales
information would be valuable to the manufacturers and distributors who stock
the shelves within each store. This information can be used to design new
products, refine marketing campaigns, develop optimal pricing schemes,
rationally allocate inventory and proactively schedule factory production.
Commercial DSS. The purpose of Commercial DSS applications is to offer
customers a new value-added information service that can result in improved
pricing, greater market share, longer customer retention or a new revenue
stream for the owner of the DSS. Information systems have been successfully
bundled with products and services over the past decade, although largely in
the context of OLTP applications such as automated teller machines, voice
response units and ticketing reservation systems. Those firms in the best
position to exploit the opportunities of Commercial DSS include major banks,
financial services, healthcare providers, retailers, publishers, utilities and
travel service providers all of whom have large volumes of customers who must
make intricate decisions on a routine basis. Many of these systems have the
potential for hundreds of
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thousands, or even millions, of users. For example, healthcare providers that
use DSS applications to offer outcome analysis for various combinations of
patients, treatments, drugs, hospitals and doctors could provide patients with
substantial peace of mind, possibly encouraging them to be treated by that
provider.
CHALLENGES FACED BY ENTERPRISE DSS DEVELOPERS
Notwithstanding the market potential for DSS applications, attempts to build
and deploy Enterprise DSS applications have traditionally been hampered by a
variety of factors, including the following:
OPTIMAL QUERY GENERATION IS TECHNICALLY CHALLENGING. Although Structured
Query Language ("SQL") has been held out as a universal software standard to
enable database queries, each RDBMS vendor has added extensions and created a
SQL interpreter that favors certain queries. In many cases, the same SQL will
not work against two different RDBMSs and in most cases, the same SQL will not
be optimal for both. Changes in the RDBMS version, data warehouse design,
query profiles or application requirements may require costly and time-
consuming revisions to the SQL execution plans. Since RDBMS vendors are
constantly seeking to gain competitive advantage for their particular database
engine, severe maintenance demands have been imposed on those firms developing
their own DSS applications that generate SQL directly against the RDBMS.
Certain DSS tools force the designer to "hardwire" application logic directly
against the logical database schema, resulting in either a "brittle" solution
that may preclude any future enhancements to the database, a "crippled"
solution that prevents many types of analysis from being implemented, or a
"slow" solution because optimal query response requires dynamic repathing at
runtime.
ADMINISTRATIVE TOOLS ARE LACKING. Companies need to deploy a multitude of
applications to a variety of constituencies, each with their own set of
security and access privileges. These constituencies need to share the same
data and application reporting objects, while using them to perform different
tasks. Users also require tools for version control, customer billing,
performance management and tuning, usage assessment, application maintenance
and mass upgrades. Because the DSS market is relatively new and still
developing, many of the administrative tools that are taken for granted in the
OLTP market are still missing. Given the lack of management tools, it is quite
challenging to scale up a workgroup application meant to serve a small,
localized set of users into a family of DSS services.
END-USER APPLICATION PROTOCOL INTERFACES ("APIS") ARE IN FLUX. Currently,
users interact with their DSS applications through a variety of interfaces
including: (i) native Windows applications that are tailored to the power-user
or analyst; (ii) executive information system ("EIS") interfaces; (iii)
printed reports; (iv) Microsoft Excel add-in modules; (v) Web browsers
supporting only HTML, Java, Active X or various combinations of these
protocols; (vi) custom interfaces constructed in Visual Basic, C++ or other
programming languages; (vii) Microsoft Access and (viii) other Microsoft
Office applications, such as Word or PowerPoint. The optimal interface is a
function of the user, its level of comfort with the DSS application, the
client hardware and the client operating system. Since these factors are
continually changing, it has been and remains unlikely that any dominant
interface will emerge. Accordingly, DSS developers are required to develop
applications that are compatible with a number of different APIs, without the
emergence of clear standards. This interface flux introduces additional
design, development, quality assurance and support requirements into the
typical Enterprise DSS project.
CERTAIN DSS TOOLSETS ARE NOT SCALABLE. A number of DSS vendors have
developed OLAP and hybrid OLAP ("HOLAP") database toolsets in an attempt to
solve data warehouse design and query generation challenges. In contrast to
ROLAP technology, OLAP and HOLAP solutions require the creation of
intermediate data caches or proprietary, non-relational databases that provide
the basis for their analytical capabilities. These proprietary databases have
traditionally been optimized for the type of summary analysis that a financial
auditor or executive would find valuable in the context of a
planning/budgeting review, and their design reflects explicit trade-offs
between performance, simplicity, power and flexibility. Technically, they have
been optimized to handle low-cardinality, low-dimensionality data structures.
Due to the rapid increase in the size of decision support databases in recent
years, the design constraints of OLAP and HOLAP architectures have become
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increasingly visible. For example, these "solutions" may truncate the range of
schema designs (which are the physical and logical models of how the data
should be stored within a database), limit data volumes, limit the breadth and
richness of a data set and require indexing, consolidating, caching and
loading schemes that are prohibitively expensive for Enterprise DSS
applications. Published benchmarks of OLAP vendors have seldom attempted to
analyze more than one gigabyte of input data. However, market research
suggests that the typical data warehouse contains in excess of 100 gigabytes
of input data. Thus, while very well suited for solving certain decision
support problems, many currently available OLAP toolsets are optimized to
analyze datasets which are two orders of magnitude smaller than those required
for Enterprise DSS.
EXISTING DSS TOOLS LACK FEATURES. Multi-dimensional analysis performed on a
large, relatively amorphous relational database can prove quite challenging
due to the stresses placed on the application server, network and client
interface during the analytical process. The tools typically used for DSS
application development have been designed to satisfy a lowest common
denominator requirement-- making certain assumptions about the volume and
nature of the data along with the complexity of analyses in order to simplify
the engineering challenges. Most do not allow the designer the ability to
articulate the sophisticated queries necessary for granular transaction-level
analysis (e.g. fraud detection, market basket analysis, call detail analysis,
database marketing, credit analysis, patient outcomes analysis). Others lack
object-based development environments, preventing developers from reusing
standard application logic. DSS tools may limit the range of dimensionality,
attribute richness, hierarchical choices, and filtering options available to
the end-user. They may lack advanced analytical capabilities such as rankings
("top 10 vendors by department"), decilings ("bottom quartile of customers in
sales"), time-based calculations ("percent change over the same period last
year") and multi-dimensional calculations ("product contribution to division
profitability"). Many tools also lack sophisticated SQL generators and are
forced to rely upon intermediate data caches that are created on the desktop
or application server in order to perform their analysis. These caches create
network and CPU bottlenecks which prevent the execution of certain queries and
slow the performance of the MPP and SMP servers storing the database.
THE EXISTING RDBMS MARKET IS FRAGMENTED. According to Giga Group, the data
warehouse market is fragmented, with no single RDBMS provider having more than
a 30% share of the market. Supporting the multiplicity of RDBMS APIs, as well
as the Interface APIs, is difficult without incurring significant sacrifices
in functionality and scalability. Global 2000 enterprises, VARs, data
syndicators, OEMs and system integrators require DSS platforms that run well
against RDBMS platforms such as Oracle, Informix, Red Brick, Sybase, Tandem,
Teradata, DB2/390, DB2/400 and DB2/UDB from IBM and SQL Server and Access from
Microsoft. Providing this portability may not be desirable or even possible
for DSS vendors that have a disproportionately large investment in one of the
competing RDBMS standards. Even DSS vendors which claim to be "open" often
have not invested the resources necessary to provide scalable performance
against each of these databases.
ESSENTIAL ENTERPRISE DSS SERVICES ARE SCARCE. Most RDBMS vendors have tended
to design their products for OLTP performance, rather than DSS performance. As
the data warehousing market began to grow, the vendors of these products have
added features and modified their core products in order to better serve the
needs of the DSS user. However, as a database grows in depth and breadth, and
the queries become more sophisticated, it has proven increasingly difficult to
create high-performance database designs that properly balance performance,
functionality and maintainability requirements. Designs can vary based upon
the nature of the RDBMS platform, server hardware, network, client hardware,
data set, user constituencies and query profile. The complexities of data
warehouse design have created a critical, but largely unmet, need for
Enterprise DSS services, including: (i) data warehouse design education; (ii)
DSS application design education; (iii) end-user DSS usage education; (iv)
data warehouse consulting to assist with hardware selection, RDBMS selection,
network and database tuning, database design and project management; (v) DSS
consulting to assist with metric, filter and report definition and development
and (vi) telephone, Web-based and onsite support from professionals that
understand Enterprise DSS. Successful Enterprise DSS developers must be able
to resolve problems quickly that arise in a heterogeneous environment
consisting of multiple hardware servers, database servers, application
servers, networks, APIs and client hardware devices from multiple vendors.
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THE MICROSTRATEGY SOLUTION
Through DSS Suite, MicroStrategy offers a comprehensive set of products and
services that function as a platform for developing and deploying Enterprise
DSS applications. MicroStrategy's software is designed to address the
requirements of DSS application developers who are required to create
scalable, portable and highly functional systems. DSS Suite frees application
developers from the need to divert scarce resources to the technical and
system integration challenges that are common across every industry. Instead,
developers are able to focus on solving the business critical analytical
problems unique to their particular industry. The advantages of DSS Suite
include:
EXTREMELY POWERFUL ANALYTICS TO TRANSACTION-LEVELS OF DETAIL. DSS Suite
offers support beyond summary and detail queries to include queries at the
most detailed level. This feature is critical to a wide range of applications,
including call detail analysis, market basket analysis, fraud detection,
credit analysis and campaign management. DSS Suite supports analysis ranging
from 10 attributes to 10,000 attributes, as well as support for sophisticated
multi-dimensional qualities (for example, weather, loan status or promotional
flags) and many-to-many relationships (colors, features). This sophistication
allows the creation of granular, transaction-specific DSS applications that
provide insight into customer behavior. Examples of the difference between
"Summary" and "Detail" questions (which many DSS tools can offer) and
"Transaction" level questions (where the Company believes it holds a distinct
advantage over its competition) are illustrated below for a typical retailer:
Summary: What were sales by department for the month of January?
Detail: What were sportswear item sales and costs by store for
Mondays in January?
Transaction: What were sales and costs for the top 5 selling items in
January? What were the 5 items most often purchased with
each of those items, and what is the typical customer
profile of individuals who buy these items by age, gender
and income bracket? What percentage of profits are
derived from the 5 items associated with our best
sellers?
Applications built with DSS Suite can access volumes of data ranging from a
few megabytes to terabytes--the Company's benchmark database for assessing
core functionality and scalability is 147 gigabytes. Using DSS Suite,
customers of the Company have successfully deployed DSS applications with
terabytes of data, thousands of attributes, and billions of rows of detail.
This scalability is accomplished with support for VLDB schemes (partitioned
snowflakes, multi-facts), a three-tier architecture with support for query
governing and asynchronous execution and a relational query engine that
intelligently leverages the RDBMS server, thereby avoiding any middle tier or
client caching bottlenecks.
OPTIMIZED SUPPORT FOR ALL MAJOR RDBMS/HARDWARE COMBINATIONS. DSS Suite
supports all major RDBMS platforms commonly used for Enterprise DSS with SQL-
optimizing drivers that contain hundreds of optimization rules. DSS Suite has
been designed to take into account the strengths, weaknesses and
idiosyncrasies of each database's SQL interpreter so that queries are made in
as efficient a manner as possible. Databases supported by DSS Suite include
Oracle, Informix, Sybase, Red Brick, Tandem, Teradata, SQL Server, Access,
DB2/390, DB2/400, DB2/UDB, Adabas D, Paradox and Dbase. The databases can be
run on platforms that support Unix, MVS, OS400, Windows NT, Windows, Tandem
NonStop and OpenVMS and that include hardware from companies such as Tandem,
NCR, IBM, Sun, Sequent, HP, Pyramid, SNI, Data General, DEC and SGI. Although
the Company's DSS solutions allow the core database component to reside on
nearly all enterprise server hardware and operating system combinations
(Mainframe, AS/400, Unix, Windows NT, Windows), the Company's application
server component currently runs only on the Windows NT operating system.
Therefore, the Company's ability to increase sales of its products may depend
on the continued acceptance of the Windows NT operating system.
APPLICATIONS DEPLOYABLE TO MULTIPLE TYPES OF USERS WITH FULL INTERFACE
FLEXIBILITY. DSS Suite enables developers to create DSS applications in a
modular fashion and to deploy common components across the enterprise in a
variety of different forms without redundant coding. The same report logic can
be tailored for
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different constituencies such as non-computer users, company executives,
spreadsheet analysts, operations personnel, novices, power users, suppliers,
customers and consumers. Applications developed using DSS Suite will
simultaneously run the following interfaces: (i) DSS Agent analytical
interface on Windows 3.1, Windows 95, Windows NT and OS/2; (ii) DSS Executive
information system interface on the Windows platform; (iii) Microsoft Excel on
the Windows platform; (iv) Custom applications developed using VBA, Visual
Basic, C or C++ combined with DSS Objects on the Windows Platform; (v)
Netscape Navigator with various combinations of HTML, Java and ActiveX on all
platforms supported by Netscape; and (vi) Internet Explorer with various
combinations of HTML, Java and ActiveX.
SUPPORT FOR LARGE NUMBERS OF USERS IN FLEXIBLE CONFIGURATIONS. The Company's
ROLAP technology allows applications built with DSS Suite to be deployed to
any number of users, from one to tens of thousands. DSS Suite fully leverages
the parallel processing and clustering features of the underlying RDBMS.
Applications can be run in the following modes: (i) stand-alone and untethered
on a single laptop; (ii) local area network with direct connection to the
database server; (iii) wide area network ("WAN") with a high-speed connection
to the application server, which in turn connects to the data warehouse server
via a slower speed WAN; (iv) Internet via DSS Web and a standard browser; and
(v) remote using DSS Web combined with wireless modems or satellite link-ups.
DSS Suite offers a wide variety of features to support international
deployment, including modular language support and support for many
international character sets.
FULL RANGE OF SERVICES NECESSARY FOR ENTERPRISE DSS SUCCESS. The Company
offers a full range of support services to ensure the success of its
customers. During the "proof of concept phase," the Company's consultants
assist with application prototyping, infrastructure assessments, feasibility
studies and provide overall Enterprise DSS architecture guidance. The
Company's educational courses such as "Introduction to DSS and Data
Warehousing" provide the customer's information system professionals with a
framework for planning and managing the process during this concept stage.
During the data warehouse "construction phase," Company consultants provide
project oversight and data warehouse design services, while Company educators
teach courses such as "Data Warehousing--Data Modeling and Design" to the
customer's information system professionals. In order to support the "full-
scale development phase," Company consultants assist with end-user
requirements analysis, DSS application design, project management and quality
assurance. Company educators offer courses in DSS design and development and
certify DSS development professionals. During the "deployment phase," Company
consultants offer end-user support, system administration, performance tuning
and troubleshooting assistance. Company educators teach courses in Enterprise
DSS management and administration. Throughout all phases, the Company's
support staff provides online support for databases and system utilities over
the Web, along with hotline telephone, fax and e-mail support. Company support
engineers are fully certified DSS engineers, capable of debugging
client/server networks, providing RDBMS configuration and tuning guidance,
offering data warehouse design support, DSS application development support,
and are fully certified in the installation, configuration and usage of the
Company's products. In the event that technical issues cannot be resolved
remotely, Company field engineers are dispatched on location to ensure the
customer's success in implementing the Company's product.
STRATEGY
The Company's objective is to become the world's leading provider of DSS
products and related services implemented by Global 2000 enterprises. The
Company's strategy for achieving this objective includes marketing,
technological and sales dimensions:
MARKETING STRATEGY--CREATE WIDESPREAD DEMAND FOR DECISION SUPPORT
SERVICES. The Company's marketing strategy focuses on communicating the
possibilities for value creation that new DSS technology offers to data
content owners and other potential users. Organizations that have accumulated
substantial data assets are frequently unaware of the "resonance" these data
assets may have both within and outside their enterprise--i.e., the extent to
which decision makers may benefit from the ability to query and analyze data
assets in diverse, sophisticated and spontaneous ways. In other cases, there
is a clear latent demand for information, but organizations are unaware that
the tools now exist to facilitate the creation of "industrial strength" DSS
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applications that can satisfy this demand. Accordingly, the Company's
marketing strategy is primarily educational, seeking to create demand for DSS
applications among the broadest possible set of decision makers, while at the
same time providing a clear technology solution to the information technology
professionals who are charged with building these applications. The Company
believes that the future of decision support is "Query Tone," a cue signaling
the availability of information on demand. The Company seeks to position DSS
application services as a utility, comparable to water, electricity,
telecommunications and radio, to be relied upon daily by individuals in both
their professional and personal lives.
A principal theme of the Query Tone concept involves appealing to the
individual's "need to know." The Company believes that Query Tone will
ultimately enable knowledge workers to pose questions against databases that
they previously had thought were impossible to ask: How loyal are my
customers? In which geographic areas are they concentrated? What are their
demographic characteristics? How should marketing funds be allocated? To which
customers should sales efforts be targeted? Consumers may similarly benefit
from Query Tone's interrogatory potential. How much money is in my bank
account? What is my stock portfolio worth? Is someone using my credit card
fraudulently? Which hospital has the best safety record for elective surgery?
Which vacation resorts have the most loyal customer base?
The Company believes that Query Tone will become as commonplace as the dial
tone, the universally recognized cue signaling the availability of
communication on demand. The Company believes that Query Tone will provide
data content owners with a business opportunity that allows them to
differentiate their current offerings, capture new revenue streams, increase
market share and ensure the continued loyalty of existing customers.
TECHNOLOGY STRATEGY--PROVIDE A SCALABLE, SOPHISTICATED AND MAINTAINABLE DSS
PLATFORM. The Company's technology strategy is to provide scalable,
sophisticated and maintainable solutions that support the RDBMS platforms
maintained by the major vendors in the VLDB segment of the data warehouse
market, including IBM, Oracle, NCR, Tandem/Compaq, Informix, Sybase and
Microsoft. Through its commitment to cross-platform flexibility, the Company
is improving its competitive position vis-a-vis larger data warehouse
developers by exploiting the reluctance of the major vendors to provide
optimal support for each other's platforms and protocols. The Company intends
to further differentiate its product offerings by increasing functionality
along the key dimensions of: (i) capacity--the volume of information that can
be efficiently analyzed; (ii) concurrency--the number of users which can be
supported simultaneously; (iii) sophistication--the range of analytical
methods available to the application designer; (iv) performance--the response
time of the system to user queries; (v) schema flexibility--the range of DSS
and OLTP databases which the software is capable of efficiently querying
without modification; (vi) maintainability--the ease with which applications
can be deployed, modified, upgraded and tuned; (vii) interface flexibility--
the number of interface options and display features supported; and (viii)
robustness--the reliability and availability of the software in mission
critical environments.
SALES STRATEGY--ACQUIRE MARKET SHARE AMONG HIGH-VOLUME DATA CONTENT
OWNERS. The Company's sales strategy focuses on building direct sales
infrastructure and relationships with indirect channel partners that are each
targeted toward acquiring market share among high-volume data content owners
both domestically and abroad. The Company believes that in many data-rich
industries, including retail, financial services and healthcare, a relative
handful of large firms control a disproportionate share of the data assets
that have widespread business applications both within those firms and
throughout the larger economy. The Company also believes that in light of the
relatively long sales cycle associated with acquiring DSS products and the
recent emergence of the DSS industry, it is critically important to gain
market share with the firms that have "resonant" data assets and that have the
highest potential to attract large numbers of decision makers. The Company is
aggressively targeting key departments within these firms that can be expected
to help spread demand for the Company's DSS solutions across the enterprise as
a whole. The Company also is expanding its active consulting practice to
enable ongoing customers to maximize the value of their investment, as well as
a support function to ensure that current customers have access to the
Company's field engineering and tele-support. Finally, the Company is
expanding its education program to enhance its potential customers' and
channel partners' understanding of the power of DSS applications.
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PRODUCTS
As illustrated by the following diagram, DSS Suite enables the access and
analysis of information stored in large relational databases through various
access devices. DSS Suite provides the infrastructure and products used to
implement three categories of applications: (i) internal corporate information
solutions; (ii) business-to-business information solutions; and (iii)
business-to-consumer information solutions.
<TABLE>
Windows Off-the-Shelf Custom Applications World Wide Web Consumer Devices
<S> <C> <C> <C>
Report Executive SpreadSheets Vertical-Statistics Data HTML Java Activexs Pager & Fax & E-mail &
Information Sys. Applications Mining Phone Printer Web
DSS Agent DSS Objects DSS Web DSS Broadcaster
DSS Server
DSS Architect Query Engine DSS Administrator
RDBMS Optimized for VLDB
Oracle Sybase Informix DB2 Teradata Red Tandem SQL
Brick Server
</TABLE>
RELATIONAL ONLINE ANALYTICAL PROCESSING SERVER
DSS Server-High Performance Server for Analysis of Very Large Databases.
DSS Server provides multidimensional analysis against MicroStrategy's broad
array of supported relational databases, including Oracle, Informix, DB2,
Tandem, Sybase, SQL Server, Teradata and Red Brick. In order to optimize DSS
application performance, DSS Server also contains MicroStrategy's High
Performance Drivers, a set of optimization rules built into MicroStrategy's
ROLAP Engine that tunes the SQL generated by DSS Server for superior query
performance against the target data warehouse RDBMS. Specifically designed for
enterprise and commercial data warehouse applications, DSS Server scales to
meet the decision making requirements of thousands of users accessing
terabytes of information.
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DSS Server provides a sophisticated array of enterprise-critical management
tools such as caching of frequently accessed data sets and query governing to
streamline performance and batch job scheduling. DSS Server also has built-in
multi-threaded user and queue management for load balancing. With this broad
set of management tools, organizations have the flexibility to tailor their
DSS architecture to work optimally within their business environment.
DSS Server also has the capability to create dynamic relational data marts
to create summary tables within the data warehouse for improved performance
and to pull subsets of the data warehouse into another relational data store
for focused analysis.
LARGE-SCALE DEPLOYMENT SERVERS
DSS Web--Interactive Analysis Environment for the World Wide Web. DSS Web
extends information access and analysis capabilities of DSS Server to any
Internet- or intranet-connected user with a Web browser. Using the DSS Web
infrastructure, corporations can rapidly implement systems that allow local
and remote users to develop and access business reports that contain
information from a relational database.
DSS Web provides a broad array of options for viewing information sets,
such as spreadsheet grids and a wide variety of graphs. Through DSS Web's
exception reporting capabilities, users receive key elements of a report in
easily interpretable, plain English messages. DSS Web also allows users to
drill dynamically to a lower level of detail to view the underlying
information or to create and save new analyses. For sensitive information, DSS
Web's security plug-ins allow businesses to extend the standard security
functionality with additional user authentication routines.
DSS Web includes an interface API that allows businesses to customize,
integrate and embed DSS Web functionality into other applications. For
example, a data syndicator for healthcare information could utilize DSS Web
with a customized interface to sell access to this information to HMOs,
hospitals, and pharmacies.
DSS Broadcaster--Personalized Information Broadcast Server. DSS
Broadcaster, which commenced Beta testing in February 1998, is a powerful
information broadcast server designed to be capable of delivering personalized
messages to many thousands of recipients via e-mail, fax, pager and mobile
phone. DSS Broadcaster will send personalized information to subscribers at
pre-defined intervals when business metrics exceed pre-defined thresholds.
Continually monitoring business conditions ensures that the appropriate
information is delivered when it is required. DSS Broadcaster's support for
consumer devices delivers information where it is most convenient, improving
productivity by eliminating the need for users to actively log onto a
dedicated information analysis application.
DSS Broadcaster will provide both a platform for distributing information
throughout the corporate enterprise and an infrastructure to implement
information products and services over the Internet to target a broader
community. For example, a retailer will be able to offer suppliers a
subscription to a set of services that delivers product performance
information to a supplier's fax machine or e-mail.
DSS Broadcaster will reduce information overload and help security
requirements by automatically customizing the contents of broadcast messages
for each individual subscriber. Microsoft Excel enclosures and embedded
hyperlinks to DSS Web products will provide access to the underlying details
for further, interactive analysis.
ADVANCED ANALYSIS AND APPLICATIONS DEVELOPMENT INTERFACES
DSS Agent--Desktop Environment for Sophisticated Analysis and
Development. DSS Agent is a desktop product that allows users to ask
sophisticated business questions against relational databases. DSS Agent
provides a broad range of business reporting views, including spreadsheet
grids, a wide variety of graphs, mapping, and presentation-quality report
writing. DSS Agent provides an advanced set of analytical capabilities such as
rankings, deciles, time-based calculations and multi-dimensional calculations.
The information filtering
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capabilities provided by DSS Agent enable users to specify in plain English
precisely which constraints they wish to apply to the targeted information,
allowing them to ask questions such as: "What are the sales in Boston on
weekends in June for customers who are single, earn more than $30,000 per year
and increased their purchases by 15% over last year?" Once users have run a
business report, DSS Agent provides capabilities for analytical follow-up such
as successively interjecting new information into the report, and drilling
throughout the user's business information. DSS Agent's intelligent agents and
alerts also allow users to take actions by automatically scanning the data
warehouse and highlighting exception areas.
DSS Agent's filtering, reporting and analytical capabilities provide users
with the ability to scan through transaction-level detail in their data
warehouse and perform sophisticated market basket analyses. Through DSS
Agent's ability to build a sophisticated analytical report, users can
understand what products sell well together and whether or not that
combination of product sales is more or less profitable than the average
market basket of products sold. All reports and analyses developed with DSS
Agent can be distributed via the Internet with DSS Web and by e-mail, fax,
pager, and mobile phone with DSS Broadcaster. The sample retail report in the
figure below illustrates DSS Agent's powerful reporting capabilities.
[GRAPHIC ILLUSTRATION OF A SAMPLE RETAIL REPORT]
DSS Objects--API for Custom Application Development. DSS Objects is a
development tool for building customized applications on top of DSS Server.
Specialized applications (such as forecasting, category management, scenario
analysis, and budgeting) and applications that tightly integrate DSS with OLTP
are easily developed in Visual Basic, VBA, Delphi, and Visual C++. DSS Objects
allows systems integrators, VARs, in-house application developers and vertical
solution providers to develop customized ROLAP applications.
DSS Objects also is packaged with an Excel Add-In that enables ROLAP
analyses to be conducted directly within Microsoft Excel for those end-users
who wish to use Excel as their analytical front-end interface. The
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Excel Add-In allows users to run reports against the data warehouse and
conduct follow-on analyses on that data through the use of the drill
everywhere capabilities included in the Excel Add-In.
APPLICATION DEVELOPMENT AND MANAGEMENT TOOLS
DSS Architect--Tool for Rapid DSS Development. DSS Architect is a tool for
implementing information analysis applications on top of a relational
database. DSS Architect creates a set of business definitions and rules based
on the underlying structure of the relational database. Users of applications
such as DSS Agent, DSS Objects, DSS Web, and DSS Broadcaster can use these
business definitions to ask questions and conduct analysis of information in
the database. DSS Architect is highly automated and is based on an open,
flexible metadata architecture, which greatly reduces the cost and time
required to implement and maintain systems.
DSS Executive--Object-Based EIS Development Tool. DSS Executive is a
design tool for developing EIS or briefing books, that provide high-level
users with a series of views that describe their business. Once created, end-
users can access briefing books by running DSS Agent in EIS mode. These
systems are easily implemented on top of any DSS Agent application by simply
compiling sets of analyses into dynamic pages that immediately focus users on
their key business drivers.
DSS Administrator--Management and Monitoring Tools for Enterprise
Deployments. DSS Administrator provides a complete set of tools for managing
and monitoring large-scale decision support applications. System monitoring
capabilities provide the information needed to tune systems for high
performance and availability. The user and object management functionality
provided by DSS Administrator enables organizations to maintain enterprise
systems supporting thousands of users.
DSS Administrator's Billing module provides the infrastructure needed to
implement billing systems for Internet-based information services. The Billing
module can be used to track system usage and generate the reports needed to
charge users of an Internet-based information service.
CUSTOMER CASE STUDIES
The following case studies illustrate the application and implementation of
the Company's products and related services by certain of the Company's
customers.
HALLMARK. Hallmark is a leader in the greeting card industry.
Representative Questions. Which type of retail outlets are over-stocked
for a particular Hallmark greeting card? Should Hallmark change its marketing
campaign strategy before shipping more cards from its distribution center?
Problem. With over 40,500 domestic retail outlets and 40,000 products,
Hallmark faces an enormous challenge in monitoring the inventory of its
individual stores. The company's ability to track inventory and to determine
which retail outlets are over-stocked or under-stocked for particular greeting
cards has important implications with respect to marketing, distribution and
development decisions. To address these challenges, Hallmark sought out a
software system that would allow managers, product analysts, and high-level
executives to access over one billion rows of transaction level and product
level data. The company needed a system that could run against a variety of
platforms and relational databases, provide a single tool with the capability
to build point-of-sale and financial reporting applications, support complex
data drilling, and offer an intuitive, easy-to-use executive interface.
Solution. By combining several different products from DSS Suite, Hallmark
created a DSS system that enables Hallmark personnel, from product analysts to
high-level executives, to utilize previously inaccessible information. For
example, using the system, product managers can quickly analyze detailed
point-of-sale data to determine the profitability of new products. By making
strategic decisions based on this information, product
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managers can eliminate poorly selling products from the development cycle.
Additionally, reports of actionable trends at the end of each business day
provide critical information that managers use to make inventory decisions
which help avoid out-of-stock and over-stock situations. As a result, the
system has reduced product development time and improved product performance
and inventory management.
LA CAIXA. La Caixa is the largest Spanish financial institution and one of
the largest savings banks in Europe.
Representative Questions. How many customers does La Caixa have with
current account balances greater than 5 million pesetas? Which customers have
at least one credit card and what is the distribution of these customers by
age and income?
Problem. Like many large banks with a diverse customer base, La Caixa
prefers to target-market specific products to those groups of customers who,
based on demographic and other information, would most likely benefit from
such products. In order to achieve this objective, the bank's product managers
and financial analysts needed a software system that would enable them to
access and analyze approximately one terabyte of detailed customer
information, and which was scalable to several terabytes of data. This system
had to provide high performance access to La Caixa's existing database, allow
for intranet database access to enable executives to analyze predefined
reports and offer a low maintenance solution for the company's information
technology department.
Solution. Using DSS Suite, La Caixa enabled more than 250 bank managers
to analyze over 15,000 customer characteristics to define market segmentation,
understand product profitability, monitor cash flow and analyze the loan risk
of customers of the bank's 3,500 branches. Such powerful analytic capabilities
have enabled La Caixa to improve the effectiveness of its marketing campaigns
and reduce the risk in the personal loans it grants. Additionally, executives
now can view high level reports through their intranet interface, creating a
cost effective and low maintenance solution.
SOURCE INFORMATICS, A SUBSIDIARY OF NATIONAL DATA CORPORATION. Source
Informatics is a leading data solutions and information provider to the
healthcare industry.
Representative Questions. To what degree was a specific company's market
share affected when the patent expired on its most successful drug? Who are
the top 100 prescribers of Amoxicillin in Manhattan?
Problem. Source Informatics collects information on approximately 130
million claims per month from a number of the largest pharmacies across the
United States and on 2.8 billion prescriptions from 893,000 doctors. In the
past this information was distributed through a limited number of channels to
a narrow set of large pharmaceutical companies. As a result, Source
Informatics was not utilizing the full potential of its data warehouse. The
Web made it possible to allow new mass markets to access the information in
its data warehouse. In order to realize this possibility, National Data needed
to implement a system that would deploy a multitude of analytical applications
to a large number of customers simultaneously, where each of these customers
requires a different set of security and access privileges. Such a system had
to analyze multi-terabytes of data, handle many concurrent users and provide
the high levels of customized analytic complexity.
Solution. Source Informatics looked to the Company's DSS Suite,
particularly DSS Web, to develop and implement a creative solution to its
problem. The diagram below illustrates how the Company addressed Source
Informatics' needs. Using various components of the DSS Suite, Source
Informatics divides its multi-terabyte data warehouse into focused subsets of
information which are then offered to specific target markets. Customers who
do not need all the raw data now leverage these information subsets via the
Web on a subscription or a per-access basis. The DSS Administrator component
of the DSS Suite is then used to administer and monitor usage patterns of
potentially thousands of users, creating a complete analysis, distribution and
maintenance system. As a result, Source Informatics is able to leverage its
data warehouse via the Web to reach a larger set of paying customers who can
now answer their questions using empirical data.
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[GRAPHIC ILLUSTRATION OF BUILDING A DATA WAREHOUSE AND EXTRACTING FULL VALUE
FROM THE DATA WAREHOUSE APPEARS HERE]
PROFESSIONAL SERVICES AND CUSTOMER SUPPORT
DSS CONSULTING--DATA WAREHOUSE AND DSS IMPLEMENTATION SERVICE. DSS Consulting
is dedicated to providing clients with the DSS industry's most focused data
warehouse and DSS implementation expertise. The Company's QuickStrike program,
a consulting program for organizations who have already committed to a DSS
development effort, includes ten working days of consulting provided by an
experienced MicroStrategy data warehouse DSS expert at a client's facilities.
MicroStrategy consultants contribute to the success of Enterprise DSS projects
by providing services such as: (i) DSS application design, development, test
and deployment; (ii) data warehouse design, population, development, tuning,
and maintenance; (iii) system integration project planning, methodology and
audit oversight; and (iv) custom application design, development and
implementation methodology for those who wish to develop applications with
proprietary interfaces using DSS Objects.
DSS EDUCATION--DATA WAREHOUSE AND DSS IMPLEMENTATION
METHODOLOGY. MicroStrategy offers training courses to provide current and
potential customers with an effective way to learn about decision support
systems and data warehousing. These courses have been developed and are taught
by senior MicroStrategy consultants with years of experience designing and
implementing data warehouses and DSS solutions. MicroStrategy's training
curriculum includes: (i) Introduction to DSS and Data Warehousing; (ii) Data
Warehousing, Decision Support and the Web; (iii) Advanced DSS Functionality and
Architecture; and (iv) Data Warehousing--DSS Modeling and Design.
DSS SUPPORT--HOTLINE, KNOWLEDGE BASE AND FIELD ENGINEERING
SERVICES. MicroStrategy provides full product implementation cycle support for
Enterprise DSS development and deployment through a variety of channels
including a Web-accessible knowledge base, a telephone hotline, e-mail and fax.
The Company's support engineers are capable of providing client/server
configuration assistance, data warehouse design support, DSS application
development assistance, RDBMS tuning and configuration assistance and
installation, configuration, tuning, and usage support for all of
MicroStrategy's products. The Company's support engineers maintain close
relationships with the development centers of the major RDBMS providers in
order to quickly resolve VLDB performance issues that arise from the
interaction between DSS and RDBMS software. In the event that it is not
possible to troubleshoot an issue remotely, Company field engineers are
available to be dispatched directly to a client site to isolate and solve
problems locally. MicroStrategy support personnel are capable of providing
mission critical support and will interface on behalf of the customer with the
relevant VLDB
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and RDBMS providers to address incompatibilities, particular to a given
configuration, that are impairing the successful deployment of the Company's
DSS applications.
The diagram set forth below illustrates the complete range of the Company's
consulting, education and support services.
<TABLE>
<CAPTION>
FINANCE HEALTH CARE RETAIL TELCO MEDIA MANUFACTURING
Data Warehouse/Decision Support Best Practices Methodology
===============================================================
MicroStrategy University
DSS Training DSS Consulting DSS Support
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Off-Site On-Site Partner Production Sales Channels Field Tele VTG
Training Training Certification Consulting Consulting Consulting Engineering Support Technologies
</TABLE>
Knowledge Transfer Implementation Maintenance
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<PAGE>
CUSTOMERS
MicroStrategy provides DSS products and related services that can support
thousands of users in multiple countries, speaking different languages and
working with different currencies. MicroStrategy has in excess of 500
customers, spread across a variety of major industries. A representative list
of the firms that since December 31, 1995 have purchased over $250,000 of the
Company's products and services is as follows:
BANKING & FINANCE TELECOMMUNICATIONS CONSUMER PACKAGED GOODS
Bank of America* Ameritech Borax, US
Banco Santander Bell South* Brown & Williamson
Barnett Bank Concert Management Services CPC Baking
CIBC Hughes Galaxy* CPC International
First Data MCI* Estee Lauder
First Union* Pacific Bell* Hallmark
First USA Bank Sprint* Heublein
Freddie Mac* WorldCom MCA Universal*
GE Capital* Ralston Purina*
J.P. Morgan PHARMACEUTICAL & HEALTHCARE S.C. Johnson Wax*
La Caixa* Cardinal Health
Royal Trust Glaxo Wellcome* TECHNOLOGY
Societe General MedPartners AC Nielsen*
The Provident Bank Merck/Medco* NCR
RETAIL Premier Healthcare Oculus AB
Asda Stores Warner Lambert* Perot Systems*
B & Q* Software AG*
Belk Department Stores Tandem Computers*
Best Buy* GROCERY & PHARMACY Western Digital
Comet American Stores*
Dayton Hudson* Associated Food Stores OTHER
Eddie Bauer* DM--Drogerie Market* Detroit Edison
Elder Beerman CVS Pharmacy* ESPN/CHILTON
Federated Systems Group* Food Lion London Electricity
Kmart* Hannaford Bros. Co.* McDonald's
Liz Claiborne* Harris Teeter Pacific Gas &
Littlewoods* Marsh Supermarkets Electric
LCBO Penn Traffic
Metro MGI Informatik* MANUFACTURING & INDUSTRIAL Price Waterhouse*
Nieman Marcus Allied Signal The SABRE Group*
Payless Cashways DuPont* U.S. Air Force
Payless Shoe Source Exxon Chemical
ShopKo*
The Burton Group* General Motors* INSURANCE
Victoria's Secret Koch Industries Commercial Union Ins.
Woolworths* Lexmark Nationwide Insurance
Messer Grieshem USAA*
Monsanto* Winterthur
Nissan
Samsung
Shaw Industries
Xerox Inc*
* Indicates that customer has purchased in excess of $500,000 in products and
services since December 31, 1995.
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SALES AND MARKETING
DIRECT SALES ORGANIZATION. MicroStrategy markets its software and services
primarily through its direct sales organization. As of March 31, 1998, the
Company had domestic sales offices in Atlanta, Bedminster, Boston, Chicago,
Cincinnati, Dallas, Denver, Detroit, Kansas City, Los Angeles, Minneapolis,
New York City, San Francisco, Seattle, Tampa and Washington, D.C., and
international sales offices located in The Netherlands (Amsterdam), Spain
(Barcelona and Madrid), Germany (Cologne), the United Kingdom (London), France
(Paris), and Austria (Vienna). The Company is represented by distributors in
countries in which it does not have sales offices, including Australia,
Brazil, Chile, Columbia, Czech Republic, Finland, Greece, Ireland, New
Zealand, Singapore, South Africa, South Korea and Sweden.
INDIRECT SALES CHANNELS. The Company has entered into relationships with
over 80 system integration, application development and platform partners
whose products and services are used in conjunction with the Company's.
Agreements with these partners generally provide them with non-exclusive
rights to market the Company's products and services and allow access to the
Company's marketing materials, product training and direct sales force for
field level assistance. In addition, the Company offers its partners product
discounts. By using indirect sales channels, the Company obtains favorable
product recommendations from the leading system integration, application
developers and platform partners, thereby increasing MicroStrategy's market
coverage. The Company also believes that such indirect sales channels allow it
to leverage sales and service resources, marketing and industry specific
expertise to expand the Company's user base. The Company is not dependent upon
any single third party partner or small group of partners, the loss of which
would have a material adverse effect on the Company.
VALUE-ADDED RESELLERS. VARs who resell DSS Suite bundled with their own
Enterprise DSS application and/or syndicated data products include:
RETAIL PHARMACEUTICAL FINANCE
AC Nielsen Concepts Dynamics American Management
Consist International IMS America Systems
FourGen Software IMS Canada Databasics
ICL Retail Systems Source Informatics PaySys
Intrepid Systems TELECOM CROSS INDUSTRY
Price Waterhouse CableData Acxiom
Radiant Systems Cincinnati Bell Chilton Research
Radius Retail Information Systems Services
Retek Systems UTILITY CIC/MetroMail
Technology Investments james + martin Naviant
RDI--DW Specialists
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SYSTEM INTEGRATORS. MicroStrategy has also entered into agreements to
provide training, support, marketing and sales assistance to a number of
system integrators, including:
AMS EMS PRAGMATEK Consulting
Andersen Consulting Ernst & Young Group
Archer Decision Sciences H.I.T. Price Waterhouse
Anubis Solutions james + martin Professional Software
Beggsheidt Enterprise Consulting Consulting
John Galt
CBSI Knightsbridge Solutions ProLink
Clarity Consulting Lancet Software DevelopmentEIS Pulse
CMS Manifest Solutions Retail Dynamics (RDI)
Computer Sciences Corporation RIS Information
Marketing Info Systems Services
Coopers & Lybrand
Naviant Technology Solutions
Cornerstone Concepts NCR Revere Group
Database Technologies NexGen SI Shamrock Computer
Decision Support Associates Nichols Research Resources
Deloitte & Touche Noblestar Systems Software AG
DMR/Trecom Olympus Group Stonebridge
Emergent Corporation Technologies
Perspective Data Architecture
Syndicated Technologies
Virtual Solutions
Zyga
PLATFORM PARTNERS. The Company's platform partners consist of firms which
co-sell and co-market complementary technology to the same target customer
base. These platform partners include IBM, Tandem/Compaq, NCR, Sequent, ICL,
Data General, Informatica, Oracle, Informix and Red Brick.
RESEARCH AND PRODUCT DEVELOPMENT
The Company has made substantial investments in research and product
development. The Company believes that its future performance will depend in
large part on its ability to maintain and enhance its current product line,
develop new products that achieve market acceptance, maintain technological
competitiveness and meet an expanding range of customer requirements. As of
March 31, 1998, the Company's research and product development staff consisted
of 122 employees. The Company's total expenses for research and development
for the three months ended March 31, 1998 and 1997 were $2.1 million and $0.7
million, respectively and for the years 1997, 1996 and 1995 were $5.1 million
(excluding $1.9 million of capitalized software costs), $2.8 million and $1.9
million, respectively.
COMPETITION
The markets for decision support and Internet-based information services are
intensely competitive and subject to rapidly changing technology. The
Company's most direct competitors in these markets are providers of decision
support software, push products, browsers with webcasting functionality,
electronic and Internet commerce systems, vertical Internet information
systems, wireless communications products, OSPs and event-driven technology.
Many of these competitors are offering (or may soon offer) products and
services that may compete with the Company's information analysis and soon-to-
be-released information broadcasting products. The bases of competition in
these markets include volume and type of information accessed, timeliness of
information delivery, degree of personalization, range of information delivery
media, quality of presentation, price/performance, sophistication of
notification events and ease of implementation.
The Company's competitors in the decision support market fall generally into
the following categories: (i) vendors of ROLAP software such as Information
Advantage, Inc. and Platinum Technologies Corporation; (ii) vendors of desktop
OLAP software such as Business Objects S.A. and Cognos Incorporated; and (iii)
vendors of multidimensional OLAP software such as Oracle Corporation, Arbor
Software Corporation (which has entered into a strategic relationship with
IBM), Seagate and SAS. The Company anticipates continued growth and
competition in the decision support software market and the entrance of new
competitors into this market in the future. Such new competitors may include
Microsoft, which has indicated
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that it may introduce certain products in 1998 that may overlap to some extent
with the functionality of the Company's products.
Push product vendors such as PointCast, Marimba and BackWeb offer
technologies that deliver information over the Internet to recipients via Web-
browsers and proprietary interfaces. Vendors of push products are focused
generally on the delivery of text-based information, such as news and sports,
but often include some level of numeric information such as stock price
updates. Moreover, Marimba has entered into technology partnerships that will
extend the scope of its offering to include the delivery of information and
analysis from relational data sources, which could provide the Company with
increased competition.
Web-browsers with channels or webcasting functionality, such as Microsoft
Internet Explorer and Netscape Navigator, provide an infrastructure for
automatically updating a set of information on a recipient's computer.
Although this infrastructure is used by the Company to enhance the
functionality of its DSS Web product line, webcasting and desktop channels
offer an alternative information delivery infrastructure to the Company's DSS
Broadcaster product line.
Products and turn-key solutions for electronic commerce, Internet commerce
and electronic business, such as those provided by IBM, Open Market, U.S. Web,
SVIP and Sun, provide a set of functionality that could be used to implement
Internet-based information services. To the extent that these information
products sell information and analysis from relational databases they will
compete with the Company's products.
Vertical Internet information systems, including Microsoft Expedia,
Microsoft Investor, StockBoss, Microsoft CarPoint, Mercury Mail, TechWeb,
ESavers (US Airways, Inc.), C.O.O.L. (Continental Airlines, Inc.), and
Internet Travel Network, have developed custom applications and products for
the commercialization, analysis and delivery of specific information via the
Internet. These systems are generally tailored to a particular application and
built in a fashion that is difficult to leverage into other applications.
These systems represent competition, in that they provide similar
functionality to applications developed using the Company's products.
Wireless communications and messaging providers, such as AT&T, Nextel,
Sprint, MCI, WorldCom, Tridium, PageNet and SkyTel, offer a variety of alpha
enabled mobile phones and pagers. It is possible that these companies will
implement custom-developed information services for consumers of their mobile
phones and pagers that will compete with applications using the Company's
products and services.
OSPs include companies such as America Online, MSN, Prodigy, @Home and WebTV
(acquired by Microsoft) that provide text-based content, such as news and
sports, over the Internet and on proprietary online services. The potential
exists for these companies to implement applications that overlap with the
functionality provided by the Company.
Providers of event notification systems include companies such as TIBCO,
which markets a product that monitors stock tickers and notifies subscribers
when preset thresholds are crossed, Clarify; which handles loan applications
with a financial system developed by SAP AG; BEA Systems, which provides
middleware; and Vitria Technology, which provides event-based workflow
software. The systems for event-driven notification provided by these
companies at present and in the future may result in technology that overlaps
with that provided by the Company.
The Company believes that it differentiates itself from other industry
participants by offering comprehensive support for all significant relational
database platforms. If a single vendor wins a substantial share of the
relational database market, the Company may find it more difficult to
differentiate its offerings from its competitors, which may materially
adversely affect the Company's business, operating results and financial
condition.
Many of the Company's competitors have longer operating histories,
significantly greater financial, technical, marketing or other resources, or
greater name recognition than the Company. In addition, many of the
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Company's competitors have well established relationships with current and
potential customers and extensive knowledge of the data warehouse industry. As
a result, these competitors may be able to respond more quickly to new or
emerging technologies and changes in customer requirements, or to devote
greater resources to the development, promotion and sale of their products,
than can the Company. Increased competition may result in price reductions,
reduced gross margins and loss of market share. There can be no assurance that
the Company will be able to compete successfully against current and future
competitors or that competitive pressures faced by the Company will not
materially adversely affect its business, operating results and financial
condition. See "Business--Competition."
Current and potential competitors may make strategic acquisitions or
establish cooperative relationships among themselves or with third parties,
thereby increasing their ability to address the needs of the Company's
prospective customers. The Company's current or future indirect channel
partners may establish cooperative relationships with current or potential
competitors of the Company, thereby limiting the Company's ability to sell its
products through particular distribution channels. Accordingly, it is possible
that new competitors or alliances among current and new competitors may emerge
and rapidly gain significant market share. Such competition could have a
material adverse effect on the Company's margins and its ability to obtain
maintenance revenues for new and existing product licenses on favorable terms.
INTELLECTUAL PROPERTY AND LICENSES
The Company relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary technology. For example, the Company licenses rather
than sells its software and requires licensees to enter into license
agreements which impose certain restrictions on licensees' use of the
software. In addition, the Company has made efforts to avoid disclosure of its
trade secrets, including but not limited to requiring those persons with
access to the Company's proprietary technology and information to enter into
confidentiality agreements with the Company and restricting access to the
Company's source code. The Company seeks to protect its software,
documentation and other written materials under trade secret and copyright
laws, which afford only limited protection. The Company presently has no
patents or patent applications pending. Despite the Company's efforts to
protect its proprietary rights, unauthorized parties may attempt to copy
aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. Policing unauthorized use of the Company's
products is difficult, and while the Company is unable to determine the extent
to which piracy of its software products exists, software piracy can be
expected to be a persistent problem. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to as great an
extent as do the laws of the United States. There can be no assurance that the
Company's means of protecting its proprietary rights will be adequate or that
the Company's competitors will not independently develop similar technology.
Generally, the Company's products are licensed through "named-user
licenses," under which only one identified user may access the product for
each "named-user" license fee paid. A user is an individual to whom a licensee
has assigned an identification number for purposes of tracking use of a
product and who is under an obligation to the licensee to protect any
confidential information of the Company. Under its standard software license
agreement, the Company has the ability to request certified statements of
records regarding identification numbers in particular, and use of the
products in general, once per year, and has the right to audit use of the
products at least once per year. Copying of products and documentation is
limited to the number of users for whom license fees have been paid.
There can be no assurance that third parties will not claim infringement by
the Company with respect to current or future products. The Company expects
that software product developers will increasingly be subject to infringement
claims as the number of products and competitors in the Company's industry
segment grows and the functionality of products in different industry segments
overlaps. Any such claims, with or without merit, could be time-consuming,
result in costly litigation, cause product shipment delays or require the
Company to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available
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<PAGE>
on terms acceptable to the Company or at all, which could have a material
adverse effect upon the Company's business, operating results and financial
condition.
EMPLOYEES
As of March 31, 1998, the Company had a total of 676 employees, of whom 521
were based in the United States and 155 based internationally. Of the total,
248 were engaged in sales and marketing, 122 in product development, 197 in
professional services and 109 in finance, administration and corporate
operations. The Company's future performance depends in significant part upon
the continued service of its key management personnel, none of whom is bound
by an employment agreement. The loss of the services of one or more of the
Company's key employees could have a material adverse effect on the Company's
business, operating results and financial condition. The Company's future
success also depends on its continuing ability to attract, train and retain
highly qualified technical, sales, service, marketing and managerial
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company can retain its key personnel in the future. None of
the Company's employees is represented by a labor union. The Company has not
experienced any work stoppages and considers its relations with its employees
to be good.
The Company believes that effective recruiting, education, and nurturing of
human resources is critical to its success and has traditionally made
substantial investments in these areas in order to differentiate itself from
its competition, increase employee loyalty and create a culture conducive to
creativity, cooperation and continuous improvement. These measures include:
PROFESSIONAL EDUCATION. All newly hired professionals complete a
professional orientation course that ranges from 4-8 weeks long presented by
"MicroStrategy University," the Company's in-house education function. The
curriculum consists of lectures, problem sets and independent and group
projects, covering data warehousing, Enterprise DSS, MicroStrategy's products,
the Company's competitors and customers. Certain lectures also deal with
general business practices, ethics and teamwork. At the end of this training,
students must pass a number of oral and written examinations in order to begin
their assignments. Following this introductory course, veteran employees
normally complete at least two weeks of continuing professional development
each year. Course content for MicroStrategy University is created by the most
experienced members of the professional staff, who generally have an annual
obligation to create "expert content" based upon the best practices they have
most recently observed in the field. This expert content is then used to
upgrade and revitalize the Company's education, consulting, support,
technology and marketing operations.
COMPANY DAYS. Each quarter, the Company invites the entire employee base
together for knowledge transfer within functions, across functions and across
geographic boundaries. These events are generally built around a set of
company-wide meetings and breakout sessions, but they also have particular
cultural themes. These events include: the "Company Retreat," which allows
employees to network with colleagues in an informal setting and which
traditionally has consisted of a Company-sponsored cruise; "University Week,"
which focuses on continuing professional development along with the creation
and codification of industry-best practices; "Friends and Family Weekend,"
during which the Company sponsors a weekend-long open house and plays host to
immediate and extended family, as well as significant others of employees; and
"Customer and Partner Festival," where the Company's business partners and
customers are encouraged to mix with the employee base in order to exchange
information and strengthen the firm's ties to the marketplace. The Company
believes that its "Company Day" events are long-term investments which will,
over time, result in superior productivity, morale, and loyalty among the
employee base, and the Company expects to continue to engage in these
activities in the future.
FACILITIES
The Company's principal offices currently occupy approximately 79,000 square
feet in Vienna, Virginia pursuant to multiple leases which expire between July
1998 and February 2001, and the Company has recently signed a four year lease
commencing in June 1999 for approximately 66,000 additional square feet in the
Vienna
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<PAGE>
area. In addition, the Company also leases sales offices domestically in the
metropolitan areas of Atlanta, Bedminster, Boston, Chicago, Cincinnati,
Dallas, Detroit, Los Angeles, Minneapolis, New York City, San Francisco,
Seattle and Washington, D.C. and internationally in Amsterdam, Barcelona,
Cologne, London, Madrid, Milan, Paris and Vienna. The Company believes that
suitable additional or alternative space will be available in the future on
commercially reasonable terms as needed.
LEGAL PROCEEDINGS
On April 6, 1998, the Company filed two lawsuits in Virginia Circuit Court
against Strategic Decisions, Inc. ("SDI") shortly before an earlier action
filed by SDI against the Company in the United States District Court in Ohio
was voluntarily dismissed. The Company asserted claims for damages for breach
of contract and claims for injunctive relief to enforce the provisions of the
contract, which involved the marketing and sale by MicroStrategy of a category
management product line developed in conjunction with SDI. The Company also
sought a declaratory judgment regarding, among other things, the Company's
joint ownership of the category management product line under the terms of the
agreement. SDI asserted counterclaims, including a claim for damages and a
declaration that it retained a joint ownership interest in the Company's
product line upon termination of the agreement. The Company expects that it
will prevail on its claims against SDI and believes that, although discovery
has recently commenced, SDI's counterclaims are either without merit or the
Company has meritorious defenses to such counterclaims. As a result, the
Company believes that these matters will not have a material adverse effect on
the Company's business, operating results or financial condition.
From time to time, the Company may be involved in other litigation that
arises in the normal course of its business operations. As of the date of this
Prospectus, the Company is not presently a party to any such other litigation
that the Company believes could reasonably be expected to have a material
adverse effect on its business or results of operation.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information concerning members of the Board of
Directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
President, Chief Executive Officer and Chairman of
Michael J. Saylor... 33 the Board of Directors
Executive Vice President, Chief Operating Officer and
Sanju K. Bansal..... 32 Director
Eduardo S. Sanchez.. 41 Vice President, International Operations
Stephen D. Foley.... 38 Vice President, Sales
Stephen S. Trundle.. 29 Vice President, Technology
Mark S. Lynch....... 35 Vice President, Finance and Chief Financial Officer
Charles A. Veley.... 32 Vice President, Corporate Development
Ralph S. Terkowitz.. 47 Director
Frank A. Ingari..... 48 Director
</TABLE>
Michael J. Saylor has served as President, Chief Executive Officer and
Chairman of the Board of Directors since founding the Company in November
1989. Prior to joining the Company, 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
the Company in 1990. He has been a member of the Board of Directors of the
Company since September 1997. Prior to joining the Company, 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.
Eduardo S. Sanchez has served as Vice President, International Operations
since July 1997. From 1994 to 1997, he served as Managing Director, European
Operations and prior to that as Senior Manager, U.S. Consulting since joining
the Company in 1992. Prior to joining the Company, Mr. Sanchez was a
manufacturing consultant in Europe, the United States, South America and
Japan. Mr. Sanchez received an M.S. in Systems Engineering from George Mason
University and a B.S. in Electrical Engineering from the University of La
Plata in Argentina.
Stephen D. Foley has served as Vice President, Sales since October 1997.
From March 1997 to October 1997, he served as Vice President, Sales for
Diffusion, an information delivery software provider. From 1996 to March 1997,
Mr. Foley served as Vice President of Sales for XDB Systems, a database
middleware company. From 1994 to 1996, he was Vice President, North American
Sales, for Visix, an application development tools company. Prior to joining
Visix, Mr. Foley served as Vice President, U.S. Direct Sales for Cognos, a
decision support software company, from 1991 to 1993. Mr. Foley received a
B.S. in Industrial Organization Psychology from Michigan State University.
Stephen S. Trundle has served as Vice President, Technology since July 1997
and as Director, Technology from 1994 to 1997. From 1992 to 1994, Mr. Trundle
served as a Consultant and then a Senior Consultant with the Company. Prior to
joining the Company, Mr. Trundle worked for Bath Iron Works on the Aegis
Destroyer program from 1991 to 1992. Mr. Trundle received an A.B. in
Engineering and an A.B. in Government from Dartmouth College.
Mark S. Lynch has served as Vice President, Finance and Chief Financial
Officer since September 1997. Prior to joining the Company, Mr. Lynch was
Chief Financial Officer for WorldCorp and World Airways from 1996 to 1997, and
before that was Vice President, Finance for Intelidata, an electronic commerce
firm, from
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1991 to 1996. Mr. Lynch has also held several senior accounting positions with
KPMG Peat Marwick and Clark Construction Group. Mr. Lynch is a certified
public accountant and received a B.S. in Accounting from Penn State and an
M.B.A. from George Washington University.
Charles A. Veley has served as Vice President, Corporate Development since
October 1997 and as Director, Corporate Development from 1996 to October 1997.
From 1994 to 1996, Mr. Veley was an Account Executive for Cambridge Technology
Partners, a client/server system integrator. From 1991 to 1994, Mr. Veley was
employed by the Company as Vice President, Sales and Marketing. Prior to
joining the Company in 1991, Mr. Veley was an Associate Consultant with the
Boston Consulting Group. Mr. Veley received an A.B. in Computer Science from
Harvard College.
Ralph S. Terkowitz has been a member of the Board of Directors of the
Company since September 1997. Mr. Terkowitz is Vice President, Technology for
the Washington Post Company, a position he has held since 1992. Until February
1996, Mr. Terkowitz was Chief Executive Officer, President and publisher of
Digital Ink, an Internet publishing venture that launched, among other
ventures, WashingtonPost.com and PoliticsNow. Mr. Terkowitz is a director of
Junglee, an Internet startup venture, and was a director of New Century
Network, a Web publishing consortium, from its inception until 1998. Mr.
Terkowitz received an A.B. in Chemistry from Cornell University and an M.S. in
Chemical Physics from the University of California, Berkeley.
Frank A. Ingari has been a member of the Board of Directors of the Company
since October 1997. Mr. Ingari is Chairman of the Board of Directors of Shiva
Corporation and was the President and Chief Executive Officer of Shiva
Corporation from 1993 to 1997. Mr. Ingari also serves as Chief Executive
Officer of Growth Ally, L.L.C., a consulting firm specializing in assisting
private technology companies in accelerating their growth. Prior to joining
Shiva Corporation, Mr. Ingari was Vice President, Marketing at Lotus
Development Corporation. From 1991 to 1992, he served as Chairman of the Board
of Directors and Chief Executive Officer of ONTOS, Inc., a supplier of object-
oriented database management systems and application development software. Mr.
Ingari received a B.A. in Creative Writing and U.S. Foreign Relations from
Cornell University.
BOARD OF DIRECTORS
The Company's Bylaws currently provide that the number of directors shall be
fixed by the Board. The Board of Directors has fixed the number of directors
at four. The Bylaws provide that directors shall be elected by a plurality
vote, with no cumulative voting, at the annual meeting of stockholders. Each
elected director holds office for a term of one year or until his successor
shall have been duly elected and qualified. Each of the Company's directors
has been elected to serve until the Company's 1999 annual meeting of
stockholders, or until his successor shall have been duly elected and
qualified. The Company plans to hold annual stockholders' meetings in the
future for the election of directors.
The Board of Directors has established a Compensation Committee and an Audit
Committee consisting in each case of Messrs. Terkowitz and Ingari. Mr.
Terkowitz is the Chairman of the Compensation Committee and Mr. Ingari is
Chairman of the Audit Committee. The Compensation Committee will be
responsible for making recommendations to the Board concerning salaries and
incentive compensation for officers and employees of the Company. The Audit
Committee will be responsible for reviewing the results and scope of the audit
and other accounting related services.
Directors do not receive any fees or other cash compensation for serving on
the Company's Board of Directors or any committee thereof, but each non-
employee director who has served during the prior six month period shall be
entitled to receive an option to purchase 5,000 shares of Class A Common Stock
on the date of each annual stockholders meeting pursuant to the terms of the
Director Option Plan. All directors are reimbursed for their reasonable out-
of-pocket expenses arising from attendance of meetings of the Board of
Directors,
55
<PAGE>
committees thereof or in respect of Company-related business. Mr. Terkowitz
and Mr. Ingari, who are not current or former officers of the Company, were
granted options to purchase 45,000 shares each of Class A Common Stock under
the Director Option Plan described below in connection with their election to
the Board of Directors. See "--Stock Option Plans."
EMPLOYMENT AGREEMENTS
Employees of the Company are generally required to enter into
confidentiality agreements prohibiting such employee from disclosing any
confidential or proprietary information of the Company. In addition, the
agreements generally provide that upon termination such employee will not work
for a competitor and will not solicit Company customers and employees for a
period of one year. At the time of commencement of employment, the Company's
employees also generally sign offer letters specifying certain basic terms and
conditions of employment. Otherwise, employees of the Company are not subject
to written employment agreements.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal years ended December 31, 1996 and 1997, the Board of
Directors had no Compensation Committee. Decisions regarding compensation for
1996 and 1997 were made by the Company's senior management. On a going-forward
basis, the Compensation Committee will be responsible for making
recommendations to the Board of Directors concerning salaries and incentive
compensation (including option grants) for officers and directors of the
Company. See "Board of Directors."
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION. The following table provides certain summary
information concerning compensation paid or accrued by the Company to or on
behalf of the Company's Chief Executive Officer and each of the other
executive officers of the Company who earned more than $100,000 (salary and
bonus) for all services rendered in all capacities to the Company during the
fiscal year ended December 31, 1997 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION(1) AWARDS
---------------------- -------------------------
NAME AND PRINCIPAL POSITION SALARY BONUS SHARES UNDERLYING OPTIONS
- --------------------------- ----------- ---------- -------------------------
<S> <C> <C> <C>
Michael J. Saylor............. $ 124,000 $ 30,000 --
Chairman of the Board, Chief
Executive Officer
and President
Sanju K. Bansal............... 111,667 30,000 --
Executive Vice President and
Chief Operating Officer
Eduardo S. Sanchez............ 122,300 -- 54,000
Vice President, International
Operations
Stephen S. Trundle............ 100,100 -- --
Vice President, Technology
Charles A. Veley.............. 90,250 50,000 --
Vice President, Corporate
Development
</TABLE>
- --------
(1) With respect to each of the Named Executive Officers, the aggregate
amount of perquisites and other personal benefits, securities or property
received was less than either $50,000 or 10% of the total annual salary
and bonus reported for such Named Executive Officer.
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<PAGE>
STOCK OPTIONS. The following table contains information concerning the stock
option grants made to each of the Named Executive Officers during the fiscal
year ended December 31, 1997:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM (3)
------------------------------------------------- ----------------------
NUMBER OF
SHARES OF
CLASS A
COMMON % OF TOTAL
STOCK OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (1) 1997 PER SHARE (2) DATE 5% 10%
- ---- ----------- ------------ ------------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Saylor....... -- -- % $ -- -- $ -- $ --
Sanju K. Bansal......... -- -- -- -- -- --
Eduardo S. Sanchez...... 54,000 2.03 2.50 9/30/07 32,125 131,118
Stephen S. Trundle...... -- -- -- -- -- --
Charles A. Veley........ -- -- -- -- -- --
</TABLE>
- --------
(1) The options vest over a five-year period and expire on the tenth
anniversary of the date of grant.
(2) The exercise price may be paid in cash or in shares of 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 the
common stock as determined by the Board of Directors on the grant date
using a revenue multiple valuation methodology.
(3) Assumes appreciation at the independently appraised value of the Class A
Common Stock of 5% and 10% per year over the ten-year option period as
mandated by the rules and regulations of the Securities and Exchange
Commission, and does not represent the Company's estimate or projection
of the future value of the Class A Common Stock. If the assumed per share
offering price of $9.00 had been used to calculate potential realizable
value, instead of the independently appraised value, appreciation at an
assumed annual rate of 5% and 10% would have resulted in values of
approximately $657,000 and $1,126,000, respectively. The actual value
realized may be greater or less than the potential realizable values set
forth in the table.
The following table sets forth information concerning option holdings
through December 31, 1997 by each of the Named Executive Officers:
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES OF CLASS A
COMMON STOCK UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT YEAR END (1) AT YEAR-END (2)
------------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Michael J. Saylor... -- -- $ -- $ --
Sanju K. Bansal..... -- -- -- --
Eduardo S. Sanchez.. 5,200 74,800 18,200 153,800
Stephen S. Trundle.. 20,200 80,800 70,700 282,800
Charles A. Veley.... 14,000 56,000 38,500 154,000
</TABLE>
- --------
(1) "Exercisable" refers to those options which will be vested and
exercisable immediately upon completion of the Offering, while
"Unexercisable" refers to those options which will be unvested at such
time.
(2) Value is determined by subtracting the exercise price from the fair
market value of the Class A Common Stock at December 31, 1997 ($4.00 per
share), multiplied by the number of shares underlying the options.
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<PAGE>
STOCK OPTION PLANS
1996 STOCK PLAN. The Company's 1996 Stock Plan (the "1996 Stock Plan"), as
amended, was approved by the Board of Directors and by the stockholders in
August of 1997. The 1996 Stock Plan provides for the granting to employees of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and for the granting of nonqualified stock
options to employees (including officers and employee directors) and
consultants. A total of 8,000,000 shares of Class A Common Stock have been
reserved for issuance under the 1996 Stock Plan, and options to purchase
5,219,018 shares have been granted as of March 31, 1998 thereunder. To date,
substantially all options granted under the 1996 Stock Plan have been
designated as incentive stock options. The 1996 Stock Plan is currently
administered by the Company's Board of Directors.
Options granted under the 1996 Stock Plan are not transferable by the
optionee other than by will or the laws of descent and distribution, and each
option is exercisable during the lifetime of the optionee only by such
optionee. The exercise price of all incentive stock options granted under the
1996 Stock Plan must be at least equal to the fair market value of the shares
of Class A Common Stock on the date of grant. With respect to any participant
who owns stock possessing more than 10% of the voting power of all classes of
the Company's outstanding capital stock, the exercise price of any incentive
stock option must be equal to at least 110% of the fair market value of the
shares of Class A Common Stock on the grant date and the maximum term of the
option must not exceed five years. The terms of all other incentive options
granted under the 1996 Stock Plan may not exceed 10 years.
Stock options granted under the 1996 Stock Plan generally vest over a five-
year period. No portion of an option shall be exercisable, whether or not
vested, until the earliest of (i) the closing of an underwritten public
offering of the Company's Class A Common Stock, (ii) a change in control of
the Company or (iii) 78 months following the date of grant of an option. In
the event of a merger of the Company with or into another corporation, each
option would be assumed or an equivalent option substituted by the successor
corporation. In the event that such successor corporation refuses to assume
the option or to substitute an equivalent option, the option shall be deemed
exercisable to the extent of the greater of (a) 40% of the number of shares of
Common Stock subject to the option and (b) the number of shares then vested
immediately prior to the change in control. As of March 31, 1998, no options
to purchase shares of Class A Common Stock had been exercised. Options to
purchase 5,219,018 shares at a weighted average exercise price of $1.98 per
share are currently outstanding under the 1996 Stock Plan and options to
purchase 2,780,982 shares of Class A Common Stock remain available for future
grants under the 1996 Stock Plan.
FRENCH PLAN. The 1997 Stock Option Plan for French employees (the "French
Plan") was approved by the Board of Directors in March of 1997. The French
Plan provides for the granting of options to employees of MicroStrategy France
SARL, the Company's French subsidiary. A total of 300,000 shares of Class A
Common Stock has been reserved for issuance under the French Plan, and options
to purchase 105,000 shares have been granted as of March 31, 1998 thereunder.
The French Plan is administered by the Company's Board of Directors. Options
granted under the French Plan are not transferable by the optionee other than
by will or by the laws of descent and distribution. The exercise price for
each option granted under the French Plan shall be 100% of the fair market
value of the shares of Class A Common Stock on the date the option is granted
and the maximum term of the option must not exceed ten years.
Stock options granted under the French Plan vest over a five year period
with 40% of options vesting on the second anniversary of the vesting
commencement date and 20% vesting on each subsequent anniversary. Options
issued under the French Plan have the same limitations on exercisability and
provisions for vesting upon a merger of the Company as options issued under
the 1996 Stock Plan described above.
1997 DIRECTOR OPTION PLAN. The Company's 1997 Director Option Plan (the
"Director Option Plan") was adopted by the Board of Directors and the
stockholders in September of 1997. A total of 200,000 shares of Class A Common
Stock has been reserved for issuance under the Director Option Plan. The
Director Option Plan provides for the grant of nonqualified stock options to
non-employee directors of the Company.
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<PAGE>
The Director Option Plan provides that each person who becomes a non-
employee director of the Company shall, on the date on which the optionee
first becomes a director of the Company, be granted an option to purchase
45,000 shares of Class A Common Stock (the "First Option"). On the date of
each annual stockholders meeting thereafter, each non-employee director shall
be granted an option to purchase 5,000 shares of Class A Common Stock (a
"Subsequent Option") if, on such date, he or she shall have served on the
Company's Board of Directors for at least six months prior to the annual
meeting. Options to purchase 45,000 shares of Class A Common Stock have been
granted to each of Mr. Terkowitz and Mr. Ingari at an exercise price of $2.50
per share. None of such options are presently vested or exercisable.
The Director Option Plan sets neither a maximum nor a minimum number of
shares subject to options that may be granted to any one non-employee
director, but does stipulate the method of making a grant. No option granted
under the Director Option Plan is transferable by the optionee other than by
will or the laws of descent and distribution, and each option is exercisable,
during the lifetime of the optionee, only by such optionee. The Director
Option Plan provides that the First Option shall become exercisable in
installments of one-fifth of the shares subject to the First Option on each of
the first, second, third, fourth and fifth anniversaries of the date of grant
of the First Option, and that each Subsequent Option shall become exercisable
in full on the fifth anniversary of its date of grant. The exercise price of
all stock options granted under the Director Option Plan shall be equal to the
fair market value of the shares of Class A Common Stock on the date of grant
of the option. Options granted under the Director Option Plan have a term of
10 years. In the event of a merger of the Company with or into another
corporation or a sale of substantially all of the Company's assets, each
option will be assumed or an equivalent option substituted by the successor
corporation. If the successor corporation does not assume outstanding options,
the exercisability of all outstanding options shall be accelerated. The Board
of Directors may amend or terminate the Director Option Plan, provided,
however, that no such action may adversely affect any outstanding option and
provided further that the provisions affecting the grant and terms of options
may not be amended more than once during any six-month period.
1998 EMPLOYEE STOCK PURCHASE PLAN. Prior to the closing of the Offering, the
Board will submit to the Existing Stockholders, and the Existing Stockholders
are expected to approve, an Employee Stock Purchase Plan (the "Purchase
Plan"), covering an aggregate of 400,000 shares of Class A Common Stock. The
Purchase Plan is intended to qualify for favorable tax treatment under Section
423 of the Internal Revenue Code of 1986, as amended. Under the Purchase Plan,
eligible employees may purchase shares of the Company's Class A Common Stock
through periodic payroll deductions. The Purchase Plan will be implemented
through a series of six month offering periods commencing on each January 1
and July 1 (each an "Offering Period"), except for the initial Offering Period
which will begin on the date of the closing of the Offering and end on
December 31, 1998. All employees of the Company or its majority-owned
subsidiaries who work at least twenty hours per week and more than five months
per calendar year are eligible to participate in the Purchase Plan.
During the first Offering Period, participants may designate not more than
10% of their cash compensation, and in subsequent Offering Periods not more
than 10% of their average total compensation, to be deducted each pay period
for the purchase of Class A Common Stock under the Purchase Plan. Participants
may purchase no more than $15,000 in Class A Common Stock in any one calendar
year. The purchase price per share will be 85% of the lesser of the fair
market value of the Class A Common Stock on the beginning or end of the
Offering Period. Employees may terminate their participation in the Purchase
Plan at any time during an Offering Period, but may not alter their rate of
payroll deduction for that offering. Participation ends automatically on
termination of employment with the Company. The Purchase Plan will terminate
no later than December 31, 2002.
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<PAGE>
CERTAIN TRANSACTIONS
EQUITY ISSUANCE, STOCKHOLDER LOANS AND LOAN GUARANTEES
Effective January 1, 1998, the Company issued a total of 1,401,641 shares of
Common Stock to Messrs. Saylor and Bansal to purchase their approximately 21%
minority interest in certain of the Company's foreign subsidiaries. As a
result of such exchange, each such subsidiary became wholly-owned by the
Company. The Company obtained an independent, third-party valuation of the
percentage of interests held by Messrs. Saylor and Bansal for purposes of
determining the number of shares of Common Stock to be issued, but the Company
did not seek or obtain an opinion about the fairness of the transaction to the
Company or its stockholders. The transaction was approved by the disinterested
members of the Board of Directors. Mr. Saylor received 1,134,662 shares of
Common Stock in the exchange and Mr. Bansal received 266,979 shares.
The Company expects to declare the S Corporation Dividend and pay the
Dividend Notes to the Existing Shareholders in the form of the Dividend Notes
prior to the termination of the Company's S corporation election, which is
expected to occur prior to the consummation of the Offering. The Dividend
Notes have (i) a term of one year, (ii) bear interest at the applicable
federal rate for debt obligations having a maturity of one year, which was
5.29% as of March 31, 1998, and (iii) are payable in four equal quarterly
installments. The Dividend Notes may be prepaid without penalty at any time at
the option of the Company. The Company intends to repay the Dividend Notes
from cash flows generated from operations, current available cash and cash
equivalents, borrowings under the Company's Business, and to the extent that
other sources are insufficient for this purpose, from the proceeds of the
Offering. See "Dividend Policy" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
The Company has on occasion made certain open, non-interest bearing advances
to Mr. Saylor and Mr. Bansal. As of December 31, 1997, the Company had
advanced Messrs. Saylor and Bansal $113,983 and $50,910, respectively. These
advances resulted primarily from the Company paying S corporation taxes for
these individuals and other miscellaneous expenses since the Company's
inception.
Mr. Saylor has guaranteed amounts outstanding under the Company's Business
Loan to the extent that such amounts exceed $2.0 million. Mr. Saylor's
liability under the guarantee is capped at $2.0 million. The guarantee
automatically terminates upon the closing of the Offering. Mr. Saylor did not
receive any compensation from the Company for providing such guarantee.
STOCK PURCHASE
On February 28, 1995, Messrs. Sanchez and Trundle purchased 442,408.08 and
294,938.72 shares, respectively, of Common Stock at a price of $0.107 per
share, such purchase price to be payable in four installments. Upon the
payment of each installment, Messrs. Sanchez and Trundle acquired 25% of the
total shares. Installments were paid on February 28, 1995 and each succeeding
December 31, with the final installment paid on December 31, 1997.
EXISTING STOCKHOLDERS AGREEMENTS
The Company has entered into certain agreements with the Existing
Stockholders (the "Existing Stockholders Agreements") pursuant to which the
Existing Stockholders have consented to (i) the revocation of the Company's S
corporation election, (ii) the termination of existing stock purchase
agreements and buy/sell agreements between the Company and the Existing
Stockholders, (iii) the exchange of all Class A Common Stock owned by the
Existing Stockholders for Class B Common Stock and (iv) the execution of tax
indemnification and lock-up agreements.
TAX INDEMNIFICATION AGREEMENT
Pursuant to the Existing Stockholders Agreements, the Company has entered
into tax indemnification agreements with the Existing Stockholders ("Tax
Indemnification Agreements") which provide for, among other things, the
indemnification of the Company by such stockholders for any federal and state
income taxes (including interest and penalties) incurred by the Company, if
for any reason, the Company
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<PAGE>
is deemed to be treated as a C corporation during any period for which it
reported its taxable income as an S corporation. The tax indemnification
obligation of the Existing Stockholders is limited to the lesser of (i) the
amount of any reduction in their tax liability as a result of any such
determination or (ii) the aggregate amount received in distributions from the
Company from January 1, 1990 until the S corporation termination date. The
Existing Stockholders Agreement also provides for the cross-indemnification by
the Company of each Existing Stockholder for any losses or liabilities with
respect to certain additional taxes (including interest and penalties)
resulting from the Company's operations during the period in which it was an S
corporation. Purchasers of Class A Common Stock in the Offering will not be
parties to any Existing Stockholders Agreement. See "Termination of S
Corporation Election and S Corporation Distribution."
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 31, 1998 and as adjusted
to reflect the sale of the shares of Class A Common Stock offered hereby, (i)
by each person who is known by the Company to own beneficially more than 5% of
the Company's Common Stock, (ii) by each Named Executive Officer and member of
the Board of Directors, (iii) by the Selling Stockholders and (iv) by all
executive officers and directors as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY NUMBER OF SHARES SHARES BENEFICIALLY
OWNED PRIOR TO BEING OFFERED OWNED AFTER OFFERING
OFFERING (1)(2) (1) (1)(2)
--------------------- ---------------- ---------------------
NAME NUMBER PERCENTAGE NUMBER NUMBER PERCENTAGE
---- ---------- ---------- ---------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Alcantara LLC (3)....... -- -- -- 22,574,662 65.0%
Michael J. Saylor (4)... 22,574,662 73.1% -- -- --
Shangri-La LLC (5)...... -- -- -- 4,966,979 14.3%
Sanju K. Bansal (6)..... 5,066,979 16.4% 100,000 -- --
Thomas P. Spahr (7)..... 962,000 3.1% 60,000 902,000 2.6%
Eduardo S. Sanchez(8)... 452,808 1.5% -- 452,808 1.3%
Charles A. Veley(9)..... 334,000 1.1% -- 334,000 1.0%
Stephen S. Trundle(10).. 335,339 1.1% -- 335,339 1.0%
Frank A. Ingari......... -- -- -- -- --
Ralph S. Terkowitz...... -- -- -- -- --
All executive officers
and directors as a
group
(9 persons)(1)......... 28,763,788 93.1% 100,000 28,663,788 82.5%
</TABLE>
- -------
(1) Shares listed in the table are shares of Class B Common Stock which have
ten votes per share, except that 2,000, 10,400, 14,000 and 40,400 shares
of Common Stock held by Mr. Spahr, Mr. Sanchez, Mr. Veley and Mr.
Trundle, respectively, consist of options to purchase Class A Common
Stock, and 60,000 and 100,000 shares of Common Stock held by Mr. Spahr
and Mr. Bansal, respectively, consist of shares of Class A Common Stock.
Shares held by the executive officers and directors as a group include
options to purchase 64,800 shares of Class A Common Stock. Options held
by Messrs. Ingari and Terkowitz are to purchase shares of Class A Common
Stock; however, none of such options are vested or exercisable within 60
days of March 31, 1998.
(2) The persons named in this table have sole voting and investment power
with respect to all shares of Common Stock shown as beneficially owned by
them, subject to community property laws where applicable. Beneficial
ownership is determined in accordance with the rules of the United States
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock subject to options held by that person
that are currently exercisable or exercisable within 60 days after March
31, 1998 are deemed outstanding. Such shares, however, are not deemed
outstanding for the purpose of computing the percentage ownership of any
other person. Options that would be exercisable within 60 days after
March 31, 1998 but for the fact that the Company had not completed its
initial public offering as of such date are treated as exercisable within
60 days after March 31, 1998 and are included in this table.
(3) In connection with the Offering, it is anticipated that Mr. Saylor will
transfer his interest in the Company to Alcantara LLC, an entity that is
controlled by Mr. Saylor.
(4) Represents shares of Class B Common Stock that, upon the closing of the
Offering, will be held beneficially by Mr. Saylor as a result of his
ownership interest in Alcantara LLC.
(5) In connection with the Offering, it is anticipated that Mr. Bansal will
transfer his interest in the Company to Shangri-La LLC, an entity that is
controlled by Mr. Bansal.
(6) Represents shares of Class B Common Stock that, upon the closing of the
Offering, will be held beneficially by Mr. Bansal as a result of his
ownership interest in Shangri-La LLC.
(7) Includes 2,000 shares of Class A Common Stock issuable upon exercise of
options.
(8) Includes 10,400 shares of Class A Common Stock issuable upon exercise of
options.
(9) Includes 14,000 shares of Class A Common Stock issuable upon exercise of
options.
(10) Includes 40,400 shares of Class A Common Stock issuable upon exercise of
options.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description is a summary of the Amended and Restated
Certificate of Incorporation of the Company (the "Certificate") a copy of
which will be filed as an exhibit to the Registration Statement of which this
Prospectus forms a part, and which will be incorporated by reference herein.
As of the date of this Prospectus, the authorized capital stock of the
Company will consist of 100,000,000 shares of Class A Common Stock,
100,000,000 shares of Class B Common Stock and 5,000,000 shares of preferred
stock. As of the date of this Prospectus (but giving effect to the Offering),
there will be 4,000,000 shares of Class A Common Stock, 30,735,514 shares of
Class B Common Stock and no shares of preferred stock outstanding.
COMMON STOCK
VOTING RIGHTS. Holders of Class A Common Stock are entitled to one (1) vote
per share. Holders of Class B Common Stock are entitled to ten (10) votes per
share. Holders of Class A Common Stock and Class B Common Stock vote together
as a single class on all matters presented to the stockholders for their vote
or approval, except as may be required by Delaware law or as otherwise
expressly specified in the Certificate. The Company, by action of its Board of
Directors and the affirmative vote of the holders of a majority of the voting
power of the Class A Common Stock and Class B Common Stock, voting together as
a class, may increase or decrease the number of authorized shares of any class
of capital stock of the Company.
DIVIDENDS. Holders of Class A Common Stock and Class B Common Stock are
entitled to receive dividends at the same rate, when and if declared by the
Board of Directors, out of legally available funds. The Company may not make
any dividend or distribution with respect to any class of Common Stock unless
at the same time the Company makes a ratable dividend or distribution with
respect to each outstanding share of Common Stock regardless of class. In the
case of a stock dividend or other distribution payable in shares of a class of
Common Stock, only shares of Class A Common Stock may be distributed with
respect to Class A Common Stock and only shares of Class B Common Stock may be
distributed with respect to Class B Common Stock, and the number of shares of
Common Stock payable per share will be equal for each class.
SPLIT, SUBDIVISION OR COMBINATION. None of the Class A Common Stock or the
Class B Common Stock may be subdivided or combined in any manner unless the
other classes are subdivided or combined in the same proportion.
CONVERSION RIGHTS. Class A Common Stock has no conversion rights. Each share
of Class B Common Stock is convertible at any time, at the option of the
holder, into one share of Class A Common Stock. Each share of Class B Common
Stock shall convert automatically into one share of Class A Common Stock upon
its sale, assignment, gift or other transfer, other than a transfer approved
in advance of the effectiveness thereof by the holders of a majority of the
Class B Common Stock outstanding, voting separately as a class; provided,
however, that a transfer effected as a result of the death of the transferor
may be approved by the holders of a majority of the Class B Common Stock
outstanding, voting separately as a class, within thirty days following such
transfer. For purposes of determining whether a transfer has been approved by
the holders of a majority of the Class B Common Stock outstanding, the shares
for which approval of the transfer is being sought shall continue to be
considered outstanding shares of Class B Common Stock and the proposed
transferor (or in the case of shares transferred as a result of the death of
the proposed transferor, the Executor or similar personal representative of
such proposed transferor) shall be entitled to vote on such transfer.
Notwithstanding the foregoing, (i) these conversion rights shall not apply
in the case of a merger or similar transaction by the corporation in which all
the outstanding shares of Common Stock of the Company regardless of class are
purchased by the acquiror, and (ii) any holder of Class B Common Stock may
pledge his shares of Class B Common Stock to a financial institution (the
"Pledgee") pursuant to a bona fide pledge of such shares as collateral
security for indebtedness due to the Pledgee and that, if the Pledgee
forecloses or takes similar action, such pledged shares of Class B Common
Stock shall be converted automatically into shares of Class A Common Stock;
provided, however, that if within five business days after such foreclosure or
similar event such converted shares are returned to the pledgor, such shares
shall be converted automatically back into shares of Class B Common Stock.
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<PAGE>
MERGER. Upon the merger or consolidation of the Company, holders of each
class of Common Stock will be entitled to receive equal per share payments or
distributions, except that in any transaction in which shares of capital stock
are distributed, such shares may differ only to the extent that the Class A
Common Stock and the Class B Common Stock differ as provided in the Company's
Certificate.
LIQUIDATION. Upon any dissolution or liquidation of the Company, the holders
of the Class A Common Stock and Class B Common Stock will be entitled to
receive ratably all assets of the Company available for distribution to
stockholders, subject to any preferential rights of any then outstanding
Preferred Stock.
OTHER PROVISIONS. The holders of the Class A Common Stock and Class B Common
Stock are not entitled to preemptive rights. The rights of holders of Class A
Common Stock and Class B Common Stock are subject to the rights of holders of
shares of any series of Preferred Stock that the Company may designate and
issue in the future.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue shares of preferred stock from time to time in one or
more series. Each series of preferred stock will have the number of shares,
designations, powers, preferences and special or relative rights and
privileges as may be determined by the Board of Directors, which may include
dividend rights, voting rights, redemption and sinking fund provisions,
liquidation preferences, conversion rights and preemptive rights. The
authority of the Board of Directors to issue preferred stock without further
action by the stockholders provides flexibility in connection with possible
acquisitions and other corporate purposes, but may also result in the issuance
of preferred stock with voting, conversion or other rights that could
adversely affect the voting power and other rights of the holders of Common
Stock or which could make it more difficult for a third party to gain control
of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Class A Common Stock will be
American Stock Transfer & Trust Company.
LISTING
Application has been made to have the Class A Common Stock approved for
quotation on the Nasdaq National Market under the trading symbol "MSTR."
CERTAIN ANTI-TAKEOVER, LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS
DELAWARE ANTI-TAKEOVER LAW. The Company is a Delaware corporation that is
subject to Section 203 of the Delaware General Corporation Law ("DGCL"). Under
Section 203, certain "business combinations" between a Delaware corporation
whose stock generally is publicly traded or held of record by more than 2,000
stockholders and an "interested stockholder" are prohibited for a three-year
period following the date that such stockholder became an interested
stockholder, unless (i) the corporation has elected in its certificate of
incorporation not to be governed by Section 203 (the Company has not made such
an election), (ii) the business combination or the transaction which resulted
in the stockholder becoming an interested stockholder was approved by the
board of directors of the corporation before such stockholder became an
interested stockholder, (iii) upon consummation of the transaction that made
such stockholder an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the
commencement of the transaction (excluding voting stock owned by directors who
are also officers or held in employee benefit plans in which the employees do
not have a confidential right to tender stock held by the plan in a tender or
exchange offer) or (iv) the business combination is approved by the board of
directors of the corporation and authorized at a meeting by two-thirds of the
voting stock which the interested stockholder did not own. The three-year
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<PAGE>
prohibition also does not apply to certain business combinations proposed by
an interested stockholder following the announcement or notification of
certain extraordinary transactions involving the corporation and a person who
had not been an interested stockholder during the previous three years or who
became an interested stockholder with the approval of a majority of the
corporation's directors. The term "business combination" is defined generally
to include mergers or consolidations between a Delaware corporation and an
interested stockholder, transactions with an interested stockholder involving
the assets or stock of the corporation or its majority-owned subsidiaries, and
transactions which increase an interested stockholder's percentage ownership
of stock. The term "interested stockholder" is defined generally as those
stockholders who become beneficial owners of 15% or more of a Delaware
corporation's voting stock, together with the affiliates or associates of that
stockholder.
LIMITATION OF OFFICER AND DIRECTOR LIABILITY AND INDEMNIFICATION
ARRANGEMENTS. The Company's Certificate provides that an officer or director
of the Company will not be personally liable to the Company or its
stockholders for monetary damages for any breach of his fiduciary duty as an
officer or director, except in certain cases where liability is mandated by
the DGCL. The provision has no effect on any non-monetary remedies that may be
available to the Company or its stockholders, nor does it relieve the Company
or its officers or directors from compliance with federal or state securities
laws. The Certificate also generally provides that the Company shall
indemnify, to the fullest extent permitted by law, any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit, investigation, administrative hearing or any other
proceeding (each, a "Proceeding") by reason of the fact that he is or was a
director or officer of the Company, or is or was serving at the request of the
Company as a director, officer, employee or agent of another entity, against
expenses incurred by him in connection with such Proceeding. An officer or
director shall not be entitled to indemnification by the Company if (i) the
officer or director did not act in good faith and in a manner reasonably
believed to be in, or not opposed to, the best interests of the Company, or
(ii) with respect to any criminal action or proceeding, the officer or
director had reasonable cause to believe his conduct was unlawful.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market or the availability of substantial amounts of Common Stock for
sale could adversely affect prevailing market prices.
Upon the closing of the Offering, the Company will have 4,000,000 shares of
Class A Common Stock and 30,735,514 shares of Class B Common Stock
outstanding, assuming no exercise of the Underwriters' over-allotment option
and no exercise of outstanding options to purchase Class A Common Stock. Of
these shares, the 4,000,000 shares of Class A Common Stock sold in the
Offering are freely tradable without restriction or further registration under
the Securities Act of 1933, as amended (the "Securities Act"), except that any
shares held by an "affiliate" of the Company, as that term is defined in Rule
144 under the Securities Act ("Rule 144"), may generally only be sold in
compliance with the limitations of Rule 144 described below. The remaining
30,735,514 shares of Class B Common Stock are "restricted securities" within
the meaning of Rule 144 in that they have not been registered under the
Securities Act. These restricted securities will generally be available for
sale in the open market after the Offering, subject to the Lock-up Agreements
(defined below) and the applicable requirements of Rule 144.
In general, Rule 144 provides that after a period of one year has elapsed
between the later of the date on which restricted securities were acquired
from the Company and the date on which they were acquired from an affiliate of
the Company, the holder of such restricted securities (including an affiliate)
is entitled to sell a number of shares within any three-month period that does
not exceed the greater of (i) one percent of the then outstanding shares of
the Class A Common Stock or (ii) the average weekly reported volume of trading
of the Class A Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 also are subject to certain requirements pertaining
to the manner of such sales, notice of such sales and the availability of
current
65
<PAGE>
public information concerning the Company. Affiliates may sell shares not
constituting restricted securities in accordance with the foregoing volume
limitations and other requirements of Rule 144 but without regard to the one
year holding period. Under Rule 144(k), after a period of two years has
elapsed between the later of the date on which restricted securities were
acquired from the Company and the date on which they were acquired from an
affiliate, a holder of such restricted securities who is not an affiliate of
the Company at the time of the sale and has not been an affiliate for at least
three months prior to the sale would be entitled to sell the shares
immediately without regard to the volume limitations and other conditions of
Rule 144 described above.
The holders of all of the 30,735,514 shares of Class B Common Stock
outstanding prior to the Offering have agreed to enter into agreements with
the Underwriters (the "Lock-up Agreements") which will provide that, until the
expiration of 180 days after the date of this Prospectus, they will not offer,
sell, contract to sell or otherwise dispose of, any shares of Class A Common
Stock or any securities of the Company that are substantially similar to the
Class A Common Stock or which are convertible into or exchangeable for, or
represent the right to receive, Class A Common Stock (including Class B Common
Stock) without the prior written consent of the representatives of the
Underwriters. In addition, the Company has agreed not to sell or otherwise
dispose of any shares of Common Stock during the 180-day period following the
date of the Prospectus, except the Company may issue, and grant options to
purchase, shares of Class A Common Stock under the Company Stock Plans. In
addition, the Company may issue shares of Class A Common Stock in connection
with any acquisition of another company if the terms of such issuance provide
that such Class A Common Stock shall not be resold prior to the expiration of
the 180-day period referenced in the preceding sentence.
The Company intends to file a Registration Statement on Form S-8 as soon as
practicable after the date of this Prospectus to register the 8,000,000,
300,000 and 200,000 shares of Class A Common Stock that are issuable upon the
exercise of stock options either outstanding or available for grant pursuant
to the 1996 Stock Plan, the French Plan and the Director Option Plan,
respectively. Such registration statement is expected to become effective
immediately upon filing; however, consistent with the terms of the Company
Stock Plans, holders of options will be unable to sell any shares of Class A
Common Stock received upon the exercise of options granted thereunder until
the expiration of 180 days after the date of this Prospectus. Options granted
under the Director Option Plan do not begin to vest until October of 1998.
Following effectiveness, shares covered by the Registration Statement on Form
S-8 will be eligible for sale in the public markets, subject to Rule 144
limitations applicable to affiliates as well as to the limitations on sale and
vesting described above. See "Shares Eligible for Future Sale."
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<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Underwriting Agreement") between the Company, the Selling Stockholders and
each of the underwriters named below (the "Underwriters"), the Company and the
Selling Stockholders have agreed to sell to each of the Underwriters, and each
of the Underwriters has severally agreed to purchase from the Company and the
Selling Stockholders the aggregate number of shares of Class A Common Stock
set forth opposite its name below.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...............................................
Hambrecht & Quist LLC.......................................
Friedman, Billings, Ramsey & Co., Inc.......................
---------
Total..................................................... 4,000,000
=========
</TABLE>
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Hambrecht & Quist LLC
and Friedman, Billings, Ramsey & Co., Inc. are acting as representatives (the
"Representatives") of the Underwriters.
The Underwriters propose to offer the shares of Class A Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at
such prices less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share to certain brokers and dealers. After the shares of
Class A Common Stock are released for sale to the public, the offering price
and other selling terms may from time to time be varied by the
Representatives.
The representatives of the Underwriters have informed the Company and the
Selling Stockholders that they do not expect sales to accounts over which the
Underwriters exercise discretionary authority to exceed five percent of the
total number of shares of Class A Common Stock offered by them.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 600,000
shares of Class A Common Stock solely to cover over-allotments, if any at the
public offering price. If the Underwriters exercise their over-allotment
option, the Underwriters have severally agreed, subject to certain conditions,
to purchase approximately the same percentage thereof that the number of
shares to be purchased by each of them, as shown in the foregoing table, bears
to the 4,000,000 shares of Class A Common Stock offered hereby.
The holders of all of the shares of Class B Common Stock outstanding prior
to completion of the Offering have agreed to enter into Lock-up Agreements
which will provide that, until the expiration of 180 days after the date of
this Prospectus, they will not offer, sell, contract to sell or otherwise
dispose of, any shares of Class A Common Stock or any securities of the
Company that are substantially similar to the Class A Common Stock or which
are convertible into or exchangeable for, or represent the right to receive
Class A Common Stock (including Class B Common Stock) without the prior
written consent of the Representatives. The Company Stock Plans restrict
option holders under the plans from selling, transferring or otherwise
disposing of Class A Common Stock or any security convertible into or
exchangeable or exercisable for Class A Common Stock, without the prior
written consent of the Representatives, for a period of 180 days after the
date of this Prospectus. In addition, the Company has agreed not to sell or
otherwise dispose of any shares of Common Stock during the 180-day period
following the date of the Prospectus, except the Company may issue, and grant
options to purchase, shares of Common Stock under the Stock Plans. In
addition, the Company may issue shares of Class A Common Stock in connection
with any acquisition of another company if the terms of such issuance provide
that such Class A Common Stock shall not be resold prior to the expiration of
the 180-day period referenced in the preceding sentence.
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<PAGE>
At the Company's request, the Underwriters have reserved for sale at the
initial public offering price up to 460,000 shares of Class A Common Stock
offered hereby for certain individuals who have expressed an interest in
purchasing such shares of Class A Common Stock in the Offering. The number of
shares available for sale to the general public will be reduced to the extent
such persons purchase such reserved shares. Any reserved shares not so
purchased will be offered by the Underwriters to the general public on the
same basis as other shares offered hereby.
Prior to the Offering, there has been no public market for the shares of
Class A Common Stock. The initial public offering price will be negotiated
among the Company and the representatives of the Underwriters. Among the
factors to be considered in determining the initial public offering price of
the Class A Common Stock, in addition to prevailing market conditions, will be
the Company's historical performance, estimates of the business potential and
earnings prospects of the Company, an assessment of the Company's management
and the consideration of the above factors in relation to market valuation of
companies in related businesses.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
In connection with the Offering, the Underwriters may purchase and sell the
Class A Common Stock in the open market. These transactions may include over-
allotment and stabilizing transactions and purchases to cover short positions
created by the Underwriters in connection with the Offering. Stabilizing
transactions consist of certain bids or purchases for the purpose of
preventing or retarding a decline in the market price of the Class A Common
Stock; and syndicate short positions involve the sale by the Underwriters of a
greater number of shares of Class A Common Stock than they are required to
purchase from the Company in the Offering. The Underwriters also may impose a
penalty bid, whereby selling concessions allowed to broker-dealers in respect
of the securities sold in the Offering may be reclaimed by the Underwriters if
such shares of Class A Common Stock are repurchased by the Underwriters in
stabilizing or covering transactions. These activities may stabilize, maintain
or otherwise affect the market price of the Class A Common Stock, which may be
higher than the price that may otherwise prevail in the open market; and these
activities, if commenced, may be discontinued at any time. These transactions
may be effected on the Nasdaq National Market, in the over-the-counter market
or otherwise.
LEGAL MATTERS
The validity of the Class A Common Stock offered hereby and certain other
legal matters will be passed upon for the Company by Latham & Watkins,
Washington, D.C. A partner of Latham & Watkins holds nonstatutory options to
purchase approximately 25,000 shares of Class A Common Stock. Certain legal
matters in connection with the Offering will be reviewed for the Underwriters
by Ropes & Gray, Boston, Massachusetts.
EXPERTS
The consolidated balance sheets of MicroStrategy Incorporated, as of
December 31, 1996 and 1997, and the consolidated statements of operations,
stockholders' (deficit) equity, and cash flows for each of the three years in
the period ended December 31, 1997 included in this Prospectus, have been
audited by Coopers & Lybrand L.L.P., independent accountants, as set forth in
their report thereon appearing elsewhere herein and are included in reliance
upon such report given upon the authority of such firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C., 20549, a Registration Statement on Form S-1
under the Securities Act of 1933, as amended, with respect to the Class A
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. Certain items are omitted in accordance
68
<PAGE>
with the rules and regulations of the Commission. For further information with
respect to the Company and the Class A Common Stock offered hereby, reference
is made to the Registration Statement and the exhibits and schedules files as
a part thereof. Statements contained in this Prospectus as to the contents of
any contract or any other document referred to are not necessarily complete,
and, in each instance, if such contract or document is filed as an exhibit,
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference to such exhibit. The Registration Statement,
including exhibits and schedules thereto, may be inspected without charge at
the public reference facilities maintained by the Commission in Room 1024, 450
Fifth Street, N.W., Washington, D.C., 20549, and the Commission's regional
offices located at 500 West Madison Street, Suite 1400, Chicago, Illinois,
60661 and Seven World Trade Center, 13th Floor, New York, New York, 10048.
Copies of all or any part thereof may be obtained from the Commission after
payment of fees prescribed by the Commission. The Commission also maintains a
Web site that contains reports, proxy and information statements and other
information regarding registrants, including the Company, that file
electronically with the Commission. The address of this site is
http://www.sec.gov.
69
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and as of
March 31, 1998 (unaudited) and Pro Forma as of March 31, 1998
(unaudited).............................................................. F-3
Consolidated Statements of Operations and Comprehensive Income for the
Years Ended December 31, 1995, 1996 and 1997 and for the three months
ended March 31, 1997 and 1998 (unaudited)................................ F-4
Consolidated Statements of Stockholders' (Deficit) Equity for the Years
Ended December 31, 1995, 1996 and 1997 and for the three months ended
March 31, 1998 (unaudited)............................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997 and for the three months ended March 31, 1998 and
1997 (unaudited)......................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
MicroStrategy Incorporated
We have audited the accompanying consolidated balance sheets of
MicroStrategy Incorporated and its subsidiaries as of December 31, 1996 and
1997, and the related consolidated statements of operations and comprehensive
income, stockholders' (deficit) equity, and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards 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 financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of MicroStrategy Incorporated and its subsidiaries as of December 31, 1996 and
1997, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P
McLean, Virginia
January 30, 1998, except for Notes 4 and 8,
as to which the date is May 8, 1998
F-2
<PAGE>
MICROSTRATEGY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------ MARCH 31, MARCH 31,
1996 1997 1998 1998
-------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..... $ 1,686 $ 3,506 $ 2,304 $ 2,304
Accounts receivable, net...... 8,475 16,085 15,939 15,939
Prepaid expenses and other
current assets............... 395 1,435 1,461 1,461
-------- -------- -------- --------
Total current assets........ 10,556 21,026 19,704 19,704
-------- -------- -------- --------
Property and equipment, net..... 2,197 6,891 7,739 7,739
Deposits and other assets....... 251 2,148 3,149 3,149
-------- -------- -------- --------
Total assets................ $ 13,004 $ 30,065 $ 30,592 $ 30,592
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS'
(DEFICIT) EQUITY
Current liabilities:
Line-of-credit................ $ 2,758 $ 4,508 $ 5,376 $ 5,376
Notes payable, current
portion...................... 356 900 1,115 1,115
Notes payable to
stockholders................. -- -- -- 10,000
Accounts payable and accrued
expenses..................... 2,811 9,406 7,273 7,273
Accrued compensation and
employee benefits............ 1,748 3,633 2,449 2,449
Deferred revenue.............. 5,120 8,340 9,315 9,315
-------- -------- -------- --------
Total current liabilities... 12,793 26,787 25,528 35,528
Notes payable, long-term
portion........................ 460 2,658 2,636 2,636
Deferred revenue................ 544 1,047 1,241 1,241
-------- -------- -------- --------
Total liabilities........... 13,797 30,492 29,405 39,405
-------- -------- -------- --------
Commitments and contingencies
Stockholders' (deficit) equity:
Preferred stock, par value
$0.001 per share, 5,000,000
shares authorized, no shares
issued or outstanding........ -- -- -- --
Common stock, par value $0.001
per share, 50,000,000 shares
authorized; 31,442,673 in
1996, 29,493,873 in 1997,
30,895,514 in 1998 and pro
forma 1998 .................. 31 29 31 31
Class A Common Stock, par
value $0.001 per share,
100,000,000 shares
authorized, no shares issued
or outstanding............... -- -- -- --
Class B Common Stock, par
value $0.001 per share,
100,000,000 shares
authorized, no shares issued
or outstanding............... -- -- -- --
Additional paid-in capital.... 213 20 1,086 1,086
Accumulated other
comprehensive income......... -- 158 162 162
Accumulated deficit........... (755) (634) (92) (10,092)
Notes receivable from
stockholders................. (87) -- -- --
Less cost of treasury stock,
1,948,800 shares in 1996 and
no shares in 1997 and 1998... (195) -- -- --
-------- -------- -------- --------
Total stockholders'
(deficit) equity........... (793) (427) 1,187 (8,813)
-------- -------- -------- --------
Total liabilities and
stockholders' (deficit)
equity.................... $ 13,004 $ 30,065 $ 30,592 $ 30,592
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-3
<PAGE>
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES:
Product licenses...... $ 4,077 $ 15,873 $ 36,601 $ 4,731 $ 14,282
Product support....... 5,700 6,730 16,956 3,406 5,613
---------- ---------- ---------- ---------- ----------
Total revenues...... 9,777 22,603 53,557 8,137 19,895
---------- ---------- ---------- ---------- ----------
Cost of revenues:
Product licenses...... 257 1,020 1,641 357 538
Product support....... 2,201 4,237 9,475 1,799 3,163
---------- ---------- ---------- ---------- ----------
Total cost of
revenues........... 2,458 5,257 11,116 2,156 3,701
---------- ---------- ---------- ---------- ----------
Gross margin............ 7,319 17,346 42,441 5,981 16,194
Operating expenses:
Sales and marketing... 2,992 13,054 30,468 5,292 10,828
Research and
development.......... 1,855 2,840 5,049 735 2,092
General and
administrative....... 2,395 3,742 6,552 895 2,563
---------- ---------- ---------- ---------- ----------
Total operating
expenses........... 7,242 19,636 42,069 6,922 15,483
---------- ---------- ---------- ---------- ----------
Income (loss) from
operations............. 77 (2,290) 372 (941) 711
Interest income......... 16 22 94 -- 47
Interest expense........ (56) (127) (333) (61) (237)
Other income (expense),
net.................... 11 20 (12) (1) 21
---------- ---------- ---------- ---------- ----------
Net income (loss)....... $ 48 $ (2,375) $ 121 $ (1,003) $ 542
========== ========== ========== ========== ==========
Other comprehensive
income:
Foreign currency
translation
adjustment........... -- -- 158 78 4
---------- ---------- ---------- ---------- ----------
Other comprehensive
income................. -- -- 158 78 4
---------- ---------- ---------- ---------- ----------
Comprehensive income
(loss)................. $ 48 $ (2,375) $ 279 $ (925) $ 546
========== ========== ========== ========== ==========
Basic net income (loss)
per share.............. $ 0.00 $ (0.08) $ 0.00 $ 0.00 $ 0.02
========== ========== ========== ========== ==========
Weighted average shares
outstanding used in
computing basic net
income (loss) per
share.................. 28,896,622 29,493,873 29,493,873 29,493,873 30,895,514
========== ========== ========== ========== ==========
Diluted net income
(loss) per share....... $ 0.00 $ (0.08) $ 0.00 $ 0.00 $ 0.02
========== ========== ========== ========== ==========
Weighted average shares
outstanding used in
computing diluted net
income (loss) per
share.................. 28,896,622 29,493,873 32,256,323 29,493,873 35,040,308
========== ========== ========== ========== ==========
PRO FORMA INFORMATION
(UNAUDITED):
Net income, as
reported............... $ 121 $ 542
Pro forma income taxes.. (489) (206)
========== ==========
Pro forma net income
(loss)................. $ (368) $ 336
========== ==========
Pro forma basic net
income (loss) per
share.................. $ (0.01) $ 0.01
========== ==========
Pro forma diluted net
income (loss) per
share.................. $ (0.01) $ 0.01
========== ==========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-4
<PAGE>
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED RETAINED NOTES
COMMON STOCK ADDITIONAL OTHER EARNINGS RECEIVABLE TREASURY STOCK
------------------ PAID-IN COMPREHENSIVE (ACCUMULATED FROM ------------------
SHARES AMOUNT CAPITAL INCOME DEFICIT) STOCKHOLDERS SHARES AMOUNT TOTAL
---------- ------ ---------- ------------- ------------ ------------ ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................. 31,328,000 $ 31 $ 40 $-- $ 1,738 $ -- 3,648,000 $(363) $ 1,446
Issuance of common
stock in exchange
for notes receivable
from stockholders... 1,666,404 2 157 -- -- (159) -- -- --
Proceeds from
payments on notes
receivable.......... -- -- -- -- -- 52 -- -- 52
Retirement of
treasury stock...... (688,000) (1) -- -- (66) -- (688,000) 67 --
Net income........... -- -- -- -- 48 -- -- -- 48
---------- ---- ------ ---- ------- ----- ---------- ----- -------
Balance, December 31,
1995................. 32,306,404 32 197 -- 1,720 (107) 2,960,000 (296) 1,546
Issuance of common
stock in exchange
for notes receivable
from stockholders... 147,469 -- 16 -- -- (16) -- -- --
Proceeds from
payments on notes
receivable.......... -- -- -- -- -- 36 -- -- 36
Retirement of
treasury stock...... (1,011,200) (1) -- -- (100) -- (1,011,200) 101 --
Net loss............. -- -- -- -- (2,375) -- -- -- (2,375)
---------- ---- ------ ---- ------- ----- ---------- ----- -------
Balance, December 31,
1996................. 31,442,673 31 213 -- (755) (87) 1,948,800 (195) (793)
Proceeds from
payments on notes
receivable.......... -- -- -- -- -- 87 -- -- 87
Retirement of
treasury stock...... (1,948,800) (2) (193) -- -- -- (1,948,800) 195 --
Translation
adjustment.......... -- -- -- 158 -- -- -- -- 158
Net income........... -- -- -- -- 121 -- -- -- 121
---------- ---- ------ ---- ------- ----- ---------- ----- -------
Balance, December 31,
1997................. 29,493,873 29 20 158 (634) -- -- -- (427)
Issuance of common
stock in exchange
for minority
interest of
Company's foreign
subsidiaries........ 1,401,641 2 1,066 -- -- -- -- -- 1,068
Translation
adjustment.......... -- -- -- 4 -- -- -- -- 4
Net income........... -- -- -- -- 542 -- -- -- 542
---------- ---- ------ ---- ------- ----- ---------- ----- -------
Balance, March 31,
1998 (unaudited)..... 30,895,514 $ 31 $1,086 $162 $ (92) $ -- -- $ -- $ 1,187
========== ==== ====== ==== ======= ===== ========== ===== =======
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-5
<PAGE>
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------- --------------------
1995 1996 1997 1997 1998
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)..... $ 48 $ (2,375) $ 121 $(1,003) $ 542
Adjustments to reconcile
net loss to net cash
from operating
activities:
Depreciation and
amortization......... 283 306 1,243 148 650
Provision for doubtful
accounts, net of
write-offs and
recoveries........... 36 381 312 66 --
Loss on sale of
property and
equipment............ -- 17 -- -- --
Compensation expense
recognized in
exchange for notes
payable.............. 397 -- -- -- --
Changes in operating
assets and liabilities,
net of effect of
foreign exchange rate
changes:
Accounts receivable... (2,771) (4,859) (8,235) 219 113
Prepaid expenses and
other current
assets............... (4) (230) (1,051) (2) (37)
Accounts payable and
accrued expenses,
compensation and
benefits............. 117 3,780 8,951 1,085 (3,162)
Deferred revenue...... 1,627 3,985 3,512 (214) 1,168
Deposits and other
assets............... -- (58) 102 (63) (155)
-------- -------- -------- --------- --------
Net cash provided by
(used in) operating
activities......... (267) 947 4,955 236 (881)
-------- -------- -------- --------- --------
Investing activities:
Acquisition of
property and
equipment............ (469) (1,680) (5,954) (594) (1,365)
Increase in
capitalized
software............. -- -- (1,928) (400) --
-------- -------- -------- --------- --------
Net cash used in
investing
activities:........ (469) (1,680) (7,882) (994) (1,365)
-------- -------- -------- --------- --------
Financing activities:
Borrowings on short-
term line of credit,
net.................. 750 2,008 1,750 -- 868
Proceeds from payments
on stockholders'
notes receivable..... 52 36 87 40 --
Proceeds from issuance
of note payable...... 438 306 3,264 -- 432
Principal payments on
notes payable........ (110) (574) (521) (225) (240)
-------- -------- -------- --------- --------
Net cash provided by
financing
activities......... 1,130 1,776 4,580 (185) 1,060
-------- -------- -------- --------- --------
Effect of foreign
exchange rate
changes on cash.... -- -- 167 (48) (16)
-------- -------- -------- --------- --------
Net increase (decrease)
in cash and cash
equivalents............ 394 1,043 1,820 (991) (1,202)
Cash and cash
equivalents, beginning
of year................ 249 643 1,686 1,686 3,506
-------- -------- -------- --------- --------
Cash and cash
equivalents, end of
year................... $ 643 $ 1,686 $ 3,506 $ 695 $ 2,304
======== ======== ======== ========= ========
Supplemental disclosure
of noncash investing
and financing
activities:
Issuance of notes
receivable in
exchange for common
stock................ $ 159 $ 16 $ -- $ -- $ --
======== ======== ======== ========= ========
Retirement of treasury
stock................ $ 67 $ 101 $ 195 $ 195 $ --
======== ======== ======== ========= ========
Issuance of common
stock in exchange for
minority interest of
Company's foreign
subsidiaries......... $ -- $ -- $ -- $ -- $ 1,068
======== ======== ======== ========= ========
Supplemental disclosure
of cash flow
information:
Cash paid during the
year for interest.... $ 58 $ 112 $ 290 $ 46 $ 205
======== ======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-6
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization
MicroStrategy Incorporated (the "Company") designs, develops, markets and
supports high performance, mission critical client/server relational database
management systems and provides related software and services for data
warehouse applications. The Company provides its products and services to
customers both domestically and worldwide.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries located in France, Germany, United Kingdom,
the Netherlands and Spain. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Prior to January 1, 1998, the Company owned 79% of its foreign subsidiaries
with the remaining 21% being owned by the Company's majority stockholders.
Effective January 1, 1998, the Company acquired the remaining 21% minority
interest of its foreign subsidiaries from its majority stockholders through
the issuance of 1,401,641 shares of Class B Common Stock. Due to the
management control the Company had over its foreign subsidiaries prior to the
transaction and due to the fact that the Company owned 100% of its foreign
subsidiaries after the transaction, the Company has consolidated the financial
statements of these foreign subsidiaries as wholly owned subsidiaries for
financial reporting.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents include various short-term money market instruments.
Software Development Costs
In accordance with 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 costs are amortized
over the estimated product life using the greater of the straight-line method
or the ratio of current product revenues to total projected future revenues.
Software development costs net of accumulated amortization are $1,831 and
$1,681 at December 31, 1997 and March 31, 1998, respectively, and are included
in deposits and other assets on the balance sheet. Amortization expense
related to software development costs was $97 and $150 for the year ended
December 31, 1997 and the three months ended March 31, 1998, respectively.
Prior to the year ended December 31, 1997, the establishment of technological
feasibility of the Company's products and general release of such software had
substantially coincided. As a result, software development costs qualifying
for capitalization were insignificant and, therefore, the Company had not
capitalized any software development costs prior to 1997.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three to ten years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful lives of the
assets or the terms of the leases.
F-7
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Depreciation and amortization expense related to property and equipment was
$283, $306 and $1,141, respectively, for the years ended December 31, 1995,
1996 and 1997.
Revenue Recognition
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants' (AICPA) Statement of Position (SOP) 91-1
Software Revenue Recognition. Revenue from product licensing arrangements is
generally recognized after execution of a licensing agreement and shipment of
the product, provided that no significant vendor obligations remain and the
resulting receivable is deemed collectible by management. In addition, the
Company recognizes revenue from sales to value-added resellers (VARs) and
original equipment manufacturers (OEMs) at the time of product shipment,
subject to evaluation of possible product returns or exchanges. Historically,
the Company has not experienced any returns of exchanges of its products from
direct sale customers, VARs or OEMs. Services revenue, which includes training
and consulting, is recognized at the time the service is performed. The
Company defers and recognizes maintenance revenue ratably over the terms of
the contract period, ranging from 12 to 36 months.
In October 1997, the AICPA issued SOP 97-2 which will supersede SOP 91-1
effective January 1, 1998, which was amended March 31, 1998 by SOP 98-4.
Management has assessed this new statement as amended and believes that its
adoption will not have a material effect on the timing of the Company's
revenue recognition or cause changes to its revenue recognition polices.
Income Taxes
The Company has elected to be treated for federal and state income tax
purpose as a Subchapter S corporation. Under Subchapter S, the taxable income
or loss is reported by the stockholders and, accordingly, no federal or state
income taxes have been provided in the financial statements.
In connection with the initial public offering of the Company's common stock
(the Offering), the Company will no longer be treated as a Subchapter S
corporation for tax purposes. The Company will be subject to federal and state
income taxes and will recognize deferred taxes in accordance with Statement of
Financial Accounting Standard 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 consolidated statement of operations includes pro forma information to
reflect income taxes as if the Company had been a Subchapter C corporation for
the year ended December 31, 1997 and the three months ended March 31, 1998.
Basic and Diluted Net Income (Loss) Per Share
Net income (loss) per share is computed on a basic and diluted basis using
the weighted average number of shares of Common Stock, assuming conversion of
dilutive common stock equivalent shares from common stock options.
Pro Forma Basic and Diluted Net Loss per Share (Unaudited)
Unaudited pro forma basic net income per share for the year ended December
31, 1997 and the three months ended March 31, 1998 is based on the weighted
average number of common shares outstanding during the
F-8
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
period. The unaudited pro forma weighted average number of common shares
includes shares of common stock to be issued to two of the existing
shareholders in exchange for their minority interests in certain of the
Company's foreign subsidiaries and the number of shares issued upon the
Company's initial public offering. In addition, the unaudited pro forma
weighted average number of common shares outstanding includes the number of
shares whose proceeds would be necessary to pay the dividend as required by
Staff Accounting Bulletin topic 1.B.3. The Company expects to pay the dividend
out of cash flows from future operations. The unaudited pro forma weighted
average number of common shares assuming dilution includes shares issuable
upon the exercise of stock options computed in accordance with the treasury
stock method, and shares issuable upon the exercise of the underwriters' over-
allotment option.
Foreign Currency Translation
The assets and liabilities of non-U.S. operations are translated into U.S.
dollars at exchange rates in effect as of each balance sheet date. To date,
the Company has not sought to hedge the risks associated with fluctuations in
exchange rates but may undertake such transactions in the future. Revenue and
expense accounts of these operations are translated at average exchange rates
prevailing during the period the transactions occur. Accordingly, translation
gains and losses are included as component of stockholders' equity. Foreign
currency transaction gains and losses are included in determining net income.
To date, such gains and losses have not been significant.
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 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 years ended December 31, 1996 and 1997, no one customer accounted
for 10% or more of total revenues. For the year ended December 31, 1995, one
customer accounted for 14% of total revenues.
For the year ended December 31, 1995, one customer accounted for 13% of
accounts receivable. For the years ended December 31, 1996 and 1997, no one
customer accounted for 10% or more of total accounts receivable.
Fair Value of Financial Instruments
The Company's financial instruments, which consist of cash, cash
equivalents, accounts receivable, payables, line of credit and notes payable,
approximate fair value. The carrying amounts of the line of credit and notes
payable approximate fair value as these financial instruments contain variable
interest rates which reprice frequently.
Purchase of Minority Interest in Foreign Subsidiaries
Effective January 1, 1998, the Company issued a total of 1,401,641 shares of
Class B Common Stock to certain existing stockholders in exchange for their
approximate 21% minority interest in certain of the Company's foreign
subsidiaries. The Company accounted for the transaction under the purchase
method of accounting. After the exchange, each subsidiary was wholly-owned by
the Company. The Company obtained an independent, third-party valuation of the
interests held by the stockholders. The Company recorded goodwill of $1,068
which is included in deposits and other assets in the balance sheet
representing the excess of the fair
F-9
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
market value over the cost of the non-controlling interest of one of the
shareholders. The Company is amortizing the goodwill over a period of 15
years.
Interim results (unaudited)
The accompanying consolidated balance sheet as of March 31, 1998, the
consolidated statements of operations and of cash flows for the three months
ended March 31, 1997 and 1998, and the consolidated statement of stockholders'
equity for the three months ended March 31, 1998 are unaudited. In the opinion
of management, the statements have been prepared on the same basis as the
audited consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
statement of the results of interim periods. The data disclosed in these notes
to consolidated financial statements for these periods are also unaudited.
NOTE 2--ACCOUNTS RECEIVABLE
Accounts receivable, net of allowances, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
------ -------
<S> <C> <C>
Billed...................................................... $7,947 $16,621
Unbilled.................................................... 986 234
Less allowance for doubtful accounts........................ (458) (770)
------ -------
$8,475 $16,085
====== =======
</TABLE>
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- -------
<S> <C> <C>
Computer equipment and software............................ $ 2,209 $ 6,703
Furniture and equipment.................................... 494 1,512
Leasehold improvements..................................... 47 292
Less: accumulated depreciation and amortization............ (553) (1,616)
------- -------
$ 2,197 $ 6,891
======= =======
</TABLE>
NOTE 4--BANK BORROWINGS
On December 10, 1996, the Company entered into a business loan with a bank
(the "Business Loan"). This Business Loan was used to repay the Company's
previous line of credit with another financial institution. Pursuant to the
Business Loan, at December 31, 1997 the Company had available a $6.4 million
revolving line of credit, a $2.0 million revolving equipment line and, since
November 1997, a $2.0 million non-revolving equipment loan. On March 31, 1998,
the Company increased the revolving credit line by $3.0 million to $9.4
million, increased the non-revolving equipment loan by $2.0 million to $4.0
million and amended certain of its debt covenants. Borrowings under the
Business Loan may not exceed 80% of eligible accounts receivable for the
revolving credit line and 80% of the cost of the asset for the equipment
credit lines. The borrowings bear interest at the lender's prime rate or LIBOR
plus 2.75% for the revolving line of credit and prime plus one-half
F-10
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
percent or a rate equal to the yield of U.S. Treasury Bonds plus 2.65% for
loans with a 3-year maturity or 2.85% for loans with a 4-year maturity for the
equipment lines of credit (revolving and non-revolving). In addition,
borrowings under the Business Loan are collateralized by substantially all of
the Company's assets and are partially guaranteed by a stockholder and officer
of the Company for up to $2.0 million for all amounts borrowed under the
Business Loan in excess of $2.0 million. As of March 31, 1998, $5.4 million
and $3.5 million were outstanding under the revolving line of credit and
revolving equipment lines of credit, respectively.
Subsequent to March 31, 1998, the Company had additional borrowings of $2.7
million under the revolving line of credit and additional repayments of $0.1
million under the revolving equipment line.
The Business Loan requires the Company to maintain certain financial ratios
and to comply with certain other covenants. From time to time, the Company has
not been in compliance with certain of these covenants. However, the Company
has obtained a waiver from the financial institution for events of non-
compliance with these covenants through December 31, 1997. On March 31, 1998,
the Company amended certain of these debt covenants and is in compliance with
these revised covenants.
NOTE 5--NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
----- ------
<S> <C> <C>
Notes payable to financial institution with interest rates
varying from 8.8% to 9.4%, at December 31, 1997, maturities
through December 31, 2001, repayable in monthly
installments and collateralized by the related equipment... $ 306 $3,328
Note payable to consultant bearing interest at 8.5%,
repayable in monthly installments of $9 through December
2000....................................................... 315 230
Notes payable to stockholders............................... 195 --
----- ------
Total notes payable......................................... 816 3,558
Less: current portion....................................... (356) (900)
----- ------
Notes payable, long term portion............................ $ 460 $2,658
===== ======
</TABLE>
Annual maturities of long-term debt at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998.................................................................. $ 900
1999.................................................................. 976
2000.................................................................. 991
2001.................................................................. 691
------
$3,558
======
</TABLE>
F-11
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 6--PRO FORMA INCOME TAXES (UNAUDITED)
As of December 31, 1997 the Company was an S corporation, and accordingly,
the Company was not liable for corporate income taxes. Had the Company been a
tax-paying entity, the tax provision would have consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Current:
Federal....................................................... $ (148)
State......................................................... 71
Foreign....................................................... 124
-------
47
Deferred:
Federal....................................................... 794
State......................................................... 170
Foreign....................................................... (1,443)
-------
(479)
Increase in valuation allowance................................. 921
-------
$ 489
=======
</TABLE>
F-12
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Pre tax income for the year ended December 31, 1997 for the domestic
operations was $1,031. The pro forma provision for income taxes differs from
the amount computed by applying the federal statutory income tax rate to the
Company's pro forma income before taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Income tax benefit at federal statutory rate.................... $ 41
State income tax, net of federal tax effect..................... 5
Foreign income taxes............................................ 2
Research and development tax credit............................. (480)
Change in valuation allowance................................... 921
-----
Provision for income taxes...................................... $ 489
=====
</TABLE>
Significant components of the Company's pro forma deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Deferred tax assets:
Accounts receivable allowances................................ $ 287
Accrued compensation.......................................... 384
Deferred revenue.............................................. 595
Foreign net operating losses.................................. 1,801
-------
3,067
Valuation allowance........................................... (1,801)
-------
Net deferred tax assets......................................... 1,266
-------
Deferred tax liabilities:
Prepaid assets................................................ 447
Depreciation.................................................. 558
Capitalized software.......................................... 703
-------
Total deferred tax liabilities.............................. 1,708
-------
Total net deferred tax liability................................ $ (442)
=======
</TABLE>
Upon termination of its S corporation status, the Company will account for
income taxes in accordance with Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes". Had the Company been taxed as a C
corporation, the Company would have recorded net deferred tax liability of
$442 as of December 31, 1997. As of December 31, 1997, the Company would have
recorded a valuation allowance of $1,801, primarily against the net operating
loss carryforwards in foreign jurisdictions. As of December 31, 1997,
management has concluded that no valuation allowance is required on the
domestic deferred tax assets based on its assessment that current and expected
future levels of taxable income are sufficient to realize domestic deferred
tax assets.
NOTE 7--COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space under operating lease agreements expiring at
various dates through 2000. In addition to base rent, the Company is
responsible for certain taxes, utilities, and maintenance costs. Future
F-13
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
minimum lease payments under noncancelable operating leases with a remaining
term in excess of one year at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998................................................................... $ 781
1999................................................................... 795
2000................................................................... 667
2001................................................................... 321
2002................................................................... 184
</TABLE>
Total rental expense for 1995, 1996 and 1997 was approximately $298, $699
and $1,635, respectively.
Contingencies
The Company is involved in proceedings through the normal course of
business, however, the ultimate resolution of these proceedings cannot be
predicted with certainty. Management believes that any unfavorable outcome
related to these proceedings will not have a material effect on the Company's
financial position or results of operations.
NOTE 8--STOCKHOLDERS EQUITY
Net Income (Loss) Per Share
Reconciliations of the basic net income (loss) per share and diluted net
income (loss) per share computations for the years ended December 31, 1995,
1996, 1997 and the three months ended March 31, 1998 are as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31, 1998
--------------------------------- PRO FORMA ----------------------- ---
1995 1996 1997 1997 ACTUAL PRO FORMA
---------- ---------- ---------- ----------- ----------- ----------- ---
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BASIC NET INCOME (LOSS)
PER SHARE:
Weighted-average common
shares outstanding..... 28,896,622 29,493,873 29,493,873 35,846,625 30,895,514 35,846,625
========== ========== ========== ========== ========== ==========
Net income (loss)....... $ 48 $ (2,375) $ 121 $ (368) $ 542 $ 336
========== ========== ========== ========== ========== ==========
Basic net income (loss)
per share.............. $ 0.00 $ (0.08) $ 0.00 $ (0.01) $ 0.02 $ 0.01
========== ========== ========== ========== ========== ==========
DILUTED NET INCOME
(LOSS) PER SHARE:
Weighted-average common
shares outstanding..... 28,896,622 29,493,873 29,493,873 35,846,625 30,895,514 35,846,625
---------- ---------- ---------- ---------- ---------- ----------
Common shares issuable
on exercise of stock
options, net of shares
assumed to be repur-
chased at the average
market price........... -- -- 2,762,450 2,762,450 4,144,794 4,144,794
Common shares issuable
upon underwriters op-
tion................... -- -- -- 600,000 -- 600,000
========== ========== ========== ========== ========== ==========
Weighted-average common
shares outstanding, as-
suming dilution........ 28,896,622 29,493,873 32,256,323 39,209,075 35,040,308 40,591,419
========== ========== ========== ========== ========== ==========
Net income (loss)....... $ 48 $ (2,375) $ 121 $ (368) $ 542 $ 336
========== ========== ========== ========== ========== ==========
Diluted net income
(loss) per share....... $ 0.00 $ (0.08) $ 0.00 $ (0.01) $ 0.02 $ 0.01
========== ========== ========== ========== ========== ==========
</TABLE>
Common stock equivalents are included in the computation of diluted net
income (loss) per share using the treasury stock method. During 1996, stock
options granted by the Company to purchase 1,172,963 common shares were not
included in the computation because the effect was anti-dilutive.
F-14
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Prior to consummation of the Offering, all shares of common stock
outstanding prior to the Offering will be changed and converted into shares of
Class A Common Stock and exchanged for an identical number of shares of Class
B Common Stock.
Pro forma weighted average shares outstanding during 1997 and the three
months ended March 31, 1998 includes 1,401,641 shares of common stock issued
to two of the existing stockholders effective January 1, 1998 in exchange for
their minority interests in certain of the Company's foreign subsidiaries and
also includes 3,840,000 shares of common stock issued upon the Company's
initial public offering. Pro forma weighted average shares outstanding also
includes the assumed issuance of an additional 1,111,111 shares of common
stock which would be necessary for the Company to pay a $10 million dividend
to the existing shareholders.
Employee and Directors Stock Option Plans
In February, 1996, the Company adopted a Stock Plan (the "1996 Stock Plan")
in order to provide an incentive to eligible employees, consultants and
officers of the Company. Under the 1996 Stock Plan, as amended, 8,000,000
shares of common stock are reserved, options to purchase 4,720,863 shares of
which have been granted.
In March, 1997, the Company adopted the "French Plan", which provides for
the granting of options to employees of MicroStrategy France SARL, the
Company's French subsidiary. A total of 300,000 shares of common stock has
been reserved under the French Plan, options to purchase 101,000 shares of
which have been granted as of December 31, 1997.
In September, 1997, the Company adopted the "1997 Director Option Plan",
which provides for the grants of nonqualified stock options to non-employee
directors of the Company. A total of 200,000 shares of common stock has been
reserved under the Director Option Plan, options to purchase 90,000 shares of
which have been granted as of December 31, 1997.
Shares of Class A Common Stock will be issued upon exercise of any of the
stock options granted under the 1996 Stock Plan, the French Plan and the 1997
Director Option Plan.
The stock option exercise price of options under the Company's stock option
plans may not be less than the determined fair market value at the date of
grant. Stock options to date generally vest ratably over five years from the
date of grant and expire ten years after grant. Vested stock options are
exercisable at the earliest of (1) the closing of an underwritten public
offering, (2) change in control of the Company or (3) 78 months following the
date of grant of an option.
F-15
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
A summary of the status of the Company's stock option plans as required by
SFAS 123 is presented below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING WEIGHTED
OPTION PRICE CONTRACTUAL AVERAGE
SHARES RANGE PER SHARE LIFE (YEARS) EXERCISE PRICE
--------- --------------- ------------ --------------
<S> <C> <C> <C> <C>
Outstanding at December
31, 1995............... -- $ -- -- $ --
Granted............... 2,482,416 0.50--1.25 8.5 0.84
Exercised............. -- -- -- --
Surrendered........... (23,000) 0.50--1.13 8.3 0.55
--------- ----------- --- -----
Outstanding at December
31, 1996............... 2,459,416 0.50--1.25 8.5 0.84
Granted............... 2,660,363 1.50--4.00 9.7 2.44
Exercised............. -- -- -- --
Surrendered........... (207,916) 0.50--2.50 8.8 1.10
--------- ----------- --- -----
Outstanding at December
31, 1997............... 4,911,863 0.50--4.00 9.1 1.70
Granted............... 573,155 4.00--6.00 9.8 4.29
Exercised............. -- -- -- --
Surrendered........... (71,000) 0.50--4.00 9.1 2.04
--------- ----------- --- -----
Outstanding at March 31,
1998................... 5,414,018 0.50--6.00 8.9 1.99
========= =========== === =====
Options vested at
December 31, 1997...... 456,300 $0.50--1.25 8.5 $0.83
========= =========== === =====
</TABLE>
No options were exercisable as of December 31, 1996.
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE AT
OPTIONS OUTSTANDING AT DECEMBER 31, 1997 DECEMBER 31, 1997
--------------------------------------------------------------- --------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER OF REMANING CONTRACTUAL WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
EXERCISE PRICES SHARES LIFE(YEARS) EXERCISE PRICE SHARES EXERCISE PRICE
--------------- --------- -------------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$0.50-$1.00 1,445,000 8.31 $0.65 289,000 $0.62
1.13- 1.50 1,200,433 8.96 1.42 167,300 1.19
2.00- 4.00 2,266,430 9.74 2.62 -- --
--------- -------
4,911,863 456,300
========= =======
</TABLE>
In 1996, the Company adopted Statement of Financial Accounting Standards No.
123 (SFAS 123), "Accounting for Stock--Based Compensation." As permitted by
SFAS 123, the Company has elected to continue following the provisions of
Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock
Issued to Employees," and to adopt the disclosure only provisions of SFAS No.
123. If compensation expense had been recorded based on the fair value at the
grant dates for awards under the Plans, the Company's net loss would have been
adjusted to the pro forma amounts presented below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1996 1997
------- ------
<S> <C> <C>
Net income (loss)
As reported................................................. $(2,375) $ 121
Pro forma................................................... $(2,467) $ (258)
Basic net income (loss) per share, as reported.............. $ (0.08) $ 0.00
Diluted net income (loss) per share, as reported............ $ (0.08) $ 0.00
Pro forma basic net income (loss) per share................. $ (0.08) $(0.01)
Pro forma diluted net income (loss) per share............... $ (0.08) $(0.01)
</TABLE>
F-16
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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
grants issued during the years ended December 31, 1996 and 1997, respectively:
volatility factors of 70% and 60%, weighted-average expected life of 5 years
and 2.5 years, risk-free interest rates of 6%, and no dividend yields. The
weighted average fair value of grants made during the years ended December 31,
1996 and 1997 are $0.52 and $1.04, respectively.
During the three months ended March 31, 1998, the Company granted a total of
573,155 options with exercise prices ranging from $4.00 to $6.00.
Distribution to S Corporation Stockholders
The Company intends to distribute a dividend of $10,000 to the existing
stockholders of the S corporation in the form of short-term notes prior to the
termination of the Company's S corporation election. The notes issued to the
existing stockholders by the Company will bear interest at the "applicable
federal rate" for short-term obligations and will be due and payable at
various times during 1998. The Company plans to repay the notes from cash
flows from future operations of the Company in accordance with the terms of
the notes. This dividend has been reflected in the Company's unaudited pro
forma balance sheet at December 31, 1997.
NOTE 9--EMPLOYEE BENEFIT PLAN
The Company sponsors a plan to provide retirement and incidental benefits
for its employees, known as the MicroStrategy 401(k) plan (the "Plan").
Participants may make voluntary contributions to the Plan of up to 20% of
their compensation not to exceed the Federally determined maximum allowable
contribution. The Plan permits for discretionary company contributions;
however, no contributions were made for the years ended December 31, 1995,
1996 and 1997.
NOTE 10--SEGMENT INFORMATION
The following table presents a summary of operations by geographic region,
including eliminations of all significant intercompany transactions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------------
1995 1996 1997
------- --------- ---------
<S> <C> <C> <C>
REVENUE:
Domestic..................................... $ 8,675 $ 20,089 $ 39,310
Europe....................................... 1,102 2,514 14,247
------- --------- ---------
Total revenue.............................. $ 9,777 $ 22,603 $ 53,557
======= ========= =========
OPERATING (LOSS) INCOME:
Domestic..................................... $ 129 $ (1,172) $ (639)
Europe....................................... (52) (1,118) 1,011
------- --------- ---------
Total operating (loss) income.............. $ 77 $ (2,290) $ 372
======= ========= =========
IDENTIFIABLE ASSETS:
Domestic..................................... $ 9,046 $ 21,376
Europe....................................... 3,958 8,689
--------- ---------
Total assets............................... $ 13,004 $ 30,065
========= =========
</TABLE>
Transfers of $365, $1,047, and $4,443 for the years ended December 31, 1995,
1996 and 1997 from domestic to foreign operations have been excluded from the
above table and eliminated in the consolidated financial statements.
F-17
<PAGE>
GLOSSARY OF TERMS
"API"--APPLICATION PROGRAM INTERFACE. Provides routines, protocols and tools
for developing custom applications. Software that provides an API affords
businesses an opportunity to customize, integrate and embed provided
functionality into their own applications.
"BUSINESS METRICS"--Business measures used to gauge corporate performance.
For example: profit, loss, sales, and inventory.
"C++"--A popular programming language used to create computer applications
software.
"COMMERCIAL DSS"--COMMERCIAL DECISION SUPPORT SYSTEMS. A DSS based on
corporate data that is provided to customers, as opposed to employees. For
example, healthcare providers that provide patients with outcome analysis
capabilities for various combinations of patients, treatments, drugs,
hospitals and doctors.
"CPU"--CENTRAL PROCESSING UNIT. The CPU is the brain of the computer.
Sometimes referred to simply as the processor or central processor, the CPU is
where most calculations take place. In terms of computing power, the CPU is
the most important element of a computer system.
"DATA WAREHOUSE"--A collection of data designed to support management
decision-making. Data warehouses contain refined, standardized data culled
from many different departments across a business enterprise. These data
present a coherent picture of business conditions at a single point in time.
"DECILINGS"--A type of analysis that distributes results into ten groups;
1st 10%, 2nd 10%, etc.
"DELPHI"--A programming language developed by Borland International, Inc.
Delphi is similar to Visual Basic from Microsoft, but whereas Visual Basic is
based on the BASIC programming language, Delphi is based on Pascal.
"DSS"--DECISION SUPPORT SYSTEM. Software designed to support the management
decision-making process via adhoc query processing against corporate data
stores.
"EIS"--EXECUTIVE INFORMATION SYSTEM. Software designed to provide predefined
reports or briefing books to top-level executives.
"ENTERPRISE DSS"--A Decision Support System that comprises the information
requirements of all departments within a corporation, thereby satisfying the
reporting requirements of the corporate "enterprise", as opposed to a single
department.
"GIGABYTE"--A measure of computer data storage; approximately 1 billion
bytes (1,000,000,000). In comparison, a 3.5" floppy disk contains 1.44
Megabytes; approximately 1,440,000 bytes.
"GLOBAL 2000"--The 2000 largest publicly traded corporations worldwide
(based on revenue).
"HARDWARE"--Refers to computer components such disks, disk drives, monitors,
keyboards, printers, memory chips, CPUs, etc.
"HOLAP"--HYBRID ONLINE ANALYTICAL PROCESSING. A Decision Support System with
the capability to extract data from a proprietary, multi-dimensional array
(cube) or a relational database.
"HTML"--HYPERTEXT MARKUP LANGUAGE. The language used to create World Wide
Web pages, with hyperlinks and markup for text formatting (different heading
styles, bold, italic, numbered lists, insertion of images, etc.).
G-1
<PAGE>
"JAVA"--A cross-platform programming language developed by Sun Microsystems
that can be used to create animations and interactive features on World Wide
Web pages. Java programs are embedded into HTML documents.
"LOAD BALANCING"--Distributing processing and communications activity evenly
across computer systems so that no single device is overwhelmed.
"MIDDLEWARE"--Software that connects two otherwise separate software
programs.
"MPP"--MASSIVELY PARALLEL PROCESSING. A type of computing that uses many
separate CPUs running in parallel to execute a single program.
"OEM"--ORIGINAL EQUIPMENT MANUFACTURER. A company that manufactures a
product and sells it to a reseller.
"OLAP"--ONLINE ANALYTICAL PROCESSING. A category of software tools that
provides analysis of data stored in a database.
"OLTP"--ONLINE TRANSACTION PROCESSING. A type of computer processing in
which the computer responds immediately to user requests. Each request is
considered to be a transaction. Automatic teller machines for banks are an
example of transaction processing.
"OSP"--ONLINE SERVICE PROVIDER. Internet content providers that bundle
multiple sources of information into a single, easily navigable home site.
Examples include America Online, LEXIS/NEXIS, and Microsoft Network.
"PLATFORM PARTNERS"--MicroStrategy Platform Partners are firms which co-sell
and co-market complementary technology to the same target customer base. These
platform partners include IBM, Tandem/Compaq, NCR, Sequent, ICL, Data General,
Informatica, Oracle, Informix and Red Brick.
"PULL TECHNOLOGY"--To request data from another program or computer. The
World Wide Web is based on pull technologies where a page isn't delivered
until a browser request is received.
"PUSH TECHNOLOGY"--A technology that allows information to be delivered or
"pushed" directly to a user who subscribes to it, rather than the user having
to request the information. Probably the oldest and most widely used push
technology is email--mail is pushed (delivered) to you whether or not
requested. The prime example of an Internet push technology is the PointCast
Network.
"QUERY TONE"--Query Tone is universal knowledge enablement--the ability of
any user to ask any question at any time.
"RDBMS"--RELATIONAL DATABASE MANAGEMENT SYSTEM. A type of database
management system (DBMS) that stores data in the form of related tables.
Relational databases are powerful because they require few assumptions about
how data is related or how it will be extracted from the database. As a
result, the same database can be viewed in many different ways. Examples of
RDBMSs include Oracle, Sybase, SQL Server, and Informix.
"REMOTE DSS"--Remote DSS applications provide information to operational
professionals throughout an enterprise regardless of their geographic
location. Users may be spread across dozens, hundreds or even thousands of
locations.
"ROLAP"--RELATIONAL ONLINE ANALYTICAL PROCESSING. A form of OLAP that
provides information from data stored in a relational database management
system.
G-2
<PAGE>
"SCALABLE HARDWARE"--How well a computer's hardware system (memory,
processor, disk drives, etc.) can adapt to different demands. As demands
increase, scalable hardware systems provide additional capabilities in cost-
effective increments with minimal impact on the unit cost of business and the
procurement of additional services.
"SMP"--SYMMETRIC MULTIPROCESSING. A computer architecture that provides fast
performance by making multiple CPUs available to complete individual processes
simultaneously (multiprocessing). SMP uses a single operating system that
shares common memory and disk input/output resources.
"SQL"--STRUCTURED QUERY LANGUAGE (PRONOUNCED SQL OR SEQUEL). A language used
to create, maintain, and query relational databases. SQL uses regular English
words for many of its commands, which makes it easy to use. It is often
embedded within other programming languages.
"SUPPLY CHAIN DSS"--Supply Chain Decision Support Systems allow and
encourage trading partners to give preferential treatment to one another in
exchange for greater certainty and visibility up and down their value chains.
For example, a DSS application that provides access to retail sales
information would be valuable to the manufacturers who stock the shelves
within each store. This information can be used to design new products, refine
marketing campaigns, develop optimal pricing schemes, rationally allocate
inventory and proactively schedule factory production.
"TCP/IP"--THE TRANSMISSION CONTROL PROTOCOL (TCP) ON TOP OF THE INTERNET
PROTOCOL (IP). A transmission protocol used to transfer data between different
types of computers and computer networks.
"TERABYTE"--A measure of computer data storage; approximately 1 trillion
bytes (1,000,000,000,000). In comparison, a 3.5" floppy disk contains 1.44
Megabytes; approximately 1,440,000 bytes.
"VAR"--VALUE ADDED RESELLER. Solution providers that bundle other software
products with their own applications.
"VISUAL BASIC"--A programming language from Microsoft in which a programmer
uses a graphical user interface to choose and modify pre-selected chunks of
code written in the BASIC programming language.
"VBA"--Visual Basic for Applications. Visual Basic for Applications is an
edition of Visual Basic designed specifically to provide rich development
capabilities inside an off-the-shelf application.
"VLDB"--VERY LARGE DATABASE. While there is apparently no official or
standard definition for the term Very Large DataBase, it is sometimes used to
describe databases occupying magnetic storage in the terabyte range and
containing billions of table rows.
"WAN"--WIDE AREA NETWORK. A network in which computers are connected to each
other over a long distance, using telephone lines and satellite
communications.
G-3
<PAGE>
Mission: Provide Query Tone to the World's Largest Companies
Banking [LOGO OF ROYAL TRUST APPEARS HERE]
Royal Trust, a private investment trust and custody subsidiary of the Royal Bank
of Canada, with more than 1 million clients worldwide, is providing one-to-one
marketing services by using a decision support solution based on MicroStrategy's
technology. The integrated one-to-one marketing solution, deployed via the World
Wide Web, enables Royal Trust's marketing and distributed sales forces in its
Wealth Management Divisions to interactively analyze 200-gigabytes of customer
portfolio and market information. Trust believes that the new web-based DSS
solution makes it possible for its personnel to more closely target and market
their products and services to meet client requirements, thereby increasing
customer loyalty and profitability.
Royal Trust believes that its DSS solution provides users with information that
helps to identify market opportunities, identify the scope of the clients
affected, and communicate with each relationship manager the impact on a
specific portfolio, along with a recommended action. Expected benefits to Royal
Trust may include higher response rates to marketing campaigns, enhanced
customer retention, increased sales force productivity, and faster decision
making capabilities.
Retail [LOGO OF HALLMARK APPEARS HERE]
Hallmark, the multi-billion dollar leader in the greeting card industry, is
getting closer to its customers and making more informed decisions using its
point of sale data warehouse in conjunction with MicroStrategy's DSS technology.
Hallmark is now able to improve decision making for determining assortments,
promotions, advertising, inventory management, pricing, and product development.
Hallmark believes its DSS Solution provides users with reports of actionable
trends by the end of the business day, resulting in cost savings, more efficient
production, and promotion decision processes. Over 200 Hallmark managers and
analysts now have the ability to better understand sales trends and customer
purchase patterns by analyzing 200 gigabytes of transaction-level data and
item-level data on over 40,000 products and 18,000 retail stores.
Using MicroStrategy's technology to retrieve data from the warehouse, Hallmark
believes that it has reduced product development and merchandising time, enabled
evaluation of promotional programs, reduced in-store testing time, and improved
inventory and planning for individual stores. The application has increased the
efficiency of the decision making process, affecting total product performance,
product selection, and inventory management for individual stores or clusters of
stores.
Pharmaceutical [LOGO OF GLAXO WELLCOME APPEARS HERE]
Glaxo Wellcome, a research-based pharmaceutical manufacturer, has developed a
strategic analysis application for its data warehouse that projects product
demand and availability to reduce the risk that life preserving pharmaceutical
products are not available to customers. Glaxo Wellcome believes that its DSS
solution provides analyses of sales, inventory, and prescription data for drugs
manufactured by Glaxo Wellcome by analyzing the distribution cycle of
pharmaceutical drugs, along with historical market data.
Using MicroStrategy's technology, Glaxo Wellcome can project increased demand,
respond more efficiently to consumer requirements, and maximize the efficiency
of the supply chain. In addition to helping Glaxo Wellcome, Inc. project market
demand for their products, Glaxo Wellcome believes that a number of other
benefits are associated with this business-critical pharmaceutical application.
By improving inventory management, the DSS solution is helping Glaxo Wellcome
streamline the business process, and control expenses. MicroStrategy's products
have also enhanced reporting processes: monthly reports are now fully automated,
can be produced and distributed within hours, are easy to understand, and
provide additional analytical capabilities to users.
Telecommunications [LOGO OF MCI APPEARS HERE]
MCI, a pioneer of diversified communications and one of the world's largest long
distance providers, needs to provide users with the correct information in order
to operate their businesses in an efficient manner. MCI collects and summarizes
information on millions of customers and billion of calls. The system
"Data$martMCI" is growing at the rate of almost half a terabyte a year. Easy
access to this data is the key to the system's success. It is expected that the
system will be handling thousands of queries every day.
In the near future, MCI's Business Markets Finance Unit expects that as many as
10,000 of its employees will be using a MicroStrategy-built DSS solution to
access several terabytes of data to answer highly detailed questions on every
aspect of business. Using MicroStrategy's technology, MCI's Business Markets
Finance Unit expects that its field sales staff will be able to review their
customers' phone usage patterns, accountants will be able to view performance
trends over time, and financial analysts will be able to more accurately project
the profitability of potential customers. In addition to projected cost savings,
MCI's Business Markets Finance Unit believes that MicroStrategy's products have
resulted in significant cost savings during the project's pilot stage.
Query Tone represents the ability, where appropriate, of any user to receive the
answer to any question, any time, anywhere from the proper data warehouse.
[LOGO OF MICROSTRATEGY APPEARS HERE]
[GRAPHIC ARTWORK APPEARS HERE]
<TABLE>
<CAPTION>
Data Warehouse Department Enterprise Supply/Chain Commercial Consumer
Department Enterprise Data
Data Mart/DSS Warehouse/DSS Supply Chain DSS Commercial DSS Consumer DSS
<S> <C> <C> <C> <C> <C>
Typical User VP of Marketing Regional Sales Manager Vendor Account Executive Small Business Owner Mom
Typical How effective was Which are the bottom Which items had more Where are my new My child needs
Question last week's $10 10 stores by sales? than 3 stock-outs customers coming surgery, which
million promotion Show me unprofitable during the last year from? How loyal are hospital, doctor,
campaign? departments within for my largest they? What are their HMO should I use?
each. customer? demographic & How does our bank
psychographic account fluctuate
profiles? during December?
Potential
Users per
Database* 50 - 500 500 - 5,000 50,000 500,000 5,000,000
Global Users* 5,000,000 50,000,000 100,000,000 250,000,000 1,000,000,000
</TABLE>
*The above potential user counts are for illustrative purposes only and do not
represent actual market size estimates.
<PAGE>
VICTORIA'S
Apparel SECRET
Victoria's Secret Stores, a leading provider of women's lingerie and
accessories, developed a data warehouse and intranet application to streamline
its supply chain and maintain optimal inventory per store. The data warehouse
contains detailed sales and inventory information for each item in each store
for three seasons, which amounts to approximately 150 gigabytes of data. Using
MicroStrategy's technology, Victoria's Secret Stores is able to deliver a set of
merchandising best practices to hundreds of its merchandisers, individual store
managers, and associates, providing them with a consistent methodology to follow
when making decisions about product pricing, promotion, and inventory.
This DSS solution enables the Victoria's Secret Stores to provide its customers
with an optional selection of styles, colors and size combinations at its
shops--with little or no increase in inventory costs. Victoria's Secret Stores
estimates that it has the potential to significantly reduce markdown expenses by
varying promotions and allocating inventory based on the geographic buying
patterns it has found through the MicroStrategy-based application.
Healthcare [LOGO OF PREMIER APPEARS HERE]
Premier Inc., the largest hospital alliance in the United States, is using
MicroStrategy's DSS technology to enable its 1,800 member hospitals to make more
cost-effective decisions and improve market position. Market Vantage, an
innovative Query Tone application for healthcare, provides subscribers with
information from the National Database of all Medicare Discharges and All-Payor
Data from 28 states, which in the aggregate contain more than 11 million records
in a 50-gigabyte data warehouse. Member hospitals subscribe to Market Vantage to
evaluate hospital efficiency, market share, quality of care, patient
demographics, physician profiles, and a variety of competitive positioning
questions.
Premier believes that it will generate substantial revenue by commercializing
its data. By offering services that project the future volume of procedures
required by certain communities, Premier is able to more accurately identify the
long-term cost savings and value associated with mergers of community hospitals.
Premier also provides hospitals with assessments that pinpoint opportunities for
cost reduction. Using MicroStrategy's technology, Premier believes that it will
make a positive impact in the healthcare industry by providing hospitals with
the information they require to determine procedures that can be performed at a
lower cost without sacrificing the quality of care.
Financial/Insurance [LOGO OF USAA FEDERAL SAVINGS BANK APPEARS HERE]
USAA, one of the largest insurers in the United States, is a worldwide insurance
and financial services association. USAA's 13 million clients primarily include
present and former military officers and their families. USAA implemented a
comprehensive DSS Solution using MicroStrategy's DSS Web and DSS Agent to give
decision-makers direct access to mission-critical loss and claim data.
This information provides USAA's property and casualty analysts with the ability
to track losses and assess costs over time, determine the risk profile of
clients with certain characteristics, establish insurance rates and reserve
levels, and remain informed of industry trends. The accuracy with which these
analyses are conducted can significantly impact profitability and market
viability of a company. USAA believes that MicroStrategy's DSS Solution will
enable it to provide the level of accuracy required by insurance businesses,
while reducing IT from the business of end-user reporting.
Media/Market Research [LOGO OF ESPN/CHILTON APPEARS HERE]
ESPN, the leading cable television sports network, and Chilton Research
Services, one of America's top market research and consulting firms, have formed
a joint venture to offer Sports Poll Interactive, the first web-based data
warehouse subscription service for sports marketers. Powered by MicroStrategy's
DSS Web, Sports Poll Interactive guides major marketing decisions by allowing
advertisers, event sponsors, media outlets, and sports associations to purchase
information on the behaviors, perceptions, interests, and demographics of sports
fans across the United States.
ESPN/CHILTON believes that this powerful e-commerce solution will enable it to
increase the number of organizations it can serve, significantly reduce the need
for ESPN/CHILTON to hire additional staff to field customer requests and reduce
printing and distribution costs associated with using paper reports. For
example, for the first time companies can log onto the Internet to gauge whether
hockey is more popular than baseball in Los Angeles and which pro athlete it
should secure to endorse its next product. This Query Tone application enables
organizations to make more effective marketing and organizational decisions.
Information Like Water(TM)
<PAGE>
MicroStrategy's Services
<TABLE>
<CAPTION>
FINANCE HEALTH CARE RETAIL TELCO MEDIA MANUFACTURING
Data Warehouse/Decision Support Best Practices Methodology
===============================================================
MicroStrategy University
DSS Training DSS Consulting DSS Support
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Off-Site On-Site Partner Production Sales Channels Field Tele VTG
Training Training Certification Consulting Consulting Consulting Engineering Support Technologies
</TABLE>
Knowledge Transfer Implementation Maintenance
DSS Training includes classes for beginner, intermediate, and advanced DSS
users, DSS developers, and Data Warehouse modelers. These classes are taught at
many fixed locations throughout the US and Europe, as well as on customer sites.
For our Channel Partners, we also offer Certification Courses which are more
challenging and empowering. Thousands of DSS professionals have attended these
classes, which range in duration from one day to three weeks.
DSS Consulting includes one group dedicated to helping our customers achieve
production success with their DSS applications, another group focused upon sales
support, prototyping, and pilot applications development, and a third group that
is especially dedicated to helping our VAR and SI partners overcome those
challenges unique to building and deploying successful industry specific DSS
applications. MicroStrategy consulting provides the expertise necessary to
support all major phases of the Data Warehouse and Decision Support lifecycle.
DSS Support consists of traditional telephone support services, augmented by
field engineers able to travel onsite on less than one day's notice, as well as
RDBMS specific very large database (VLDB) experts capable of working directly
with either customers or platform vendors to optimize the performance of key
high-end configurations. MicroStrategy support engineers undergo the same
rigorous training that is required of consultants who work in the field. Their
expertise allows us to offer the mission critical support and deployment
security that is expected by the world's largest organizations.
MicroStrategy University consists of compulsory "bootcamps" for Technical (6
weeks) as well as Sales & Marketing (4 weeks) professionals. These are followed
by continuing professional development courses for veteran employees (at least 2
weeks/year).
For one week each year, the firm is converted into the world's largest DSS/DW
campus, with dozens of courses being taught to 85% of the firm's employees by
the most experienced 5% of our professional staff. This annual exercise results
in the creation of thousands of pages of fresh, recently updated courseware
(Expert Content) on topics such as Vertical Applications, DW Modeling & Tuning
Methods, Optimization Strategies for Various RDBMS Platforms, DSS Design
Techniques, Consulting, and Methodology. This Expert Content is then used to
upgrade & revitalize our operational Education, Consulting, and Support
programs.
MicroStrategy draws Data Warehouse / Decision Support Best Practice Methodology
from its first hand experience implementing large-scale DW projects across all
major RDBMS platforms and industries. These engagements provide invaluable
primary knowledge of the current state of DSS technology. With in-excess-of 500
customers across data rich industries such as finance, health care, retail,
telecommunications, media, and manufacturing, we have had the opportunity to
gather "real world" knowledge that is nearly impossible to duplicate in a
laboratory.
[LOGO OF MICROSTRATEGY APPEARS HERE]
<PAGE>
"Any sufficiently advanced
technology is indistinguishable from magic."
Arthur C. Clarke
<TABLE>
<S> <C> <C> <C>
Relational [ARTWORK APPEARS HERE]
Online Analytical
Processing Server
DSSServer
High Performance Server
for Very Large Databases
---------------------------------------------------------------------------------------
Large-Scale Information [ARTWORK APPEARS HERE] [ARTWORK APPEARS HERE]
Deployment Servers
DSSWeb DSSBroadcaster
Interactive Analysis Personalized Information
Environment for the Broadcast Server
World Wide Web *Currently in beta testing
---------------------------------------------------------------------------------------
Advanced Analysis [ARTWORK APPEARS HERE] [ARTWORK APPEARS HERE]
and Application
Development Interfaces
DSSAgent DSSObjects
Desktop Environment for OLE API for Custom
Sophisticated Analysis Application Development
and Development
---------------------------------------------------------------------------------------
Decision Support [ARTWORK APPEARS HERE] [ARTWORK APPEARS HERE] [ARTWORK APPEARS HERE]
Development and
Management Tools
DSSArchitect DSSAdministrator DSSExecutive
CASE Tool for Rapid Management and Monitoring Object-Based
DSS Development Tools for Enterprise Deployments EIS Development Tool
---------------------------------------------------------------------------------------
Professional [ARTWORK APPEARS HERE] [ARTWORK APPEARS HERE] [ARTWORK APPEARS HERE]
Services
DSSConsulting DSSTraining DSSSupport
Data Warehouse and DSS Data Warehouse and DSS Data Warehouse and DSS
Implementation Services Implementation Methodology Customer Services
</TABLE>
[LOGO OF MICROSTRATEGY APPEARS HERE]
Information Like Water(TM)
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of the Class A Common Stock being registered hereby. All of the
amounts shown are estimates except for the Commission registration fee, NASD
filing fee, and Nasdaq National Market Listing Fees.
<TABLE>
<S> <C>
Commission Registration Fee....................................... $ 13,570
NASD Filing Fee................................................... 4,100
Nasdaq National Market Listing Fees............................... 25,000
Accounting Fees and Expenses...................................... 175,000
Blue Sky Fees and Expenses........................................ 15,000
Legal Fees and Expenses........................................... 350,000
Printing and Engraving Expenses................................... 225,000
Transfer Agent Fees............................................... 25,000
Miscellaneous Expenses............................................ 67,300
---------
TOTAL........................................................... $ 900,000
=========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware
("Section 145") permits a Delaware corporation to indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending,
or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (other than an action by or in the right of
the corporation) by reason of the fact that such person is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, or other enterprise,
against expenses (including attorneys' fees), judgments, fines, and amounts
paid in settlement actually and reasonably incurred by such person in
connection with such action, suit, or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe such person's conduct
was unlawful.
In the case of an action by or in the right of the corporation, Section 145
permits the corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action
or suit by or in the right of the corporation to procure a judgment in its
favor by reason of the fact that such person is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner such person reasonably believed to be
in or not opposed to the best interest of the corporation. No indemnification
may be made in respect of any claim, issue, or matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to
the extent that the Court of Chancery or the court in which such action or
suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
To the extent that a present or former director or officer of a corporation
has been successful on the merits or otherwise in defense of any action, suit
or proceeding referred to in the preceding two paragraphs, Section 145
requires that such person be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
therewith.
II-1
<PAGE>
Section 145 provides that expenses (including attorneys' fees) incurred by
an officer or director in defending any civil, criminal, administrative, or
investigative action, suit or proceeding may be paid by the corporation in
advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such director or officer to repay
such amount if it shall ultimately be determined that such person is not
entitled to be indemnified by the corporation as authorized in Section 145.
The Company's Certificate provides that an officer or director of the
Company will not be personally liable to the Company or its stockholders for
monetary damages for any breach of his fiduciary duty as an officer or
director, except in certain cases where liability is mandated by the DGCL. The
provision has no effect on any non-monetary remedies that may be available to
the Company or its stockholders, nor does it relieve the Company or its
officers or directors from compliance with federal or state securities laws.
The Certificate also generally provides that the Company shall indemnify, to
the fullest extent permitted by law, any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit, investigation, administrative hearing or any other proceeding (each, a
"Proceeding") by reason of the fact that he is or was a director or officer of
the Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another entity, against expenses incurred by him
in connection with such Proceeding. An officer or director shall not be
entitled to indemnification by the Company if (i) the officer or director did
not act in good faith and in a manner reasonably believed to be in, or not
opposed to, the best interests of the Company, or (ii) with respect to any
criminal action or proceeding, the officer or director had reasonable cause to
believe his conduct was unlawful.
The Underwriting Agreement filed herewith as Exhibit 1.1 provides for
indemnification of the directors, certain officers and controlling persons of
the Company by the Underwriters against certain civil liabilities, including
liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following transactions reflect the issuance during the previous three
years of securities not registered under the Securities Act:
1. At various times during the period from March 31, 1996 through March
31, 1998, the Company has granted to employees and directors options to
purchase an aggregate of 5,414,018 shares of Common Stock with exercise
prices ranging from $0.50 to $6.00 and with a weighted average exercise
price of $1.99 per share.
2. On February 28, 1995, the Company issued 1,327,224.32 shares of Common
Stock for an aggregate purchase price of $142,152.75 to four employees of
the Company. The purchase price for the Common Stock was to be paid in four
cash installments, the first due on the date of issuance and the remaining
payments due on December 31 of each year over the next three-year period.
3. On March 23, 1995, the Company issued 294,938.72 shares of the Common
Stock for a purchase price of $31,589.50 to an employee of the Company. The
purchase price for the Common Stock was to be paid in four cash
installments, the first due on the date of issuance and the remaining
payments due on December 31 of each year over the next three-year period.
4. On March 29, 1995, the Company issued 44,240.80 shares of the Common
Stock for a purchase price of $4,738.42 to an employee of the Company. The
purchase price for the Common Stock was to be paid in four cash
installments, the first due on the date of issuance and the remaining
payments due on December 31 of each year over the next three-year period.
5. On January 10, 1996, the Company issued 147,469.44 shares of the
Common Stock for a purchase price of $15,794.75 to an employee of the
Company. The purchase price for the Common Stock was to be paid in three
cash installments, the first due on the date of issuance and the remaining
payments due on December 31 of each year over the next two-year period.
6. Effective January 1, 1998, the Company issued a total of 1,401,641
shares of Common Stock to Messrs. Saylor and Bansal in exchange for their
interests in certain of the Company's international subsidiaries.
All of the shares of Common Stock described in paragraphs 2 through 6 above
are being changed and converted into shares of Class A Common Stock and
exchanged for an identical number of shares of Class B Common Stock prior to
consummation of the Offering. The issuances of the securities described above
were made in reliance on one or more of the exemptions from registration under
the Securities Act, including those provided for by Section 4(2) and Rule 701
thereunder. The purchasers of these securities represented that they had
adequate access, through their employment with the Company, to information
about the Company.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Form of Amended and Restated Certificate of Incorporation of the
Company (as proposed to be effective upon closing of the Offering).
3.2* Form of Restated Bylaws of the Company (as proposed to be effective
upon closing of the Offering).
4.1* Form of Certificate of Class A Common Stock of the Company.
5.1* Opinion of Latham & Watkins.
10.1 Stock Purchase Agreement dated September 8, 1991 between the Company
and Sanju K. Bansal.
10.2 Stock Purchase Agreement dated October 11, 1992 between the Company
and Charles A. Veley.
10.3 Stock Purchase Agreement dated February 28, 1995 between the Company
and Eduardo S. Sanchez.
10.4 Stock Purchase Agreement dated February 28, 1995 between the Company
and Stephen S. Trundle.
10.5 1996 Stock Plan (as amended) of the Company.
10.6 1997--Stock Option Plan for French Employees.
10.7 1997 Director Option Plan of the Company.
10.8 Business Loan/Security Agreement between the Company and NationsBank,
N.A., dated December 10, 1996.
10.9 First Modification of Business Loan/Security Agreement between the
Company and NationsBank, N.A. dated November 20, 1997.
10.10 Second Modification of Business Loan/Security Agreement between the
Company and NationsBank, N.A. dated March 31, 1998.
10.11 Form of Tax Indemnification Agreement between the Company and the
Existing Stockholders.
10.12* Form of Master Amendment Agreement between the Company and the
Existing Stockholders.
21.1 Subsidiaries of the Company.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2* Consent of Latham & Watkins.
27 Financial Data Schedule.
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
(b) Financial Statement Schedules
The following schedule to the Financial Statements of the Company and its
subsidiaries is included in this Registration Statement:
Schedule I Valuation and Qualifying Accounts and Reserves
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred
II-3
<PAGE>
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such new securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
MICROSTRATEGY INCORPORATED HAS DULY CAUSED THIS AMENDMENT NO. 1 TO THE
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN VIENNA, VIRGINIA ON MAY 22, 1998.
MicroStrategy Incorporated
/s/ Michael J. Saylor
By: _________________________________
MICHAEL J. SAYLOR
CHAIRMAN OF THE BOARD, CHIEF
EXECUTIVE OFFICER AND PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
NAME TITLE DATE
Chairman of the
/s/ Michael J. Saylor Board, Chief May 22, 1998
- ------------------------------------- Executive Officer
MICHAEL J. SAYLOR and
President (Principal
Executive Officer)
Executive Vice
* President and Chief May 22, 1998
- ------------------------------------- Operating Officer
SANJU K. BANSAL
Vice President,
/s/ Mark S. Lynch Finance and Chief May 22, 1998
- ------------------------------------- Financial Officer
MARK S. LYNCH (Principal
Financial and
Accounting Officer)
Director
* May 22, 1998
- -------------------------------------
FRANK A. INGARI
Director
* May 22, 1998
- -------------------------------------
RALPH S. TERKOWITZ
*By: /s/ Mark S. Lynch
- ----------------------
May 22, 1998
MARK S. LYNCH
Attorney-in-fact
II-5
<PAGE>
SCHEDULE I
VALUATION QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING OF CHARGED TO END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
- ----------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts...............
December 31, 1995....... 41 36 -- 77
December 31, 1996....... 77 432 (51) 458
December 31, 1997....... 458 579 (267) 770
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
MicroStrategy Incorporated
In connection with our audits of the consolidated financial statements of
MicroStrategy Incorporated as of December 31, 1996 and 1997, and for each of
the three years in the period ended December 31, 1997, which financial
statements are included in the Prospectus, we have also audited the financial
statement schedule listed in Item 16 herein.
In our opinion, this financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, present fairly,
in all material respects, the information required to be included therein.
Coopers & Lybrand L.L.P
McLean, Virginia
January 30, 1998, except for Notes 4 and 8, as to which the date is May 8,
1998
S-1
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Form of Amended and Restated Certificate of Incorporation of the
Company (as proposed to be effective upon closing of the Offering).
3.2* Form of Restated Bylaws of the Company (as proposed to be effective
upon closing of the Offering).
4.1* Form of Certificate of Class A Common Stock of the Company.
5.1* Opinion of Latham & Watkins.
10.1 Stock Purchase Agreement dated September 8, 1991 between the Company
and Sanju K. Bansal.
10.2 Stock Purchase Agreement dated October 11, 1992 between the Company
and Charles A. Veley.
10.3 Stock Purchase Agreement dated February 28, 1995 between the Company
and Eduardo S. Sanchez.
10.4 Stock Purchase Agreement dated February 28, 1995 between the Company
and Stephen S. Trundle.
10.5 1996 Stock Plan (as amended) of the Company.
10.6 1997 Stock Option Plan for French Employees.
10.7 1997 Director Option Plan of the Company.
10.8 Business Loan/Security Agreement between the Company and NationsBank,
N.A., dated December 10, 1996.
10.9 First Modification of Business Loan/Security Agreement between the
Company and NationsBank, N.A. dated November 20, 1997.
10.10 Second Modification of Business Loan/Security Agreement between the
Company and NationsBank, N.A. dated March 31, 1998.
10.11 Form of Tax Indemnification Agreement between the Company and the
Existing Stockholders.
10.12* Form of Master Amendment Agreement between the Company and the
Existing Stockholders.
21.1 Subsidiaries of the Company.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2* Consent of Latham & Watkins.
27 Financial Data Schedule.
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
Exhibit 10.1
1
STOCK PURCHASE AGREEMENT
FOR
MIRCOSTRATEGY INCORPORATED
--------------------------
THIS STOCK PURCHASE AGREEMENT ("Agreement"), by and between
MICROSTRATEGY INCORPORATED, a Delaware corporation (the "Corporation") and SANJU
K. BANSAL of New Castle County, Delaware, ("Bansal") is being entered into on 8
September, 1991.
WHEREAS, Michael J. Saylor ("Saylor") of New Castle County,
Delaware has caused the Corporation to be formed for the purpose of being a full
service provider of strategy system software, support and service and related
activities and any other lawful business as determined by the Board of Directors
of the Corporation; and
WHEREAS, Bansal wishes to become a shareholder in the
Corporation subject to the terms and conditions of this Agreement;
NOW THEREFORE, for the mutual promises, covenants,
understandings, representations, warranties and benefits contained herein, the
parties hereto agree as follows:
1. Subscription for Shares. Bansal agrees to subscribe to
-----------------------
such number of shares of the authorized stock of the Corporation at such price
as is more particularly described in Exhibit A attached hereto.
2. Payment for Shares. Concurrent with the execution of this
------------------
Stock Purchase Agreement, Bansal shall pay into the Corporation, as paid in
capital and/or surplus, in
<PAGE>
2
exchange for the capital stock of the Corporation, the total subscription price
as more particularly described in Exhibit A.
3. Shareholders Buy/Sell Agreement. Bansal agrees to execute
-------------------------------
and be bound by a Shareholders Buy/Sell Agreement with respect to all the
outstanding shares of the Corporation ("Shares") in the form substantially
similar to that attached hereto as Exhibit B.
4. Representations of Bansal. Bansal represents and warrants
-------------------------
as follows:
(a) That he has received and carefully read this Agreement
including all of its attachments.
(b) That he is purchasing the Shares in the Corporation
without being furnished any offering literature or prospectus other than this
Agreement.
(c) That he recognizes that the Shares have not been
registered under the Securities Act of 1933, as amended (the "Act"), or under
the securities laws of any state and, therefore, cannot be resold unless they
are registered under the Act and applicable state securities laws or unless an
exemption from registration is available. Bansal recognizes that he has no
rights to require such registration. He also recognizes that no public agency
has passed upon the accuracy or adequacy of the information contained in this
Agreement or the fairness of the terms of the subscription.
<PAGE>
3
(d) That he is acquiring the Shares for his own account for a
long term investment and not with a view toward resale, fractionalization,
division, or distribution thereof. The parties do not presently have any reason
to anticipate any change in his circumstances, financial or otherwise, or any
particular occasion or event which would necessitate or require the sale or
distribution of the Shares. No one other than the parties hereto have any
beneficial interest in the Shares.
(e) That he recognizes the transfer of the Shares is subject
to a Shareholders Buy/Sell Agreement which agreement severely restricts his
ability to sell or otherwise dispose of the Shares, and among other provision,
provides further, under certain circumstances, for the mandatory sale of his
Shares to the Corporation and/or its remaining Shareholder.
(f) That he recognizes the Corporation is in the development
stage, has no history of operations or earnings, is a speculative venture, and
that the total amount of funds tendered to purchase the Shares, including any
debt of the Corporation guaranteed by him, is placed at the risk of the business
and may be completely lost.
(g) That he has been provided with access to all information
requested in addition to the Agreement for evaluating his purchase of Shares,
none of which was contrary to the information contained in this Agreement.
<PAGE>
4
(h) That he has been presented with and has acted upon the
opportunity to ask questions and receive answers from the offeror relating to
the terms and conditions of the purchase of the Shares, to consult with legal
counsel and to obtain any additional information necessary to verify the
accuracy of the information made available to him.
(i) That Bansal recognizes he is a minority Shareholder in
the Corporation and that, as such, pursuant to the General Corporation Law of
the State of Delaware ("GCL"), his rights to control, operate, and manage the
Corporation are limited, and that as the majority Shareholder, Saylor, by virtue
of his ability to elect directors as provided by the GCL and by virtue of his
ability to vote his Shares pursuant to the GCL, has substantial control over the
operations, management and activities of the Corporation.
5. Indemnification. Bansal agrees to indemnify and hold
---------------
harmless the Corporation and its affiliates, and Saylor from any and all
damages, losses, costs and expenses (including reasonable attorneys' fees) any
of which may be incurred by reason of the failure of the representations and
warranties made by him in this Agreement, or in any document provided by him to
Microstrategy or to its affiliates.
6. Applicable Law. This Agreement shall be deemed to have
--------------
been made in the State of Delaware, shall become valid when executed and
accepted by the parties, and shall be governed and construed in accordance with
the laws
<PAGE>
5
of such State, which laws shall prevail in the event of any conflict of laws.
7. Severability. If, for any reason, any portion of this
------------
Agreement is held to be invalid, contrary to or in conflict with any applicable
present or future law or regulation in a final, unappealable ruling issued by
any court, agency or tribunal of competent jurisdiction in a proceeding to which
the Corporation and Bansal are a party, that ruling shall not impair the
operation of, or having any effect upon, such other portions of this Agreement
as may remain otherwise enforceable, which shall continue to be given full force
and effect and bind the parties hereto, although any portion held to be invalid
shall be deemed not be a part of this Agreement when the time for appeal
expires, or upon the receipt, by either party, of notice of non-enforcement
thereof.
8. Binding Effect. This Agreement is binding upon the parties
--------------
hereto and their respective executors, administrators, heirs, assigns and
successors in interest.
9. Construction. The preambles are a part of this Agreement
------------
and are expressly incorporated herein.
<PAGE>
6
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year aforesaid.
ATTEST MICROSTRATEGY INCORPORATED
[SIGNATURE APPEARS HERE] By: [SIGNATURE APPEARS HERE] [SEAL]
- ----------------------- ---------------------------
Secretary President
WITNESS: Sanju K. Bansal
[SIGNATURE APPEARS HERE] /s/ Sanju K. Bansal [SEAL]
- ----------------------- --------------------------------
<PAGE>
7
EXHIBIT A
---------
SUBSCRIPTION OF SHARES
OF
MICROSTRATEGY INCORPORATED
Total
Price Subscription
Name Shares Per Share Price
---- ------ --------- -----
Michael J. Saylor 100 $1.00 $100.00
Thomas P. Spahr 28 $1.00 $28.00
Sanju K. Bansal 18 $1.00 $18.00
<PAGE>
8
EXHIBIT B
---------
MICROSTRATEGY INCORPORATED
SHAREHOLDERS BUY/SELL AGREEMENT
-------------------------------
THIS AGREEMENT, made this _____ day of __________, 1989, by
and among MICHAEL J. SAYLOR, party of the first part ("Saylor"), and SANJU K.
BANSAL, party of the second part ("Bansal"), both of which parties and any
successors shall collectively be referred to as "Shareholders," and
MICROSTRATEGY INCORPORATED, a Delaware corporation, party of the third part
("Corporation").
WITNESSETH:
----------
WHEREAS, the Shareholders are the owners of all of the issued
capital stock of Corporation (together with any capital stock issued hereafter,
the "Shares") as follows: Michael J. Saylor -- 100 Shares and Thomas P. Spahr --
28 Shares and Sanju K. Bansal -- 18 Shares; and
WHEREAS, the parties to this agreement believe that it is in
their mutual best interests to provide continuity in the management and policies
of the Corporation. Accordingly, the purpose of this agreement is to impose
certain restrictions and obligations with respect to the disposition of the
Shares by any Shareholder and to provide for the purchase by the Corporation of
a deceased Shareholder's Shares therein.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants and conditions herein contained, and for
<PAGE>
9
other good and valuable consideration, receipt of which is hereby acknowledged,
the parties hereto, intending to be legally bound hereby, mutually covenant and
agrees follows:
1. RIGHT OF FIRST PURCHASE:
(a) Restriction:
Each Shareholder agrees that during his lifetime he will not
sell, give, encumber, pledge or otherwise transfer, assign, or dispose of either
voluntarily or involuntarily, or by operation of law, all or any part of the
Shares which he now owns or may hereafter acquire (except as otherwise
permitted herein) without first offering in writing such Shares to the
Corporation and to the other Shareholder for a Total Purchase Price determined
in accordance with paragraph 5 hereof, and on the terms provided therein.
(b) Period of Rights:
The Corporation shall promptly notify the other Shareholder
of the receipt of such offer and its contents, and the Corporation shall have a
period of thirty (30) days from the date of receipt of such offer to exercise or
waive its right to purchase all of the Shares so offered. If the Corporation
waives or fails to exercise its rights within said period, the Corporation shall
thereupon notify the Shareholder of such a fact in writing and such other
Shareholder shall have a period of thirty (30) days from the receipt of such
notice or from the expiration of said thirty (30) day period, whichever is the
earlier, to exercise or waive the right to purchase all of the Shares so offered
at the Total Purchase Price determined in
<PAGE>
10
accordance with paragraph 5 of this agreement, and on the terms as provided
therein.
It is understood and agreed that neither the Corporation nor
the other Shareholder shall have the right to buy any less than all of the
Shares so offered by the selling Shareholder.
(c) Failure to Exercise Right:
In the event neither the Corporation nor the other
Shareholder shall elect to purchase all of the Shares so offered within the
proper period, or shall waive such rights, then the offering Shareholder shall
be free to sell such Shares so offered to any person or entity provided that
such person or entity shall, upon the purchase of such Shares, agree to be bound
by the terms and conditions of this agreement. Any of the offered Shares not so
sold within a period of ninety (90) days after any offer under subparagraphs
1(a) and 1(b) hereof to the Corporation and the Shareholder has expired, shall
again become subject to the terms of this agreement and may not thereafter be
sold to any other party without first offering them to the Corporation and the
other Shareholders in accordance with the terms and conditions of this
agreement.
2. TERMINATION OF EMPLOYMENT:
If any Shareholder's employment with the Corporation is
terminated for any reason, other than by reason of death, said terminated or
retiring employee shall, within ninety (90) days thereof, offer for sale all of
his Shares to the Corporation at a Total Purchase Price determined in accordance
<PAGE>
11
with paragraph 5 of this agreement, and of the terms contained therein, and the
Corporation shall purchase the aforesaid Shares in accordance therewith.
3. INSURANCE:
(a) To the extent that life insurance is owned on
the lives of certain Shareholders, all such policies of insurance subject hereto
shall be listed in Schedule "A," attached hereto and made a part hereof. It is
agreed that further or substituted policies of insurance may from time to time
be made subject to the provisions hereof, or that policies subject hereto may be
withdrawn herefrom by the Shareholders and the Corporation. The description of
the policies so added or withdrawn shall be included in said Schedule "A."
(b) The premiums that shall be payable upon the said
policies shall be paid by the Corporation.
(c) Any dividends that may be payable upon the said
policies shall be disposed of as directed in the application for said policies
or as afterward directed by the Corporation.
(d) Any provisions of the policy contracts
notwithstanding, it is agreed that all of the rights, benefits, privileges, and
options pertaining to the said policies, including but not limiting the
generality of the above classification, the right to change the dividend option,
the right to borrow on the said policies of insurance for any purpose
whatsoever, the right to surrender any policy for its cash surrender value, and
the right to assign any policy or to
<PAGE>
12
change the beneficial interest thereunder shall be exercised only by the
Corporation.
4. DEATH OF A SHAREHOLDER:
(a) Each Shareholder hereby agrees that if he shall
be the first to die of the Shareholders, all of his Shares shall be offered for
sale to the Corporation at a Per Share Price determined in accordance with
subparagraph 5(b) of this agreement and on the terms contained in this paragraph
(and not on the terms contained in subparagraph 5(a) of this agreement).
(b) The Corporation hereby agrees that following the
death of the first to die of the Shareholders, it shall forthwith purchase the
Shares of the then deceased Shareholder at a Per Share Price determined in
accordance with subparagraph 5(b) of this agreement and on the terms contained
in this paragraph.
(c) Upon the death of any Shareholder the
Corporation shall forthwith submit proof of claim with respect to any and all
policies of insurance issued upon the life of said deceased Shareholder that
were payable to the Corporation upon the death of said Shareholder. Said
Corporation shall receive, use and apply all proceeds received under said
policies in trust for the uses and purposes herein set forth.
(d) In the event that the amount of insurance
proceeds paid to the Corporation shall be in excess of the purchase price of the
Shares of the deceased Shareholder, such excess of proceeds over purchase price
shall be paid over forthwith to the Corporation to be held by it free from all
of
<PAGE>
13
the provisions hereof. The Corporation shall forthwith pay over the balance of
the proceeds (equal in amount to said purchase price) to the executors or
administrators of the deceased Shareholder. Thereupon the Corporation shall
receive as the owner thereof the Shares of the deceased Shareholder.
(e) In the event that the amount of insurance
proceeds paid to the Corporation shall be equal to the purchase price of the
Shares of the deceased Shareholder, the Corporation shall forthwith pay over all
of the said proceeds to the executors or administrators of the deceased
Shareholder. Thereupon the Corporation shall receive as the owner thereof the
Shares of the deceased Shareholder.
(f) In the event that the said proceeds of the said
policy are less than the purchase price of the Shares being purchased as
determined in the manner hereinbefore set forth, the Corporation shall pay all
of said proceeds to the executors, or administrators of the deceased
Shareholder, and in addition the Corporation shall pay an amount equal to the
amount by which the purchase price, as determined in the manner herein set
forth, exceeds the said proceeds of the said policies issued upon the life of
the deceased Shareholder. In such case, or in the event that there is no
insurance policy in effect on the life of the deceased Shareholder, the payment
shall be made to the said executors or administrators in two (2) equal annual
installments with interest at the rate of nine percent (9%) per annum on the
unpaid balance. In connection therewith, it is understood and agreed that the
Corporation at any time or from
<PAGE>
14
time to time may prepay in part or in full said remaining balance due without
penalty or premium. Further, in connection therewith, upon payment of the
initial sum due the estate of the deceased Shareholder, together with the
execution of a judgment note, upon the terms contained in this subparagraph, in
favor of the estate of the deceased Shareholder for the unpaid balance, the said
estate shall duly endorse and deliver all of the Shares of the deceased
Shareholder to the Corporation.
5. PURCHASE PRICE:
(a) The "Total Purchase Price" with respect to any
Shares being purchased pursuant to paragraphs 1, 2 or 9 of this agreement shall
be the sum of four separate payments (each an "Annual Purchase Price Payment")
to be paid in cash by the purchaser to the seller as provided herein, each
payment to be computed as follows:
Each Annual Purchase Price Payment shall be the Per
Share Price as defined and determined for that year (assuming that the Shares
being purchased were still issued and outstanding) pursuant to subparagraph (b)
of this paragraph, multiplied by the total number of Shares being purchased,
divided by four (4).
The first Annual Purchase Price Payment shall be
paid within thirty (30) days of the acceptance of any offer to sell or
notification of any requirement to purchase any Shares pursuant to paragraphs 1,
2 or 9 of this agreement, at which time the seller shall duly endorse and
deliver all of his Shares to the purchaser. Each of the remaining three Annual
Purchase
<PAGE>
15
Price Payments as determined pursuant to this subparagraph shall be a general
obligation, as it becomes due, of the purchaser and paid in cash annually
thereafter.
Selling Shareholder may, at his option, require that 3/4 of the shares
being sold be pledged or placed in escrow. As each "Annual Purchase Price
Payment" is made, 1/4 of the total number of shares being sold will be removed
from escrow. The number of shares placed and removed from escrow will be rounded
to the nearest whole number of shares. For example if the shareholder initially
has 18 shares, 14 shares will be placed in escrow. After the second payment 1/2
of the total shares will remain in escrow (9 shares). After the third payment 5
shares will remain in escrow. After the fourth payment 0 shares will remain in
escrow.
Should any Annual Purchaser Price Payment be due and payable in any
calendar year prior to the time in such calendar year that the Per Share Price
has been defined and determined pursuant to subparagraph (b) of this paragraph,
then and in that case the Per Share Price shall be the Per Share Price as
determined for the previous calendar year, and the Annual Purchase Price Payment
shall be paid in accordance with this agreement, subject, however, to the
following adjustment: at such time during the said calendar year that the Per
Share Price shall be finally defined and determined for that calendar year, the
Annual Purchase Price Payment paid for that year shall be re-calculated
accordingly and an amount equal to any excess in the re-calculated Annual
Purchase Price Payment for that year
<PAGE>
16
over the Annual Purchase Price Payment already paid by the purchaser shall be
paid by the purchaser to the seller forthwith. Should the re-calculated Annual
Purchase Price Payment for the said year be less than the Annual Purchase Price
Payment already paid, then and in that case, an amount equal to the difference
between the Annual Purchase Price Payment already paid by the purchaser to the
seller and the re-calculated Annual Purchase Price Payment shall be refunded by
the seller to the purchaser forthwith.
(b) The Per Share Price for the purposes of this agreement shall
be the amount endorsed on Schedule "B." The parties agree, at on or before
March 31, of each year, they shall mutually agree upon the Per Share Price as of
December 31 of the preceding calendar year and shall duly endorse Exhibit "B"
with said Per Share Price and the date thereof. The initial Per Share Price for
the purpose of this agreement shall be fixed by the Shareholders immediately
upon the execution of this agreement and shall be duly endorsed on Schedule "B."
This means that whenever the number of shares outstanding changes, the Price Per
Share will be recalculated immediately based upon the new number of shares, and
this Price Per Share will be used to calculate the value of any Annual Purchase
Price Payment coming due following the change in the number of shares
outstanding.
The shareholders will determine the valuation of the shares (once
per year, and whenever the number of shares
<PAGE>
17
outstanding changes) by exercising the following formula in good faith:
Per Share Price = Total Business Valuation/Total Shares Outstanding
CASE Formula Business Valuation (greater than) (Gross Receipts or Sales) * Two
(2) THEN Total Business Valuation= (Gross Receipts or Sales) * Two (2)
CASE Formula Business Valuation (less than) (Gross Receipts or Sales) * One-
Half (.5) THEN Total Business Valuation= (Gross Receipts or Sales) *One-
Half (.5)
CASE (Gross Receipts or Sales) * One-Half (.5)less than Formula Business Value
(less than) (Gross Receipts or Sales) * Two (2) THEN Total Business
Valuation= Formula Business Valuation
Formula Business Valuation * Adjusted After Tax Earnings/Cost Of Capital
Adjusted After Tax Earnings = After Tax Earnings + Principals Salary
Adjustment
After Tax Earnings = Earnings (or loss) after operating expenses
and taxes as reported to the IRS for tax purposes.
Principals Salary Adjustment = (Principal's Combined Salary -
Principals Salary Allowance)* (1-Corporate Income Tax Rate)
Principals Combined Salary = sum of non-dividend related, taxable
compensation from the corporation for all shareholders
Principal's Salary Allowance = Number of Principals * Nominal
Principal Salary (Definition of a Principal: any
shareholder with more than 2.5% ownership of the company's
stock)
Nominal Principal Salary = $50,000/year in 1990
Escalating at Consumer Price Index + 5%
Cost Of Capital = Risk-Free Interest Rate + Risk Premium
Risk Free Interest Rate = 3 Month Treasury Bill Rate Risk Premium
= 5%
Each year, every shareholder will be granted the above information in order to
calculate the valuation of the firm using this formula. If, within forty-five
(45) days after March 31 of each year, a shareholder has reason to believe that
the firm is being undervalued based upon this information, he may upon written
demand to the other Shareholders require that the Per Share Price be fixed by
arbitration. The arbitrator will
<PAGE>
18
then seek to value the firm in the spirit of the original agreement while taking
into account any business irregularities.
In the event of arbitration, the accountant for the Corporation
shall retain the accounting firm of Price Waterhouse (or its successor) to act
as arbitrator.
Said arbitrator shall, within one hundred twenty (120) days of said
demand for arbitration determine, without right of appeal therefrom, the Per
Share Price which shall be, in the opinion of the arbitrator, the fair market
value of the Corporation as a going concern divided by the total number of
Shares outstanding. The said valuation so determined by arbitration shall be
endorsed on this agreement by the Corporation's accountant and shall be binding
for the then current calendar year. In the event that the valuation returned by
the arbitrator is more than 5% higher than that set by the corporation, the
corporation shall pay for the audit process. In the event that the valuation
returned by the auditor is 5% lower than that set by the corporation, the
protesting shareholder shall pay for the audit. If the arbitrator's valuation of
the firm is within 5% of the value set by the corporation, the cost of the audit
will be split between the protesting shareholder and the corporation equally
(50% to be paid by each party).
For purposes of this paragraph, "Shareholder" shall include any
former Shareholder who shall have received at least one, but
<PAGE>
19
not all, of his four Annual Purchase Price Payments due pursuant to this
paragraph.
6. SALE OF A MAJORITY OF SHARES OF THE CORPORATION
(a) In the case of a proposed sale by a Shareholder
("Controlling Shareholder") to a third party of a majority of the total Shares
outstanding and the failure of both the Corporation and the other Shareholder to
exercise their respective rights of first purchase pursuant to paragraph 1 of
this agreement, the remaining Shareholder ("Minority Shareholder") shall have
the right to require the Corporation to purchase all of his Shares by notifying
the Corporation, within thirty (30) days of his receipt of notice pursuant to
subparagraph 1(b) of this agreement, of his desire to sell his Shares and the
Corporation shall purchase, for a Total Purchase Price as defined in
subparagraph 5(a) of this agreement, all such Shares in accordance with
subparagraph (c) of this paragraph.
(b) In the case of the sale by any Controlling Shareholder to
a third party of Shares representing a majority of the Shares outstanding,
should the Minority Shareholder have previously sold his Shares to the
Corporation pursuant to paragraphs 1, 2 or 9 of this agreement and not have
received, at the time of the aforesaid sale of Shares by the Controlling
Shareholder, the entire Total Purchase Price, then in that case the Per Share
Price for computing all succeeding Annual Purchase
<PAGE>
20
Price Payments shall be adjusted in accordance with subparagraph (c) of this
agreement and paid in accordance therewith.
(c) For purposes of this paragraph, the Per Share Price used
to compute the Total Purchase Price or any succeeding Annual Purchase Price
Payment shall be the selling price of each of the Shares being sold by the
Controlling Shareholder, the provisions of subparagraph 5(b) of this agreement
to the contrary notwithstanding.
In the case of a sale of a majority of Shares outstanding by
the Controlling Shareholder pursuant to this paragraph, any and all payments due
to the Minority Shareholder as a result of either subparagraph (a) or (b) of
this paragraph shall be due and payable as follows: one half paid to the
Minority Shareholder contemporaneously with the sale of the Shares by the
Controlling Shareholder to a third party, and the remaining one half due and
payable one year thereafter, the payment provisions of subparagraph 5(a) of this
agreement to the contrary notwithstanding.
7. PURCHASE OF INSURANCE POLICIES ON WITHDRAWAL OF PARTY:
In the event that any Shareholder shall cease to be a party to
this agreement, such Shareholder shall have the right to purchase from the
Corporation the insurance policies on his life, if any, listed in Schedule "A"
for a price equal to the cash surrender value of the policies at the date of the
offer of sale. The right to purchase shall be exercised and the price paid
contemporaneously with the payment of the price for the
<PAGE>
21
Shares purchased from such Shareholder. The Corporation shall deliver the
policies to the Shareholder and shall execute any necessary instruments of
transfer. In the event any policies of insurance subject to the foregoing option
are not so purchased, such policies shall be released from the terms of this
agreement.
8. NOTIFICATION OF STOCK (EQUITY) ISSUANCE:
In the event that the corporation decides to issue stock to a
party not mentioned herein, the corporation will provide 30 days advance written
notice to the shareholders detailing the identity of the new shareholder, the
number of shares to be issued, and the conditions leading to the granting of
equity.
9. ANTIDILUTION PROVISIONS:
Saylor and the Corporation both agree that they will not issue
or cause to be issued any Shares sufficient to make the number of Shares owned
by Bansal thereafter less than nine percent (9%) of the total number of Shares
issued and outstanding, without first offering to purchase all of Bansal's
Shares for a Total Purchase Price determined in accordance with paragraph 5 of
this agreement and on the terms and conditions as provided therein. Should
Bansal accept, within thirty (30) days, such offer to purchase his Shares, the
Corporation shall thereafter purchase the aforesaid Shares in accordance with
the terms contained in paragraph 5 of this Agreement. Should Bansal not, within
thirty (30) days, accept the aforesaid offer to purchase his Shares, the
Corporation shall be free to issue any
<PAGE>
22
and all Shares permitted by law without regard to this paragraph.
The spirit of anti-dilution shall also apply to shares in escrow. If
Bansal has shares in escrow pursuant to paragraphs 1,2, 5, or 9, and if Saylor
or corporation issue or cause to be issued Shares such that there exist more
than 200 Total Shares, the number of shares in escrow will be increased in exact
proportion to the number of Total Shares.
The formula shall be as follows:
New Shares in escrow = (Total Shares) * (Shares in Escrow)/200
For example, using the above formula, if Bansal has 14 shares in escrow and
Saylor or Corporation increase Total Shares to 500, Bansal's shares in escrow
would be increased to 35.
10. SUB-CHAPTER S ELECTION:
(a) Prior to making any transfer of the Shares under this
agreement, the transferring Shareholder shall obtain from the Corporation a
written certification that neither such transfer nor any transaction
contemplated with respect to such transfer (including, without limitation, the
foreclosure of any lien or encumbrance or, the case of a transfer in trust, the
termination of such trust or the taking of any action by any beneficiary of such
trust) will or may result in the termination
<PAGE>
23
of the Corporation's Sub-Chapter S Election should such election be then in
effect ("S Election"). The Corporation may require, as a condition to any such
certification to be provided by the Corporation under this agreement, a legal
opinion of counsel of its choice as to the matters to be contained in such
certification, satisfactory in form and substance to the Corporation, and
arrangements satisfactory to the Corporation to ensure that any transferee shall
take any actions necessary to maintain the Corporation's S Election (including,
without limitation, with respect to any transfer in trust, the timely filing of
an election to treat such trust as a qualified subchapter S trust ("QSST") under
Section 1361(d) of the Internal Revenue Code, if applicable). Should it be
necessary for the corporation to obtain legal opinion concerning the impact of
a Shareholder's actions on the corporation's S Election status, the corporation
will conclude its legal analysis within 30 days after receiving the request from
the Shareholder.
(b) No Shareholder shall take any action which would result
in the termination of the Corporation's S Election without the prior written
consent of persons holding a majority of the Shares.
(c) If any Shareholder makes any transfer or takes any other
action that causes termination of the Corporation's S Election, the Board of
Directors may direct the appropriate officers of the Corporation to attempt to
obtain a waiver from the Internal Revenue Service of the terminating
<PAGE>
24
event on grounds of inadvertency or to commence the appropriate procedure to
obtain approval from the Internal Revenue Service to file a new election to be
treated as an S corporation before the 5-year waiting period after termination
of an S Election has expired.
(d) Nothing in this agreement shall be construed to prevent
the Corporation or persons holding a majority of the Shares from terminating the
Corporation's S Election, if the Corporation's directors or such persons
determine that such termination is desirable.
<PAGE>
25
11. ENDORSEMENT ON STOCK CERTIFICATES:
Upon the execution of this agreement, the certificates of stock
subject hereto shall be surrendered to the Corporation and endorsed as follows:
This certificate is transferable only upon compliance with the
provisions of an agreement dated _____________, 19., between
Michael J. Saylor, Sanju K. Bansal and MicroStrategy Incorporated, a
copy of which together with all amendments thereto is on file in the
office of the Secretary of the Corporation.
After endorsement the certificates shall be returned to the
Shareholders who shall, subject to the terms of this agreement, be entitled to
exercise all rights of ownership of the Shares.
All shares of stock of the Corporation hereafter issued to any
Shareholder shall be deemed to be "Shares" as defined in this agreement, shall
be subject to all of its terms and conditions, and bear the same or similar
endorsement.
12. TERMINATION OF AGREEMENT:
(a) This agreement shall terminate upon the occurrence of any
of the following events:
(i) Dissolution of the Corporation.
(ii) The voluntary agreement of all parties who are then
bound by the terms hereof.
(b) Upon the termination of this agreement, each Shareholder
shall surrender to the Corporation the certificate for his stock and the
Corporation shall issue to
<PAGE>
26
him in lieu thereof new certificates for an equal number of Shares without the
endorsement set forth in paragraph 10.
13. TRANSFER OF SHARES IN VIOLATION OF THE AGREEMENT:
Any transfer of Shares or attempted transfer of Shares in violation
of this agreement shall be deemed null and void, and, at the election of the
Corporation or any Shareholder, be deemed to be an offer to sell the Shares
according to the provisions and procedures of paragraphs 1 and 5 of this
agreement.
14. ENFORCEMENT:
Since the parties will suffer irreparable harm and damage in the
event this agreement is not exactly carried out, it is stipulated:
(a) If any dispute arises concerning the transfer of Shares,
an injunction may be issued restraining any transfer pending determination of
the dispute; and
(b) If any dispute arises concerning the right or duty to buy
or sell, then the rights or duty shall be enforceable in a court of equity by a
decree of specific performance after the determination of the dispute.
These remedies, however, shall be cumulative and not exclusive and
shall be in addition to any other remedy which the parties may have.
15. BINDING UPON:
This agreement shall be for the benefit of and binding upon the
parties hereto, their heirs, administrators, executors,
<PAGE>
27
successors and assigns, and the parties hereto do covenant and agree that they,
themselves, and their heirs, executors, administrators, successors and assigns,
will execute any and all instruments, releases, assignments and consents that
may be required of them in accordance with the provision of this agreement.
16. MISCELLANEOUS:
(a) All offers, acceptances, notifications and other
communications contemplated by this agreement shall be sent, by Registered Mail
return receipt requested, to the appropriate party at the then current address
contained in the files of the Corporation, and shall be effective upon delivery
or upon refusal.
(b) Any shareholder who either desires or is required to sell
his Shares pursuant to this agreement shall duly endorse and deliver all of the
Shares upon receipt of any initial payment.
17. CONSTRUCTION:
This agreement shall be construed under the laws of the State of
Delaware.
18. PRIOR AGREEMENT.
To the extent that any prior agreements may have existed covering
the same subject matter, the said prior agreements are hereby terminated and
declared null and void.
<PAGE>
28
IN WITNESS WHEREOF, the parties, for themselves, their heirs,
executors, administrators, successors and assigns, have hereunto set their hands
and seals the day and date first above written.
WITNESS:
[SIGNATURE APPEARS HERE] /s/ Michael J. Saylor (SEAL)
- ------------------------------------ -------------------------------------
Michael J. Saylor
/s/ Sanju K. Bansal (SEAL)
- ------------------------------------ -------------------------------------
Sanju K. Bansal
MICROSTRATEGY INCORPORATED
By:
---------------------------------------
ATTEST: By: /s/ Michael J. Saylor
---------------------------------------
Secretary
CORPORATE SEAL]
<PAGE>
29
SCHEDULE A
----------
LIFE INSURANCE POLICIES
[None as of 1/1/90]
<PAGE>
30
SCHEDULE B
----------
Price Per Share Date Initials
- --------------- ---- --------
$________________________ 1/1/90 to 12/31/90 (--------------------------
(__________________________
$________________________ 1/1/91 to 12/31/91 (--------------------------
(__________________________
$________________________ 1/1/92 to 12/31/92 (--------------------------
(__________________________
$________________________ 1/1/93 to 12/31/93 (--------------------------
(__________________________
$________________________ 1/1/94 to 12/31/94 (--------------------------
(__________________________
$________________________ 1/1/95 to 12/31/95 (--------------------------
(__________________________
$________________________ 1/1/96 to 12/31/96 (--------------------------
(__________________________
<PAGE>
1
Exhibit 10.2
STOCK PURCHASE AGREEMENT
FOR
MICROSTRATEGY INCORPORATED
--------------------------
THIS STOCK PURCHASE AGREEMENT ("Agreement"), by and between MICROSTRATEGY
INCORPORATED, a Delaware corporation (the "Corporation") and CHARLES A. VELEY of
New Castle County, Delaware, ("Veley") is being entered into on 11 October,
1992.
WHEREAS, Michael J. Saylor ("Saylor") of New Castle County, Delaware has
caused the Corporation to be formed for the purpose of being a full service
provider of strategy system software, support and service and related activities
and any other lawful business as determined by the Board of Directors of the
Corporation; and
WHEREAS, Veley wishes to become a shareholder in the Corporation subject to
the terms and conditions of this Agreement;
NOW THEREFORE, for the mutual promises, covenants, understandings,
representations, warranties and benefits contained herein, the parties hereto
agree as follows:
1. Subscription for Shares. Veley agrees to subscribe to such number of
-----------------------
shares of the authorized stock of the Corporation at such price as is more
particularly described in Exhibit A attached hereto.
2. Payment for Shares. Concurrent with the execution of this Stock
------------------
Purchase Agreement, Veley shall pay into the Corporation, as paid in capital
and/or surplus, in
<PAGE>
2
exchange for the capital stock of the Corporation, the total subscription price
as more particularly described in Exhibit A.
3. Shareholders Buy/Sell Agreement. Veley agrees to execute and be bound
-------------------------------
by a Shareholders Buy/Sell Agreement with respect to all the outstanding shares
of the Corporation ("Shares") in the form substantially similar to that attached
hereto as Exhibit B.
4. Representations of Veley. Veley represents and warrants as follows:
------------------------
(a) That he has received and carefully read this Agreement including all
of its attachments.
(b) That he is purchasing the Shares in the Corporation without being
furnished any offering literature or prospectus other than this Agreement.
(c) That he recognizes that the Shares have not been registered under the
Securities Act of 1933, as amended (the "Act"), or under the securities laws of
any state and, therefore, cannot be resold unless they are registered under the
Act and applicable state securities laws or unless an exemption from
registration is available. Veley recognizes that he has no rights to require
such registration. He also recognizes that no public agency has passed upon the
accuracy or adequacy of the information contained in this Agreement or the
fairness of the terms of the subscription.
<PAGE>
3
(d) That he is acquiring the Shares for his own account for a long term
investment and not with a view toward resale, fractionalization, division, or
distribution thereof. The parties do not presently have any reason to anticipate
any change in his circumstances, financial or otherwise, or any particular
occasion or event which would necessitate or require the sale or distribution of
the Shares. No one other than the parties hereto have any beneficial interest in
the Shares.
(e) That he recognizes the transfer of the Shares is subject to a
Shareholders Buy/Sell Agreement which agreement severely restricts his ability
to sell or otherwise dispose of the Shares, and among other provision, provides
further, under certain circumstances, for the mandatory sale of his Shares to
the Corporation and/or its remaining Shareholder.
(f) That he recognizes the Corporation is in the development stage, has
no history of operations or earnings, is a speculative venture, and that the
total amount of funds tendered to purchase the Shares, including any debt of the
Corporation guaranteed by him, is placed at the risk of the business and may be
completely lost.
(g) That he has been provided with access to all information requested
in addition to the Agreement for evaluating his purchase of Shares, none of
which was contrary to the information contained in this Agreement.
<PAGE>
4
(h) That he has been presented with and has acted upon the opportunity
to ask questions and receive answers from the offeror relating to the terms and
conditions of the purchase of the Shares, to consult with legal counsel and to
obtain any additional information necessary to verify the accuracy of the
information made available to him.
(i) That Veley recognizes he is a minority Shareholder in the
Corporation and that, as such, pursuant to the General Corporation Law of the
State of Delaware ("GCL"), his rights to control, operate, and manage the
Corporation are limited, and that as the majority Shareholder, Saylor, by virtue
of his ability to elect directors as provided by the GCL and by virtue of his
ability to vote his Shares pursuant to the GCL, has substantial control over the
operations, management and activities of the Corporation.
5. Indemnification. Veley agrees to indemnify and hold harmless the
---------------
Corporation and its affiliates, and Saylor from any and all damages, losses,
costs and expenses (including reasonable attorneys' fees) any of which may be
incurred by reason of the failure of the representations and warranties made by
him in this Agreement, or in any document provided by him to Microstrategy or to
its affiliates.
6. Applicable Law. This Agreement shall be deemed to have been made in
--------------
the State of Delaware, shall become valid when executed and accepted by the
parties, and shall be governed and construed in accordance with the laws
<PAGE>
5
of such State, which laws shall prevail in the event of any conflict of laws.
7. Severability. If, for any reason, any portion of this Agreement is
------------
held to be invalid, contrary to or in conflict with any applicable present or
future law or regulation in a final, unappealable ruling issued by any court,
agency or tribunal of competent jurisdiction in a proceeding to which the
Corporation and Veley are a party, that ruling shall not impair the operation
of, or having any effect upon, such other portions of this Agreement as may
remain otherwise enforceable, which shall continue to be given full force and
effect and bind the parties hereto, although any portion held to be invalid
shall be deemed not be a part of this Agreement when the time for appeal
expires, or upon the receipt, by either party, of notice of nonenforcement
thereof.
8. Binding Effect. This Agreement is binding upon the parties hereto
--------------
and their respective executors, administrators, heirs, assigns and successors in
interest.
9. Construction. The preambles are a part of this Agreement and are
------------
expressly incorporated herein.
<PAGE>
6
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year aforesaid.
ATTEST MICROSTRATEGY INCORPORATED
[SIGNATURE APPEARS HERE] By: [SIGNATURE APPEARS HERE] [SEAL]
- ------------------------------- -----------------------------
Secretary President
WITNESS: Charles A. Veley
[SIGNATURE APPEARS HERE] /s/ Charles A. Veley [SEAL]
- ------------------------------- --------------------------------
<PAGE>
7
EXHIBIT A
---------
SUBSCRIPTION OF SHARES
OF
MICROSTRATEGY INCORPORATED
Total
Price Subscription
Name Shares Per Share Price
---- ------ --------- -----
Michael J. Saylor 100 $1.00 $100.00
Thomas P. Spahr 28 $1.00 $28.00
Sanju K. Bansal 18 $1.00 $18.00
Charles A. Veley 5 $1.00 $5.00
Yimin Zhuang 3 $1.00 $3.00
<PAGE>
8
EXHIBIT B
---------
MICROSTRATEGY INCORPORATED
SHAREHOLDERS BUY/SELL AGREEMENT
-------------------------------
THIS AGREEMENT, made this _____ day of __________ 1992, by and among
MICHAEL J. SAYLOR, party of the first part ("Saylor"), and CHARLES A. VELEY,
party of the second part ("Veley"), both of which parties and any successors
shall collectively be referred to as "Shareholders," and MICROSTRATEGY
INCORPORATED, a Delaware corporation, party of the third part ("Corporation").
WITNESSETH:
----------
WHEREAS, the Shareholders are the owners of all of the issued capital stock
of Corporation (together with any capital stock issued hereafter, the "Shares")
as follows: Michael J. Saylor -- 100 Shares and Thomas P. Spahr -- 28 Shares and
Sanju K. Bansal -- 18 Shares and Charles A. Veley -- 5 Shares and Yimin Zhuang
- -- 3 Shares; and
WHEREAS, the parties to this agreement believe that it is in their mutual
best interests to provide continuity in the management and policies of the
Corporation. Accordingly, the purpose of this agreement is to impose certain
restrictions and obligations with respect to the disposition of the Shares by
any Shareholder and to provide for the purchase by the Corporation of a deceased
Shareholder's Shares therein.
<PAGE>
9
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and conditions herein contained, and for other good and valuable
consideration, receipt of which is hereby acknowledged, the parties hereto,
intending to be legally bound hereby, mutually covenant and agrees follows:
1. RIGHT OF FIRST PURCHASE:
(a) Restriction:
Each Shareholder agrees that during his lifetime he will not sell,
give, encumber, pledge or otherwise transfer, assign, or dispose of either
voluntarily or involuntarily, or by operation of law, all or any part of the
Shares which he now owns or may hereafter acquire (except as otherwise permitted
herein) without first offering in writing such Shares to the Corporation and to
the other Shareholder for a Total Purchase Price determined in accordance with
paragraph 5 hereof, and on the terms provided therein.
(b) Period of Rights:
The Corporation shall promptly notify the other Shareholder of the
receipt of such offer and its contents, and the Corporation shall have a period
of thirty (30) days from the date of receipt of such offer to exercise or waive
its right to purchase all of the Shares so offered. If the Corporation waives or
fails to exercise its rights within said period, the Corporation shall thereupon
notify the Shareholder of such a fact in writing and such other Shareholder
shall have a period of thirty (30) days from the receipt of such notice or from
the expiration of said thirty (30) day period, whichever is the
<PAGE>
10
earlier, to exercise or waive the right to purchase all of the Shares so offered
at the Total Purchase Price determined in accordance with paragraph 5 of this
agreement, and on the terms as provided therein.
It is understood and agreed that neither the Corporation nor the other
Shareholder shall have the right to buy any less than all of the Shares so
offered by the selling Shareholder.
(c) Failure to Exercise Right:
In the event neither the Corporation nor the other Shareholder shall
elect to purchase all of the Shares so offered within the proper period, or
shall waive such rights, then the offering Shareholder shall be free to sell
such Shares so offered to any person or entity provided that such person or
entity shall, upon the purchase of such Shares, agree to be bound by the terms
and conditions of this agreement. Any of the offered Shares not so sold within a
period of ninety (90) days after any offer under subparagraphs 1(a) and 1(b)
hereof to the Corporation and the Shareholder has expired, shall again become
subject to the terms of this agreement and may not thereafter be sold to any
other party without first offering them to the Corporation and the other
Shareholders in accordance with the terms and conditions of this agreement.
2. TERMINATION OF EMPLOYMENT:
If any Shareholder's employment with the Corporation is terminated for
any reason, other than by reason of death, said terminated or retiring employee
shall, within ninety (90)
<PAGE>
11
days thereof, offer for sale all of his Shares to the Corporation at a Total
Purchase Price determined in accordance with paragraph 5 of this agreement, and
of the terms contained therein, and the Corporation shall purchase the aforesaid
Shares in accordance therewith.
3. INSURANCE:
(a) To the extent that life insurance is owned on the lives of
certain Shareholders, all such policies of insurance subject hereto shall be
listed in Schedule "A ," attached hereto and made a part hereof. It is agreed
that further or substituted policies of insurance may from time to time be made
subject to the provisions hereof, or that policies subject hereto may be
withdrawn herefrom by the Shareholders and the Corporation. The description of
the policies so added or withdrawn shall be included in said Schedule "A."
(b) The premiums that shall be payable upon the said policies
shall be paid by the Corporation.
(c) Any dividends that may be payable upon the said policies
shall be disposed of as directed in the application for said policies or as
afterward directed by the Corporation.
(d) Any provisions of the policy contracts notwithstanding, it is
agreed that all of the rights, benefits, privileges, and options pertaining to
the said policies, including but not limiting the generality of the above
classification, the right to change the dividend option, the right to borrow on
the said policies of insurance for any
<PAGE>
12
purpose whatsoever, the right to surrender any policy for its cash surrender
value, and the right to assign any policy or to change the beneficial interest
thereunder shall be exercised only by the Corporation.
4. DEATH OF A SHAREHOLDER:
(a) Each Shareholder hereby agrees that if he shall be the first to
die of the Shareholders, all of his Shares shall be offered for sale to the
Corporation at a Per Share Price determined in accordance with subparagraph 5(b)
of this agreement and on the terms contained in this paragraph (and not on the
terms contained in subparagraph 5(a) of this agreement).
(b) The Corporation hereby agrees that following the death of the
first to die of the Shareholders, it shall forthwith purchase the Shares of the
then deceased Shareholder at a Per Share Price determined in accordance with
subparagraph 5(b) of this agreement and on the terms contained in this
paragraph.
(c) Upon the death of any Shareholder the Corporation shall forthwith
submit proof of claim with respect to any and all policies of insurance issued
upon the life of said deceased Shareholder that were payable to the Corporation
upon the death of said Shareholder. Said Corporation shall receive, use and
apply all proceeds received under said policies in trust for the uses and
purposes herein set forth.
(d) In the event that the amount of insurance proceeds paid to the
Corporation shall be in excess of the purchase price of the Shares of the
deceased Shareholder, such
<PAGE>
13
excess of proceeds over purchase price shall be paid over forthwith to the
Corporation to be held by it free from all of the provisions hereof. The
Corporation shall forthwith pay over the balance of the proceeds (equal in
amount to said purchase price) to the executors or administrators of the
deceased Shareholder. Thereupon the Corporation shall receive as the owner
thereof the Shares of the deceased Shareholder.
(e) In the event that the amount of insurance proceeds paid to the
Corporation shall be equal to the purchase price of the Shares of the deceased
Shareholder, the Corporation shall forthwith pay over all of the said proceeds
to the executors or administrators of the deceased Shareholder. Thereupon the
Corporation shall receive as the owner thereof the Shares of the deceased
Shareholder.
(f) In the event that the said proceeds of the said policy are less than
the purchase price of the Shares being purchased as determined in the manner
hereinbefore set forth, the Corporation shall pay all of said proceeds to the
executors, or administrators of the deceased Shareholder, and in addition the
Corporation shall pay an amount equal to the amount by which the purchase price,
as determined in the manner herein set forth, exceeds the said proceeds of the
said policies issued upon the life of the deceased Shareholder. In such case, or
in the event that there is no insurance policy in effect on the life of the
deceased Shareholder, the payment shall be made to the said executors or
administrators in two (2) equal annual installments with interest at the rate of
nine percent (9%) per
<PAGE>
14
annum on the unpaid balance. In connection therewith, it is understood and
agreed that the Corporation at any time or from time to time may prepay in part
or in full said remaining balance due without penalty or premium. Further, in
connection therewith, upon payment of the initial sum due the estate of the
deceased Shareholder, together with the execution of a judgment note, upon the
terms contained in this subparagraph, in favor of the estate of the deceased
Shareholder for the unpaid balance, the said estate shall duly endorse and
deliver all of the Shares of the deceased Shareholder to the Corporation.
5. PURCHASE PRICE:
(a) The "Total Purchase Price" with respect to any Shares being
purchased pursuant to paragraphs 1, 2 or 9 of this agreement shall be the sum of
four separate payments (each an "Annual Purchase Price Payment") to be paid in
cash by the purchaser to the seller as provided herein, each payment to be
computed as follows:
Each Annual Purchase Price Payment shall be the Per Share Price
as defined and determined for that year (assuming that the Shares being
purchased were still issued and outstanding) pursuant to subparagraph (b) of
this paragraph, multiplied by the total number of Shares being purchased,
divided by four (4).
The first Annual Purchase Price Payment shall be paid within
thirty (30) days of the acceptance of any offer to sell or notification of any
requirement to purchase any Shares pursuant to paragraphs 1, 2 or 9 of this
agreement, at which
<PAGE>
15
time the seller shall duly endorse and deliver all of his Shares to the
purchaser. Each of the remaining three Annual Purchase Price Payments as
determined pursuant to this subparagraph shall be a general obligation, as it
becomes due, of the purchaser and paid in cash annually thereafter.
Selling Shareholder may, at his option, require that 3/4 of the shares
being sold be pledged or placed in escrow. As each "Annual Purchase Price
Payment" is made, 1/4 of the total number of shares being sold will be removed
from escrow. The number of shares placed and removed from escrow will be rounded
to the nearest whole number of shares. For example if the shareholder initially
has 18 shares, 14 shares will be placed in escrow. After the second payment 1/2
of the total shares will remain in escrow (9 shares). After the third payment 5
shares will remain in escrow. After the fourth payment 0 shares will remain in
escrow.
Should any Annual Purchase Price Payment be due and payable in
any calendar year prior to the time in such calendar year that the Per Share
Price has been defined and determined pursuant to subparagraph (b) of this
paragraph, then and in that case the Per Share Price shall be the Per Share
Price as determined for the previous calendar year, and the Annual Purchase
Price Payment shall be paid in accordance with this agreement, subject, however,
to the following adjustment: at such time during the said calendar year that the
Per Share Price shall be finally defined and determined for that calendar year,
the Annual Purchase Price Payment paid for that year shall be
<PAGE>
16
re-calculated accordingly and an amount equal to any excess in the re-calculated
Annual Purchase Price Payment for that year over the Annual Purchase Price
Payment already paid by the purchaser shall be paid by the purchaser to the
seller forthwith. Should the re-calculated Annual Purchase Price Payment for the
said year be less than the Annual Purchase Price Payment already paid, then and
in that case, an amount equal to the difference between the Annual Purchase
Price Payment already paid by the purchaser to the seller and the re-calculated
Annual Purchase Price Payment shall be refunded by the seller to the purchaser
forthwith.
(b) The Per Share Price for the purposes of this agreement shall
be the amount endorsed on Schedule "B." The parties agree, at on or before March
31, of each year, they shall mutually agree upon the Per Share Price as of
December 31 of the preceding calendar year and shall duly endorse Exhibit "B"
with said Per Share Price and the date thereof. The initial Per Share Price for
the purpose of this agreement shall be fixed by the Shareholders immediately
upon the execution of this agreement and shall be duly endorsed on Schedule "B."
This means that whenever the number of shares outstanding changes, the Price Per
Share will be recalculated immediately based upon the new number of shares, and
this Price Per Share will be used to calculate the value of any Annual Purchase
Price Payment coming due following the change in the number of shares
outstanding.
<PAGE>
17
The shareholders will determine the valuation of the shares (once per
year, or whenever the number of shares outstanding changes) by exercising the
following formula in good faith:
Per Share Price = Total Business Valuation / Total Shares Outstanding
CASE Formula Business Valuation greater than (Gross Receipts or Sales) * Two
(2) THEN Total Business Valuation= (Gross Receipts or Sales) * Two (2)
CASE Formula Business Valuation less than (Gross Receipts or Sales) * One-Half
(.5) THEN Total Business Valuation= (Gross Receipts or Sales) *One-Half
(.5)
CASE (Gross Receipts or Sales) * One-Half (.5) less than Formula Business
Value less than (Gross Receipts or Sales) * Two (2) THEN
Total Business Valuation= Formula Business Valuation
Formula Business Valuation=Adjusted After Tax Earnings/Cost Of Capital
Adjusted After Tax Earnings=After Tax Earnings + Principals Salary
Adjustment
After Tax Earnings= Earnings (or loss) after operating expenses
and taxes as reported to the IRS for tax purposes.
Principals Salary Adjustment= (Principal's Combined Salary -
Principals Salary Allowance)* (1-Corporate Income Tax Rate)
Principals Combined Salary= sum of non-dividend related, taxable
compensation from the corporation for all shareholders
Principal's Salary Allowance= Number of Principals * Nominal
Principal Salary
(Definition of a Principal: any shareholder with more than
2.5% ownership of the company's stock)
Nominal Principal Salary= $50,000/year in 1990
Escalating at Consumer Price Index + 5%
Cost Of Capital= Long Term Risk Free Interest Rate + Risk Premium Long
Term Risk Free Interest Rate= 30 Year U.S. Treasury Bill Rate
Risk Premium = 5%
Each year, every shareholder will be granted the above information in order to
calculate the valuation of the firm using this formula. If, within forty-five
(45) days after March 31 of each year, a shareholder has reason to believe that
the firm is being undervalued based upon this information, he may upon written
demand to the other Shareholders require that the
<PAGE>
18
Per Share Price be fixed by arbitration. The arbitrator will then seek to value
the firm in the spirit of the original agreement while taking into account any
business irregularities.
In the event of arbitration, the accountant for the
Corporation shall retain the accounting firm of Price Waterhouse (or its
successor) to act as arbitrator.
Said arbitrator shall, within one hundred twenty (120) days
of said demand for arbitration determine, without right of appeal therefrom, the
Per Share Price which shall be, in the opinion of the arbitrator, the fair
market value of the Corporation as a going concern divided by the total number
of Shares outstanding. The said valuation so determined by arbitration shall be
endorsed on this agreement by the Corporation's accountant and shall be binding
for the then current calendar year. In the event that the valuation returned by
the arbitrator is more than 5% higher than that set by the corporation, the
corporation shall pay for the audit process. In the event that the valuation
returned by the auditor is 5% lower than that set by the corporation, the
protesting shareholder shall pay for the audit. If the arbitrator's valuation of
the firm is within 5% of the value set by the corporation, the cost of the audit
will be split between the protesting shareholder and the corporation equally
(50% to be paid by each party).
For purposes of this paragraph, "Shareholder" shall include any former
Shareholder who shall have received at least one, but
<PAGE>
19
not all, of his four Annual Purchase Price Payments due pursuant to this
paragraph.
6. SALE OF A MAJORITY OF SHARES OF THE CORPORATION
(a) In the case of a proposed sale by a Shareholder ("Controlling
Shareholder") to a third party of a majority of the total Shares outstanding and
the failure of both the Corporation and the other Shareholder to exercise their
respective rights of first purchase pursuant to paragraph 1 of this agreement,
the remaining Shareholder ("Minority Shareholder") shall have the right to
require the Corporation to purchase all of his Shares by notifying the
Corporation, within thirty (30) days of his receipt of notice pursuant to
subparagraph 1(b) of this agreement, of his desire to sell his Shares and the
Corporation shall purchase, for a Total Purchase Price as defined in
subparagraph 5(a) of this agreement, all such Shares in accordance with
subparagraph (c) of this paragraph.
(b) In the case of the sale by any Controlling Shareholder to a
third party of Shares representing a majority of the Shares outstanding, should
the Minority Shareholder have previously sold his Shares to the Corporation
pursuant to paragraphs 1, 2 or 9 of this agreement and not have received, at the
time of the aforesaid sale of Shares by the Controlling Shareholder, the entire
Total Purchase Price, then in that case the Per Share Price for computing all
succeeding Annual Purchase
<PAGE>
20
Price Payments shall be adjusted in accordance with subparagraph (c) of this
agreement and paid in accordance therewith.
(c) For purposes of this paragraph, the Per Share Price used to
compute the Total Purchase Price or any succeeding Annual Purchase Price Payment
shall be the selling price of each of the Shares being sold by the Controlling
Shareholder, the provisions of subparagraph 5(b) of this agreement to the
contrary notwithstanding.
In the case of a sale of a majority of Shares outstanding by the
Controlling Shareholder pursuant to this paragraph, any and all payments due to
the Minority Shareholder as a result of either subparagraph (a) or (b) of this
paragraph shall be due and payable as follows: one half paid to the Minority
Shareholder contemporaneously with the sale of the Shares by the Controlling
Shareholder to a third party, and the remaining one half due and payable one
year thereafter, the payment provisions of subparagraph 5(a) of this agreement
to the contrary notwithstanding.
7. PURCHASE OF INSURANCE POLICIES ON WITHDRAWAL OF PARTY:
In the event that any Shareholder shall cease to be a party to
this agreement, such Shareholder shall have the right to purchase from the
Corporation the insurance policies on his life, if any, listed in Schedule "A"
for a price equal to the cash surrender value of the policies at the date of the
offer of sale. The right to purchase shall be exercised and the price paid
contemporaneously with the payment of the price for the
<PAGE>
21
Shares purchased from such Shareholder. The Corporation shall deliver the
policies to the Shareholder and shall execute any necessary instruments of
transfer. In the event any policies of insurance subject to the foregoing option
are not so purchased, such policies shall be released from the terms of this
agreement.
8. NOTIFICATION OF STOCK (EQUITY) ISSUANCE:
In the event that the corporation decides to issue stock to a
party not mentioned herein, the corporation will provide 30 days advance written
notice to the shareholders detailing the identity of the new shareholder, the
number of shares to be issued, and the conditions leading to the granting of
equity.
9. ANTIDILUTION PROVISIONS:
Saylor and the Corporation both agree that they will not issue or
cause to be issued any Shares sufficient to make the number of Shares owned by
Veley thereafter less than Two and One Half percent (2.5%) of the total number
of Shares issued and outstanding, without first offering to purchase all of
Veley's Shares for a Total Purchase Price determined in accordance with
paragraph 5 of this agreement and on the terms and conditions as provided
therein. Should Veley accept, within thirty (30) days, such offer to purchase
his Shares, the Corporation shall thereafter purchase the aforesaid Shares in
accordance with the terms contained in paragraph 5 of this Agreement. Should
Veley not, within thirty (30) days, accept the aforesaid offer to purchase his
Shares, the Corporation
<PAGE>
22
shall be free to issue any and all Shares permitted by law without regard to
this paragraph.
10. SUB-CHAPTER S ELECTION:
(a) Prior to making any transfer of the Shares under this
agreement, the transferring Shareholder shall obtain from the Corporation a
written certification that neither such transfer nor any transaction
contemplated with respect to such transfer (including, without limitation, the
foreclosure of any lien or encumbrance or, the case of a transfer in trust, the
termination of such trust or the taking of any action by any beneficiary of such
trust) will or may result in the termination of the Corporation's Sub-Chapter S
Election should such election be then in effect ("S Election"). The Corporation
may require, as a condition to any such certification to be provided by the
Corporation under this agreement, a legal opinion of counsel of its choice as to
the matters to be contained in such certification, satisfactory in form and
substance to the Corporation, and arrangements satisfactory to the Corporation
to ensure that any transferee shall take any actions necessary to maintain the
Corporation's S Election (including, without limitation, with respect to any
transfer in trust, the timely filing of an election to treat such trust as a
qualified subchapter S trust ("QSST") under Section 1361(d) of the Internal
Revenue Code, if applicable). Should it be necessary for the corporation to
obtain legal opinion concerning the impact of a Shareholder's actions on the
corporation's S Election status, the corporation will conclude its legal
<PAGE>
23
analysis within 30 days after receiving the request from the Shareholder.
(b) No Shareholder shall take any action which would result in the
termination of the Corporation's S Election without the prior written consent of
persons holding a majority of the Shares.
(c) If any Shareholder makes any transfer or takes any other action that
causes termination of the Corporation's S Election, the Board of Directors may
direct the appropriate officers of the Corporation to attempt to obtain a waiver
from the Internal Revenue Service of the terminating event on grounds of
inadvertency or to commence the appropriate procedure to obtain approval from
the Internal Revenue Service to file a new election to be treated as an S
corporation before the 5-year waiting period after termination of an S Election
has expired.
(d) Nothing in this agreement shall be construed to prevent the Corporation
or persons holding a majority of the Shares from terminating the Corporation's S
Election, if the Corporation's directors or such persons determine that such
termination is desirable.
<PAGE>
24
11. ENDORSEMENT ON STOCK CERTIFICATES:
Upon the execution of this agreement, the certificates of stock
subject hereto shall be surrendered to the Corporation and endorsed as follows:
This certificate is transferable only upon compliance with the
provisions of an agreement dated 15 Dec, 1992, between Michael J.
Saylor, Charles A. Veley and MicroStrategy Incorporated, a copy of
which together with all amendments thereto is on file in the office
of the Secretary of the Corporation.
After endorsement the certificates shall be returned to the
Shareholders who shall, subject to the terms of this agreement, be entitled to
exercise all rights of ownership of the Shares.
All shares of stock of the Corporation hereafter issued to any
Shareholder shall be deemed to be "Shares" as defined in this agreement, shall
be subject to all of its terms and conditions, and bear the same or similar
endorsement.
12. TERMINATION OF AGREEMENT:
(a) This agreement shall terminate upon the occurrence of any
of the following events:
(i) Dissolution of the Corporation.
(ii) The voluntary agreement of all parties who are then
bound by the terms hereof.
(b) Upon the termination of this agreement, each Shareholder
shall surrender to the Corporation the certificate for his stock and the
Corporation shall issue to
<PAGE>
25
him in lieu thereof new certificates for an equal number of Shares without the
endorsement set forth in paragraph 10.
13. TRANSFER OF SHARES IN VIOLATION OF THE AGREEMENT:
Any transfer of Shares or attempted transfer of Shares in
violation of this agreement shall be deemed null and void, and, at the election
of the Corporation or any Shareholder, be deemed to be an offer to sell the
Shares according to the provisions and procedures of paragraphs 1 and 5 of this
agreement.
14. ENFORCEMENT:
Since the parties will suffer irreparable harm and damage in the
event this agreement is not exactly carried out, it is stipulated:
(a) If any dispute arises concerning the transfer of Shares, an
injunction may be issued restraining any transfer pending determination of the
dispute; and
(b) If any dispute arises concerning the right or duty to buy
or sell, then the rights or duty shall be enforceable in a court of equity by a
decree of specific performance after the determination of the dispute.
These remedies, however, shall be cumulative and not exclusive and
shall be in addition to any other remedy which the parties may have.
15. BINDING UPON:
This agreement shall be for the benefit of and binding upon the
parties hereto, their heirs, administrators, executors,
<PAGE>
26
successors and assigns, and the parties hereto do covenant and agree that they,
themselves, and their heirs, executors, administrators, successors and assigns,
will execute any and all instruments, releases, assignments and consents that
may be required of them in accordance with the provision of this agreement.
16. MISCELLANEOUS:
(a) All offers, acceptances, notifications and other
communications contemplated by this agreement shall be sent, by Registered Mail
return receipt requested, to the appropriate party at the then current address
contained in the files of the Corporation, and shall be effective upon delivery
or upon refusal.
(b) Any shareholder who either desires or is required to sell
his Shares pursuant to this agreement shall duly endorse and deliver all of the
Shares upon receipt of any initial payment.
17. CONSTRUCTION:
This agreement shall be construed under the laws of the State of
Delaware.
18. PRIOR AGREEMENT.
To the extent that any prior agreements may have existed covering
the same subject matter, the said prior agreements are hereby terminated and
declared null and void.
<PAGE>
27
IN WITNESS WHEREOF, the parties, for themselves, their heirs,
executors, administrators, successors and assigns, have hereunto set their hands
and seals the day and date first above written.
WITNESS:
/s/ Eileen P. Angeloui
- --------------------------------
/s/ Michael J. Saylor (SEAL)
- ---------------------------
Michael J. Saylor
- --------------------------------
/s/ Charles A. Veley (SEAL)
- ---------------------------
Charles A. Veley
MICROSTRATEGY INCORPORATED
By:
------------------------------
ATTEST: By: [SIGNATURE APPEARS HERE]
------------------------------
Secretary
[CORPORATE SEAL]
<PAGE>
28
SCHEDULE A
----------
LIFE INSURANCE POLICIES
[None as of 1/1/90]
<PAGE>
Exhibit 10.3
MICROSTRATEGY INCORPORATED
STOCK PURCHASE AGREEMENT
------------------------
THIS STOCK PURCHASE AGREEMENT ("Agreement"), by and between
MICROSTRATEGY INCORPORATED, a Delaware corporation (the "Corporation"), Michael
J. Saylor ("Saylor") of Fairfax County, Virginia and Eduardo S. Sanchez of
Alexandria, Virginia ("Purchaser") is being entered into on the 28th day of
February, 1995.
WHEREAS, Saylor has caused the Corporation to be formed for
the purpose of being a full service provider of decision support software,
support and service and related activities and any other lawful business as
determined by the Board of Directors of the Corporation and of the majority
shareholder of the Corporation; and
WHEREAS, Purchaser wishes to become a shareholder in the
Corporation subject to the terms and conditions of this Agreement;
NOW THEREFORE, for the mutual promises, covenants,
understandings, representations, warranties and benefits contained herein, the
parties hereto agree as follows:
1. Subscription for Shares.
------------------------
Purchaser agrees to purchase such number of shares of the
authorized common stock of the Corporation ("Shares") (of which there are 1,000
shares authorized and
-1-
<PAGE>
184 shares issued and outstanding as of the date hereof) at such price
("Purchase Price") as is more particularly described in Exhibit A attached here.
2. Payment for Shares.
-------------------
(a) Concurrent with the execution of this Stock Purchase
Agreement, Purchaser shall pay into the Corporation, as paid in capital and/or
surplus, in exchange for the capital stock of the Corporation, the Purchase
Price.
(b) The Purchase Price shall be paid in four installments
as follows: twenty-five percent (25%) of the Purchase Price shall be payable
upon the receipt of the Shares (the "Down Payment"). The remaining seventy-five
percent (75%) of the Purchase Price shall be payable in three equal installments
(the "Succeeding Installment(s)") without interest as follows:
Due December 31, 1995 25%
Due December 31, 1996 25%
Due December 31, 1997 25%
Provided, however, that if the Purchaser's Shares are
subject to redemption pursuant to Paragraph 2 of a Shareholders' Buy/Sell
Agreement by and among Michael J. Saylor, the Shareholder and MicroStrategy
Incorporated dated as of the date hereof, the amount of any unpaid Succeeding
Installments shall be reduced and offset against the Redemption Price (as
defined in the aforementioned Shareholders' Buy/Sell Agreement) and such
Redemption Price shall be reduced accordingly.
-2-
<PAGE>
(c) Upon the payment by the Purchaser of the down
Payment, twenty-five per cent (25%) of the Shares purchased shall be deemed to
be "Vested Shares" for the purpose of this agreement and the Shareholders'
Buy/Sell Agreement described in paragraph 3 hereof. Upon the payment of each
Succeeding Installment, an additional twenty-five percent (25%) of the Shares
purchased shall be deemed to be "Vested Shares."
(d) Should Purchaser fail to pay any of the Succeeding
Installments in a timely fashion ("Default") so long as he remains an employee
of the Corporation, then and in that case he shall forfeit and return to the
Corporation all of the Shares purchased whether they be Vested Shares or
otherwise whereupon Purchaser shall have no further liability to the Corporation
except as provided in Paragraph 5 herein. Should the Purchaser in case of a
Default fail to return his Shares to the Corporation, the Corporation shall take
such action as is appropriate and necessary to void any and all outstanding
Shares owned by Purchaser. In the case of a Default, the indemnification as
described in paragraph 5 of this Agreement shall continue.
3. Shareholders' Buy/Sell Agreement. The Parties to this
---------------------------------
agreement agree to execute and be bound by a Shareholders' Buy/Sell Agreement in
the form substantially similar to that attached hereto as Exhibit B.
4. Representations of Parties.
---------------------------
(a) Purchaser represents and warrants as follows:
(i) That he has received and carefully read this
Agreement including all of its attachments.
-3-
<PAGE>
(ii) That he is purchasing Shares of the Corporation
without being furnished any offering literature or prospectus other than this
Agreement.
(iii) That he recognizes that the Shares have not
been registered under the Securities Act of 1933, as amended (the "Act"), or
under the securities laws of any state and, therefore, cannot be resold unless
they are registered under the Act and applicable state securities laws or unless
an exemption from registration is available. Purchaser recognizes that he has no
rights to require such registration. He also recognizes that no public agency
has passed upon the accuracy or adequacy of the information contained in this
Agreement or the fairness of the terms of the subscription.
(iv) That he is acquiring Shares for his own account
for a long term investment and not with a view toward resale, fractionalization,
division, or distribution thereof. The parties do not presently have any reason
to anticipate any change in the Purchaser's circumstances, financial or
otherwise, or any particular occasion or event which would necessitate or
require the sale or distribution of the Purchaser's Shares. No one other than
the parties hereto have any beneficial interest in the Purchaser's Shares.
(v) That he recognizes the transfer of his Shares
is subject to a Shareholders' Buy/Sell Agreement which agreement severely
restricts his ability to sell or otherwise dispose of the Shares, and among
other provisions, provides further, under certain circumstances, for the
mandatory sale of his Shares to the Corporation and/or Saylor.
(vi) That he recognizes that the Corporation is in
the development stage, has a limited history of operations or earnings, is a
speculative venture, and the total
-4-
<PAGE>
amount of funds tendered to purchase his Shares, including any debt of the
Corporation guaranteed by him, is placed at the risk of the business and may be
completely lost.
(vii) That he has been provided with access to all
information requested in addition to the Agreement for evaluating his purchase
of the Shares, none of which was contrary to the information contained in this
Agreement.
(viii) That he has been presented with and has acted
upon the opportunity to ask questions and receive answers from the officers of
the Corporation as to the terms and conditions of the purchase of his Shares, to
consult with legal counsel and to obtain any additional information necessary
to verify the accuracy of the information made available to him.
(ix) That he recognizes he is a minority
Shareholder in the Corporation and that, as such, pursuant to the General
Corporation Law of the State of Delaware ("GCL") his rights to control, operate,
and manage the Corporation are limited, and that as the majority Shareholder,
Saylor, by virtue of his ability to elect directors as provided by the GCL, by
virtue of his ability to cause the Corporation to issue additional shares
pursuant to the GCL, and by virtue of his ability to vote his Shares pursuant to
the GCL, has substantial control over the operations, management and activities
of the Corporation.
(b) The Corporation represents and warrants as follows:
(i) That it is a Corporation, duly organized,
validly existing and in good standing under the laws of the State of Delaware,
and has all requisite corporate
-5-
<PAGE>
power and authority, and has taken all requisite corporate action, to authorize
the execution and delivery of this Agreement and the Shareholders' Buy/Sell
Agreement and perform its obligations thereunder.
(ii) That the execution, delivery, and performance
under this Agreement and the Shareholders' Buy/Sell Agreement will not violate,
contravene, be inconsistent with, or cause a default under the Corporation's
Certificate of Incorporation, the Corporation's bylaws, or any other
certificate, instrument or agreement to which the Corporation is a party or by
which it is bound or which relates to the Shares.
(iii) That upon full payment therefore by Purchaser,
the Shares that are issued to Purchaser will be duly authorized and validly
issued and will be fully paid and nonassessable. The Purchaser's Shares will not
be subject to any lien, restriction, limitation, or other encumbrances except as
provided by this Agreement and the Shareholders' Buy/Sell Agreement.
5. Indemnification. Purchaser agrees to indemnify and
----------------
hold harmless the Corporation and its affiliates, and Saylor from any and all
damages, losses, costs and expenses (including reasonable attorney's fees) any
of which may be incurred by reason of any inaccuracy or breach of the
representations and warranties made by him in this Agreement, or in any document
provided by him to the Corporation or to its affiliates making express reference
to this Agreement.
6. Applicable Law. This Agreement shall be deemed to
--------------
have been made in the State of Delaware, shall become valid when executed by the
parties, and shall be
-6-
<PAGE>
governed and construed in accordance with the laws of such State, which laws
shall prevail in the event of any conflict of laws.
7. Severability. If for any reason any portion of this
-------------
Agreement is held to be invalid, contrary to or in conflict with any applicable
present or future law or regulation in a final, unappealable ruling issued by
any court, agency or tribunal of competent jurisdiction in a proceeding to which
the Corporation, Saylor and Purchaser are a party, that ruling shall not impair
the operation of, or having any effect upon, such other portions of this
Agreement as may remain otherwise enforceable, which shall continue to be given
full force and effect and bind the parties hereto, although any portion held to
be invalid shall be deemed not be a part of the Agreement when the time for
appeal expires, or upon the receipt, by either party, of notice of
non-enforcement thereof.
8. Binding Effect. This Agreement is binding upon the
---------------
parties hereto and their respective executors, administrators, heirs, assigns
and successors in interest.
9. Construction. The preambles are a part of this
-------------
Agreement and are expressly incorporated herein.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year aforesaid.
ATTEST MICROSTRATEGY INCORPORATED
/s/ Michael J. Saylor By: /s/ Michael J. Saylor (Seal)
- ------------------------------ --------------------------------
Secretary President
WITNESS: Purchaser
[SIGNATURE APPEARS HERE] [SIGNATURE APPEARS HERE] (Seal)
- ------------------------------ --------------------------------
WITNESS:
[SIGNATURE APPEARS HERE] /s/ Michael J. Saylor
- ------------------------------ --------------------------------
Michael J. Saylor
-8-
<PAGE>
EXHIBIT A
---------
SUBSCRIPTION OF SHARES
OF
MICROSTRATEGY INCORPORATED
Total
Price Purchaser
Name Shares Per Share Price
- ---- ------ --------- ---------
Eduardo S. Sanchez 2.7650505 $17,136.85 $47,384.25
-9-
<PAGE>
EXHIBIT B
---------
MICROSTRATEGY INCORPORATED
SHAREHOLDERS BUY/SELL AGREEMENT
-------------------------------
THIS AGREEMENT, made this 28th day of February, 1995, by and
among Michael J. Saylor, ("Saylor"), and Eduardo S. Sanchez ("Shareholder"), and
MICROSTRATEGY INCORPORATED, a Delaware corporation, ("Corporation").
WITNESSETH:
----------
WHEREAS, the Shareholder is the owner of certain Shares of
the authorized common stock of Corporation ("Shares"); and
WHEREAS, Saylor is the majority shareholder of the
Corporation; and
WHEREAS, the parties to this agreement believe that it is in
their mutual best interests to provide continuity in the management and policies
of the Corporation, and therefore the purpose of this agreement is to impose
certain restrictions and obligations with respect to the disposition of the
Shares owned by the Shareholder and to provide for the purchase by the
Corporation of the Shareholder's Shares under certain circumstances;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants and conditions herein contained, and for other good and
valuable consideration, receipt of which is hereby acknowledged, the parties
hereto, intending to be legally bound hereby, mutually covenant and agree as
follows:
-10-
<PAGE>
1. RIGHT OF FIRST PURCHASE:
The Shareholder agrees that he will not sell, give, encumber,
pledge or otherwise transfer, assign, or dispose of either voluntarily or
involuntarily, or by operation of law (collectively a "Transfer"), all or any
part of the Shares which he now owns or may hereafter acquire (except as
otherwise permitted or required herein) without the consent of the Corporation.
2. TERMINATION OF EMPLOYMENT; DEATH:
(a) Mandatory Sale:
If any Shareholder's employment with the Corporation
terminates or is terminated for any reason including death, such Shareholder or
the Shareholder's estate, as the case may be, shall, within ninety (90) days
thereof, offer for sale to the Corporation all of the Shares owned by him at
that time at a redemption price ("Redemption Price") determined and paid in
accordance with the terms contained herein, and the Corporation shall purchase
the aforesaid Shares in accordance herewith.
(b) Redemption Price:
The Redemption Price for any Vested Shares (as defined in the
Stock Purchase Agreement among the parties dated as of the date hereof) shall be
calculated as follows:
The gross revenues of the Corporation for the preceding
fiscal year as reported on line 1(c) of IRS Form 1120S (or its successor) times
.75 divided by the total Shares outstanding times the number of Vested Shares
being sold to the Corporation.
-11-
<PAGE>
The Redemption Price for all other Shares shall be the
Purchase Price (as defined in a Stock Purchase Agreement) reduced by any unpaid
Succeeding Installments (as defined in the Stock Purchase Agreement) as of the
date of the said termination.
The total Redemption Price for all Vested Shares and all
other Shares shall be paid in four equal installments as follows: Twenty-five
percent (25%) within thirty (30) days of the date on which the Shares are
offered for sale pursuant to paragraph (a) above, and the remaining seventy-five
percent (75%) in three equal installments ("Installment Payment(s)"). The first
Installment Payment is due and payable one year from the date of termination or
death, as the case may be; the second Installment Payment is due and payable two
years from the date of termination or death, as the case may be; and the third
and final Installment Payment is due and payable three years from the date of
termination or death, as the case may be. There shall be no interest affixed to
any unpaid Installment Payment unless such installment is late, in which case
interest on the unpaid amount shall accrue at the rate of 12% per annum from the
date on which such installment was due until paid in full.
3. ANTIDILUTION PROVISIONS:
Saylor and the Corporation both agree that should at any time
the Corporation issue or cause to be issued additional Shares of its capital
stock, including options, warrants, or any other stock equivalents or
derivatives ("Additional Shares"), to or for the benefit of Saylor, or any of
his relatives, or to be held in trust for Saylor or any of his relatives, then
and in that case, the Corporation shall notify Shareholder of the proposed
issuance of Additional Shares, and Shareholder shall, at that time, have the
opportunity and right to purchase such
-12-
<PAGE>
number of Shares or share equivalents or derivatives ("Additional Shareholder
Shares") as are necessary to maintain Shareholder's ownership in the Corporation
in the same relative proportion to Saylor's ownership (i.e. the fraction
determined by dividing Shareholder's Shares by Sailor's Shares shall be constant
under such circumstances). In determining the number of Shares owned by Saylor
in calculating the anti-dilution provisions of this paragraph, all Shares issued
for his benefit or to his relatives, including Shares held by trusts for the
benefit of Saylor or his relatives, shall be included. The purchase price for
such Additional Shareholder Shares to be purchased by Shareholder shall be the
same purchase price and, paid upon the same terms and conditions, as the
Corporation is offering and accepting from Saylor for such Additional
Shareholder Shares. If Saylor shall receive such Additional Shareholder Shares
for services, or if for any reason Saylor is not required to tender any cash or
other tangible consideration for his Shares, Shareholder shall, in consideration
for his agreement to sell his Shares to the Corporation pursuant to the
Agreement, be entitled to receive from the Corporation, at no additional cash
cost to him, the requisite number of Shares to maintain his percentage ownership
of the Corporation constant. A Waiver by Shareholder of his right to purchase
Additional Shareholder Shares at any given time shall not be construed as a
waiver of Shareholder's rights to purchase Additional Shareholder Shares in the
future.
4. DISTRIBUTIONS:
The Corporation and Saylor agree to cause the Corporation to
distribute annually or pay or cause to be distributed or paid to Shareholder,
for as long as Shareholder
-13-
<PAGE>
may own stock in the Corporation, such amounts of cash as are necessary to
approximate his additional tax liability attributable to his share of the
reportable, taxable earnings of the Corporation as a result of its sub-chapter S
tax status. The Corporation agrees to make such distributions or payments prior
to the time that Shareholder is required to make tax payments relating to the
Corporation's earnings.
5. PUBLIC OFFERING:
In the event the Corporation shall have a public offering of
its Shares, Shareholder shall have no fewer or less beneficial rights with
regard to registration of his Shares, sale of his Shares, or any other rights,
than does any other shareholder of the Corporation. Upon the occurrence of a
public offering, all restrictions or limitations with respect to Shareholder's
right to Transfer his Shares as contained in this Shareholders' Buy/Sell
Agreement shall be null and void.
6. SUB-CHAPTER S ELECTION:
(a) Transfers:
Prior to making any Transfer of the Shares under this
agreement, the transferring Shareholder shall obtain from the Corporation a
written certification that neither such Transfer nor any transaction
contemplated with respect to such Transfer (including, without limitation, the
foreclosure of any lien or encumbrance or, in case of a Transfer in trust, the
termination of such trust or the taking of any action by any beneficiary of such
trust) will or may result in the termination of the Corporation's Sub-Chapter S
Election should such election be then in effect ("S Election"). The Corporation
may require, as a
-14-
<PAGE>
condition to any such certification to be provided by the Corporation under this
agreement, a legal opinion of counsel of its choice as to the matters to be
contained in such certification, satisfactory in form and substance to the
Corporation, and arrangements satisfactory to the Corporation to ensure that any
transferee shall take any actions necessary to maintain the Corporation's S
Election (including, without limitation, with respect to any Transfer in trust,
the timely filing of an election to treat such trust as a qualified sub-chapter
S trust ("QSST") under Section 1361(d) of the Internal Revenue Code, if
applicable). Should it be necessary for the Corporation to obtain legal opinion
concerning the impact of a Shareholder's actions on the Corporation's S Election
status, the Corporation will conclude its legal analysis within thirty (30) days
after receiving the request from the Shareholder.
(b) Consent:
No Shareholder shall take any action which would result in
the termination of the Corporation's S Election without the prior written
consent of the holder(s) of a majority of the Shares.
(c) Waiver:
If any Shareholder makes any Transfer or takes any other
action that causes termination of the Corporation's S Election, the Board of
Directors may direct the appropriate officers of the Corporation to attempt to
obtain a waiver from the Internal Revenue Service of the terminating event on
grounds of inadvertency or to commence the appropriate procedure to obtain
approval from the Internal Revenue Service to file a new
-15-
<PAGE>
election to be treated as an S corporation before the 5-year waiting period
after termination of an S Election has expired.
(d) Termination of Sub-Chapter S Election:
Nothing in this agreement shall be construed to prevent the
Corporation or the holder(s) of a majority of the Corporation's Shares from
terminating the Corporation's S Election, if the Corporation's board of
directors and such holder(s) determine that such termination is desirable.
7. ENDORSEMENT ON STOCK CERTIFICATES:
Upon the execution of this agreement, the certificates of
stock subject hereto shall be surrendered to the Corporation and endorsed as
follows:
This certificate is transferable only upon
compliance with the provisions of an agreement dated
_______, 19__ among Michael J. Saylor, Eduardo S. Sanchez and
MicroStrategy Incorporated, a copy of which together with all
amendments thereto is on file in the office of the Secretary
of the Corporation.
After endorsement the certificate shall be returned to the
Shareholder who shall, subject to the terms of this agreement, be entitled to
exercise all rights of ownership of the Shares owned by him.
All Shares hereafter issued to the Shareholder shall be
subject to all of its terms and conditions, and bear the same or similar
endorsement.
8. TERMINATION OF AGREEMENT:
-16-
<PAGE>
This agreement shall terminate upon the occurrence
of any of the following events:
(i) Dissolution of the Corporation.
(ii) The voluntary agreement of all
parties who are then bound by the terms hereof.
Upon the termination of this agreement, each
Shareholder shall surrender to the Corporation the certificate for his stock and
the Corporation shall issue to him in lieu thereof new certificates for an equal
number of Shares without the endorsement set forth in paragraph 7.
9. TRANSFER OF SHARES IN VIOLATION OF THE AGREEMENT
Any Transfer of Shares or attempted Transfer of Shares in
violation of this agreement shall be deemed null and void, and, at the election
of the Corporation or any Shareholder, be deemed to be an offer to sell the
transferor's Shares according to the provisions and procedures of paragraph 2
of this agreement.
10. ENFORCEMENT:
Since the parties will suffer irreparable harm and damage in
the event this agreement is not exactly carried out, it is stipulated:
(i) If any dispute arises concerning the
Transfer of Shares, an injunction may be issued restraining any Transfer pending
determination of the dispute; and
-17-
<PAGE>
(ii) If any dispute arises concerning the
right or duty to buy or sell, then the right or duty shall be enforceable in a
court of equity by a decree of specific performance after the determination of
the dispute.
These remedies, however, shall be cumulative and not
exclusive and shall be in addition to any other remedy which the parties may
have.
11. BINDING UPON:
This agreement shall be for the benefit of and binding upon
the parties hereto, their heirs, administrators, executors, successors and
assigns, and the parties hereto do covenant and agree that they, themselves,
and their heirs, executors, administrators, successors and assigns, will execute
any and all instruments, releases, assignments and consents that may be required
of them in accordance with the provisions of this agreement.
12. MISCELLANEOUS:
(a) Communications:
All offers, acceptances, notifications and other
communications contemplated by this agreement shall be sent by Registered Mail,
return receipt requested, to the appropriate party at the then current address
contained in the files of the Corporation, and shall be effective upon delivery
or upon refusal.
(b) Endorsement of Shares:
Any Shareholder who either desires or is required to sell his
Shares pursuant to this agreement shall duly endorse and deliver all of the
Shares upon receipt of any initial payment.
-18-
<PAGE>
13. CONSTRUCTION:
This agreement shall be construed under the laws of the State
of Delaware.
14. PRIOR AGREEMENT:
To the extent that any prior agreements, commitments or
understandings, whether oral or in writing may have existed covering the same or
similar subject matter, the said prior agreements, commitments or understandings
are hereby terminated and declared null and void, and this agreement is the
entire agreement between the parties with respect to the same or similar subject
matter.
-19-
<PAGE>
IN WITNESS WHEREOF, the parties, for themselves, their heirs,
executors, administrators, successors and assigns, have hereunto set their hands
and seals the day and date first above written.
WITNESS:
[SIGNATURE APPEARS HERE] [SIGNATURE APPEARS HERE]
- ------------------------ -------------------------------
Shareholder
[SIGNATURE APPEARS HERE] /s/ Michael J. Saylor
- ------------------------ -------------------------------
Michael J. Saylor
MICROSTRATEGY INCORPORATED
By: /s/ Michael J. Saylor
----------------------------
ATTEST
By: /s/ Michael J. Saylor
-------------------------
Secretary
[CORPORATE SEAL]
-20-
<PAGE>
Exhibit 10.4
MICROSTRATEGY INCORPORATED
STOCK PURCHASE AGREEMENT
------------------------
THIS STOCK PURCHASE AGREEMENT ("Agreement"), by and between
MICROSTRATEGY INCORPORATED, a Delaware corporation (the "Corporation"), Michael
J. Saylor ("Saylor") of Fairfax County, Virginia and Stephen S. Trundle of
Arlington, Virginia ("Purchaser") is being entered into on the 28th day of
February, 1995.
WHEREAS, Saylor has caused the Corporation to be formed for
the purpose of being a full service provider of decision support software,
support and service and related activities and any other lawful business as
determined by the Board of Directors of the Corporation and of the majority
shareholder of the Corporation; and
WHEREAS, Purchaser wishes to become a shareholder in the
Corporation subject to the terms and conditions of this Agreement;
NOW THEREFORE, for the mutual promises, covenants,
understandings, representations, warranties and benefits contained herein, the
parties hereto agree as follows:
1. Subscription for Shares.
-----------------------
Purchaser agrees to purchase such number of shares of the
authorized common stock of the Corporation ("Shares") (of which there are 1,000
shares authorized and
-1-
<PAGE>
184 shares issued and outstanding as of the date hereof) at such price
("Purchase Price") as is more particularly described in Exhibit A attached here.
2. Payment for Shares.
------------------
(a) Concurrent with the execution of this Stock Purchase
Agreement, Purchaser shall pay into the Corporation, as paid in capital and/or
surplus, in exchange for the capital stock of the Corporation, the Purchase
Price.
(b) The Purchase Price shall be paid in four installments as
follows: twenty-five percent (25%) of the Purchase Price shall be payable upon
the receipt of the Shares (the "Down Payment"). The remaining seventy-five
percent (75%) of the Purchase Price shall be payable in three equal installments
(the "Succeeding Installment(s)") without interest as follows:
Due December 31, 1995 25%
Due December 31, 1996 25%
Due December 31, 1997 25%
Provided, however, that if the Purchaser's Shares are subject
to redemption pursuant to Paragraph 2 of a Shareholders' Buy/Sell Agreement by
and among Michael J. Saylor, the Shareholder and MicroStrategy Incorporated
dated as of the date hereof, the amount of any unpaid Succeeding Installments
shall be reduced and offset against the Redemption Price (as defined in the
aforementioned Shareholders' Buy/Sell Agreement) and such Redemption Price shall
be reduced accordingly.
-2-
<PAGE>
(c) Upon the payment by the Purchaser of the down Payment,
twenty-five per cent (25%) of the Shares purchased shall be deemed to be "Vested
Shares" for the purpose of this agreement and the Shareholders' Buy/Sell
Agreement described in paragraph 3 hereof. Upon the payment of each Succeeding
Installment, an additional twenty-five percent (25%) of the Shares purchased
shall be deemed to be "Vested Shares".
(c) Should Purchaser fail to pay any of the Succeeding
Installments in a timely fashion ("Default") so long as he remains an employee
of the Corporation, then and in that case he shall forfeit and return to the
Corporation all of the Shares purchased whether they be Vested Shares or
otherwise whereupon Purchaser shall have no further liability to the Corporation
except as provided in Paragraph 5 herein. Should the Purchaser in case of a
Default fail to return his Shares to the Corporation, the Corporation shall take
such action as is appropriate and necessary to void any and all outstanding
Shares owned by Purchaser. In the case of a Default, the indemnification as
described in paragraph 5 of this Agreement shall continue.
3. Shareholders' Buy/Sell Agreement. The Parties to this
--------------------------------
agreement agree to execute and be bound by a Shareholders' Buy/Sell Agreement in
the form substantially similar to that attached hereto as Exhibit B.
4. Representations of Parties.
--------------------------
(a) Purchaser represents and warrants as follows:
(i) That he has received and carefully read this
Agreement including all of its attachments.
-3-
<PAGE>
(ii) That he is purchasing Shares of the Corporation
without being furnished any offering literature or prospectus other than this
Agreement.
(iii) That he recognizes that the Shares have not been
registered under the Securities Act of 1933, as amended (the "Act"), or under
the securities laws of any state and, therefore, cannot be resold unless they
are registered under the Act and applicable state securities laws or unless an
exemption from registration is available. Purchaser recognizes that he has no
rights to require such registration. He also recognizes that no public agency
has passed upon the accuracy or adequacy of the information contained in this
Agreement or the fairness of the terms of the subscription.
(iv) That he is acquiring Shares for his own account for
a long term investment and not with a view toward resale, fractionalization,
division, or distribution thereof. The parties do not presently have any reason
to anticipate any change in the Purchaser's circumstances, financial or
otherwise, or any particular occasion or event which would necessitate or
require the sale or distribution of the Purchaser's Shares. No one other than
the parties hereto have any beneficial interest in the Purchaser's Shares.
(v) That he recognizes the transfer of his Shares is
subject to a Shareholders' Buy/Sell Agreement which agreement severely restricts
his ability to sell or otherwise dispose of the Shares, and among other
provisions, provides further, under certain circumstances, for the mandatory
sale of his Shares to the Corporation and/or Saylor.
(vi) That he recognizes that the Corporation is in the
development stage, has a limited history of operations or earnings, is a
speculative venture, and the total
-4-
<PAGE>
amount of funds tendered to purchase his Shares, including any debt of the
Corporation guaranteed by him, is placed at the risk of the business and may be
completely lost.
(vii) That he has been provided with access to all
information requested in addition to the Agreement for evaluating his purchase
of the Shares, none of which was contrary to the information contained in this
Agreement.
(viii) That he has been presented with and has acted
upon the opportunity to ask questions and receive answers from the officers of
the Corporation as to the terms and conditions of the purchase of his Shares, to
consult with legal counsel and to obtain any additional information necessary to
verify the accuracy of the information made available to him.
(ix) That he recognizes he is a minority Shareholder
in the Corporation and that, as such, pursuant to the General Corporation Law of
the State of Delaware ("GCL") his rights to control, operate, and manage the
Corporation are limited, and that as the majority Shareholder, Saylor, by virtue
of his ability to elect directors as provided by the GCL, by virtue of his
ability to cause the Corporation to issue additional shares pursuant to the GCL,
and by virtue of his ability to vote his Shares pursuant to the GCL, has
substantial control over the operations, management and activities of the
Corporation.
(b) The Corporation represents and warrants as follows:
(i) That it is a Corporation, duly organized, validly
existing and in good standing under the laws of the State of Delaware, and has
all requisite corporate
-5-
<PAGE>
power and authority, and has taken all requisite corporate action, to authorize
the execution and delivery of this Agreement and the Shareholders' Buy/Sell
Agreement and perform its obligations thereunder.
(ii) That the execution, delivery, and performance under
this Agreement and the Shareholders' Buy/Sell Agreement will not violate,
contravene, be inconsistent with, or cause a default under the Corporation's
Certificate of Incorporation, the Corporation's bylaws, or any other
certificate, instrument or agreement to which the Corporation is a party or by
which it is bound or which relates to the Shares.
(iii) That upon full payment therefore by Purchaser, the
Shares that are issued to Purchaser will be duly authorized and validly issued
and will be fully paid and nonassessable. The Purchaser's Shares will not be
subject to any lien, restriction, limitation, or other encumbrances except as
provided by this Agreement and the Shareholders' Buy/Sell Agreement.
5. Indemnification. Purchaser agrees to indemnify and hold
---------------
harmless the Corporation and its affiliates, and Saylor from any and all
damages, losses, costs and expenses (including reasonable attorney's fees) any
of which may be incurred by reason of any inaccuracy or breach of the
representations and warranties made by him in this Agreement, or in any document
provided by him to the Corporation or to its affiliates making express reference
to this Agreement.
6. Applicable Law. This Agreement shall be deemed to have
--------------
been made in the State of Delaware, shall become valid when executed by the
parties, and shall be
-6-
<PAGE>
governed and construed in accordance with the laws of such State, which laws
shall prevail in the event of any conflict of laws.
7. Severability. If for any reason any portion of this
------------
Agreement is held to be invalid, contrary to or in conflict with any applicable
present or future law or regulation in a final, unappealable ruling issued by
any court, agency or tribunal of competent jurisdiction in a proceeding to which
the Corporation, Saylor and Purchaser are a party, that ruling shall not impair
the operation of, or having any effect upon, such other portions of this
Agreement as may remain otherwise enforceable, which shall continue to be given
full force and effect and bind the parties hereto, although any portion held to
be invalid shall be deemed not be a part of the Agreement when the time for
appeal expires, or upon the receipt, by either party, of notice of
non-enforcement thereof.
8. Binding Effect. This Agreement is binding upon the
--------------
parties hereto and their respective executors, administrators, heirs, assigns
and successors in interest.
9. Construction. The preambles are a part of this Agreement
------------
and are expressly incorporated herein.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year aforesaid.
ATTEST MICROSTRATEGY INCORPORATED
/s/ Michael J. Saylor By: /s/ Michael J. Saylor (Seal)
- -------------------------- ----------------------------
Secretary President
WITNESS: Purchaser
[SIGNATURE APPEARS HERE] [SIGNATURE APPEARS HERE] (Seal)
- -------------------------- -------------------------------
WITNESS:
[SIGNATURE APPEARS HERE] /s/ Michael J. Saylor
- -------------------------- -------------------------------
Michael J. Saylor
-8-
<PAGE>
EXHIBIT A
---------
SUBSCRIPTION OF SHARES
OF
MICROSTRATEGY INCORPORATED
Total
Price Purchaser
Name Shares Per Share Price
- ---- ------ --------- -----
Stephen S. Trundle 1.843367 $17,136.85 $31,589.50
-9-
<PAGE>
EXHIBIT B
---------
MICROSTRATEGY INCORPORATED
SHAREHOLDERS BUY/SELL AGREEMENT
-------------------------------
THIS AGREEMENT, made this 28th day of February, 1995, by and
among Michael J. Saylor, ("Saylor"), and Stephen S. Trundle ("Shareholder"), and
MICROSTRATEGY INCORPORATED, a Delaware corporation, ("Corporation").
WITNESSETH:
----------
WHEREAS, the Shareholder is the owner of certain Shares of
the authorized common stock of Corporation ("Shares"); and
WHEREAS, Saylor is the majority shareholder of the
Corporation; and
WHEREAS, the parties to this agreement believe that it is in
their mutual best interests to provide continuity in the management and policies
of the Corporation, and therefore the purpose of this agreement is to impose
certain restrictions and obligations with respect to the disposition of the
Shares owned by the Shareholder and to provide for the purchase by the
Corporation of the Shareholder's Shares under certain circumstances;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants and conditions herein contained, and for other good and
valuable consideration, receipt of which is hereby acknowledged, the parties
hereto, intending to be legally bound hereby, mutually covenant and agree as
follows:
-10-
<PAGE>
1. RIGHT OF FIRST PURCHASE:
The Shareholder agrees that he will not sell, give, encumber,
pledge or otherwise transfer, assign, or dispose of either voluntarily or
involuntarily, or by operation of law (collectively a "Transfer"), all or any
part of the Shares which he now owns or may hereafter acquire (except as
otherwise permitted or required herein) without the consent of the Corporation.
2. TERMINATION OF EMPLOYMENT; DEATH:
(a) Mandatory Sale:
If any Shareholder's employment with the Corporation
terminates or is terminated for any reason including death, such Shareholder or
the Shareholder's estate, as the case may be, shall, within ninety (90) days
thereof, offer for sale to the Corporation all of the Shares owned by him at
that time at a redemption price ("Redemption Price") determined and paid in
accordance with the terms contained herein, and the Corporation shall purchase
the aforesaid Shares in accordance herewith.
(b) Redemption Price:
The Redemption Price for any Vested Shares (as defined in the
Stock Purchase Agreement among the parties dated as of the date hereof) shall be
calculated as follows:
The gross revenues of the Corporation for the preceding
fiscal year as reported on line 1(c) of IRS Form 1120S (or its successor) times
.75 divided by the total Shares outstanding times the number of Vested Shares
being sold to the Corporation.
-11-
<PAGE>
The Redemption Price for all other Shares shall be the
Purchase Price (as defined in a Stock Purchase Agreement) reduced by any unpaid
Succeeding Installments (as defined in the Stock Purchase Agreement) as of the
date of the said termination.
The total Redemption Price for all Vested Shares and all
other Shares shall be paid in four equal installments as follows: Twenty-five
percent (25%) within thirty (30) days of the date on which the Shares are
offered for sale pursuant to paragraph (a) above, and the remaining seventy-five
percent (75%) in three equal installments ("Installment Payment(s)"). The first
Installment Payment is due and payable one year from the date of termination or
death, as the case may be; the second Installment Payment is due and payable two
years from the date of termination or death, as the case may be; and the third
and final Installment Payment is due and payable three years from the date of
termination or death, as the case may be. There shall be no interest affixed to
any unpaid Installment Payment unless such installment is late, in which case
interest on the unpaid amount shall accrue at the rate of 12% per annum from the
date on which such installment was due until paid in full.
3. ANTIDILUTION PROVISIONS:
Saylor and the Corporation both agree that should at any time
the Corporation issue or cause to be issued additional Shares of its capital
stock, including options, warrants, or any other stock equivalents or
derivatives ("Additional Shares"), to or for the benefit of Saylor, or any of
his relatives, or to be held in trust for Saylor or any of his relatives, then
and in that case, the Corporation shall notify Shareholder of the proposed
issuance of Additional Shares, and Shareholder shall, at that time, have the
opportunity and right to purchase such
-12-
<PAGE>
number of Shares or share equivalents or derivatives ("Additional Shareholder
Shares") as are necessary to maintain Shareholder's ownership in the Corporation
in the same relative proportion to Saylor's ownership (i.e. the fraction
determined by dividing Shareholder's Shares by Saylor's Shares shall be constant
under such circumstances). In determining the number of Shares owned by Saylor
in calculating the anti-dilution provisions of this paragraph, all Shares issued
for his benefit or to his relatives, including Shares held by trusts for the
benefit of Saylor or his relatives, shall be included. The purchase price for
such Additional Shareholder Shares to be purchased by Shareholder shall be the
same purchase price and, paid upon the same terms and conditions, as the
Corporation is offering and accepting from Saylor for such Additional
Shareholder Shares. If Saylor shall receive such Additional Shareholder Shares
for services, or if for any reason Saylor is not required to tender any cash or
other tangible consideration for his Shares, Shareholder shall, in consideration
for his agreement to sell his Shares to the Corporation pursuant to the
Agreement, be entitled to receive from the Corporation, at no additional cash
cost to him, the requisite number of Shares to maintain his percentage ownership
of the Corporation constant. A Waiver by Shareholder of his right to purchase
Additional Shareholder Shares at any given time shall not be construed as a
waiver of Shareholder's rights to purchase Additional Shareholder Shares in the
future.
4. DISTRIBUTIONS:
The Corporation and Saylor agree to cause the Corporation to
distribute annually or pay or cause to be distributed or paid to Shareholder,
for as long as Shareholder
-13-
<PAGE>
may own stock in the Corporation, such amounts of cash as are necessary to
approximate his additional tax liability attributable to his share of the
reportable, taxable earnings of the Corporation as a result of its sub-chapter S
tax status. The Corporation agrees to make such distributions or payments prior
to the time that Shareholder is required to make tax payment relating to the
Corporation's earnings.
5. PUBLIC OFFERING:
In the event the Corporation shall have a public offering of
its Shares, Shareholder shall have no fewer or less beneficial rights with
regard to registration of his Shares, sale of his Shares, or any other rights,
than does any other shareholder of the Corporation. Upon the occurrence of a
public offering, all restrictions or limitations with respect to Shareholder's
right to Transfer his Shares as contained in this Shareholders, Buy/Sell
Agreement shall be null and void.
6. SUB-CHAPTER S ELECTION:
(a) Transfers:
Prior to making any Transfer of the Shares under this
agreement, the transferring Shareholder shall obtain from the Corporation a
written certification that neither such Transfer nor any transaction
contemplated with respect to such Transfer (including, without limitation, the
foreclosure of any lien or encumbrance or, in case of a Transfer in trust, the
termination of such trust or the taking of any action by any beneficiary of such
trust) will or may result in the termination of the Corporation's Sub-Chapter S
Election should such election be then in effect ("S Election"). The Corporation
may require, as a
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<PAGE>
condition to any such certification to be provided by the Corporation under this
agreement, a legal opinion of counsel of its choice as to the matters to be
contained in such certification, satisfactory in form and substance to the
Corporation, and arrangements satisfactory to the Corporation to ensure that any
transferee shall take any actions necessary to maintain the Corporation's S
Election (including, without limitation, with respect to any Transfer in trust,
the timely filing of an election to treat such trust as a qualified sub-chapter
S trust ("QSST") under Section 1361(d) of the Internal Revenue Code, if
applicable). Should it be necessary for the Corporation to obtain legal opinion
concerning the impact of a Shareholder's actions on the Corporation's S Election
status, the Corporation will conclude its legal analysis within thirty (30) days
after receiving the request from the Shareholder.
(b) Consent:
No Shareholder shall take any action which would result in
the termination of the Corporation's S Election without the prior written
consent of the holder(s) of a majority of the Shares.
(c) Waiver:
If any Shareholder makes any Transfer or takes any other
action that causes termination of the Corporation's S Election, the Board of
Directors may direct the appropriate officers of the Corporation to attempt to
obtain a waiver from the Internal Revenue Service of the terminating event on
grounds of inadvertency or to commence the appropriate procedure to obtain
approval from the Internal Revenue Service to file a new
-15-
<PAGE>
election to be treated as an S corporation before the 5-year waiting period
after termination of an S Election has expired.
(d) Termination of Sub-Chapter S Election:
Nothing in this agreement shall be construed to prevent the
Corporation or the holder(s) of a majority of the Corporation's Shares from
terminating the Corporation's S Election, if the Corporation's board of
directors and such holder(s) determine that such termination is desirable.
7. ENDORSEMENT ON STOCK CERTIFICATES:
Upon the execution of this agreement, the certificates of
stock subject hereto shall be surrendered to the Corporation and endorsed as
follows:
This certificate is transferable only upon
compliance with the provisions of an agreement dated
_________, 19__, among Michael J. Saylor, Stephen S. Trundle
and MicroStrategy Incorporated, a copy of which together with
all amendments thereto is on file in the office of the
Secretary of the Corporation.
After endorsement the certificate shall be returned to the
Shareholder who shall, subject to the terms of this agreement, be entitled to
exercise all rights of ownership of the Shares owned by him.
All Shares hereafter issued to the Shareholder shall be
subject to all of its terms and conditions, and bear the same or similar
endorsement.
8. TERMINATION OF AGREEMENT:
-16-
<PAGE>
This agreement shall terminate upon the occurrence
of any of the following events:
(i) Dissolution of the Corporation.
(ii) The voluntary agreement of all parties who
are then bound by the terms hereof.
Upon the termination of this agreement, each Shareholder
shall surrender to the Corporation the certificate for his stock and the
Corporation shall issue to him in lieu thereof new certificates for an equal
number of Shares without the endorsement set forth in paragraph 7.
9. TRANSFER OF SHARES IN VIOLATION OF THE AGREEMENT
Any Transfer of Shares or attempted Transfer of Shares in
violation of this agreement shall be deemed null and void, and, at the election
of the Corporation or any Shareholder, be deemed to be an offer to sell the
transferror's Shares according to the provisions and procedures of paragraph 2
of this agreement.
10. ENFORCEMENT:
Since the parties will suffer irreparable harm and damage in
the event this agreement is not exactly carried out, it is stipulated:
(i) If any dispute arises concerning the Transfer of
Shares, an injunction may be issued restraining any Transfer pending
determination of the dispute; and
-17-
<PAGE>
(ii) If any dispute arises concerning the right or
duty to buy or sell, then the right or duty shall be enforceable in a court of
equity by a decree of specific performance after the determination of the
dispute.
These remedies, however, shall be cumulative and not
exclusive and shall be in addition to any other remedy which the parties may
have.
11. BINDING UPON:
This agreement shall be for the benefit of and binding upon
the parties hereto, their heirs, administrators, executors, successors and
assigns, and the parties hereto do covenant and agree that they, themselves, and
their heirs, executors, administrators, successors and assigns, will execute any
and all instruments, releases, assignments and consents that may be required of
them in accordance with the provisions of this agreement.
12. MISCELLANEOUS:
(a) Communications:
All offers, acceptances, notifications and other
communications contemplated by this agreement shall be sent by Registered Mail,
return receipt requested, to the appropriate party at the then current address
contained in the files of the Corporation, and shall be effective upon delivery
or upon refusal.
(b) Endorsement of Shares:
Any Shareholder who either desires or is required to sell his
Shares pursuant to this agreement shall duly endorse and deliver all of the
Shares upon receipt of any initial payment.
-18-
<PAGE>
13. CONSTRUCTION:
This agreement shall be construed under the laws of the State
of Delaware.
14. PRIOR AGREEMENT:
To the extent that any prior agreements, commitments or
understandings, whether oral or in writing may have existed covering the same or
similar subject matter, the said prior agreements, commitments or understandings
are hereby terminated and declared null and void, and this agreement is the
entire agreement between the parties with respect to the same or similar subject
matter.
-19-
<PAGE>
IN WITNESS WHEREOF, the parties, for themselves, their heirs,
executors, administrators, successors and assigns, have hereunto set their hands
and seals the day and date first above written.
WITNESS:
[SIGNATURE ILLEGIBLE]
- --------------------- [SIGNATURE ILLEGIBLE]
[SIGNATURE ILLEGIBLE] ---------------------
- --------------------- Shareholder
/s/ Michael J. Saylor
---------------------
Michael J. Saylor
MICROSTRATEGY INCORPORATED
By:
-----------------------
ATTEST
By:/s/ Michael J. Saylor
----------------------
Secretary
[CORPORATE SEAL]
-20-
<PAGE>
Exhibit 10.5
MICROSTRATEGY INCORPORATED
1996 Stock Plan
1. Purpose of the Plan. The purpose of the MicroStrategy Incorporated
-------------------
(the "Company") 1996 Stock Plan is to enable the Company to provide an incentive
to eligible employees, consultants and officers whose present and potential
contributions are important to the continued success of the Company, to afford
these individuals the opportunity to acquire a proprietary interest in the
Company, and to enable the Company to enlist and retain in its employment the
best available talent for the successful conduct of its business.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or such of its Committees as shall
-------------
be administering the Plan, in accordance with Section 5 of the Plan.
(b) "Applicable Laws" means the legal requirements relating to the
---------------
administration of stock option plans under applicable securities and corporate
laws and the Code.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a Committee, if any, appointed by the Board in
---------
accordance with Section 5 of the Plan.
(f) "Common Stock" means the Common Stock of the Company.
------------
(g) "Company" means MicroStrategy Incorporated, a Delaware
-------
corporation.
(h) "Consultant" means (i) any person, including an advisor, engaged
----------
by the Company or a Parent or Subsidiary to render services and who is
compensated for such services, (ii) any Director who is not an employee of the
Company, but who is paid only a director's fee by the Company or (iii) any
Director who is not compensated by the Company for his/her services as a
Director.
(i) "Continuous Status as an Employee or Consultant" means that the
----------------------------------------------
employment or consulting relationship is not interrupted or terminated by the
Company, any Parent or Subsidiary, or where applicable, any entity affiliated
with the Company. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of: (i) any leave of absence approved by the
Board, including sick leave, military leave, or any other personal leave;
provided, however, that for purposes of Incentive Stock Options, any such leave
- --------
may not exceed ninety (90) days, unless reemployment upon the expiration of such
leave is guaranteed by contract (including
-1-
<PAGE>
certain Company policies), statute or applicable regulation; or (ii) transfers
between locations of the Company or between the Company, its Parent, its
Subsidiaries, or where applicable, affiliated or successor entities. In the
event any such authorized or permitted leave exceeds ninety (90) days, the
Option shall be deemed, to the extent otherwise Vested, a Nonstatutory Stock
Option.
(j) "Director" means a member of the Board.
--------
(k) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
(l) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent, Subsidiary or where applicable, entities
affiliated with the Company. Neither service as a Director nor mere payment of
a director's fee by the Company shall be sufficient to constitute "employment"
by the Company.
(m) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(n) "Exercisable" means the portion of an Option that is Vested and
-----------
that may be exercised and shares of Common Stock may be purchased pursuant
thereto, in accordance with Sections I and II of the Option Agreement; per the
Option Agreement Vested Options may not be Exercisable.
(o) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the National
Market System of the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") System, the Fair Market Value of a Share of Common Stock
shall be the closing sales price for such stock (or the closing bid, if no sales
were reported) as quoted on such system or exchange (or the exchange with the
greatest volume of trading in Common Stock) on the last market trading day prior
to the day of determination, as reported in The Wall Street Journal or such
other source as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the NASDAQ System (but not
on the National Market System thereof) or is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the day of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(p) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive
-2-
<PAGE>
stock option within the meaning of Section 422 of the Code and the regulations
promulgated thereunder.
(q) "Nonstatutory Stock Option" means any Option that is not an
-------------------------
Incentive Stock Option.
(r) "Notice of Grant" means a written notice evidencing certain terms
---------------
and conditions of an individual Option grant. The Notice of Grant is part of
the Option Agreement.
(s) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(t) "Option" means a stock option granted pursuant to the Plan.
------
(u) "Option Agreement" means a written agreement between the Company
----------------
and an Optionee evidencing the terms and conditions of an individual Option
grant. The Option Agreement is subject to the terms and conditions of the Plan.
(v) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(w) "Optionee" means an Employee or Consultant who holds an
--------
outstanding Option.
(x) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(z) "Plan" means this 1996 Stock Plan.
----
(aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
----------
successor rule thereto, as in effect when discretion (as defined therein) is
being exercised with respect to the Plan.
(bb) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 11 of the Plan.
(cc) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
(dd) "Vested" shall mean that portion of an Option that an Optionee
------
shall be entitled to retain in the event such Optionee's Continuous Status as an
Employee shall have been terminated; Vested Options may not be exercised (and no
Shares may be purchased thereby pursuant to sections I and II of the Option
Agreement) until such Options become Exercisable.
3. Eligibility. Nonstatutory Stock Options may be granted to either
-----------
Employees or Consultants. Incentive Stock Options may be granted only to
Employees. If otherwise eligible, an Employee or Consultant who has been
granted an Option may be granted additional Options.
-3-
<PAGE>
4. Stock Subject to the Plan. Subject to the provisions of Section 11 of
-------------------------
the Plan, the total number of Shares reserved and available for distribution
under the Plan is 8.0 million (8,000,000) Shares, subject to subsequent
adjustment for any stock split, reverse stock split, stock dividend combination
or reclassification of the Shares or any other increase or decrease in the
number of issued Shares effected without receipt of additional consideration by
the Company. Subject to Section 11 of the Plan, if any Shares that have been
optioned under an Option cease to be subject to such Option (other than through
exercise of the Option), or if any Option granted hereunder is forfeited prior
to the issuance of Common Stock to the participant, the shares that were subject
to such Option shall again be available for distribution in connection with
future Option grants under the Plan; provided, however, that Shares that have
--------
actually been issued under the Plan shall not in any event be returned to the
Plan and shall not become available for future distribution under the Plan.
5. Administration.
--------------
(a) Composition of Administrator.
----------------------------
(i) Multiple Administrative Bodies. If permitted by Rule
------------------------------
16b-3 and Applicable Laws, the Plan may (but need not) be administered by
different administrative bodies with respect to (A) Directors who are employees,
(B) Officers who are not Directors and (C) Employees who are neither Directors
nor Officers.
(ii) Administration with respect to Directors and Officers.
-----------------------------------------------------
With respect to grants of Options to eligible participants who are Officers or
Directors of the Company, the Plan shall be administered by (A) the Board, if
the Board may administer the Plan in compliance with Rule 16b-3 as it applies to
a plan intended to qualify thereunder as a discretionary grant, or (B) a
Committee designated by the Board to administer the Plan, which Committee shall
be constituted (1) in such a manner as to permit the Plan to comply with Rule
16b-3 as it applies to a plan intended to qualify thereunder as a discretionary
grant or award plan and (2) in such a manner as to satisfy the Applicable Laws.
(iii) Administration with respect to Other Persons. With
--------------------------------------------
respect to grants of Options to eligible participants who are neither Directors
nor Officers of the Company, the Plan shall be administered by (A) the Board or
(B) a Committee designated by the Board, which Committee shall be constituted in
such a manner as to satisfy the Applicable Laws.
(iv) General. Once a Committee has been appointed pursuant to
-------
subsection (ii) or (iii) of this Section 5(a), such Committee shall continue to
serve in its designated capacity until otherwise directed by the Board. From
time to time the Board may increase the size of any Committee and appoint
additional members thereof, remove members (with or without cause) and appoint
new members in substitution therefor, fill vacancies (however caused) and remove
all members of a Committee and thereafter directly administer the Plan, all to
the extent permitted by the Applicable Laws and, in the case of a Committee
appointed under subsection (ii), to the extent permitted by Rule 16b-3 as it
applies to a plan intended to qualify thereunder as a discretionary grant
-4-
<PAGE>
plan.
(b) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(o) of the Plan;
(ii) to select the Consultants and Employees to whom Options
may be granted hereunder;
(iii) to determine whether and to what extent Options or any
combination thereof, are granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each Option granted hereunder;
(v) to approve forms of agreement for use under the Plan
(which need not be identical);
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder. Such terms and
conditions include, but are not limited to, the exercise price, the time or
times when Options may Vest or become Exercisable (which may be based on
performance criteria), any Vesting acceleration or acceleration of the time or
schedule under which an Option becomes Exercisable, or waiver of forfeiture
restrictions, and any restriction or limitation regarding any Option or the
shares of Common Stock relating thereto, based in each case on such factors as
the Administrator, in its sole discretion, shall determine;
(vii) to construe and interpret the terms of the Plan;
(viii) to prescribe, amend and rescind rules and regulations
relating to the Plan;
(ix) to determine whether and under what circumstances an
Option may be settled in cash instead of Common Stock or Common Stock instead of
cash;
(x) to reduce the exercise price of any Option;
(xi) to modify or amend each Option (subject to Section 11 of
the Plan);
(xii) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option previously
granted by the Administrator;
(xiii) to institute a program whereby outstanding options are
surrendered in
-5-
<PAGE>
exchange for options with a lower exercise price;
(xiv) to determine the terms and restrictions applicable to
Options; and
(xv) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's
----------------------------------
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options.
6. Duration of the Plan. The Plan shall remain in effect until terminated
--------------------
by the Board under the terms of the Plan, provided that in no event may
Incentive Stock Options be granted under the Plan later than 10 years from the
date the Plan was adopted by the Board.
7. Options.
-------
(a) Options. The Administrator, in its discretion, may grant Options
-------
to eligible participants and shall determine whether such Options shall be
Incentive Stock Options or Nonstatutory Stock Options. Each Option shall be
evidenced by a Notice of Grant which shall expressly identify the Options as
Incentive Stock Options or as Nonstatutory Stock Options, and be in such form
and contain such provisions as the Administrator shall from time to time deem
appropriate. Without limiting the foregoing, the Administrator may at any time
authorize the Company, with the consent of the respective recipients, to issue
new Options in exchange for the surrender and cancellation of outstanding
Options. Option agreements shall contain the following terms and conditions:
(i) Exercise Price; Number of Shares. The per Share exercise
--------------------------------
price for the Shares issuable pursuant to an Option shall be such price as is
determined by the Administrator; provided, however, that in the case of an
--------
Incentive Stock Option, the price shall be no less than 100% of the Fair Market
Value of the Common Stock on the date the Option is granted, subject to any
additional conditions set out in Section 7(a)(iv) below.
The Notice of Grant shall specify the number of Shares to which
it pertains.
(ii) Waiting Period and Exercise Dates. At the time an Option
---------------------------------
is granted, the Administrator will determine the terms and conditions to be
satisfied before Shares shall be deemed Vested, as well as the dates on which
the Option shall be Exercisable. The Administrator may specify that an Option
may not Vest or be Exercisable until the completion of the service period
specified at the time of grant or the occurrence of any other triggering event
that the Administrator, in its sole discretion, may impose at the time of grant.
(Any such period is referred to herein as the "waiting period.") At the time an
Option is granted, the Administrator shall fix the period within which the
Option shall be deemed Vested and/or Exercisable, which shall not be earlier
than the end of the waiting period, if any, nor, in the case of an Incentive
Stock Option, later than ten (10) years, from the date of grant.
-6-
<PAGE>
(iii) Form of Payment. The consideration to be paid for the
---------------
Shares to be issued upon exercise of an Option, including the method of payment,
shall be determined by the Administrator (and, in the case of an Incentive Stock
Option, shall be determined at the time of grant) and may consist entirely of:
(1) cash;
(2) check;
(3) other Shares which (1) in the case of Shares acquired
upon exercise of an option, have been owned by the Optionee for more than six
months on the date of surrender, and (2) have a Fair Market Value on the date of
surrender not greater than the aggregate exercise price of the Shares as to
which said Option shall be exercised;
(4) delivery of a properly executed exercise notice
together with such other documentation as the Administrator and the broker, if
applicable, shall require to effect an exercise of the Option and delivery to
the Company of the sale or loan proceeds required to pay the exercise price;
(5) any combination of the foregoing methods of payment;
or
(6) such other consideration and method of payment for
the issuance of Shares to the extent permitted by Applicable Laws.
(iv) Special Incentive Stock Option Provisions. In addition to
-----------------------------------------
the foregoing, Options granted under the Plan which are intended to be Incentive
Stock Options under Section 422 of the Code shall be subject to the following
terms and conditions:
(1) Dollar Limitation. To the extent that the aggregate
-----------------
Fair Market Value of (a) the Shares with respect to which Options designated as
Incentive Stock Options plus (b) the shares of stock of the Company, Parent and
any Subsidiary with respect to which other incentive stock options are
Exercisable for the first time by an Optionee during any calendar year under all
plans of the Company and any Parent and Subsidiary exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of the
preceding sentence, (a) Options shall be taken into account in the order in
which they were granted, and (b) the Fair Market Value of the Shares shall be
determined as of the time the Option or other incentive stock option is granted.
(2) 10% Stockholder. If any Optionee to whom an
---------------
Incentive Stock Option is to be granted pursuant to the provisions of the Plan
is, on the date of grant, the owner of Common Stock (as determined under Section
424(d) of the Code) possessing more than 10% of the total combined voting power
of all classes of stock of the Company or any Parent or Subsidiary of the
Company, then the following special provisions shall be applicable to the Option
granted to such individual:
-7-
<PAGE>
(a) The per Share Option price of Shares subject to
such Incentive Stock Option shall not be less than 110% of the Fair Market Value
of Common Stock on the date of grant; and
(b) The Option shall not have a term in excess of
five (5) years from the date of grant.
Except as modified by the preceding provisions of this subsection 7(a)(iv) and
except as otherwise limited by Section 422 of the Code, all of the provisions of
the Plan shall be applicable to the Incentive Stock Options granted hereunder.
(v) Other Provisions. Each Option granted under the Plan may
----------------
contain such other terms, provisions, and conditions not inconsistent with the
Plan as may be determined by the Administrator.
(vi) Buyout Provisions. The Administrator may at any time
-----------------
offer to purchase for a payment in cash, promissory note or Shares, an Option
previously granted, based on such terms and conditions as the Administrator
shall establish and communicate to the Optionee at the time that such offer is
made.
(b) Method of Exercise.
------------------
(i) Procedure for Exercise; Rights as a Stockholder. Any
-----------------------------------------------
Option granted hereunder shall be Exercisable only if it is Vested and only at
---
such times and under such conditions as determined by the Administrator and as
shall be permissible under the terms of the Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Administrator (and, in the case
of an Incentive Stock Option, determined at the time of grant) and permitted by
the Option Agreement, consist of any consideration and method of payment
allowable under subsection 7(a)(iii) of the Plan. Until the issuance (as
evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company) of the stock certificate evidencing
such Shares, no right to vote or receive dividends or any other rights as a
stockholder shall exist with respect to the Optioned Stock, notwithstanding the
exercise of the Option. No adjustment will be made for a dividend or other
similar right for which the record date is after the date when such written
notice of exercise is delivered to the Company but prior to the date the stock
certificate is issued, except as provided in Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter shall be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
-8-
<PAGE>
(ii) Rule 16b-3. Options granted to individuals subject to
----------
Section 16 of the Exchange Act ("Insiders") must comply with the applicable
provisions of Rule 16b-3 and shall contain such additional conditions or
restrictions as may be required thereunder to qualify for the maximum exemption
from Section 16 of the Exchange Act with respect to Plan transactions.
(iii) Termination of Employment or Consulting Relationship.
----------------------------------------------------
In the event an Optionee's Continuous Status as an Employee or Consultant
terminates (including upon the Optionee's death or Disability), the Optionee may
exercise his or her Option, but only within such period of time as is determined
by the Administrator at the time of grant, not to exceed the period set forth in
the applicable Option Agreement (three (3) months in the case of an Incentive
Stock Option) from the date of such termination, and only to the extent that the
Optionee was entitled to exercise it at the date of such termination (but in no
event later than the expiration of the term of such Option as set forth in the
Option Agreement). To the extent that Optionee was not entitled to exercise an
Option at the date of such termination, and to the extent that the Optionee does
not exercise such Option (to the extent otherwise so entitled) within the time
specified herein, the Option shall terminate. Notwithstanding the foregoing, any
Incentive Stock Option that is Vested but does not become Exercisable within
three (3) months of the termination of Optionee's Continuous Status as an
Employee shall become, to the extent otherwise Vested, a Nonstatutory Stock
Option.
(iv) Disability of Optionee. In the event an Optionee's
----------------------
Continuous Status as an Employee or Consultant terminates as a result of the
Optionee's Disability, the Optionee may exercise his or her Option, but only
within twelve (12) months from the date of such termination, and only to the
extent that the Optionee was entitled to exercise it at the date Optionee was
first deemed disabled (but in no event later than the expiration of the term of
such Option as set forth in the Option Agreement). If such disability is not a
"disability" as such term is defined in Section 22(e)(3) of the Code, then, in
the case of an Incentive Stock Option, such Incentive Stock Option shall
automatically cease to be treated as an Incentive Stock Option and shall be
treated as a Nonstatutory Stock Option on the day three months and one day
following such termination. To the extent that Optionee was not entitled to
exercise an Option at the date of such termination, and to the extent that the
Optionee does not exercise such Option (to the extent otherwise so entitled)
within the time specified herein, the Option shall terminate.
(v) Death of Optionee. In the event of an Optionee's death,
-----------------
the Optionee's estate or a person who acquired the right to exercise the
deceased Optionee's Option by bequest or inheritance may exercise the Option,
but only within twelve (12) months following the date of death, and only to the
extent that the Optionee was entitled to exercise it at the date of death (but
in no event later than the expiration of the term of such Option as set forth in
the Option Agreement). To the extent that Optionee was not entitled to exercise
an Option at the date of death, and to the extent that the Optionee's estate or
a person who acquired the right to exercise such Option does not exercise such
Option (to the extent otherwise so entitled) within the time specified herein,
the Option shall terminate.
8. Non-Transferability of Options. Options may not be sold, pledged,
------------------------------
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent
-9-
<PAGE>
or distribution and may be exercised, during the lifetime of the Optionee, only
by the Optionee.
9. Adjustments Upon Changes in Capitalization, Dissolution, Merger, Asset
----------------------------------------------------------------------
Sale or Change of Control.
- -------------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, shall be proportionately and automatically
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
--------
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, to the extent that an Option has not
been previously exercised, it will terminate immediately prior to the
consummation of such proposed action. The Board may, in the exercise of its
sole discretion in such instances, declare that any Option shall terminate as of
a date fixed by the Board and give each Optionee the right to exercise his or
her Option as to all or any part of the Optioned Stock, including Shares as to
which the Option would not otherwise be Exercisable.
(c) Merger or Asset Sale. Subject to the following sentence, in the
--------------------
event of a merger of the Company with or into another corporation, the sale of
substantially all of the assets of the Company or a Change in Control, each
outstanding Option shall be assumed or an equivalent Option substituted by the
successor corporation or a Parent or Subsidiary of the successor corporation.
In the event that the successor corporation does not agree to assume the Option
or to substitute an equivalent option, then the Option shall be deemed
Exercisable to the extent of the greater of (i) 40% of the number of shares
-------
subject to the Option or (ii) the number of shares then Vested immediately prior
to the occurrence of the Change of Control pursuant to the provisions of Section
1 of the Option Agreement between the Company and Optionee. Such Options shall
terminate to the extent such Options are not Vested and exercised immediately
prior to the occurrence of a Change in Control. For the purposes of this
paragraph, the Option shall be considered assumed if, immediately following the
merger, sale of assets or Change in Control, the Option confers the right to
purchase, for each Share of Optioned Stock subject to the Option immediately
prior to the merger or sale of assets, the consideration (whether stock, cash,
or other securities or property) received in the merger or sale of assets by
holders of Common Stock for each Share held on the effective date of the
transaction (and if holders were offered a choice of
-10-
<PAGE>
consideration, the type of consideration chosen by the holders of a majority of
the outstanding Shares); provided, however, that if such consideration received
--------
in the merger, sale of assets or Change in Control was not solely common stock
of the successor corporation or its Parent, the Administrator may, with the
consent of the successor corporation and the Optionee, provide for the
consideration to be received upon the exercise of the Option, for each Share of
Optioned Stock subject to the Option, to be solely common stock of the successor
corporation or its Parent equal in Fair Market Value to the per share
consideration received by holders of Common Stock in the merger, sale of assets
or Change in Control.
(d) Definition of "Change in Control". For purposes of this Section
---------------------------------
9, a "Change in Control" means the happening of any of the following:
(i) When any "person," as such term is used in Sections 13(d)
and 14(d) of the Exchange Act (other than the Company, a Subsidiary or a Company
employee benefit plan, including any trustee of such plan acting as trustee) is
or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company representing more
than fifty percent (50%) of the combined voting power of the Company's then
outstanding securities entitled to vote generally in the election of directors;
or
(ii) A merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) at least fifty percent (50%) of
the total voting power represented by the voting securities of the Company or
such surviving entity outstanding immediately after such merger or
consolidation, or the stockholders of the Company approve an agreement for the
sale or disposition by the Company of all or substantially all the Company's
assets; or
(iii) A change in the composition of the Board of Directors of
the Company occurring within a two-year period without the consent of a majority
of the Incumbent Directors, as a result of which fewer than a majority of the
directors are Incumbent Directors. "Incumbent Directors" shall mean directors
who either (A) are directors of the Company as of the date the Plan is approved
by the stockholders, or (B) are elected, or nominated for election, to the Board
of Directors of the Company with the affirmative votes of at least a majority of
the Incumbent Directors at the time of such election or nomination (but shall
not include an individual whose election or nomination is in connection with an
actual or threatened proxy contest relating to the election of directors to the
Company).
(e) Change in Control Price. For purposes of this Section 9, "Change
-----------------------
in Control Price" shall be, as determined by the Board, (i) the highest Fair
Market Value of a Share within the 60-day period immediately preceding the date
of determination of the Change in Control Price by the Board (the "60-Day
Period"), or (ii) the highest price paid or offered per Share, as determined by
the Board, in any bona fide transaction or bona fide offer related to the Change
in Control of the Company, at any time within the 60-Day Period, or (iii) such
lower price as the Board, in its discretion, determines to be a reasonable
estimate of the fair market value of a Share.
-11-
<PAGE>
10. Date of Grant. The date of grant of an Option shall be, for all
-------------
purposes, the date on which the Administrator makes the determination granting
such Option, or such other later date as is determined by the Administrator.
Notice of the determination shall be provided to each Optionee within a
reasonable time after the date of such grant.
11. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or terminate the Plan.
(b) Stockholder Approval. The Company shall obtain stockholder
--------------------
approval of any Plan amendment to the extent necessary and desirable to comply
with Rule 16b-3 or with Section 422 of the Code (or any successor rule or
statute or other applicable law, rule or regulation, including the requirements
of any exchange or quotation system on which the Common Stock is listed or
quoted). Such stockholder approval, if required, shall be obtained in such a
manner and to such a degree as is required by the Applicable Laws, rules or
regulations.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
12. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, Applicable Laws,
and the requirements of any stock exchange or quotation system upon which the
Shares may then be listed or quoted, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option, the Company may require the person exercising such Option to represent
and warrant at the time of any such exercise that the Shares are being purchased
only for investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation is
required.
13. Liability of Company.
--------------------
(a) Inability to Obtain Authority. The inability of the Company to
-----------------------------
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder, shall relieve the Company of any liability in
respect of the failure to issue or sell such Shares as to which such
-12-
<PAGE>
requisite authority shall not have been obtained.
(b) Grants Exceeding Allotted Shares. If the Optioned Stock covered
--------------------------------
by an Option exceeds, as of the date of grant, the number of Shares which may be
issued under the Plan without additional stockholder approval, such Option shall
be void with respect to such excess Optioned Stock, unless stockholder approval
of an amendment sufficiently increasing the number of Shares subject to the Plan
is timely obtained in accordance with Section 11(b) of the Plan.
14. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
15. Stockholder Approval. Continuance of the Plan shall be subject to
--------------------
approval by the stockholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such stockholder approval shall be obtained
in the manner and to the degree required under applicable federal and state law.
-13-
<PAGE>
Exhibit 10.6
MICROSTRATEGY INCORPORATED
1997 STOCK OPTION PLAN FOR FRENCH EMPLOYEES
1. Purposes of the Plan. The purposes of this 1997 Stock Option Plan for
--------------------
French Employees are:
. to attract and retain the best available personnel for positions of
substantial responsibility,
. to provide additional incentive to French Employees, and
. to promote the success of the Company's business and the business
of its French subsidiary.
Options shall be granted under the Plan at the discretion of the
Administrator and as reflected in the terms of Option Agreements, and are
intended to qualify for preferred treatment under French tax laws.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as
-------------
shall be administering the Plan.
(b) "Applicable Laws" means the legal requirements relating to the
---------------
administration of stock option plans under French corporate, securities, and tax
laws, any stock exchange or quotation system on which the Common Stock is listed
or quoted and the applicable laws of any country or jurisdiction where Options
are, or will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the
---------
Board in accordance with Section 4 of the Plan.
(f) "Common Stock" means the common stock of the Company.
------------
(g) "Company" means MicroStrategy Incorporated, a Delaware
-------
corporation.
(h) "Director" means a member of the Board.
--------
(i) "Disability" means total and permanent disability, as defined
----------
under Applicable Laws.
<PAGE>
(j) "Employee" means any person employed by a Subsidiary in a
--------
salaried position, who does not own more than 10% of the voting power of all
classes of stock of the Company, or any Parent or Subsidiary, and who is a
resident of the Republic of France.
(k) "Fair Market Value" means, as of any date, the dollar value of
-----------------
Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market of the Nasdaq Stock Market, its Fair Market Value shall be the
average quotation price for the last 20 days preceding the date of determination
for such stock (or the average closing bid for such 20 day period, if no sales
were reported) as quoted on such exchange or system and reported in The Wall
Street Journal or such other source as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq Stock Market
(but not on the Nasdaq National Market thereof) or regularly quoted by a
recognized securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean between the high bid and low asked prices for the
Common Stock for the last 20 days preceding the date of determination; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(l) "Option" means a stock option granted pursuant to the Plan.
------
(m) "Option Agreement" means a written agreement between the Company
----------------
and an Optionee evidencing the terms and conditions of an individual Option
grant. The Option Agreement is subject to the terms and conditions of the Plan.
(n) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(o) "Optionee" means a person eligible to participate in the Plan
--------
pursuant to Section 5 and who holds an outstanding Option.
(p) "Plan" means this MicroStrategy Incorporated 1997 Stock Option
----
Plan for French Employees.
(q) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 12 of the Plan.
(r) "Subsidiary" means any participating subsidiary of the Company
----------
located in the Republic of France.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
-------------------------
the Plan, the maximum aggregate number of Shares that may be optioned and sold
under the Plan is three hundred thousand (300,000) Shares. However, at no time
shall the total number of Options outstanding which may be exercised for newly
issued Shares of Common Stock exceed that number equal to one-third of the
Company's voting stock. The Shares may be authorized, but unissued, or
reacquired
2
<PAGE>
Common Stock. If any Optioned Stock is to consist of reacquired Shares, such
Optioned Stock must be purchased by the Company prior to the date of grant of
the corresponding Option and must be reserved and set aside for such purpose.
If an Option expires or becomes unexercisable without having been
exercised in full, the unpurchased Shares which were subject thereto shall
become available for future grant under the Plan (unless the Plan has
terminated).
4. Administration of the Plan.
--------------------------
(a) Procedure. The Plan shall be administered by the Board or a
---------
Committee.
(b) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
(i) to determine Fair Market Value;
(ii) to select the persons to whom Options may be granted
hereunder;
(iii) to determine whether and to what extent Options are
granted hereunder;
(iv) to determine the number of Shares to be covered by each
Option granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder. Such terms and
conditions may include, but are not limited to, the exercise price, the time or
times when Options may be exercised (which may be based on performance
criteria), any vesting acceleration or waiver of forfeiture restrictions, and
any restriction or limitation regarding any Option or the Shares relating
thereto, based in each case on such factors as the Administrator, in its sole
discretion, shall determine;
(vii) to construe and interpret the terms of the Plan;
(viii) to prescribe, amend and rescind rules and regulations
relating to the Plan;
(ix) to modify or amend each Option (subject to Section 14(c)
of the Plan);
(x) to authorize any person to execute on behalf of the
Company or a Subsidiary any instrument required to effect the grant of an Option
previously granted by the Administrator;
(xi) to determine the terms and restrictions applicable to
Options; and
3
<PAGE>
(xii) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's
----------------------------------
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options.
(d) Reporting to the Stockholders' Meeting. The Company shall
--------------------------------------
annually report to its stockholders the number of shares subject to, the
exercise price of and number of Shares acquired upon exercise of Options granted
hereunder.
5. Eligibility. Options may be granted only to Employees; provided,
-----------
however, that the President Directeur General, the Directeur General and other
directors who are also Employees of a participating Subsidiary may be granted
Options. An individual who has been granted an Option may, if otherwise
eligible, be granted additional Options.
6. Limitations. Neither the Plan nor any Option shall confer upon any
-----------
Optionee any right with respect to continuing the Optionee's employment
relationship with the Company.
7. Term of Plan. The Plan shall become effective as of the date of its
------------
adoption by the Board. It shall continue in effect until five years from the
date of its adoption, unless terminated earlier under Section 14 of the Plan.
8. Term of Option. The term of each Option shall be as stated in the
--------------
Option Agreement; provided, however, that the maximum term of an Option shall
not exceed ten (10) years from the date of grant of the Option.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) Exercise Price. The exercise price for the Shares to be issued
--------------
pursuant to exercise of an Option shall be one hundred percent (100%) of the
Fair Market Value on the date the Option is granted. The exercise price shall
not be modified while the Option is outstanding.
(b) Vesting and Exercisability. As used herein, the term "vested"
--------------------------
shall mean that portion of an Option, if any, that the Optionee shall be
entitled to retain (as set forth below and subject in all cases to the vested
portion becoming exercisable) in the event that the Optionee ceases to be an
Employee prior to the expiration of the Option. As used herein, the term
"exercisable" shall mean that portion of an Option, if any, that the Optionee
shall be then entitled, from time to time, to exercise as set forth more fully
below.
(i) Vesting.
-------
(A) Options granted hereunder shall vest in accordance
with the following schedule: (i) no portion of an Option shall be vested prior
to the second anniversary of its Vesting Commencement Date (as such term is
defined in the Option Agreement); (ii) forty percent (40%) of the Option shall
be vested on the second anniversary of the Vesting Commencement Date;
4
<PAGE>
(iii) thereafter, twenty percent (20%) of the Option shall be vested on each
subsequent anniversary of the Vesting Commencement Date, if during such period
Optionee has not ceased to be an Employee (such that an Option granted hereunder
shall be vested in full on the fifth anniversary of its Vesting Commencement
Date).
(B) An Optionee shall be entitled to retain the vested
portion of an Option, in the event the Optionee ceases to be an Employee, for
the period set forth in Section 10 below. No vested portion of any Option may be
exercised until it is otherwise exercisable, as provided below.
(ii) Exercisability.
--------------
(A) No portion of any Option shall be exercisable,
whether or not vested, until the earliest to occur of the following events (each
an "Event of Exercisability"): (i) the date immediately following the closing of
the initial firm commitment underwritten public offering of common stock of the
Company; (ii) immediately prior to the occurrence of any Change in Control of
the Company; or (iii) the date 78 months following the Option's date of grant.
(B) In the event that an Event of Exercisability shall
occur, the entire vested portion of the Option shall in such event be
exercisable; thereafter, this Option shall become exercisable as, and to the
extent that, it becomes vested.
(c) Restriction on Sale. The Shares subject to this Option may not
-------------------
be transferred, assigned or hypothecated in any manner otherwise than by will or
by the laws of descent or distribution before the date three years after the
second anniversary of the Vesting Commencement Date.
(d) Form of Consideration. The Administrator shall determine the
---------------------
acceptable form of consideration for exercising an Option, including the method
of payment. Such consideration may consist of:
(i) cash or check (denominated in U.S. Dollars);
(ii) wire transfer (denominated in U.S. Dollars);
(iii) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan;
(iv) any combination of the foregoing methods of payment.
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable according to the terms of the Plan, but
may not be exercised for a fraction of a Share. An Option shall be deemed
exercised when:
(i) the Subsidiary or the Company receives written notice of
exercise (in
5
<PAGE>
accordance with the Option Agreement and in the form attached hereto as
Exhibit A) from the person entitled to exercise the Option, accompanied by full
payment for the Shares with respect to which the Option is exercised;
(ii) the Subsidiary or the Company receives a written
subscription agreement to the Shares (in accordance with the Option Agreement
and in the form attached hereto as Exhibit B) from the person entitled to
exercise the Option.
Full payment may consist of any consideration and method of
payment authorized by the Administrator and permitted by the Option Agreement
and the Plan, and shall be deemed to be definitively made upon receipt of the
payment by the Company or the Subsidiary. Shares issued upon exercise of an
Option shall be issued in the name of the Optionee or, if requested by the
Optionee, in the name of the Optionee and his or her spouse. Until the Shares
are issued (as evidenced by the appropriate entry on the books of the Company or
of a duly authorized transfer agent of the Company), no right to vote or receive
dividends or any other rights as a stockholder shall exist with respect to the
Optioned Stock, notwithstanding the exercise of the Option. The Company shall
issue to the Optionee (or cause to be issued) such Shares promptly after the
Option is exercised and after full payment, as indicated above, is received by
the Company. No adjustment will be made for a dividend or other right for which
the record date is prior to the date the Shares are issued, except as provided
in Section 12 of the Plan.
Exercising an Option in any manner shall decrease the number of
Shares thereafter available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Employment. In the event an Optionee ceases to
-------------------------
be an Employee (other than upon the Optionee's death), the Optionee may exercise
his or her Option to the extent that the Option was vested at the date of such
termination and to the extent that the Optionee is or becomes entitled to
exercise the Option after termination, but only within such period of time as is
determined by the Administrator at the time of grant, and in no event later than
the expiration of the term of such Option as set forth in the Option Agreement.
To the extent that the Option was not vested at the date of such termination,
and to the extent that the Optionee does not exercise such Option (to the extent
otherwise so entitled) within the time specified herein, the Option shall
terminate.
(c) Death of Optionee. In the event of an Optionee's death, the
-----------------
Optionee's estate or a person who acquired the right to exercise the deceased
Optionee's Option by bequest or inheritance may exercise the Option to the
extent that the Option was vested at the date of death and to the extent such
estate or person is or becomes entitled to exercise the Option after the
Optionee's death, but only within six (6) months following the date of death,
and in no event later than the expiration of the term of such Option as set
forth in the Option Agreement. To the extent that the Option was not vested at
the date of death, and to the extent that the Optionee's estate or a person who
acquired the right to exercise such Option does not exercise such Option (to the
extent otherwise so entitled) within the time specified herein, the Option shall
terminate.
11. Non-Transferability of Options. An Option may not be sold, pledged,
------------------------------
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent
6
<PAGE>
or distribution and may be exercised, during the lifetime of the Optionee, only
by the Optionee.
12. Adjustments Upon Changes in Capitalization, Dissolution, Merger, Asset
----------------------------------------------------------------------
Sale or Change of Control.
-------------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, to the extent that an Option has not
been previously exercised, it will terminate immediately prior to the
consummation of such proposed action. The Board may, in the exercise of its
sole discretion in such instances, declare that any Option shall terminate as of
a date fixed by the Board and give each Optionee the right to exercise his or
her Option as to all or any part of the Optioned Stock, including Shares as to
which the Option would not otherwise be exercisable.
(c) Merger or Asset Sale. Subject to the following sentence, in the
--------------------
event of a merger of the Company with or into another corporation, the sale of
substantially all of the assets of the Company or a Change in Control, each
outstanding Option shall be assumed or an equivalent Option substituted by the
successor corporation or a Parent or Subsidiary of the successor corporation. In
such event, if the successor corporation does not agree to assume the Option or
to substitute an equivalent option, then the Option shall be deemed vested and
exercisable to the extent of the greater of (i) 40% of the number of shares
-------
subject to the Option or (ii) the number of shares then vested immediately prior
to the occurrence of the Change of Control pursuant to the provisions of
Section 1 of the Option Agreement between the Company and Optionee. Such Options
shall terminate to the extent such Options are not vested and exercised
immediately prior to the occurrence of the Change in Control. For the purposes
of this paragraph, the Option shall be considered assumed if, immediately
following the merger, sale of assets or Change in Control, the Option confers
right to purchase, for each Share of Optioned Stock subject to the Option
immediately prior to the merger or sale of assets, the consideration (whether
stock, cash, or other securities or property) received in the merger or sale of
assets by holders of Common Stock for each Share held on the effective date of
the transaction (and if holders were offered a choice of consideration, the type
of consideration chosen by the holders of a majority of the outstanding Shares);
provided, however, that if such consideration received in the merger, sale of
- --------
assets or Change in Control was not solely common stock of the successor
corporation or its Parent, the Administrator may, with the consent of
7
<PAGE>
the successor corporation and the Optionee, provide for the consideration to be
received upon the exercise of the Option, for each Share of Optioned Stock
subject to the Option, to be solely common stock of the successor corporation or
its Parent equal in Fair Market Value to the per share consideration received by
holders of Common Stock in the merger, sale of assets or Change in Control.
(d) Definition of "Change in Control". For purposes of this
--------------------------------
Section 9, a "Change in Control" means the happening of any of the following:
(i) When any "person," as such term is used in Sections 13(d)
and 14(d) of the Exchange Act (other than the Company, a Subsidiary or a Company
employee benefit plan, including any trustee of such plan acting as trustee) is
or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company representing fifty
percent (50%) or more of the combined voting power of the Company's then
outstanding securities entitled to vote generally in the election of directors;
or
(ii) A merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than fifty percent (50%) of
the total voting power represented by the voting securities of the Company or
such surviving entity outstanding immediately after such merger or
consolidation, or the stockholders of the Company approve an agreement for the
sale or disposition by the Company of all or substantially all the Company's
assets; or
(iii) A change in the composition of the Board of Directors of
the Company occurring within a two-year period, as a result of which fewer than
a majority of the directors are Incumbent Directors. "Incumbent Directors" shall
mean directors who either (A) are directors of the Company as of the date the
Plan is approved by the stockholders, or (B) are elected, or nominated for
election, to the Board of Directors of the Company with the affirmative votes of
at least a majority of the Incumbent Directors at the time of such election or
nomination (but shall not include an individual whose election or nomination is
in connection with an actual or threatened proxy contest relating to the
election of directors to the Company).
13. Date of Grant. The date of grant of an Option shall be, for all
-------------
purposes, the date on which the Administrator makes the determination granting
such Option, or such other later date as is determined by the Administrator.
Notice of the determination shall be provided to each Optionee within a
reasonable time after the date of such grant.
14. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Administrator may at any time
-------------------------
amend, alter, suspend or terminate the Plan.
(b) Stockholder Approval. The Company shall obtain stockholder
--------------------
approval of any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws. Such stockholder approval, if required, shall be obtained
in such a manner and to such a degree as is
8
<PAGE>
required by the Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and a
representative of the Administrator.
15. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with Applicable Laws, including, without
limitation, the requirements of any stock exchange or quotation system upon
which the Shares may then be listed or quoted, and shall be further subject to
the approval of counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of
--------------------------
an Option, the Company may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Shares are being
purchased only for investment and without any present intention to sell or
distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required under Applicable Laws.
16. Liability of Company.
--------------------
(a) Inability to Obtain Authority. The inability of the Company to
-----------------------------
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder, shall relieve the Company of any liability in
respect of the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
(b) Grants Exceeding Allotted Shares. If the Optioned Stock covered
--------------------------------
by an Option exceeds, as of the date of grant, the number of Shares which may be
issued under the Plan without additional stockholder approval, such Option shall
be void with respect to such excess Optioned Stock, unless stockholder approval
of an amendment sufficiently increasing the number of Shares subject to the Plan
is timely obtained in accordance with Section 14(b) of the Plan. In the event
more than one Option is granted which exceeds, as of the date of grant, the
number of Shares which may be issued under the Plan without additional
stockholder approval, such Options shall be void as set forth in the preceding
sentence on a pro rata basis.
17. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
9
<PAGE>
MICROSTRATEGY INCORPORATED
1997 STOCK OPTION PLAN FOR FRENCH EMPLOYEES
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the 1997 Stock Option
Plan for French Employees shall have the same defined meanings in this Option
Agreement.
I. NOTICE OF STOCK OPTION GRANT
----------------------------
Optionee's Name and Address:
-------------------------------------
-------------------------------------
-------------------------------------
You have been granted an option to purchase Common Stock, subject to the
terms and conditions of the Plan and this Stock Option Agreement, as follows:
Date of Grant
-------------------------------------
Exercise Price per Share $
-------------------------------------
Total Number of Shares Granted
-------------------------------------
Total Exercise Price $
-------------------------------------
Term/Expiration Date:
-------------------------------------
Vesting and Exercisability. As used herein, the term "vested" shall mean
--------------------------
that portion of this Option, if any, that Optionee shall be entitled to retain
(as set forth below and subject in all cases to the vested portion becoming
exercisable) in the event that Optionee ceases to be an Employee prior to the
expiration of this Option. As used herein, the term "exercisable" shall mean
that portion of this Option, if any, that the Optionee shall be then entitled,
from time to time, to exercise as set forth more fully below.
(1) Vesting.
-------
(i) This Option shall vest in accordance with the following
schedule: (i) no portion of this Option shall be vested prior to the second
anniversary of the Vesting Commencement Date; (ii) forty percent (40%) of this
Option shall be vested on the second anniversary of the Vesting Commencement
Date (the "Second Anniversary"); (iii) thereafter,
10
<PAGE>
twenty percent (20%) of this Option shall be vested on each subsequent
anniversary of the Vesting Commencement Date if during such period Optionee
remains an Employee (such that this Option shall be vested in full on the fifth
anniversary of the Vesting Commencement Date).
(ii) Optionee shall be entitled to retain the vested portion of this
Option in the event Optionee ceases to be an Employee, for the period set forth
below. No vested portion of any Option may be exercised until it is otherwise
exercisable, as provided below.
(2) Exercisability.
--------------
(i) No portion of this Option shall be exercisable, whether or not
vested, until the earliest to occur of the following events (each an "Event of
Exercisability"): (i) the date immediately following the closing of the initial
firm commitment underwritten public offering of common stock of the Company;
(ii) immediately prior to the occurrence of any Change in Control of the
Company; or (iii) the date 78 months following the date of grant of this Option.
(ii) In the event that an Event of Exercisability shall occur, the
entire vested portion of this Option shall be exercisable; thereafter, this
Option shall become exercisable as, and to the extent that, it becomes vested.
(3) Restriction on Sale.
-------------------
The Shares subject to this Option may not be transferred, assigned or
hypothecated in any manner otherwise than by will or by the laws of descent or
distribution before the date three years after the Second Anniversary.
(4) Termination Period.
-------------------
This Option may be exercised to the extent that it is both vested and
exercisable until the later to occur of the following: (i) the thirtieth (30th)
day after termination of the Optionee's employment relationship, or (ii) the
fifth anniversary of the Vesting Commencement Date. In the case of a
termination of the Optionee's employment relationship as a result of death, this
Option may be exercised, to the extent that it is both vested and exercisable,
for six (6) months.
II. AGREEMENT
---------
1. Grant of Option. The Board of the Company hereby grants to the
---------------
Optionee, an option (the "Option") to purchase a number of Shares, as set forth
in the Notice of Grant, at the exercise price per share set forth in the Notice
of Grant (the "Exercise Price"), subject to the terms and conditions of the
Plan, which is incorporated herein by reference. Subject to Section 14(c) of
the Plan, in the event of a conflict between the terms and conditions of the
Plan and the terms and conditions of this Option Agreement, the terms and
conditions of the Plan shall prevail.
11
<PAGE>
2. Exercise of Option.
------------------
(a) Right to Exercise. This Option is exercisable during its term
-----------------
as set forth in the Notice of Grant and the applicable provisions of the Plan
and this Option Agreement.
(b) Method of Exercise. This Option is exercisable by: (i) delivery
------------------
of an exercise notice to the Subsidiary, in the form attached hereto as
Exhibit A (the "Exercise Notice"), which shall state the election to exercise
the Option and the number of Shares in respect of which the Option is being
exercised (the "Exercised Shares"), (ii) delivery of a subscription agreement to
the Subsidiary, in the form attached as Exhibit B (the "Subscription
Agreement"), (iii) delivery of the aggregate Exercise Price as to all Exercised
Shares to the Subsidiary and (iv) such other representations and agreements as
may be required by the Company or the Subsidiary pursuant to the provisions of
the Plan. Until issuance of such Shares (as evidenced by the appropriate entry
on the books of the Company or of a duly authorized transfer agent of the
Company), no right to vote or receive dividends or any other rights as a
stockholder shall exist with respect to the Optioned Stock, notwithstanding the
exercise of the Option. The Company shall issue to the Optionee (or cause to be
issued) such Shares promptly after the Option is exercised. No adjustment will
be made for a dividend or other right for which the record date is prior to the
date issuance of such Shares, except as provided in Section 12 of the Plan. The
Exercise Notice and Subscription Agreement shall be signed by the Optionee and
shall be delivered in person or by certified mail to the Secretary of the
Subsidiary. This Option shall be deemed to be exercised upon receipt by the
Subsidiary of such fully executed Exercise Notice and Subscription Agreement
accompanied by such aggregate Exercise Price.
No Shares shall be issued pursuant to the exercise of this Option
unless such issuance and exercise complies with all relevant provisions of law
and the requirements of any stock exchange upon which the Shares are then
listed. Assuming such compliance, for income tax purposes the Exercised Shares
shall be considered transferred to the Optionee on the date the Option is
exercised with respect to such Exercised Shares.
3. Method of Payment. Payment of the aggregate Exercise Price shall
-----------------
be by any of the following, or a combination thereof, at the election of the
Optionee:
(a) cash or check (denominated in U.S. Dollars);
(b) wire transfer (denominated (in U.S. Dollars);
(c) consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan.
4. Lock-Up Period. Optionee hereby agrees that, if so requested by the
--------------
Company or any representative of the underwriters (the "Managing Underwriter")
in connection with any registration of the offering of any securities of the
Company under the Securities Act, Optionee shall not sell or otherwise transfer
any Shares or other securities of the Company during the 180-day period (or such
other period as may be requested in writing by the Managing Underwriter and
agreed to in writing by the Company) (the "Market Standoff Period") following
12
<PAGE>
the effective date of a registration statement of the Company filed under the
Securities Act. Such restriction shall apply to any registration statement of
the Company to become effective under the Securities Act that includes
securities to be sold on behalf of the Company to the public in an underwritten
public offering under the Securities Act. The Company may impose stop-transfer
instructions with respect to securities subject to the foregoing restrictions
until the end of such Market Standoff Period.
5. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by the Optionee. The
terms of the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
6. Term of Option. This Option may be exercised only within the term set
--------------
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option Agreement.
OPTIONEE ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE
COMPANY'S STOCK OPTION PLAN, WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL
CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT BY THE
COMPANY OR THE SUBSIDIARY.
By your signature and the signature of the Company's representative below,
you and the Company agree that this Option is granted under and governed by the
terms and conditions of the Plan and this Option Agreement. Optionee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions relating to the Plan
and Option Agreement.
OPTIONEE: MICROSTRATEGY INCORPORATED
By:
- ------------------------------------- --------------------------------
Signature
Title:
- ------------------------------------- -----------------------------
Print Name
13
<PAGE>
EXHIBIT A
---------
MICROSTRATEGY INCORPORATED
1997 STOCK OPTION PLAN FOR FRENCH EMPLOYEES
EXERCISE NOTICE
MicroStrategy Incorporated
___________________________________
___________________________________
___________________________________
Attention: General Secretary
1. Exercise of Option. Effective as of today, ___________, 199__, the
------------------
undersigned ("Optionee") hereby elects to purchase _________ Shares under and
pursuant to the Plan and the Stock Option Agreement dated ___________ (the
"Option Agreement"). The purchase price for the Shares shall be $__________, as
required by the Option Agreement.
2. Delivery of Payment. Optionee herewith delivers to the Company the
-------------------
full purchase price for the Shares.
3. Representations of Optionee. Optionee acknowledges that Optionee has
---------------------------
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions. Optionee further agrees to
execute the Investment Representation Statement attached hereto as Exhibit C.
4. Rights as Stockholder. Until issuance of the Shares (as evidenced by
---------------------
the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company), no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option.
5. Tax Consultation. Optionee represents that Optionee has consulted with
----------------
any tax consultants or advisors Optionee deems advisable in connection with the
purchase or disposition of the Shares and that Optionee is not relying on the
Company for any tax advice.
<PAGE>
6. Restrictive Legends and Stop-Transfer Orders.
--------------------------------------------
(a) Legends. Optionee understands and agrees that the Company shall
-------
cause the legends set forth below or legends substantially equivalent thereto,
to be placed upon any certificate(s) evidencing ownership of the Shares together
with any other legends that may be required by state or federal securities laws:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN
CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. SUCH SHARES MAY
NOT BE SOLD OR TRANSFERRED, DIRECTLY OR INDIRECTLY, IN OR INTO THE
UNITED STATES, ITS TERRITORIES, POSSESSIONS, OR AREAS SUBJECT TO ITS
JURISDICTION, OR TO OR FOR THE ACCOUNT OR BENEFIT OF A "U.S. PERSON"
AS THAT TERM IS DEFINED IN RULE 901 OF REGULATION S OF THE ACT, IN THE
ABSENCE OF SUCH REGISTRATION, UNLESS AND UNTIL REGISTERED UNDER THE
ACT OR THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY
ACCEPTABLE TO IT STATING THAT SUCH TRANSFER IS EXEMPT FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE ACT.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER AND RIGHT OF FIRST REFUSAL OPTIONS HELD BY
THE ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE
BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF
WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH
TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE BINDING ON
TRANSFEREES OF THESE SHARES.
(b) Stop-Transfer Notices. Optionee agrees that, in order to ensure
---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) Refusal to Transfer. The Company shall not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.
<PAGE>
7. Entire Agreement; Governing Law. The Plan and Option Agreement are
-------------------------------
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and such agreement is governed by the laws
of California and the United States of America except for that body of laws
pertaining to conflict of laws.
Submitted by: Accepted by:
OPTIONEE: MICROSTRATEGY INCORPORATED
By:
- ------------------------------ --------------------------
Signature
Its:
- ------------------------------ --------------------------
Print Name
Address:
----------------------
----------------------
----------------------
3
<PAGE>
EXHIBIT B
---------
MICROSTRATEGY INCORPORATED
1997 STOCK OPTION PLAN FOR FRENCH EMPLOYEES
SUBSCRIPTION AGREEMENT
MicroStrategy Incorporated
- -----------------------------------
- -----------------------------------
Attention: General Secretary
1. Amount and Terms of the Subscription
------------------------------------
In conformity with the Plan, an Option was granted according to the
Stock Option Agreement dated _________________ (the "Option Agreement").
______________________________________ Shares shall be issued to the
benefit of the undersigned (the "Subscriber") in accordance with the applicable
laws of the United States of America and the State of California and within the
limits of the authorized capital of the Company.
The Shares acquired may be paid up by:
(a) cash or check (denominated in U.S. Dollars);
(b) wire transfer (denominated in U.S. Dollars);
(c) consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan.
2. Subscription Agreement
----------------------
I, the undersigned, Last name
----------------------------------
First name
----------------------------------
Residence
----------------------------------
subscribe to ______________ Shares.
<PAGE>
Supporting my subscription I shall pay the total amount of the purchase
price of the Shares following one or more of the methods described in I. above.
Submitted by: Accepted by:
The Subscriber MICROSTRATEGY INCORPORATED
By:
- ---------------------------------- --------------------------------------
Signature
Title:
- ---------------------------------- -----------------------------------
Printed Name
Address
---------------
- ---------------
- ---------------
<PAGE>
EXHIBIT C
---------
MICROSTRATEGY INCORPORATED
1997 STOCK OPTION PLAN FOR FRENCH EMPLOYEES
INVESTMENT REPRESENTATION STATEMENT
OPTIONEE :
------------------------------
COMPANY : MICROSTRATEGY INCORPORATED
SECURITY : COMMON STOCK
AMOUNT :
------------------------------
DATE :
------------------------------
In connection with the purchase of the above-listed securities (the
"Securities"), the undersigned Optionee represents to the Company the following:
(a) Optionee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities.
(b) Optionee acknowledges and understands that the Securities constitute
"restricted securities" under the Securities Act of 1933, as amended (the
"Securities Act") and have not been registered under the Securities Act in
reliance upon a specific exemption therefrom. Optionee further understands that
the Securities may not be transferred in the United States for an indefinite
period of time, unless they are subsequently registered under the Securities Act
or an exemption from such registration is available. Optionee further
acknowledges and understands that the Company is under no obligation to register
the Securities. Optionee understands that any receipt evidencing the Securities
will be imprinted with a legend which prohibits the transfer of the Securities
in the United States, unless they are registered or such registration is not
required in the opinion of counsel satisfactory to the Company.
(c) Optionee is familiar with the provisions of Rule 701 and Rule 144, each
promulgated under the Securities Act, which, in substance, permit limited public
resale of "restricted securities" in the United States acquired, directly or
indirectly from the issuer thereof, in a non-public offering subject to the
satisfaction of certain conditions. Rule 701 provides that if the issuer
qualifies under Rule 701 at the time of the grant of the Option to the Optionee,
the exercise will be exempt from registration under the Securities Act. In the
event the Company becomes subject to the reporting requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended, ninety (90) days
thereafter (or such longer period as any market stand-off agreement may require)
the Securities exempt under Rule 701 may be resold in the United States, subject
to the satisfaction of certain of the conditions specified by Rule 144,
including: (1)
<PAGE>
the resale being made through a broker in an unsolicited "broker's transaction"
or in transactions directly with a market maker (as said term is defined under
the Securities Exchange Act of 1934); and, in the case of an affiliate, (2) the
availability of certain public information about the Company, (3) the amount of
Securities being sold during any three month period not exceeding the
limitations specified in Rule 144(e), and (4) the timely filing of a Form 144,
if applicable.
In the event that the Securities do not qualify under Rule 701 at the
time of grant, then the Securities may be resold in the United States only under
certain limited circumstances subject to the provisions of Rule 144, which
requires the resale to occur not less than two years after the later of the date
the Securities were sold by the Company or the date the Securities were sold by
an "affiliate" of the Company, within the meaning of Rule 144; and, in the case
of acquisition of the Securities by an affiliate, or by a non-affiliate who
subsequently holds the Securities less than three years, the satisfaction of the
conditions set forth in section (1), (2), (3), and (4) of the paragraph
immediately above.
(d) Optionee further understands that in the event all of the applicable
requirements of Rule 701 or 144 are not satisfied, registration under the
Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rules 144
and 701 are not exclusive, the Staff of the Securities and Exchange Commission
has expressed its opinion that persons proposing to sell private placement
securities in the United States other than in a registered offering and
otherwise than pursuant to Rules 144 or 701 will have a substantial burden of
proof in establishing that an exemption from registration is available for such
offers or sales, and that such persons and their respective brokers who
participate in such transactions do so at their own risk. Optionee understands
that no assurances can be given that any such other registration exemption will
be available in such event.
Signature of Optionee:
-------------------------
Date:
--------------------
2
<PAGE>
Exhibit 10.7
MICROSTRATEGY INCORPORATED
1997 DIRECTOR OPTION PLAN
1. Purposes of the Plan. The purposes of this 1997 Director Option Plan
--------------------
are to attract and retain the best available personnel for service as Outside
Directors (as defined herein) of the Company, to provide additional incentive to
the Outside Directors of the Company to serve as Directors, and to encourage
their continued service on the Board.
All options granted hereunder shall be nonstatutory stock options.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Board" means the Board of Directors of the Company.
-----
(b) "Code" means the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" means the Common Stock of the Company.
------------
(d) "Company" means Microstrategy Incorporated, a Delaware
-------
corporation.
(e) "Director" means a member of the Board.
--------
(f) "Employee" means any person, including officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a Director's fee by the Company shall not be sufficient in and of itself to
constitute "employment" by the Company.
(g) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(h) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the date of determination, as reported in The
Wall Street Journal or such other source as the Board deems reliable, or;
<PAGE>
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board.
(i) "Inside Director" means a Director who is an Employee.
---------------
(j) "Option" means a stock option granted pursuant to the Plan.
------
(k) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(l) "Optionee" means a Director who holds an Option.
--------
(m) "Outside Director" means a Director who is not an Employee.
----------------
(n) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(o) "Plan" means this 1997 Director Option Plan.
----
(p) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 10 of the Plan.
(q) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 10 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 200,000 Shares of Common Stock (the "Pool"). The Shares may
be authorized, but unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been
exercised in full, the unpurchased Shares which were subject thereto shall
become available for future grant or sale under the Plan (unless the Plan has
terminated). Shares that have actually been issued under the Plan shall not be
returned to the Plan and shall not become available for future distribution
under the Plan.
4. Administration and Grants of Options under the Plan.
---------------------------------------------------
(a) Procedure for Grants. The provisions set forth in this Section
--------------------
4(a) shall not be amended more than once every six months, other than to comport
with changes in the Code, the Employee Retirement Income Security Act of 1974,
as amended, or the rules thereunder. All grants of Options to Outside Directors
under this Plan shall be automatic and nondiscretionary and shall be made
strictly in accordance with the following provisions:
(i) No person shall have any discretion to select which Outside
Directors
-2-
<PAGE>
shall be granted Options or to determine the number of Shares to be covered by
Options granted to Outside Directors.
(ii) Each Outside Director shall be automatically granted an Option
to purchase 45,000 Shares (the "First Option") on the date on which the later of
the following events occurs: (A) the effective date of this Plan, as determined
in accordance with Section 6 hereof, or (B) the date on which such person first
becomes an Outside Director, whether through election by the shareholders of the
Company or appointment by the Board to fill a vacancy; provided, however, that
an Inside Director who ceases to be an Inside Director but who remains a
Director shall not receive a First Option.
(iii) Each Outside Director shall be granted an Option to purchase
5,000 Shares (a "Subsequent Option") each year on the date of the annual
stockholders' meeting provided he or she is then an Outside Director and if as
of such date, he or she shall have served on the Board for at least the
preceding six (6) months.
(iv) Notwithstanding the provisions of subsections (ii) and (iii)
hereof, any exercise of an Option granted before the Company has obtained
stockholder approval of the Plan in accordance with Section 16 hereof shall be
conditioned upon obtaining such stockholder approval of the Plan in accordance
with Section 16 hereof.
(v) The terms of a First Option granted hereunder shall be as
follows:
(A) the term of the First Option shall be ten (10) years.
(B) the First Option shall vest and become exercisable only
pursuant to the terms of the Director Option Agreement evidencing such First
Option, except as set forth in Sections 8 and 10 hereof.
(C) the exercise price per Share shall be 100% of the Fair
Market Value per Share on the date of grant of the First Option. In the event
that the date of grant of the First Option is not a trading day, the exercise
price per Share shall be the Fair Market Value on the next trading day
immediately following the date of grant of the First Option.
(D) subject to Section 10 hereof, the First Option shall become
vested as to twenty percent (20%) of the Shares subject to the First Option on
each anniversary of its date of grant, provided that the Optionee continues to
serve as a Director on such dates.
(vi) The terms of a Subsequent Option granted hereunder shall be as
follows:
(A) the term of the Subsequent Option shall be ten (10) years.
(B) the Subsequent Option shall vest and become exercisable
only
-3-
<PAGE>
pursuant to the terms of the Director Option Agreement evidencing such
Subsequent Option, except as set forth in Sections 8 and 10 hereof.
(C) the exercise price per Share shall be 100% of the Fair
Market Value per Share on the date of grant of the Subsequent Option. In the
event that the date of grant of the Subsequent Option is not a trading day, the
exercise price per Share shall be the Fair Market Value on the next trading day
immediately following the date of grant of the Subsequent Option.
(D) subject to Section 10 hereof, the Subsequent Option shall
vest as to one hundred percent (100%) of the Shares subject to the Subsequent
Option on the fifth anniversary of its date of grant, provided that the Optionee
continues to serve as a Director on such date.
(vii) In the event that any Option granted under the Plan would cause
the number of Shares subject to outstanding Options plus the number of Shares
previously purchased under Options to exceed the Pool, then the remaining Shares
available for Option grant shall be granted under Options to the Outside
Directors on a pro rata basis. No further grants shall be made until such time,
if any, as additional Shares become available for grant under the Plan through
action of the Board or the stockholders to increase the number of Shares which
may be issued under the Plan or through cancellation or expiration of Options
previously granted hereunder.
5. Eligibility. Options may be granted only to Outside Directors. All
-----------
Options shall be automatically granted in accordance with the terms set forth in
Section 4 hereof.
The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate the Director's relationship with the Company at any time.
6. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board or its approval by the stockholders of the
Company as described in Section 16 of the Plan. It shall continue in effect for
a term of ten (10) years unless sooner terminated under Section 11 of the Plan.
7. Form of Consideration. The consideration to be paid for the Shares to
---------------------
be issued upon exercise of an Option, including the method of payment, shall
consist of (i) cash, (ii) check, (iii) other shares which (A) in the case of
Shares acquired upon exercise of an Option, have been owned by the Optionee for
more than six (6) months on the date of surrender, and (B) have a Fair Market
Value on the date of surrender equal to the aggregate exercise price of the
Shares as to which said Option shall be exercised, (iv) delivery of a properly
executed exercise notice together with such other documentation as the Company
and the broker, if applicable, shall require to effect an exercise of the option
and delivery to the Company of the sale or loan proceeds required to pay the
exercise price, or (v) any combination of the foregoing methods of payment.
-4-
<PAGE>
8. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall vest and become exercisable at such times as are set
forth in Section 4 hereof and pursuant to the Director Option Agreement;
provided, however, that no Options shall be exercisable until stockholder
approval of the Plan in accordance with Section 16 hereof has been obtained.
An Option may not be exercised for a fraction of a Share.
If otherwise exercisable, an Option shall be deemed to be exercised
when written notice of such exercise has been given to the Company in accordance
with the terms of the Option by the person entitled to exercise the Option and
full payment for the Shares with respect to which the Option is exercised has
been received by the Company. Full payment may consist of any consideration and
method of payment allowable under Section 7 of the Plan. Until the issuance (as
evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company) of the stock certificate evidencing
such Shares, no right to vote or receive dividends or any other rights as a
stockholder shall exist with respect to the Optioned Stock, notwithstanding the
exercise of the Option. A share certificate for the number of Shares so
acquired shall be issued to the Optionee as soon as practicable after exercise
of the Option. No adjustment shall be made for a dividend or other right for
which the record date is prior to the date the stock certificate is issued,
except as provided in Section 10 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Rule 16b-3. Options granted to Outside Directors must comply with
----------
the applicable provisions of Rule 16b-3 promulgated under the Exchange Act or
any successor thereto and shall contain such additional conditions or
restrictions as may be required thereunder to qualify Plan transactions, and
other transactions by Outside Directors that otherwise could be matched with
Plan transactions, for the maximum exemption from Section 16 of the Exchange
Act.
(c) Termination of Continuous Status as a Director. Subject to
----------------------------------------------
Section 10 hereof, in the event an Optionee's status as a Director terminates
other than upon the Optionee's death or total and permanent disability (as
defined in Section 22(e)(3) of the Code), the Optionee shall retain any vested
portion of this Option (determined in accordance with the terms of the Director
Option Agreement) and the Optionee (or his or her legal representative, as
applicable) may exercise his or her Option, but only pursuant to the terms of
the Director Option Agreement. To the extent that the Option was not vested on
the date of such termination, and to the extent that the Optionee does not
exercise such Option (to the extent otherwise so entitled) within the time
specified pursuant to the Director Option Agreement, the Option shall terminate.
(d) Disability of Optionee. In the event Optionee's status as a
----------------------
Director terminates as a result of total and permanent disability (as defined in
Section 22(e)(3) of the Code), the
-5-
<PAGE>
Optionee shall retain any vested portion of his or her Option (determined in
accordance with the terms of the Director Option Agreement) and the Optionee (or
his legal representative, as applicable) may exercise his or her Option, but
only pursuant to the terms of the applicable Director Option Agreement. To the
extent that the Option was not vested on the date of termination, or if he or
she does not exercise such Option (to the extent otherwise so entitled) within
the time specified pursuant to the Director Option Agreement, the Option shall
terminate.
(e) Death of Optionee. In the event of an Optionee's death, the
-----------------
Optionee's estate or a person who acquired the right to exercise the Option by
bequest or inheritance shall retain the vested portion of the Option (determined
in accordance with the terms of the Director Option Agreement) and may exercise
the Option, but only in accordance with the terms of the Director Option
Agreement (but in no event later than the expiration of its ten (10) year term).
To the extent that the Option was not vested on the date of death, and to the
extent that the Optionee's estate or a person who acquired the right to exercise
such Option does not exercise such Option (to the extent otherwise so entitled)
within the time specified in the Director Option Agreement, the Option shall
terminate.
9. Non-Transferability of Options. No Option may be sold, pledged,
------------------------------
assigned or transferred in any manner other than by a qualified domestic
relations order as defined by the Code or Title I of the Employee Retirement
Income Security Act of 1974, as amended, or the rules thereunder ("QDRO") or by
will or the laws of descent and distribution unless and until such Option has
been exercised, or the shares underlying such Option have been issued, and all
restrictions applicable to such shares have lapsed; provided, however, an
Optionee may transfer an Option to a Permitted Transferee (as defined below) to
the extent permitted by any applicable law or regulations and subject to the
following terms and conditions:
(a) An Option transferred to a Permitted Transferee shall not be
assignable or transferable by the Permitted Transferee other than by a QDRO or
by will or the laws of descent and distribution.
(b) Any Option which is transferred to a Permitted Transferee shall
continue to be subject to all the terms and conditions of the Option as
applicable to the original holder (other than the ability to further transfer
the Option).
(c) The Optionee and the Permitted Transferee shall execute any and
all documents reasonably requested by the Board, including without limitation
documents to (i) confirm the status of the transferee as a Permitted Transferee,
(ii) satisfy any requirements for an exemption for the transfer under applicable
federal and state securities laws and (iii) evidence the transfer.
(d) Shares of Common Stock acquired by a Permitted Transferee through
exercise of an Option have not been registered under the Securities Act of 1933,
as amended, or any state securities act and may not be transferred, nor will any
assignee or transferee thereof be recognized as an owner of such shares of
Common Stock for any purpose, unless a registration statement under the
Securities Act of 1933, as amended, and any applicable state securities act with
respect to such shares shall then be in
-6-
<PAGE>
effect or unless the availability of an exemption from registration with respect
to any proposed transfer or disposition of such shares shall be established to
the satisfaction of counsel for the Company.
As used in this Section 9, "Permitted Transferee" shall mean (i) one
or more of the following family members of an Optionee: spouse, former spouse,
child (whether natural or adopted), stepchild, any other lineal descendant of
the Optionee, (ii) a trust, partnership or other entity established and existing
for the sole benefit of, or under the sole control of the Optionee or one or
more of the above family members of the Optionee, or (iii) any other transferee
specifically approved by the Board after taking into account any state or
federal tax or securities laws applicable to transferable Options.
No interest or right therein shall be liable for the debts, contracts
or engagements of the holder thereof or his successors in interest or shall be
subject to disposition by transfer, alienation, anticipation, pledge,
encumbrance, assignment or any other means whether such disposition be voluntary
or involuntary or by operation of law by judgment, levy, attachment, garnishment
or any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect, except to
the extent that such disposition is permitted by the preceding provisions of
this Section 9. Except as specifically provided in this Section 9, an Option
shall be exercised during the Optionee's lifetime only by the Optionee or his
guardian or legal representative.
10. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
------------------------------------------------------------------
Asset Sale.
----------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the number of Shares covered by each outstanding
Option, the number of Shares which have been authorized for issuance under the
Plan but as to which no Options have yet been granted or which have been
returned to the Plan upon cancellation or expiration of an Option, as well as
the price per Share covered by each such outstanding Option, and the number of
Shares issuable pursuant to the automatic grant provisions of Section 4 hereof
shall be proportionately adjusted for any increase or decrease in the number of
issued Shares resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued Shares effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of Shares
subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, to the extent that an Option has not
been previously exercised, it shall terminate immediately prior to the
consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation or the sale of substantially all of the assets
of the Company, outstanding Options may be assumed or equivalent options may be
substituted by the successor corporation or a Parent or
-7-
<PAGE>
Subsidiary thereof (the "Successor Corporation"). If an Option is assumed or
substituted for, the Option or equivalent option shall continue to be
exercisable as provided in Section 4 hereof for so long as the Optionee serves
as a Director or a director of the Successor Corporation. Following such
assumption or substitution, if the Optionee's status as a Director or director
of the Successor Corporation, as applicable, is terminated other than upon a
voluntary resignation by the Optionee, the Option or option shall become fully
exercisable, including as to Shares for which it would not otherwise be
exercisable. Thereafter, the Option or option shall remain exercisable in
accordance with Sections 8(c) through (e) above.
If the Successor Corporation does not assume an outstanding Option or
substitute for it an equivalent option, the Option shall become fully vested and
exercisable, including as to Shares for which it would not otherwise be
exercisable. In such event the Board shall notify the Optionee that the Option
shall be fully exercisable for a period of thirty (30) days from the date of
such notice, and upon the expiration of such period the Option shall terminate.
For the purposes of this Section 10(c), an Option shall be considered
assumed if, following the merger or sale of assets, the Option confers the right
to purchase or receive, for each Share of Optioned Stock subject to the Option
immediately prior to the merger or sale of assets, the consideration (whether
stock, cash, or other securities or property) received in the merger or sale of
assets by holders of Common Stock for each Share held on the effective date of
the transaction (and if holders were offered a choice of consideration, the type
of consideration chosen by the holders of a majority of the outstanding Shares).
11. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. Except as set forth in Section 4, the
-------------------------
Board may at any time amend, alter, suspend, or discontinue the Plan, but no
amendment, alteration, suspension, or discontinuation shall be made which would
impair the rights of any Optionee under any grant theretofore made, without his
or her consent. In addition, to the extent necessary and desirable to comply
with Rule 16b-3 under the Exchange Act (or any applicable law or regulation),
the Company shall obtain stockholder approval of any Plan amendment in such a
manner and to such a degree as required.
(b) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated.
12. Time of Granting Options. The date of grant of an Option shall, for
------------------------
all purposes, be the date determined in accordance with Section 4 hereof.
13. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without
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<PAGE>
limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules
and regulations promulgated thereunder, state securities laws, and the
requirements of any stock exchange upon which the Shares may then be listed, and
shall be further subject to the approval of counsel for the Company with respect
to such compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares, if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
14. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
15. Option Agreement. Options shall be evidenced by written option
----------------
agreements in such form as the Board shall approve.
16. Stockholder Approval. Continuance of the Plan shall be subject to
--------------------
approval by the stockholders of the Company at or prior to the first annual
meeting of stockholders held subsequent to the granting of an Option hereunder.
Such shareholder approval shall be obtained in the degree and manner required
under applicable state and federal law.
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<PAGE>
Exhibit 10.8
BUSINESS LOAN/SECURITY AGREEMENT
--------------------------------
NATIONSBANK, N.A.
8300 Greensboro Drive
Suite 550
McLean, Virginia 22102-3604
The undersigned, MICROSTRATEGY INCORPORATED, a Delaware corporation
(hereinafter referred to as "Debtor"), with principal place of business located
at 8000 Towers Crescent Drive, Suite 1400, Vienna, Virginia 22182, requests that
NATIONSBANK, N.A. ("Bank") extend financial accommodations, subject to the terms
and conditions hereof and evidenced by Debtor's promissory notes referenced
below. In consideration of Bank's extending such accommodations, Debtor makes
the representations and warranties to Bank contained herein and, as long as this
Agreement has not been terminated, agrees as follows:
1. COMMITMENT.
----------
(a) Subject to the provisions of this Agreement, Bank shall
extend to Debtor: (i) a secured revolving line of credit (the "Revolving
Credit"), in the amount of Six Million Four Hundred Thousand Dollars
($6,400,000.00), or so much thereof as shall be advanced or readvanced, bearing
interest and being payable in accordance with the terms of that certain
Revolving Promissory Note of even date herewith, made by Debtor, and payable to
the order of Bank in the original principal amount of Six Million Four Hundred
Thousand Dollars ($6,400,000.00), or so much thereof as shall be advanced or
readvanced, and all extensions, renewals and/or modifications thereof and/or
substitutions therefor (collectively the "Revolving Note"); and (ii) a secured
revolving equipment line of credit (the "Equipment Line"), in the amount of Two
Million Dollars ($2,000,000.00), or so much thereof as shall be advanced or
readvanced, bearing interest and being payable in accordance with the terms of
one or more Term Promissory Notes to be made from time to time by Debtor, and
payable to the order of Bank, each of which shall be substantially in the form
of Exhibit "A" attached hereto and incorporated herein by this reference, and
all extensions, renewals and modifications thereof and/or substitutions therefor
(individually an "Equipment Note" and collectively the "Equipment Notes").
(b) The Revolving Credit and/or the Equipment Line are sometimes
herein individually and/or collectively referred to as the "Loan", and the
Revolving Note and/or any one or more or all of the Equipment Notes are
sometimes herein individually and/or collectively referred to as the "Note".
(c) Debtor hereby authorizes Bank (at any time upon or after
prior notice shall have been sent by Bank to Debtor) to charge Debtor's
operating account maintained at Bank for the payment of any and all of the
"Obligations" (hereinafter defined) as and when the same fall due.
(d) Bank agrees that it shall not charge any line of credit
and/or commitment fees to Debtor in connection with the Loan on or before
December 31, 1997, except with the prior written consent of Debtor.
Notwithstanding the foregoing, Bank and Debtor understand and agree that the
foregoing does not relate to, among other things, any (i) applicable late
charges, prepayment fees, other prepayment-related amounts and/or attorneys'
fees incurred by Bank in connection with the occurrence of any "Event of
Default" (as hereinafter defined), that may become owing under the Loan, and/or
(ii) fees for issuance and/or renewal by Bank of any of the "Letters of Credit"
(as hereinafter defined).
<PAGE>
2. SECURITY. As collateral security for the Loan and the
--------
"Applications" (hereinafter defined), as well as for any and all other
liabilities and obligations of Debtor to Bank under this Agreement and/or the
Note, whether now existing or hereafter created or arising, direct or indirect,
matured or unmatured, and whether absolute or contingent, joint, several, or
joint and several, and no matter how the same may be evidenced or shall arise,
including without limitation all sums now or hereafter owing under the Note
and/or in connection with the Loan (all of which are hereinafter collectively
called the "Obligations"), Debtor hereby grants and conveys to Bank a first-lien
security interest in:
(a) all of Debtor's present and future accounts, contract
rights, chattel paper, notes, drafts, acceptances, chattel mortgages,
conditional sales contracts, bailment leases, security agreements and other
forms of obligations now or hereafter arising out of or acquired in the course
of Debtor's business, together with all liens, guarantees, securities, rights,
remedies and privileges pertaining to any of the foregoing, now existing or
hereafter arising (all of the foregoing being hereinafter collectively called
"Receivables");
(b) all of Debtor's inventory, including goods, wares,
merchandise and other tangible personal property now owned or hereafter acquired
by Debtor which are held for sale or lease or are furnished (or are to be
furnished) under a contract for services, and raw materials, work in process and
materials used or consumed or to be used or consumed in Debtor's business (all
of the foregoing being hereinafter collectively called "Inventory");
(c) all of Debtor's present and future furniture, fixtures and
equipment of every type and nature, together with all parts, attachments,
additions, accessories, improvements, replacements, substitutions and accessions
thereto;
(d) all of Debtor's present and future "general intangibles", as
such term is defined in the Uniform Commercial Code as adopted in Virginia (the
"UCC"), now owned or hereafter acquired by Debtor or in which Debtor now has or
hereafter acquires any right, title or interest, including, without limitation
(i) all of Debtor's choses in action, things in action, suits, actions, causes
of action and claims of every kind and nature, whether at law or in equity, (ii)
all condemnation awards and insurance proceeds, (iii) tax refunds, rights and
claims thereto and other payments from any local, state or federal government
authority or agency, (iv) all contract rights, licenses (but, with respect to
each license, only to the extent that the grant of a security interest in such
license is not prohibited by the agreement(s) creating such license), permits,
zoning approvals, rights, agreements and all other private or governmental
documents of every kind or character whatsoever and (v) all customer lists,
servicing rights, patents and patent rights (whether or not registered),
licenses, permits, uncertified/uncertificated securities, trade marks, service
marks, trade names, logos, copyrights, computer programs and software and
goodwill (all of the foregoing being hereinafter collectively called "General
Intangibles");
(e) all property, goods and chattels of the same classes as
those described above, acquired by Debtor subsequent to the effective date of
this Agreement and prior to its termination;
(f) all cash and non-cash proceeds of any or all of the
foregoing; and
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<PAGE>
(g) all increases, substitutions, replacements, additions and
accessions thereto (the foregoing (a), (b), (c), (d), (e), (f) and (g) being
hereinafter collectively called the "Collateral").
Except for Debtor's sale or lease of Inventory to its customers in the
ordinary course of business and except as otherwise permitted as provided for
immediately below, the Collateral will be kept at Debtor's principal place of
business. Notwithstanding the foregoing, from time to time, portions of the
tangible Collateral may be kept at locations other than Debtor's principal place
of business so long as and to the extent that the aggregate fair market value
thereof shall not any time exceed Two Hundred Fifty Thousand Dollars
($250,000.00). Debtor warrants that it owns or will own the Collateral free and
clear of all liens, taxes and other adverse claims, and that upon demand Debtor
will provide Bank with such additional documents and/or further assurances of
title as Bank may request in order to perfect Bank's first-lien security
interest therein. Upon and at any time after reasonable notice shall have been
sent by Bank to Debtor, Debtor will permit Bank and/or its agents, during normal
business hours, to enter upon Debtor's premises and to inspect the Collateral as
well as the books and records pertaining thereto. For the further security of
Bank, Debtor grants to Bank a security interest and a special property interest
in all books and records of Debtor pertaining to Receivables. Whenever required
pursuant to paragraphs 6(c) and/or 9(e) of this Agreement and/or during the
continuance of any Event of Default, Debtor shall, at its own cost and expense,
deliver all such books, account ledgers and records to Bank or its designated
agents at any time(s) upon request. Bank and such agents shall keep all such
books, account ledgers and records at Debtor's principal place of business
unless (A) Debtor shall not make available to Bank and/or any such agents at
such place such of Debtor's personnel, supplies, equipment and or space as may
be reasonably necessary in order to audit, check, inspect, examine as well as
make abstracts and copies of the same and/or (B) any Event of Default shall then
exist.
3. ADVANCES.
--------
(a) Letters of Credit. Debtor and Bank contemplate that, from
-----------------
time to time, Debtor may request that Bank issue one (1) or more Irrevocable
Letters of Credit for the account of Debtor. Each such request shall be made in
writing, using Bank's then standard form of Application and Agreement for
Irrevocable Stand-By and/or Commercial Letter of Credit (whatever the actual
name of such form may be at such time), and shall be executed and delivered to
Bank by Debtor. All such Applications are hereinafter individually called an
"Application" and collectively called the "Applications". All Irrevocable
Stand-By and/or Commercial Letters of Credit issued by Bank pursuant to any of
the Applications are hereinafter individually called a "Letter of Credit" and
collectively called the "Letters of Credit". None of the Applications shall
request (and none of the Letters of Credit shall provide for) any expiry date
for the related Letter of Credit, whether by automatic renewal or otherwise,
later than December 31, 1997, unless agreed to by Bank in writing. Subject to
the provisions of this Agreement, Bank shall issue each requested Letter of
Credit pursuant to its related Application if at the time Bank would fund an
advance or readvance under the Revolving Credit in an amount equal to the amount
requested for such Letter of Credit. All amounts from time to time outstanding
and (if all drawing conditions were satisfied) available to be drawn under any
and all of the Letters of Credit in the aggregate (the "Maximum Drawable
Amount") shall reduce the amounts otherwise available under the Revolving
Credit. Notwithstanding anything to the contrary set forth in
-3-
<PAGE>
any of the Applications, so long as the Revolving Credit shall not have matured
(whether by acceleration or otherwise), after giving full effect to any
extensions, renewals, modifications and/or substitutions thereof and/or
therefor, all amounts, if any, from time to time drawn under any one or more or
all of the Letters of Credit and not immediately reimbursed in full to Bank by
Debtor shall be conclusively deemed immediately thereafter to be evidenced by,
advanced and/or readvanced under, bearing interest and repayable according to
the provisions of the Revolving Note. If the Revolving Credit shall have matured
(by acceleration or otherwise), after giving full effect to any extensions,
renewals, modifications and/or substitutions thereof and or therefor, then, all
such amounts shall be governed by the provisions of the respective Applications.
(b) Revolving Credit Advances. The Revolving Credit, the
-------------------------
principal balance of which shall not at any time exceed the lesser of: (i) the
then current value of the hereinafter referenced Borrowing Base, or (ii)(A)
$6,400,000.00 minus (B) the Maximum Drawable Amount, shall be advanced or
readvanced or extended to or for the benefit of Debtor by advances or readvances
made by Bank to Debtor. Requests for advances under the Revolving Note may be
made telephonically or in writing (and, if made telephonically, confirmed in
writing within three (3) business days) not more frequently than daily, and
shall be preceded by the "Borrowing Base/Non-Default Certificate" hereinafter
referenced. The provisions of the immediately foregoing sentence shall not apply
to advances and/or readvances under the Revolving Note that relate to any draws
under any of the Letters of Credit. Among other things, the "Borrowing Base/Non-
Default Certificate" shall confirm all advances and readvances since the
preceding "Borrowing Base/Non-Default Certificate". All sums so requested shall
be in the minimum amounts from time to time specified by Bank. All advances and
readvances (other than those relating to any draws under any of the Letters of
Credit) may be made into Debtor's operating account maintained at Bank and only
on the basis of a then current "Borrowing Base/Non-Default Certificate"
delivered to Bank.
(c) Revolving Credit Borrowing Base. Each Borrowing Base/Non-
-------------------------------
Default Certificate shall certify, among other things, the dollar amount of the
Borrowing Base as of the date of such Certificate. At any particular time, the
dollar amount of the Borrowing Base shall be equal to eighty percent (80%) of
the then current amount of the "Net Outstanding Amount of Domestic Trade
Accounts Receivable" (hereinafter defined), less the Maximum Drawable Amount.
At any particular time, the dollar amount of the "Net Outstanding Amount of
Domestic Trade Accounts Receivable" shall be equal to: (i) Total Domestic Trade
Accounts Receivable as to which Debtor shall then have title, the existence of
which shall have been reported to Bank, which are valid and bona fide in all
respects, represent money due for goods sold and/or services performed by
Debtor, which shall have been billed by Debtor, for which the account debtor is
located in the United States of America, with respect to which there is no
offset or counterclaim or defense of any nature whatsoever and which shall then
be less than ninety (90) calendar days old from the original invoice date (it
being understood and agreed that any such Receivable with respect to which there
is any offset, counterclaim or defense affecting (x) fifty percent (50%) or more
of the amount of such Receivable, shall be excluded in its entirety, including
in such exclusion the portion, if any, not affected thereby, and (y) less than
fifty percent (50%) of the amount of such Receivable, may be included, but only
to the extent of the portion not affected thereby)("Total Domestic Trade
Accounts Receivable"); less (ii) any of the Total Domestic Trade Accounts
Receivable which are not acceptable to Bank in its
-4-
<PAGE>
reasonable discretion; less (iii) the net amount of any deposits paid on account
to Debtor by account debtors against any of the Total Domestic Trade Accounts
Receivable. Debtor shall submit a monthly Borrowing Base/Non-Default Certificate
to Bank on or before the fifteenth (15th) calendar day of each month and prior
to each request for an advance under the Revolving Credit.
(d) Equipment Line Advances. The Equipment Line shall be used
-----------------------
by Debtor to finance Debtor's purchases of equipment. The aggregate principal
balance outstanding under the Equipment Line shall not at any time exceed Two
Million Dollars ($2,000,000.00). Each request for an advance thereunder shall be
made by Debtor in writing and delivered to Bank at least ten (10) calendar days
prior to the desired funding date accompanied by receipts evidencing the cost of
the equipment in question and a written statement from Debtor setting forth the
amount requested to be advanced, the desired term of the related Equipment Note,
which of the two (2) interest rate options provided for below that Debtor has
chosen with respect to such request and such other related information as Bank
may reasonably require. Each such request will be evidenced by a separate
Equipment Note. The maximum amount advanced with respect to each such asset
shall not exceed eighty percent (80%) of the cost thereof. The last date for
funding any such request shall be December 31, 1997. Each Equipment Note shall
provide for a term of either three (3) or four (4) years and monthly payments of
principal and interest commencing one (1) month after the date thereof that
shall be payable in amounts described below. In no event shall any Equipment
Note have a maturity date later than December 31, 2001.
With respect to each such request, Debtor shall have the option
of selecting either the "Floating Rate" (hereinafter defined) or the "Fixed
Rate" (hereinafter defined) as the rate of interest applicable to such request.
As used herein, the "Floating Rate" means a rate that is at all times equal to
the sum of Bank's "Prime Rate" (hereinafter defined), plus 1/2 of one percent
(1/2 of 1%) per annum and if applicable it shall be adjusted as and when each
change in Bank's Prime Rate shall occur. As used herein, Bank's "Prime Rate"
means the floating and fluctuating per annum prime rate of interest of Bank as
established and declared at any time and from time to time by Bank, but which
does not necessarily represent the lowest or best rate of interest offered or
charged by Bank to its borrowers. As used herein, the "Fixed Rate" means a rate
that is at the time it shall become applicable equal to the sum of the
applicable "Treasury Bond Yield" (hereinafter defined), plus the applicable
"Spread" (hereinafter defined), and if applicable it shall be determined at the
time it shall become applicable and shall remain fixed until the end of the term
of repayment. As used herein, the "Treasury Bond Yield" means either (i) with
regard to an Equipment Note having an original term of three (3) years, the
average yield in percent per annum of the Treasury Constant Maturities for a
U.S. Treasury Bond(s) scheduled to mature on or most closely to the date that
would be three (3) years after the date on which the Fixed Rate will become
applicable, or (ii) with regard to an Equipment Note having an original term of
four (4) years, the average yield in percent per annum of the Treasury Constant
Maturities for a U.S. Treasury Bond(s) scheduled to mature on or most closely to
the date that would be four (4) years after the date on which the Fixed Rate
will become applicable, as such yields are published in Federal Reserve
Statistical Release H.I5 (519) for the week immediately preceding such
applicable date. If Federal Reserve Statistical Release H.I5 (519) ceases to be
published, then the Treasury Bond Yield shall be based upon then current market
yields of U.S. Treasury securities or an index that, in Bank's sole but
reasonable judgment, most readily corresponds to the average yield of the
Treasury Constant Maturities. As used herein, the applicable
-5-
<PAGE>
"Spread" means either (x) two and 65/100 percent (2.65%) per annum with regard
to an Equipment Note having an original term of three (3) years or (y) two and
85/100 percent (2.85%) per annum with regard to an Equipment Note having an
original term of four (4) years. Interest on the Equipment Line shall be
calculated on the basis of a 360-day year and shall be paid for the actual
number of days elapsed.
If Debtor selects the Floating Rate with respect to a particular
request, then, for so long as the Floating Rate shall continue to be applicable,
the Equipment Note related thereto shall be payable in consecutive monthly
installments in curtailment and reduction of principal each in an amount
determined by dividing the original principal amount advanced by Bank by the
number of months in the term of repayment, plus all accrued and unpaid interest
(at the Floating Rate) thereon.
Alternatively, if Debtor selects the Fixed Rate with respect to a
particular request, then, the related Equipment Note shall be payable in equal
consecutive monthly installments of principal and interest (at the Fixed Rate)
each in an amount sufficient to pay such interest and amortize fully the
original principal amount advanced by Bank over the term of repayment.
At any time, Debtor can elect (by delivering to Bank at least two
(2) business days' prior written notice) to change the rate of interest
applicable to any Equipment Notes from the Floating Rate to the Fixed Rate. Once
any Equipment Note has the Fixed Rate as its applicable interest rate, then, as
to such Equipment Note, such Fixed Rate may not be changed to the Floating Rate.
At any time, Debtor can elect (by delivering to Bank at least two
(2) business days' prior written notice) to prepay some or all of any one or
more or all of the Equipment Notes, but only with respect to such Notes that are
then subject to the Floating Rate, and, in such cases, Debtor shall not be
obligated to pay to Bank any amounts (in the nature of a prepayment fee and/or
penalty) to compensate Bank for any or all losses, costs, expenses and/or
liabilities incurred and/or sustained as a result of any such prepayments.
At any time, Debtor may prepay some or all of any one or more or
all of the Equipment Notes that are subject to the Fixed Rate; provided,
however, that, if there is any such prepayment, whether made voluntarily,
because of acceleration or otherwise, then, in each instance, Debtor will owe
and pay to Bank (together with each such prepayment) all amounts sufficient to
compensate Bank for any and all losses, costs, expenses and liabilities incurred
and/or sustained as a result of such prepayment, including, but not limited to,
the amount of any interest paid by Bank to make or carry the loan evidenced by
the Equipment Note related thereto, less the amount of any interest earned by
Bank in connection with the reemployment of such funds. For the purposes of
calculating such amounts owing only, it shall be assumed that Bank actually
funded or committed to fund such loan through the purchase of an underlying
deposit in an amount equal to the original principal amount of such loan and for
a term equal to the original term of such loan, and such determination of such
amounts shall be made by Bank and shall be conclusive, absent a manifest error
in computation.
(e) Purchase Money Advances. If any of the proceeds of the Loan
-----------------------
is for purchase money, Bank, at its option, may pay the proceeds directly to the
seller of the Collateral.
4. BUSINESS AND STATUS OF DEBTOR, AUTHORIZATION. Debtor's business
--------------------------------------------
is that of _________________________________,
-6-
<PAGE>
and Debtor is and will remain a duly organized, legally existing corporation
under the laws of Delaware, in good standing and qualified to do business as a
foreign corporation in the Commonwealth of Virginia and all other jurisdictions
where such qualification may be necessary, licensed and in full compliance in
all material respects with all applicable laws and regulations. Debtor has full
power and authority to enter into this Agreement and the transactions
contemplated hereby and Debtor's execution of this Agreement is duly authorized
and will not, in any material respect, contravene any agreement, order or
regulation to which Debtor is subject. The proceeds of the Loan will be used
only in connection with Debtor's business; there is no litigation, legal or
administrative proceeding, investigation or other action pending or, to Debtor's
knowledge, threatened against, or affecting Debtor or the "Guarantor"
(hereinafter defined); there is no outstanding or unpaid judgment against Debtor
or the Guarantor other than as have been disclosed to Bank in writing; and, as
of the execution date of this Agreement, Debtor has no subsidiaries, other than
MicroStrategy Limited, an incorporated private limited company of England and
Wales ("Limited"), MicroStrategy, Iberica, S.A., a Spanish corporation
("Iberica"), MicroStrategy Deutschland GmbH, a German limited liability company
("GmbH"), and Microstrategy France, a societe a responsabilite limitee
("France")(the "Existing Subsidiaries"). Debtor represents and warrants to Bank
that, as of the execution date hereof, no stock certificate or other evidence of
ownership of interests in certain of the Existing Subsidiaries exists for GmbH
or France.
5. PURPOSE OF LOAN. Debtor agrees that the proceeds of (a) the
---------------
Revolving Credit will be used only for working capital purposes and/or in
connection with the Letters of Credit and (b) the Equipment Line will be used
only to support Debtor's purchase of equipment.
6. FINANCIAL STATEMENTS.
--------------------
(a) All consolidated and consolidating financial statements of
Debtor (and its subsidiaries) which have been or may be delivered to Bank are or
will be complete and do or will fully and fairly reflect the consolidated and
consolidating financial conditions of Debtor (and its subsidiaries) as of the
date(s) thereof. Debtor (and/or its subsidiaries) has or will have good
marketable title, as of the date(s) thereof, to all assets reflected in such
financial statements, except as stated therein. Debtor will maintain (and will
cause its subsidiaries to maintain) books and financial records in accordance
with generally accepted accounting principles consistently applied. Debtor
agrees to deliver promptly to Bank such additional financial statements
concerning its business (and the businesses of its subsidiaries)(including
profit and loss statements, balance sheets, etc.), prepared by accountants
satisfactory to Bank, and such other financial information, prepared in
accordance with generally accepted accounting principles consistently applied,
as Bank may from time to time request.
(b) In furtherance of the foregoing, Debtor shall provide Bank:
(i) annual consolidated and consolidating financial statements of Debtor (and
its subsidiaries), which consolidated statements shall be audited and certified
by an independent certified public accountant acceptable to Bank, and all of
which financial statements are to be submitted within ninety (90) calendar days
after the close of each of Debtor's fiscal years; (ii) annual consolidated and
consolidating projections for Debtor (and its subsidiaries), including a balance
sheet and income statement, within thirty (30) calendar days after the close of
each of Debtor's fiscal years, with such projections to be prepared by Debtor;
(iii) quarterly unaudited consolidated and consolidating financial statements of
Debtor
-7-
<PAGE>
(and its subsidiaries) not later than forty-five (45) calendar days after the
close of each of Debtor's fiscal quarters, with such quarterly statements to be
prepared by Debtor; and (iv) monthly Borrowing Base Non-Default Certificates not
later than the fifteenth (15th) calendar day of each month and prior to each
request for any advance under the Revolving Credit and to be prepared by Debtor.
Additionally, Debtor shall also cause the Guarantor to provide Bank, annually
within one hundred twenty (120) calendar days after the end of each of Debtor's
fiscal years, the Guarantor's true and complete personal financial statement
dated as of a date not prior to the last day of the Debtor's fiscal year
theretofore most recently ended and signed by the Guarantor.
(c) Debtor agrees at all reasonable times, and upon and after
reasonable notice shall have been sent by Bank to Debtor, to permit a
representative of Bank to examine and audit Debtor's books and records and to
keep Bank fully advised of any litigation involving any one or more or all of
the "Obligors" (as hereinafter defined in subparagraph 14(a) of this Agreement).
(d) Debtor hereby authorizes Bank and its agents, at any time
and from time to time, during the continuance of an "Event of Default"
(hereinafter defined), to contact account debtors for the purpose of validating
the information provided to Bank by Debtor with reference to the Collateral.
7. INSURANCE. In addition to any other agreement between Bank and
---------
Debtor with reference to insurance, Debtor will at all times carry adequate
insurance with responsible companies satisfactory to Bank in such amounts and
against such risks as is usually carried by similar businesses and by owners of
similar property in the same general area. Debtor will obtain and keep in force
such additional insurance as Bank may from time to time reasonably require. All
policies covering any tangible portion of the Collateral shall name Bank as loss
payee under a "standard" loss payee clause. Policies and endorsements or
satisfactory evidence thereof are to be delivered to Bank.
8. TAXES. Debtor represents and warrants that it has filed all
-----
U.S., state and local tax returns required to be filed and has paid or made
provision for payment of all taxes due pursuant thereto. Debtor agrees to pay
when due all taxes, assessments and similar levies including income, franchise
and sales taxes imposed on Debtor, any of the Collateral and/or any other of
Debtor's property, and Debtor agrees that, upon Bank's request, Debtor shall
provide Bank with satisfactory evidence of full payment of such taxes.
9. AFFIRMATIVE COVENANTS OF DEBTOR. Debtor covenants and agrees
-------------------------------
that, until this Agreement has been terminated, Debtor shall:
(a) Pay all of the Obligations as and when due, and pay all of
its other obligations generally as and when the same come due.
(b) To the extent that the Collateral consists of tangible
property, keep the Collateral (except as otherwise provided in this Agreement)
at Debtor's principal place of business and not remove any of the Collateral
therefrom (except for Debtor's sale or lease of Inventory to its customers in
the usual course of Debtor's business).
(c) Retain possession of the Collateral (except for Debtor's
sale or lease of Inventory to its customers in the usual course of Debtor's
business) and keep it in good order and repair, ordinary wear and tear excepted,
and not waste the same,
-8-
<PAGE>
and make the same available for inspection by Bank at all reasonable times.
(d) If any Collateral has been attached to or is to be attached
to real estate, furnish Bank with a disclaimer of any interest in the Collateral
which is prior to Bank's interest, signed by all persons having an interest in
the real estate.
(e) Keep Debtor's books and records at the address specified in
the introductory paragraph of this Agreement, and pay the reasonable fees and
disbursements of any accountants or other agents of Bank selected by Bank for
any examinations and/or audits of said books and records undertaken by Bank
pursuant to subparagraph 6(c) hereof; provided, that Debtor shall not be
required to pay for more than one (1) examination or audit in any consecutive
twelve (12)-month period unless an Event of Default shall exist at the time the
same was commenced or concluded; provided, further, that it is contemplated that
an initial audit thereof will be commenced, within sixty (60) calendar days
after the date of this Agreement, by accountants and/or other agents of Bank
selected by Bank for the same, the costs of which shall be at Bank's expense,
unless, at the commencement or conclusion thereof, an Event of Default shall
exist, in which case the costs thereof shall be paid for by Debtor.
(f) Remain liable for any deficiency resulting from a sale of
any or all of the Collateral and/or from the collection of any or all of the
Receivables and pay any such deficiency (including, without double-counting, the
Maximum Drawable Amount)forthwith on demand.
(g) Promptly execute and delivery such financing statements,
continuation statements and other papers as may be necessary or advisable to
comply with the Assignment of Claims Act of l940 (as amended) and to perfect or
continue any security interests granted to Bank hereby and pay all costs of
filing in connection therewith, and execute and deliver such further documents
as Bank may from time to time reasonably request to more fully carry out the
intent of this Agreement.
(h) Maintain a consolidated ratio of its (and its subsidiaries')
(Total Liabilities less Unearned Revenue) to their consolidated Tangible Net
Worth which shall at no time exceed 1.5 to 1. As used herein, "Total
Liabilities" and "Unearned Revenue" shall be defined as they are by Generally
Accepted Accounting Principles. As used herein, "Tangible Net Worth" shall be
defined as net worth (less all intangible assets, including, but not limited to,
amounts due and/or owing from any officers, stockholders and/or affiliates, and
other intangible assets). This ratio will be measured quarterly.
(i) Maintain a consolidated cash flow coverage ratio for Debtor
(and its subsidiaries) of at least 1.2 x coverage. As used herein, such "cash
flow coverage ratio" is defined and calculated as the quantity, the numerator of
---------
which is [Income, plus Depreciation, plus Interest Expense, minus Dividends],
and the denominator of which is [Current Maturities of Long Term Debt, plus
-----------
Current Portions of Capital Leases, plus Interest Expense, plus any capitalized
software costs and capitalized research and development costs], and where each
component of such numerator and of such denominator shall, at any particular
time, be for the portion of the current fiscal year then ended, on a year-to-
date basis. This ratio will also be measured quarterly.
(j) Maintain a consolidated ratio of Debtor's (and its
subsidiaries') "Funded Debt" (as hereinafter defined) to
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<PAGE>
"EBITDA" (as hereinafter defined) that shall at no time exceed 2.0 to 1.0. As
used herein, "Funded Debt" means debt owing to any and all banks, including, but
not limited to, Bank, plus Capital Leases. As used herein, "EBITDA" means
earnings before interest, taxes, depreciation and amortization. This ratio shall
also be measured quarterly, but on a rolling twelve (12)-months basis.
(k) Deliver to Bank, on or before the fifteenth (15th) day of
each calendar month and prior to each request for an advance under the Revolving
Credit, a "Borrowing Base/Non-Default Certificate" each in the form of Exhibit
"B" attached hereto and incorporated herein by this reference, duly completed
and certified by an appropriate officer of Debtor.
(l) Pay cash to Bank, if at any time the sum of the outstanding
principal balance of the Revolving Credit and the Maximum Drawable Amount exceed
the Borrowing Base, or pledge, assign and transfer to Bank additional
Collateral, in such amount as may be necessary to eliminate any such excess, all
as Bank shall require in Bank's sole discretion.
(m) Promptly notify Bank in writing of: (i) the occurrence of
any "Event of Default" (hereinafter defined) or any event that, upon the giving
of any required notice and/or the lapse of time, or both, would constitute an
Event of Default as defined herein; (ii) any material adverse change in the
financial condition of any of the Obligors; and (iii) the commencement of any
legal process against any of the Obligors, or against any of the assets owned by
any of them where the amount in controversy exceeds Two Hundred Thousand Dollars
($200,000.00). Debtor further agrees to keep Bank fully advised of any
litigation involving any of the Obligors, as applicable.
(n) If any of the Receivables are or should become evidenced by
promissory notes, trade acceptances or other instruments, immediately notify
Bank of same in writing and upon request by Bank to deliver the same to Bank
appropriately endorsed or assigned with recourse to Bank's order.
(o) Perform when due and observe all of Debtor's other
agreements under this Agreement, the Applications, the Note and/or the other
"Loan Documents" (as hereinafter defined).
10. NEGATIVE COVENANTS OF DEBTOR. Debtor covenants and agrees that,
----------------------------
until this Agreement has been terminated, and without the prior written consent
of Bank, Debtor will not:
(a) Sell, exchange, assign, loan, deliver, lease or otherwise
dispose of any of its assets (nor enter into any sale-leaseback arrangements
with respect to any of its assets), except (i) for Debtor's sales and/or leases
of its Inventory to its customers in the ordinary course of its business, (ii)
sales of assets (other than those then a part of the Borrowing Base and/or
financed under the Equipment Line) that are obsolete or no longer useful, (iii)
transfers of assets (other than those then a part of the Borrowing Base and/or
financed under the Equipment Line) to or between Debtor and/or any of its
subsidiaries, but then only subject to the provisions set forth at the end of
this subparagraph (a), and (iv) sales of other assets (other than those then a
part of the Borrowing Base and/or financed under the Equipment Line), but, in
any particular year, the aggregate value of all such other assets, as of the
times of such sales, shall not exceed One Hundred Thousand Dollars
($100,000.00). With regard to subpart (iii) immediately above, so long as none
of the transfers of assets described below in this subparagraph (a) results in
any other violation of any of the other provisions of
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<PAGE>
this Agreement, transfers of assets (other than those then a part of the
Borrowing Base and/or financed under the Equipment Line) may be made: (1) to
Debtor; (2) from any subsidiary of Debtor not then obligated for any of the
Obligations to another subsidiary of Debtor, whether or not the latter
subsidiary is then (or simultaneously therewith becomes) obligated for all of
the Obligations; and (3) from Debtor and/or any subsidiary of Debtor then
obligated for any of the Obligations to another subsidiary of Debtor, but only
if such latter subsidiary (A) is then (or simultaneously therewith becomes)
obligated for the Obligations in a manner and pursuant to documentation
satisfactory to Bank in all respects in its sole but reasonable judgment and (B)
simultaneously therewith (x) if such latter subsidiary has its principal place
of business in the United States of America, executes and delivers to Bank a new
Security Agreement and related UCC Financing Statements the filing of which will
perfect a first lien in favor of Bank on all of the transferred assets, (y) if
such latter subsidiary has its principal place of business in the United States
of America, executes and/or delivers to Bank such additional and/or related
documentation and materials (including, but not limited to, hazard insurance
materials) as Bank may require in its sole but reasonable judgment (all of which
Security Agreement, UCC Financing Statements, additional and/or related
documentation and related materials must be satisfactory to Bank in all respects
in its sole but reasonable judgment) and (z) irrespective of where such latter
subsidiary has its principal place of business, pays to Bank all reasonable
costs and expenses incurred by Bank related thereto, including, but not limited
to, the reasonable fees and disbursements of Bank's attorneys for preparation
and/or review of such documents and related materials, and if such latter
subsidiary has its principal place of business in the United States of America,
lien search fees and recordation fees. Subject to the assumptions and conditions
set forth below in this subparagraph (a), Bank agrees that such attorneys' fees,
with regard to each subsidiary of Debtor that is to become obligated for the
----
Obligations and has its principal place of business outside the United States of
-------
America, shall not exceed Four Hundred Dollars ($400.00). Such assumptions and
conditions are as follows: (I) such subsidiary's true and correct name and
Organizational Documents (as amended to such date) shall have been delivered to
Bank and Bank's attorneys before preparation of necessary documents shall begin;
(II) the only documents required for the same shall be (AA) an Agreement in
Bank's then standard from whereby, among other things (i) such subsidiary shall
undertake liability for, become personally obligated for and subject itself to
payment and performance when due and observance of each and all of the
Obligations and all of the provisions of all of the documents relating thereto,
jointly and severally with all of the other Obligors, (ii) all of the other
Obligors shall join in and not be released and (iii) it shall be made clear that
a purpose thereof is to add such subsidiary as an Obligor and not to release or
change any of the liabilities of any of the previously existing Obligors and
(BB) an Authority Resolution to Borrow and Certification in Bank's then standard
form; (III) without limiting the generality of the foregoing, no Security
Agreement, UCC Financing Statements, hazard insurance materials and/or lien
search shall be required in connection therewith; (IV) except to correct patent
factual errors, none of the required documents shall be negotiated, commented on
or otherwise changed; and (V) the attorneys preparing the same shall have a
reasonable amount of time within which to do so, which in no event shall be less
than four (4) full business days.
(b) Create, incur, assume or in any manner become liable in
respect to any indebtedness [in excess of One Hundred Thousand Dollars
($100,000.00) outstanding in the aggregate at any particular time], whether for
borrowed money, as deferred payment for the purchase of assets, or otherwise,
other than to
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<PAGE>
Bank, except for: (i) normal trade debts (including, but not limited to,
accounts payable) incurred in the ordinary course of Debtor's business; and (ii)
capital leases incurred in the ordinary course of Debtor's business.
(c) Create, incur, assume, or suffer to exist (whether
voluntarily or involuntarily) any security interest, lien, encumbrance or other
adverse claim of any kind upon any of Debtor's property or assets, nor lend
money to, guarantee, assume or otherwise become liable in respect to the
obligations of, any firm, person, company, corporation or other entity, except:
(i) by endorsement for deposit to Debtor's operating account maintained at Bank
of instruments or other items of payment; (ii) other guaranties or security
interests inuring directly to the benefit of Bank; (iii) Debtor may make
advances to any one or more or all of its subsidiaries [both to its "less
Restricted Subsidiaries" (as hereinafter defined) and/or its "more Restricted
Subsidiaries" (as hereinafter defined)]so long as: (A) none of such advances,
individually and/or in the aggregate, violates any other provision of this
Agreement; (B) the aggregate outstanding amount of all such advances (whether to
anyone or more or all of its Less restricted Subsidiaries and/or to anyone or
more or all of its More Restricted Subsidiaries) shall not at any time exceed
One Million Dollars($1,000,000.00); and (C) the aggregate outstanding amount of
all such advances to any one of the More Restricted Subsidiaries shall not at
any time exceed One Hundred Thousand Dollars ($100,000.00) and (2) to all of the
More Restricted Subsidiaries shall not at any time exceed Four Hundred Thousand
Dollars ($400,000.00); (iv) liens in respect of capital leases encumbering only
the leased property; (v) Debtor may incur or suffer to exist liens for taxes,
fees, assessments and other governmental charges so long as they are (A) junior
to the liens of Bank on the Collateral and (B) either not delinquent or are
being contested in good faith by appropriate proceedings, and liens in
connection with judgments so long as none of them constitutes an Event of
Default under Section 14 of this Agreement and all of them are being contested
in good faith by appropriate proceedings, and easements, rights of way, defects
in title, mechanics' liens and the like affecting real property and not
interfering in any material respect with the ordinary conduct of the business of
Debtor, and (vi) Debtor may suffer to exist liens existing on the date of this
Agreement as to which, on or before such date, Debtor has notified Bank in
writing and/or Bank otherwise has actual knowledge. As used herein, the term
"Less Restricted Subsidiaries" means, at any particular time, all present and/or
future subsidiaries of Debtor with respect to each of which Bank shall have
received (w) a duly executed Pledge Agreement(s) pledging at least sixty-five
percent (65%) of the outstanding shares of stock or other form of ownership
interests in such subsidiary, (x) a duly executed Irrevocable Stock Power(s)
(one (1) for each certificate representing any or all of such shares or other
form of ownership interests, if applicable), describing the shares or interests
covered thereby, but otherwise blank, (y) the original of each such certificate,
if applicable, and (2) legal opinions relating to the same, all of which must be
satisfactory to Bank in all respects in its sole but reasonable judgment. As
used herein, the term "More Restricted Subsidiaries" means, at any particular
time, all present and/or future subsidiaries of Debtor with respect to which any
one or more or all of the conditions to qualify as one of the Less restricted
Subsidiaries shall not have been satisfied.
(d) Merge or consolidate with any company or enterprise, nor
acquire or purchase any other company or enterprise, nor enter into any
partnership, joint venture or otherwise
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<PAGE>
substantially change its legal structure or the general character of its
business as it is presently conducted, nor dissolve or cease to be a going
concern, except that, so long as none of the transactions described below in
this subparagraph (d) results in any other violation of any of the other
provisions of this Agreement, (i) any subsidiary of Debtor may merge into
Debtor, (ii) any subsidiary of Debtor then obligated for any of the Obligations
may merge into another subsidiary of Debtor only if such latter subsidiary is
then (or simultaneously therewith becomes) obligated for the Obligations in a
manner and pursuant to documentation satisfactory to Bank in all respects in its
sole but reasonable judgment, (iii) any subsidiary of Debtor not then obligated
for any of the Obligations may merge into another subsidiary of Debtor, whether
or not such latter subsidiary is then (or simultaneously therewith becomes) so
obligated, (iv) Debtor may enter into a merger or consolidation with another
corporation so long as Debtor is the surviving corporation and (v) Debtor may
enter into a merger or consolidation with another corporation wherein Debtor
shall not be the surviving corporation, but only if (A) such merger or
consolidation is for the sole purpose of changing Debtor's state of
incorporation and (B) simultaneously therewith the surviving corporation (1)
executes and delivers to Bank an Assumption Agreement pursuant to which such
surviving corporation assumes all of Debtor's obligations in relation to the
Obligations and otherwise under all of the Loan Documents, (2) executes and
delivers to Bank a new Security Agreement and related UCC Financing Statements
the filing of which will perfect a first lien in favor of Bank on all of the
Collateral of Debtor that existed immediately prior thereto, (3) executes and/or
delivers to Bank such additional and/or related documentation and materials
(including, but not limited to, hazard insurance materials) as Bank may require
in its sole but reasonable judgment (and all of which Assumption Agreement,
Security Agreement, UCC Financing Statements, additional and/or related
documentation and materials must be satisfactory to Bank in all respects in its
sole but reasonable judgment) and (4) pays to Bank all reasonable costs and
expenses incurred by Bank related thereto, including, but not limited to, the
reasonable fees and disbursements of Bank's attorneys for preparation and/or
review of such documents and related materials, lien search fees and recordation
fees.
(e) Except as otherwise permitted above, make any advances to
any third parties, other than advances that are (i) to Debtor's employees, in
the ordinary course of business and only for business expenses of Debtor, in
which cases there is no limit or restriction on the amounts thereof and/or (ii)
for purposes other than that described in (i) immediately above, in which cases
the amounts thereof shall not, at any time, in the aggregate be in excess of
Fifty Thousand Dollars ($50,000.00).
(f) Relocate any place of business and/or any of the Collateral
without giving Bank at least thirty (30) days' prior written notice thereof.
(g) Compromise, modify or discount any of the Receivables,
except for (i) ordinary trade discounts or allowances for prompt payment, or
except (ii) in accordance with Debtor's usual practices and in each such case
Debtor must deduct or exclude from the value of such Receivables the value of
such compromise, modification or discount on the next due Borrowing Base/Non-
Default Certificate.
(h) Suffer or permit any of debtor's present and/or future
subsidiaries to incur additional debt of any kind, except for debt owing to
Debtor, and then only to the extent permitted under the provisions of
subparagraph 10(c) above.
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<PAGE>
11. ENVIRONMENTAL CERTIFICATION. Debtor hereby represents and
---------------------------
warrants and covenants and agrees that it is and shall remain in compliance, in
all material respects, with all applicable laws and regulations (local, state
and federal) regarding the use, disposal and storage of any hazardous waste
and/or environmentally hazardous materials and/or toxic substances.
12. LIMITED GUARANTY. Except as otherwise provided in the Limited
----------------
Guaranty of Payment hereinafter described, a portion of the Obligations shall be
personally and unconditionally guaranteed by Michael J. Saylor (the
"Guarantor"), who, concurrently with the execution and delivery hereof, shall
execute and deliver to Bank Bank's form of Limited Guaranty of Payment.
13. ERISA. Debtor represents and warrants that Debtor has not
-----
incurred: (a) any material accumulated funding deficiency within the meaning of
the Employee Retirement Income Security Act of 1974, as amended from time to
time ("ERISA"); or (b) any liability to the Pension Benefit Guaranty Corporation
established under ERISA, in connection with any "Plan" (hereinafter defined)
established or maintained by Debtor. As used herein, the term "Plan" shall mean
any plan subject to Title IV of ERISA and maintained for employees of Debtor, or
of any member of a controlled group of corporations as defined in Section 1563
of the Internal Revenue Code of 1986, as amended, of which Debtor is a part.
14. DEFAULT. Any one of the following events shall be considered and
-------
defined as an "Event of Default":
(a) If Debtor shall fail to pay when due any principal, or if
Debtor shall fail to pay within five (5) calendar days of when due any interest
or other sum owing on any of the Obligations, or if Debtor or any present and/or
future co-maker or obligor of any of the Obligations or any present and/or
future guarantor of any of the Obligations (in whole or in part) (Debtor, all
such co-makers, obligors and guarantors are hereinafter called the "Obligors")
shall fail to pay when due (after giving effect to any applicable grace periods)
any other obligation for borrowed money, whether owed to Bank or to any other
person or entity [but, if owing to any person or entity other than Bank, only if
the principal amount of such obligation is greater than Two Hundred Thousand
Dollars ($200,000.00)];
(b) If Debtor or any of the other parties named therein (other
than Bank or trustees for the benefit of Bank) shall fail to perform when due or
observe any other covenant or agreement in the Note, in any other of the
documents now and/or hereafter evidencing, securing, guaranteeing and/or
otherwise relating to any of the Obligations (the "Loan Documents") and/or
herein and/or if any other default or Event of Default shall occur under any of
the other Loan Documents, and any of the same shall continue uncured for more
than thirty (30) calendar days;
(c) If any of the Obligors shall fail to perform when due or
observe any covenant or agreement (other than as to payment) in any of the
documents now and/or hereafter evidencing, securing, guaranteeing and/or
otherwise relating to any other obligation of any of the Obligors to the Bank,
and any of the same shall continue uncured for more than thirty (30) calendar
days;
(d) If any warranty or representation of any of the Obligors now
or hereafter made to Bank and/or anything set forth in any of the Borrowing
Base/Non-Default Certificates shall be untrue or misleading in any material
respect;
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<PAGE>
(e) If a trustee or receiver is appointed for any of the
Obligors or for all or a substantial part of any of their respective assets;
(f) If any of the Obligors makes a general assignment for the
benefit of creditors;
(g) If any of the Obligors files for bankruptcy, or an
involuntary bankruptcy petition is filed against any of the Obligors (which
involuntary petition remains undismissed for sixty (60) calendar days);
(h) If any property of any of the Obligors and/or any deposit
account of any of the Obligors having an aggregate fair market value greater
than Two Hundred Thousand Dollars ($200,000.00)is levied upon or attached or
garnished and such levy or attachment or garnishment is not released within
thirty (30) calendar days;
(i) If the value of the Collateral, taken as a whole, has been
materially and adversely affected, or if there occurs any material adverse
change in the financial conditions of the Obligors, taken as a whole, as
determined by Bank in good faith;
(j) If any issuance or service of any attachment, levy or
garnishment against any of the Obligors or any of their respective property in
an aggregate amount (or having an aggregate fair market value) greater than Two
Hundred Thousand Dollars ($200,000.00) shall occur and not be released within
thirty (30) calendar days, or if any judgment(s) in an aggregate amount greater
than Two Hundred Thousand Dollars ($200,000.00) shall be entered against any of
the Obligors by a court of competent jurisdiction and remain undismissed for
thirty (30) calendar days;
(k) If any of the Obligors shall become insolvent or incompetent
or die, or in the case of an entity, shall dissolve or cease its operations;
(l) If Debtor shall fail to comply with any material federal,
state or local law regulating the operation of Debtor's business;
(m) If Michael J. Saylor shall cease to control, make, execute
and/or see to the execution of all material decisions of Debtor; and/or
(n) If formal charges shall be filed against any of the Obligors
under any state or federal law for which forfeiture is a potential penalty and
which charges are not stayed or dismissed within sixty (60) calendar days after
the original filing thereof.
15. REMEDIES. If Debtor shall default in the performance or
--------
observance when due of any of the provisions of this Agreement, any of the
Applications, the Note and/or any other of the Loan Documents, Bank may perform
the same for Debtor's account and any monies expended in so doing shall be
chargeable with interest to Debtor (at the highest rate provided for in the
Note) and shall be added to the indebtedness secured hereby and the same shall
be immediately due and payable upon demand. During the existence of any Event
of Default and/or the existence of any act, event or condition that with notice
and/or the lapse of time would constitute an Event of Default, Bank may also, in
its sole discretion, not permit any further advances and/or readvances under
any or all of the Obligations and/or not issue any further Letters of Credit.
During the existence of any Event of
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<PAGE>
Default, Bank may also, in its sole discretion, do any one or more or all of the
following:
(a) Declare all principal, interest and other sums owing on all
of the Obligations as well as the entire Maximum Drawable Amount immediately due
and payable without demand, protest, notice of protest, notice of default,
presentment for payment or further notice of any kind, all of which are hereby
waived by Debtor;
(b) Offset against the Obligations and/or the Maximum Drawable
Amount, or seize, hold and/or impress any and all credits, stocks, bonds, or
other securities or property of any nature whatsoever on deposit with, or held
by, or in the possession of, Bank, to the credit of or for the account of
Debtor, without notice;
(c) To the extent that any of the Collateral consists of
tangible property, require Debtor to assemble the Collateral and make it
available to Bank at any reasonable place to be designated by Bank. Without
limiting the generality of the foregoing, Debtor agrees that Bank's address set
forth above is such a reasonable place;
(d) Enter upon Debtor's premises peaceably, by Bank's own means
with or without legal process, and take possession of any or all of the
Collateral, or render it unusable, or sell or otherwise dispose of the
Collateral on Debtor's premises or elsewhere, and Debtor agrees not to resist or
interfere. Unless the Collateral is perishable or threatens to decline speedily
in value or is of a type customarily sold on a recognized market, Bank will give
Debtor reasonable notice of the time and place of any public sale thereof or of
the time after which any private sale or any other intended disposition thereof
is to be made. The requirement of reasonable notice will be met if such notice
is mailed, postage prepaid, to the address of Debtor shown above, at least ten
(10) calendar days before the time of sale or disposition;
(e) Collect, demand, receive, sue for and/or compromise, in
Bank's own name or in the name of Debtor, or otherwise, but at the expense and
cost of Debtor, any and all of the "Receivables", as that term is defined
herein, and give good and sufficient releases therefor, endorse any checks,
drafts or other orders for the payment of monies payable to Debtor in payment
thereof and, in its discretion, file any claims or take any action or
proceeding, either in Bank's own name or in the name of Debtor, or otherwise,
which Bank may deem necessary or advisable in connection with the foregoing. It
is expressly understood and agreed, however, that Bank shall not be required or
obligated in any manner to make any inquiries as to the nature or sufficiency of
any payment received by it or to present or file any claims or take any other
action to collect or enforce a payment of any amounts which may have been
assigned to Bank or to which Bank may be entitled hereunder at any time or
times;
(f) Perform any of the provisions of the Loan Documents for
Debtor's account, and any monies expended in so doing shall be added to the
Obligations and chargeable to Debtor with interest (at the highest rate
applicable to any of the Obligations) and the same shall be immediately due and
payable upon demand;
(g) Apply proceeds of the Collateral against any one or more or
all of the Obligations and/or hold the same as collateral security for the
Maximum Drawable Amount, but otherwise in Bank's sole and absolute discretion;
and/or
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<PAGE>
(h) Proceed to enforce such other and additional rights and
remedies as Bank may have hereunder or under any other agreements with Debtor,
under any of the other Loan Documents and/or as may be provided by law.
16. MISCELLANEOUS. Wherever used herein, and wherever the context
-------------
shall permit or require the same, the term "the Note" shall mean the Revolving
Note and/or any one or more or all of the Equipment Notes, in each instance as
the context may permit or require. All rights and remedies of Bank hereunder
are cumulative and not alternative. Indulgence by Bank with respect to any of
the terms and conditions herein contained or the failure of Bank to exercise any
of its rights hereunder shall not constitute a waiver thereof, and Debtor shall
remain liable for the strict performance and observance hereof until all of the
Obligations shall have been fully paid in accordance with the terms of the Note
or any other promissory note(s) evidencing any of the same, Debtor shall have no
further right to any advance and/or readvance under the Loan or any other of the
Obligations, all of the Letters of Credit shall have expired, Debtor shall not
have any right to the issuance of any further Letters of Credit and this
Agreement shall have been terminated. No provision hereof may be waived or
modified orally, but all such waivers or modifications shall be in writing.
This Agreement and the other written loan documents issued in conjunction
herewith or pursuant hereto constitute the entire agreement of the parties and
shall continue in full force and effect until all of the Obligations shall have
been fully paid in accordance with the terms of the Note or any other promissory
note(s) evidencing any of the same, Debtor shall have no further right to any
advance and/or readvance under the Loan or any other of the Obligations, all of
the Letters of Credit shall have expired, Debtor shall not have any right to the
issuance of any further Letters of Credit and this Agreement shall have been
terminated. All warranties, representations, covenants and agreements of Debtor
herein shall survive the making of the Loan and shall be deemed made and redated
by Debtor at the time of the making of each advance and/or readvance under the
Loan and/or any other of the Obligations, at the time of receipt by Bank of each
of the Applications and at the time of issuance (and, if applicable, renewal) by
Bank of each of the Letters of Credit. In addition to any other sums payable by
Debtor hereunder and/or under the Note and/or under any other documents
evidencing any of the Obligations, after the occurrence of any "Event of
Default", Debtor agrees to pay Bank's costs of collection and attorneys' fees
(as provided for in the Note, or, if not provided for in the Note, then,
reasonable attorneys' fees) incurred in the enforcement of any provision hereof,
whether suit be brought or not. To the extent that any provisions of this
Agreement shall conflict with or be expressly inconsistent with any provisions
of any of the other Loan Documents, then, the provisions of this Agreement shall
govern and prevail.
This Agreement: (a) may be executed and delivered by the various
parties hereto in any number of multiple counterparts, each of which shall be
deemed to be an original and all of which together shall constitute one and the
same Agreement; (b) shall be governed in all respects by the laws of the
Commonwealth of Virginia (expressly excluding, however, its choice of law
rules); and (c) shall be binding upon and shall
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<PAGE>
inure to the benefit of the parties hereto and their respective heirs,
executors, administrators, personal representatives, successors and assigns.
This Agreement is signed, sealed and delivered effective as of this
10th day of December, 1996, but executed on September 30, 1997.
DEBTOR:
------
[Corporate Seal] MICROSTRATEGY INCORPORATED,
ATTEST: a Delaware corporation
By:/s/ Sanju Bansal By: /s/ Michael J. Saylor
---------------------- ----------------------------------------
Name: Sanju Bansal Name: Michael J. Saylor
-------------------- ----------------------------------
Title: COO Title: President and Chief
------------------ ---------------------------------
Executive Officer
---------------------------------
BANK:
----
NATIONSBANK, N.A.
By: /s/ Yvonne Durazzo
-----------------------------------------
Name: Yvonne Durazzo
------------------------------------
Title: Vice President
-----------------------------------
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EXHIBIT 10.9
MODIFICATION OF
---------------
BUSINESS LOAN/SECURITY AGREEMENT
--------------------------------
THIS MODIFICATION OF BUSINESS LOAN/SECURITY AGREEMENT (this "Agreement") is
entered into on November 20, 1997, by and among: (1) MICROSTRATEGY INCORPORATED,
a Delaware corporation ("Debtor"); (2) NATIONSBANK, N.A. ("Bank"); and (3)
MICHAEL J. SAYLOR, Personally ("Guarantor").
RECITALS
--------
R-1. Reference is hereby made to that certain Business Loan/Security
Agreement dated effective as of December 10, 1996, and executed on September 30,
1997, by and between Debtor and Bank (the "BLSA").
R-2. Debtor has requested that Bank: (a) extend the maturity date of the
"Revolving Credit" and the "Revolving Note" (as each such quoted term is defined
in the BLSA); and (b) establish for Debtor a new secured non-revolving equipment
credit facility (the "New Equipment Facility") totally separate and apart from
the "Equipment Line" (as defined in the BLSA).
R-3. Subject to the terms and conditions hereinafter set forth, Bank has
agreed to such requests of Debtor.
NOW, THEREFORE, for Ten Dollars ($10.00), in consideration of Bank's
agreements as hereinafter set forth, and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto hereby agree as follows:
1. The Recitals set forth above are hereby incorporated into this
Agreement by this reference with the same force and effect as if fully set forth
hereinbelow.
2. Simultaneously with the execution and delivery of this Agreement,
Debtor, Bank and Guarantor are also entering into that certain Note Modification
Agreement of even date herewith, pursuant to which the maturity date of the
Revolving Credit and the Revolving Note is being extended to May 31, 1998 (the
"Extension Agreement").
3. All references in the BLSA to the Revolving Credit and the Revolving
Note shall be deemed to be the same as extended by the Extension Agreement and
as modified by this Agreement.
4. Subject to the provisions of the BLSA (as modified by this Agreement),
Bank shall extend to Debtor the New Equipment Facility in the aggregate amount
of Two Million Dollars ($2,000,000.00), or so much thereof as shall be advanced,
bearing interest and being payable in accordance with the terms of one or more
Term Promissory Notes to be made from time to time by Debtor, and payable to the
order of Bank, each of which shall be substantially in the form of Exhibit "A"
attached hereto and incorporated herein by this reference, and all extensions,
renewals and modifications thereof and/or substitutions therefor (individually a
"New Equipment Facility Note" and collectively the "New Equipment Facility
Notes").
5. In each instance, as the context may permit or require, each reference
in the BLSA to:
(a) the "Loan" shall be deemed to be to (individual and/or collectively)
the Revolving Credit, the Equipment Line and/or the New Equipment Facility;
(b) the "Note" shall be deemed to be the Revolving Note and/or any one or
more or all of the Equipment Notes and/or any one or more or all of the New
Equipment Facility Notes; and
(c) the "Obligations" shall be deemed to be to such term as it is defined
below in this Agreement.
6. Notwithstanding anything to the contrary set forth in the BLSA, Debtor
shall pay to Bank: (a) the "Non-Use Fee" (hereinafter explained and defined)
that relates to the Revolving Credit, from time to time as
<PAGE>
provided for in paragraph 7 below; and (b) if not previously paid by Debtor to
Bank, then, simultaneously with Debtor's execution and delivery of this
Agreement, a commitment fee in the amount of Seven Thousand Six Hundred Dollars
($7,600.00) relating to the New Equipment Facility.
7. Debtor shall pay to Bank a non-use fee (the "Non-Use Fee") relating to
the Revolving Credit. The Non-Use Fee shall: (a) be one-quarter of one percent
(1/4 of 1%) per annum on the average daily unused portion of the Revolving
Credit (the "Daily Unused Portion"), payable quarterly in arrears; (b) be
determined using January 1, 1998, as the first day with respect to which the
Daily Unused Portion shall be determined; (c) apply to the first calendar
quarter ending on March 31, 1998, and to each succeeding calendar quarter or
portion thereof until the Revolving Credit shall have been fully paid and
satisfied and Debtor shall have no right to any further advance and/or readvance
thereunder; (d) be calculated on the basis of a 360-day year; and (e) be paid by
Debtor to Bank within ten (10) calendar days after the end of each calendar
quarter (with the first such quarter being the quarter ending on March 31,
1998).
8. As collateral security for the Loan (including the Revolving Credit,
the Equipment Line and the New Equipment Facility) and the "Applications" (as
defined in the BLSA), as well as for any and all other liabilities and
obligations of Debtor to Bank under this Agreement and/or the Note (including
the Revolving Note, any one or more or all of the Equipment Notes and any one or
more or all of the New Equipment Facility Notes), whether now existing or
hereafter created or arising, direct or indirect, matured or unmatured, and
whether absolute or contingent, joint, several, or joint and several, and no
matter how the same may be evidenced or shall arise, including without
limitation all sums now or hereafter owing under the Note and/or in connection
with the Loan (all of which are hereinafter collectively called the
"Obligations"), Debtor hereby grants and conveys to Bank a first-lien security
interest in:
(a) all of Debtor's present and future accounts, contract rights, chattel
paper, notes, drafts, acceptances, chattel mortgages, conditional sales
contracts, bailment leases, security agreements and other forms of obligations
now or hereafter arising out of or acquired in the course of Debtor's business,
together with all liens, guarantees, securities, rights, remedies and privileges
pertaining to any of the foregoing, now existing or hereafter arising (all of
the foregoing being hereinafter collectively called "Receivables");
(b) all of Debtor's inventory, including goods, wares, merchandise and
other tangible personal property now owned or hereafter acquired by Debtor which
are held for sale or lease or are furnished (or are to be furnished) under a
contract for services, and raw materials, work in process and materials used or
consumed or to be used or consumed in Debtor's business (all of the foregoing
being hereinafter collectively called "Inventory");
(c) all of Debtor's present and future furniture, fixtures and equipment
of every type and nature, together with all parts, attachments, additions,
accessories, improvements, replacements, substitutions and accessions thereto;
(d) all of Debtor's present and future "general intangibles", as such term
is defined in the Uniform Commercial Code as adopted in Virginia (the "UCC"),
now owned or hereafter acquired by Debtor or in which Debtor now has or
hereafter acquires any right, title or interest, including, without limitation
(i) all of Debtor's choses in action, things in action, suits, actions, causes
of action and claims of every kind and nature, whether at law or in equity, (ii)
all condemnation awards and insurance proceeds, (iii) tax refunds, rights and
claims thereto and other payments from any local, state or federal government
authority or agency, (iv) all contract rights, licenses (but, with respect to
each license, only to the extent that the grant of a security interest in such
license is not prohibited by the agreement(s) creating such license), permits,
zoning approvals, rights, agreements and all other private or governmental
documents of every kind or character whatsoever and (v) all customer lists,
servicing rights, patents and patent rights (whether or not registered),
licenses, permits, uncertified/uncertificated securities, trade marks, service
marks, trade names, logos, copyrights, computer programs and software and
goodwill (all of the foregoing being hereinafter collectively called "General
Intangibles");
(e) all property, goods and chattels of the same classes as those
described above, acquired by Debtor subsequent to the date of this Agreement and
prior to its termination;
<PAGE>
(f) all cash and non-cash proceeds of any or all of the
foregoing; and
(g) all increases, substitutions, replacements, additions and
accessions thereto.
9. The New Equipment Facility shall be used by Debtor to finance Debtor's
purchases of equipment. All provisions set forth in 3(d) on pages 5 and 6 of
the BLSA relating to Equipment Line Advance and the Equipment Line shall also
apply to the New Equipment Facility; provided, however, that:
(a) the New Equipment Facility is non-revolving and the aggregate amount
advanced thereunder shall never exceed Two Million Dollars ($2,000,000.00);
(b) each request for an advance under the New Equipment Facility will be
evidenced by a New Equipment Facility Note;
(c) the last date for funding any request under the New Equipment Facility
shall be May 31, 1998; and
(d) in no event shall any New Equipment Facility Note have a maturity date
later than May 31, 2002.
10. Except as otherwise provided in the Substitute Limited Guaranty of
Payment hereinafter described, a portion of the Obligations shall be personally
and unconditionally guaranteed by Guarantor, who, simultaneously with his
execution and delivery of this Agreement, shall execute and deliver to Bank
Bank's form of Substitute Limited Guaranty of Payment (the "Substitute Limited
Guaranty").
11. As of the date hereof, the outstanding unpaid principal balance of the
Revolving Note is _______________________________________________Dollars
($_____________) and neither Debtor nor Guarantor has any claim, counterclaim,
set-off and/or defense against the Revolving Note, the BLSA and/or any of the
other "Loan Documents" (as defined in the BLSA) relating thereto.
12. As of the date hereof, the outstanding unpaid principal balance owing
under the Equipment Line is
_____________________________________________________Dollars ($___________) and
neither Debtor nor Guarantor has any claim, counterclaim, set-off and/or defense
against the Equipment Line, any of the "Equipment Notes" (as defined in the
BLSA) and/or any of the other Loan Documents relating thereto.
13. As of the date hereof, the "Maximum Drawable Amount" (as defined in
the BLSA) is ____________________________________________Dollars ($____________)
and neither Debtor nor Guarantor has any claim, counterclaim, set-off and /or
defense against any of the "Applications" (as defined in the BLSA).
14. Guarantor: (a) consents to the provisions of this Agreement; (b)
agrees to the provisions of this Agreement where Guarantor is expressly
mentioned; (c) acknowledges and agrees that he has no claim, counterclaim, set-
off and/or defense against the Substitute Limited Guaranty; and (d) acknowledges
and agrees (subject to the provisions of the Substitute Limited Guaranty) that
the Substitute Limited Guaranty shall apply to the Obligations (as defined in
this Agreement).
15. Except as hereby expressly modified and/or herein expressly
referenced, the BLSA
<PAGE>
and the other Loan Documents shall otherwise be unchanged, shall remain in full
force and effect, and are hereby expressly approved, ratified and confirmed in
all respects.
16. This Agreement: (a) may be executed and delivered by the various
parties hereto in any number of multiple counterparts, each of which shall be
deemed to be an original and all of which together shall constitute one and the
same Agreement; (b) shall be governed in all respects by the laws of the
Commonwealth of Virginia (expressly excluding, however, its choice of law
rules); and (c) shall be binding upon and shall inure to the benefit of the
parties hereto and their respective heirs, executors, administrators, personal
representatives, successors and assigns.
DEBTOR:
------
[Corporate Seal] MICROSTRATEGY INCORPORATED,
ATTEST: a Delaware corporation
By:_________________________ By:___________________________ Name: _________
______ Title:________________________
BANK:
----
NATIONSBANK, N.A.
By:__________________________
Name:________________________
Title:_______________________
WITNESS: GUARANTOR:
---------
_________________ ____________________
Michael J. Saylor, Personally
<PAGE>
EXHIBIT 10.10
SECOND MODIFICATION
-------------------
TO BUSINESS LOAN/SECURITY AGREEMENT
-----------------------------------
THIS SECOND MODIFICATION TO BUSINESS LOAN/SECURITY AGREEMENT ("Second
Modification") is made as of March 31, 1998, by and among MicroStrategy,
Incorporated, having an address at 8000 Towers Crescent Drive, Suite 1400,
Vienna, VA 22182 (the "Debtor"), Michael J. Saylor (the "Guarantor") and
NationsBank, N.A., a national banking corporation, having an address at 8300
Greensboro Drive, Suite 550, McLean, VA 22102 (the "Bank").
RECITALS
--------
1. The Debtor and the Bank entered into a Business Loan/Security
Agreement, dated as of September 30, 1997, which was modified by a
Modification of Business Loan/Security Agreement, dated September
12, 1997 (the "September, 1997, Modification").
2. The Debtor and the Bank amended the Business Loan/Security Agreement
by Modification of Loan Agreement, dated November 25, 1997 (the
"First Modification"). (The Business Loan/Security Agreement, as
amended by the September, 1997 Modification and the First
Modification, is hereinafter called the "Loan Agreement.")
3. To evidence its obligation to repay the Bank's advances under the
Loan Agreement, the Borrower gave Lender a Revolving Promissory
Note, effective as of December 10, 1996, in the face amount of Six
Million, Four Hundred Thousand Dollars ($6,400,000.00), which was
amended by a Note Modification Agreement, dated as of November 25,
1997.
4. The Debtor and the Bank desire further to amend the Loan Agreement
for the following purposes: (1) to increase the maximum amount of
the Revolving Credit from Six Million, Four Hundred Thousand Dollars
($6,400,000.00) to Nine Million, Four Hundred Thousand Dollars
($9,400,000.00); (2) to extend the maturity date of the Revolving
Credit to September 30, 1998; (3) to provide for an increase in the
New Equipment Facility from Two Million Dollars ($2,000,000.00) to
Four Million Dollars ($4,000,000.00); and (4) for the other purposes
hereinafter set forth.
5. The Debtor and the Bank are simultaneously entering into a Second
Amendment to Revolving Note to increase the face amount of the
Revolving Note to Nine Million, Four Hundred Thousand Dollars
($9,400,000.00). (The Revolving Promissory Note, as amended by the
Note Modification Agreement, dated as of November 25, 1997, and as
further amended by the Second Amendment to Revolving Note, is
hereinafter called the "Revolving Note.")
6. The Guarantor is the guarantor under a Substitute Limited Guaranty
of Payment, dated November 25, 1997 (the "Guaranty"), guaranteeing,
subject to certain
<PAGE>
limitations as expressed in the Guaranty, the Debtor's obligations
under the Loan Agreement, as amended, including (without limiting
the generality of the foregoing) the Revolving Note, the Equipment
Notes and the Term Promissory Notes.
7. The Guarantor desires to enter into this Second Modification to
evidence the Guarantor's consent to the terms and conditions of this
Second Modification and to confirm that the Guaranty remains in full
force and effect, subject to the limitations as expressed in the
Guaranty, as to all credit extended under the Loan Agreement, as
amended by this Second Modification.
8. Capitalized terms used in this Second Modification and not defined
herein have the meanings ascribed to them in the Loan Agreement.
AGREEMENTS
----------
IN CONSIDERATION, of the premises, the mutual agreements herein
contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Debtor, the Guarantor
and the Bank hereby agree as follows:
1. In Paragraphs 1(a) and 3(b) of the Loan Agreement, the words "Six
Million, Four Hundred Thousand Dollars ($6,400,000.00)" are deleted
in their entirety and replaced with the words "Nine Million, Four
Hundred Thousand Dollars ($9,400,000.00)."
2. The fifth sentence of Paragraph 3(a) of the Loan Agreement is
deleted in its entirety and replaced with the following:
None of the Applications shall request (and none of the Letters
of Credit shall provide for) any expiry date for the related
Letter of Credit, whether by automatic renewal or otherwise,
later than September 30, 1998, unless agreed to by Bank in
writing.
3. Certain definitions used in the Loan Agreement are modified as
follows:
a. The term "Collateral" includes the additional collateral granted
in the First Modification and any equipment purchased with the
New Equipment Facility, as modified by this Second Amendment.
b. The term "Loan" includes all advances evidenced by the Revolving
Note, as previously modified by Note Modification Agreement,
dated November 25, 1997, and as further modified by the Second
Modification of Revolving Note, and all advances under the New
Equipment Facility, as modified by this Second Amendment.
c. The term "Note" includes the Revolving Note, as previously
modified by Note Modification Agreement, dated November 25,
1997, and as further modified by
2
<PAGE>
the Second Modification of Revolving Note, and each Equipment
Note issued pursuant to the Loan Agreement or this Second
Amendment. "Equipment Note" includes Term Promissory Notes
issued under the New Equipment Facility.
d. The term "Obligations," as used in the Loan Agreement, includes
the Note, the Loan and the Debtor's obligation to reimburse any
drawing under a Letter of Credit.
4. The maturity date of the Revolving Note is extended to September 30,
1998, as stated in a Second Modification of Revolving Note.
5. The Non-Use Fee of one-quarter of one percent (1/4%) of the Daily
Unused Portion, shall remain in full force and effect, except the
Daily Unused Portion shall be the unused portion of the new
Revolving Credit amount --i.e., the unused portion of Nine Million,
Four Hundred Thousand Dollars ($9,400,000.00).
6. The provisions of the Loan Agreement regarding the New Equipment
Facility (as initially established by the First Modification) are
modified as follows:
a. The aggregate amount of the New Equipment Facility is increased
from Two Million Dollars ($2,000,000.00) to Four Million Dollars
($4,000,000.00), or so much thereof as may be advanced. The New
Equipment Facility is not a revolving loan facility; amounts
heretofore advanced under the New Equipment Facility shall not
be readvanced.
b. Notwithstanding Paragraph 9(c) of the First Modification, the
last day for funding any request under the New Equipment
Facility is extended from May 31, 1998 to September 30, 1998.
c. Paragraph 9 (d) of the First Modification is deleted in its
entirety and replaced with the following: "In no event shall any
New Equipment Facility Note have a maturity date later than
September 30, 2002."
d. In accordance with the Loan Agreement, each advance under the
New Equipment Facility shall be evidenced by a separate Term
Promissory Note. No advance under the New Equipment Facility
shall exceed Eighty Percent (80%) of the cost of the equipment
to be purchased with the proceeds of the advance. Each Term
Promissory Note shall bear interest at the applicable "Floating
Rate" or "Fixed Rate" provided in Paragraph 3 (d) of the Loan
Agreement. Each advance under the New Equipment Facility shall
be conditional on the Bank's receipt of a valid first lien
security interest in the equipment purchased with the proceeds
of the advance. To that end, Debtor grants and regrants to Bank
a security interest in any and all equipment purchased with the
proceeds of the New Equipment Facility. No seller financing
shall be permitted with regard to any equipment purchased with
the proceeds of the New Equipment Facility.
3
<PAGE>
e. Exhibit "A" to the First Modification, which comprises the form
of Term Promissory Note to be used to evidence the Debtor's
obligation to repay advances under the New Equipment Facility,
is deleted in its entirety and replaces with Exhibit A attached
hereto and made a part hereof.
7. Paragraph 9 (j) of the Loan Agreement is amended by deleting the
first sentence in its entirety and replacing it with the following:
Maintain a consolidated ratio of Debtor's (and its
subsidiaries') "Funded Debt" (as hereinafter defined) to
"EBITDA" (as hereinafter defined) that shall not exceed:
5.0 to 1.0 for the quarter ending March 31, 1998;
4.0 to 1.0 for the quarter ending June 30, 1998;
3.0 to 1.0 for the quarter ending September 30, 1998; or
2.0 to 1.0 for the quarter ending December 31, 1998
(provided that the application of this covenant to the
quarter ending December 31, 1998, shall not be deemed to
extend the maturity date).
8. Paragraph 10 (c)(iii)(B) of the Loan Agreement is amended by
deleting the words "One Million Dollars ($1,000,000.00)" and
replacing them with the words "Five Million Dollars
($5,000,000.00)."
9. A new paragraph 10 (i) is added to the Loan Agreement providing as
follows:
The Debtor (and its subsidiaries) shall not sustain a loss,
calculated on a consolidated basis, of more than Two Hundred and
Fifty Thousand Dollars ($250,000.00) during any quarter.
Paragraph 2 of the September, 1997 Modification, is deleted in its
entirety, and Paragraph 10 (h) of the Loan Agreement is confirmed
and remains in full force and effect.
10. The Debtor confirms its obligations to provide the Bank with
financial reports as provided in the Loan Agreement and agrees
promptly to provide such other or further financial information as
the Bank may reasonably request.
11. The Security Interest in the Collateral granted by the Loan
Agreement shall henceforth secure not only the Obligations under the
Loan Agreement, as hereby modified, but also any other credit that
Bank may extend to the Debtor. To that end, Debtor grants and
regrants to Bank a security interest in the Collateral.
4
<PAGE>
12. Except as modified by this Second Modification, the Loan Agreement
remains in full force and effect and unmodified. Debtor and the
Guarantor warrant and represent that they have no offsets or
defenses to their obligations under the Loan Agreement, as so
modified.
13. The Guarantor consents to this Second Modification, agrees that this
Second Modification does not impair the Guarantor's liabilities or
obligations under the Guaranty, and confirms that the Guaranty
remains in full force and effect as to all credit extended under the
Loan Agreement as amended this Second Modification, subject to
certain limits expressed in the Guaranty. Without limiting the
generality of the foregoing, the Guarantor acknowledges and agrees
that:
a. the Loan (as herein redefined) and indebtedness evidenced by the
Note (as herein redefined) and the Obligations (as herein
redefined) come within the meaning of the term "Indebtedness" as
defined in the Guaranty; and
b. References in the Guaranty to the Business Loan Security
Agreement or BLSA shall be deemed to refer to the Loan
Agreement, as amended by this Second Amendment; and
c. "Revolving Credit," as used in the Guaranty, refers to the
increased Revolving Credit amount under this Second Amendment --
i.e., Nine Million, Four Hundred Thousand Dollars
($9,400,000.00); and
d. "New Equipment Facility," as used in the Guaranty, refers to the
New Equipment Facility, as increased by this Second Amendment to
an aggregate amount of Four Million Dollars ($4,000,000.00).
The foregoing shall not be deemed to alter the nature of the
Guaranty as a continuing one. The Guaranty shall include any and all
existing new or increased Indebtedness, whether or not presently
contemplated by the Guarantor or the Bank, and whether or not the
same shall be incurred after satisfaction, payment or reduction of
any previous Indebtedness (as defined in the Guaranty).
14. The Debtor promises to pay the Bank a commitment fee of Fifteen
Thousand Dollars ($15,000.00) on the execution of this Second
Amendment. The Debtor promises to pay all costs and expenses
incurred by the Bank in connection with the Bank's review, due
diligence and closing of the transactions contemplated by this
Second Amendment, including attorney's fees (to include outside
counsel's fees, which will not exceed Three Thousand Dollars
($3,000.00)), and any recordation taxes and fees incurred by the
Bank in connection with the negotiation and preparation of all
documents necessary in connection with the transactions contemplated
by this Second Amendment.
15. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO
INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO
THIS INSTRUMENT, AGREEMENT OR DOCUMENT OR ANY
5
<PAGE>
RELATED INSTRUMENTS, AGREEMENTS OR DOCUMENTS, INCLUDING ANY CLAIM
BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY
BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT
(OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF
PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF
J.A.M.S./ENDISPUTE OR ANY SUCCESSOR THEREOF ("J.A.M.S."), AND THE
"SPECIAL RULES" AS SET FORTH BELOW. IN THE EVENT OF ANY
INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY
ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION.
ANY PARTY TO THIS INSTRUMENT, AGREEMENT, OR DOCUMENT MAY BRING AN
ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL
ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS AGREEMENT
APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION.
(i) SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE
-------------
COUNTY OF ANY BORROWER'S DOMICILE AT TIME OF THE EXECUTION OF THIS
INSTRUMENT, AGREEMENT OR DOCUMENT AND ADMINISTERED BY J.A.M.S. WHO
WILL APPOINT AN ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY
PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE AMERICAN
ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE
COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE
ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO
EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60
DAYS.
(ii) RESERVATION OF RIGHTS. NOTHING IN THIS ARBITRATION
---------------------
PROVISION SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY
OTHERWISE APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY
WAIVERS CONTAINED IN THIS INSTRUMENT, AGREEMENT, OR DOCUMENT; OR
(II) BE A WAIVER BY THE BANK OF THE PROTECTION AFFORDED TO IT BY 12
U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III)
LIMIT THE RIGHT OF THE BANK HERETO (A) TO EXERCISE SELF HELP
REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE
AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN
FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT
LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT
OF A RECEIVER. THE BANK MAY EXERCISE SUCH SELF HELP RIGHTS,
FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR
ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY
ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS INSTRUMENT,
AGREEMENT OR DOCUMENT. NEITHER THIS EXERCISE OF SELF HELP REMEDIES
NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR
PROVISIONAL OR
6
<PAGE>
ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY
PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE
MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH
REMEDIES.
IN WITNESS WHEREOF, the undersigned have duly executed this Second
Modification as of the day and year first herein above set forth.
MICROSTRATEGY, INCORPORATED
By:
-------------------------------------
Michael J. Saylor
President and Chief Executive Officer
NATIONSBANK, N.A.
By:
-------------------------------------
Yvonne Durazzo
Vice President
-------------------------------------
Michael J. Saylor
STATE OF VIRGINIA )
) To-wit:
COUNTY/CITY OF__________________________ )
I __________________________, a Notary Public in and for the jurisdiction
aforesaid, do certify that Michael J. Saylor, whose name is signed to the
writing above, acknowledged the same before me in my jurisdiction aforesaid.
Given under my hand and seal this _____ day of _____________, 1998.
-------------------------------------
Notary Public
My Commission Expires: ____________
7
<PAGE>
EXHIBIT 10.11
TAX INDEMNIFICATION AGREEMENT
This TAX INDEMNIFICATION AGREEMENT (the "Agreement") is entered into
as of May _____, 1998 between MicroStrategy Incorporated (the "Company") and the
persons listed on Schedule A attached hereto (individually a "Stockholder" and
collectively the "Stockholders"). Capitalized terms not otherwise defined have
the meanings ascribed to them in Section 1.1.
WHEREAS, the Company and the Stockholders have entered into this
Agreement as a condition to the Public Offering;
WHEREAS, the Company has been an "S corporation" (as defined in
Section 1361(a)(1) of the Code for federal tax purposes since January 1, 1992;
WHEREAS, the Company and the Stockholders plan to terminate the
Company's S corporation status prior to the completion of the Public Offering,
and as a result the Company will be a "C corporation" (as defined in Section
1361(a)(2) of the Code) beginning on the Termination Date; and
WHEREAS, the Company and the Stockholders wish to terminate this
Agreement such that it has no effect should the Public Offering not occur;
NOW, THEREFORE, the parties agree as follows:
ARTICLE I.
DEFINITIONS
1.1. Definitions. The following terms, as used herein, have the
following meanings:
"Adjustment Amount" means the net increase in taxable income of one or
more of the Stockholders or the Company based on a Final Determination and which
gives rise to a payment pursuant to Section 3.3 or 3.4 hereof.
"Affected Stockholder" means a Stockholder whose tax returns are
adjusted in a manner which gives rise to an obligation of the Company pursuant
to Section 3.3 hereof.
"Blended Rate" means a percentage which equals the sum of the maximum
marginal federal and state individual income tax rates for an individual
residing in Virginia (after giving effect to the full deductibility of state
income taxes for federal income tax purposes) in effect for the year of the
adjustment to a tax return of the Company or such Stockholder that gives rise to
a correlative adjustment to a tax return of such Stockholder or the Company,
respectively. For example, if an adjustment results in an amount due from the
Stockholders hereunder, the year of the Company's return that was adjusted shall
determine the Blended Rate to be used in computing the amount due.
<PAGE>
"Closing Date" means the date on which the Public Offering closes.
"Code" means the Internal Revenue Code of 1986, as amended.
"C Short Year" means that portion of the S Termination Year of the
Company beginning on the Termination Date and ending on the last day of the S
Termination Year.
"C Taxable Year" means any taxable year (or portion thereof) of the
Company during which it is a C corporation, including the C Short Year.
"Final Determination" means the final resolution of any income tax
liability (including all related interest and penalties) for a taxable period.
A Final Determination shall result from the first to occur of:
(i) the expiration of 30 days after IRS acceptance of a Waiver
of Restrictions on Assessment and Collection of Deficiency in Tax and
Acceptance of Overassessment on Federal Revenue Form 870 or 870-AD (or
any successor comparable form or the expiration of a comparable period
with respect to any comparable agreement or form under the laws of
other jurisdictions), unless, within such period, the taxpayer gives
notice to the other party of the taxpayer's intention to attempt to
recover all or part of any amount paid pursuant to the Waiver by the
filing of a timely claim for refund;
(ii) a decision, judgment, decree, or other order by a court of
competent jurisdiction that is not subject to further judicial review
(by appeal or otherwise) and has become final;
(iii) the execution of a closing agreement under section 7121 of
the Code or the acceptance by the IRS or its counsel of an offer in
compromise under section 7122 of the Code, or comparable agreements
under the laws of other jurisdictions;
(iv) the expiration of the time for filing a claim for refund or
for instituting suit in respect of a claim for refund disallowed in
whole or part by the IRS or other relevant taxing authority;
(v) any other final disposition of the tax liability for such
period by reason of the expiration of the applicable statute of
limitations; or
(vi) any other event that the parties agree is a final and
irrevocable determination of the liability at issue.
-2-
<PAGE>
"Public Offering" means the public offering of the Company's Common
Stock pursuant to the Registration Statement on Form S-1 expected to be
originally filed by the Company with the Securities and Exchange Commission on
December 23, 1997.
"S Short Year" means that portion of the S Termination Year beginning
on the first day of such taxable year and ending on the day immediately
preceding the Termination Date.
"S Taxable Year" means any taxable year (or portion thereof) of the
Company during which the Company was an S corporation, including the S Short
Year.
"S Termination Year" shall mean the fiscal year of the Company that
includes the Termination Date.
"Taxing Authority" means the United States Internal Revenue Service
and any comparable state or foreign taxing authority.
"Termination Date" means the date on which the S corporation status of
the Company will terminate pursuant to Section 1362(d) of the Code.
ARTICLE II.
TERMINATION OF S CORPORATION STATUS AND ALLOCATIONS OF INCOME
2.1. Termination of S Corporation Status. The Company and the
Stockholders shall cause the Company to terminate its S corporation status at
least two days prior to the Closing Date.
2.2. Allocation Election. The Company shall be required to elect to
allocate the items described in Section 1362(e)(2)(A) of the Code pursuant to
Section 1362(e)(3) of the Code under "normal tax accounting rules," and the
Stockholders agree to consent to such election and to provide the Company with
the statement of consent of all Stockholders described in Section 1.1362-6(a)(5)
and Section 1.1362-6(b) of the Treasury Regulations.
ARTICLE III.
OBLIGATIONS
3.1 Liability for Taxes Incurred by Stockholders During the S Short
Year. Each Stockholder covenants and agrees that: (i) the Stockholder will
duly include, in his own federal and state income tax returns, all items of
income, gain, loss, deduction, or credit attributable to the S Short Year in a
manner consistent with the Form 1120S and the schedules thereto (and the
corresponding state income tax forms and schedules) to be filed by the Company
with respect to such period; (ii) such returns shall be filed no later than the
date due (including extensions, if any) for filing such returns; and (iii) each
Stockholder shall pay any and all taxes required to be paid for its taxable year
that includes the S Short Year.
3.2 Liability for Taxes Incurred by the Company During the S Short
Year and
-3-
<PAGE>
the C Short Year. The Company covenants and agrees that: (i) the Company shall
be responsible for and shall effect the filing of all federal and state income
tax returns for the Company with respect to the S Short Year and the C Short
Year; (ii) such Company returns shall be accurately prepared and timely filed;
and (iii) the Company shall pay any and all taxes required to be paid by the
Company for the periods covered by such returns as required by applicable law.
3.3. Company's Indemnification of Stockholders for Tax Liabilities.
In the event of an adjustment to one or more tax returns of the Company for an S
Taxable Year based on a Final Determination which results in a net increase in
taxable income of a Stockholder and a corresponding adjustment to one or more
tax returns of the Company for a C Taxable Year based on a Final Determination
which results in a net decrease in taxable income of the Company, the Company
shall pay to any Affected Stockholder an amount equal to the Adjustment Amount
multiplied by the Blended Rate. In addition, provided the Affected Stockholder
originally reported its distributive share of income and other items of the
Company from an S Taxable Year consistently with Schedule K-1 provided to him by
the Company, the Company shall pay to the Affected Stockholder any penalties or
interest actually paid by the Affected Stockholder as a result of the adjustment
to such items giving rise to the Company's liability hereunder. The Company
shall pay the amount due to the Affected Stockholder within thirty (30) business
days after the receipt of notice from the Affected Stockholder that a payment is
due by such party to the appropriate Taxing Authority.
3.4. Stockholders' Indemnification of Company for Tax Liabilities.
(a) Adjustments to Company's Taxable Income. In the event of an
adjustment of one or more tax returns of the Company for a C Taxable Year based
on a Final Determination which results in a net increase in taxable income of
the Company for a C Taxable Year and a corresponding adjustment to one or more
tax returns of the Company for an S Taxable Year based on a Final Determination
which results in a net decrease in taxable income of the Company for the S
Taxable Year, each Stockholder, severally but not jointly and subject to the
limitations contained in Section 3.4(c), agrees to contribute to the capital of
the Company its pro rata share (based upon the relative amount of Company stock
held by such Stockholder during the relevant time period) of an amount equal to
the Adjustment Amount multiplied by the Blended Rate. In addition, subject to
the limitations contained in Section 3.4(c), each Stockholder shall contribute
to the capital of the Company an amount equal to its pro rata share (based upon
the relative amount of Company stock held by such Stockholder during the
relevant time period) of any penalties and interest to be paid by the Company to
any Taxing Authority as a result of such determination.
(b) Adjustments Attributable to Company's S Status. If based on a
Final Determination the Company is deemed to have been a C corporation for
federal, state or local income tax purposes during any period in which it
reported (or intends to report) its taxable income as an S corporation, each
Stockholder, severally but not jointly and subject to the limitations contained
in Section 3.4(c), agrees to contribute to the capital of the Company an amount
equal to its pro rata share (based upon the relative amount of Company stock
held by
-4-
<PAGE>
such Stockholder during the relevant time period) of the Adjustment Amount with
respect to such year multiplied by the Blended Rate. Subject to the limitations
contained in Section 3.4(c), the Stockholders, severally but not jointly, shall
hold the Company harmless from its pro rata share (based upon the relative
amount of Company stock held by such Stockholder during the relevant time
period) of any taxes, penalties and interest incurred by the Company
attributable to the period prior to the Termination Date to the extent not
included on the Company's financial statements filed with the Securities and
Exchange Commission on Form S-1 as adjusted for the passage of time through the
Termination Date in accordance with the past custom and practice of the Company
in filing its tax returns.
(c) Limit on Indemnification Amount. Notwithstanding the foregoing
provisions of this Section 3.4, the payments required to be made by any Affected
Stockholder to the Company pursuant to this Section 3.4 shall not exceed the
lesser of (A) the amount of the refund from any Taxing Authority attributable to
the reduction in such Affected Stockholder's tax liability attributable to
adjustments established pursuant to the Final Determination and (B) the amount
of the total distributions to such Stockholder made by the Company from January
1, 1990 through and including the Termination Date. For purposes of this
Section 3.4(c), the amount of the refund shall include refunds or abatements of
taxes, interest on such refunds or abatements, and any other amount actually
received by the Affected Stockholder from the Taxing Authority with respect to
such determination.
(d) Time of Indemnification Payment. The Stockholders shall
contribute to the capital of the Company amounts set forth in this Section 3.4
within thirty (30) business days after the later of (a) the receipt of the
refund from the Taxing Authority attributable to such adjustment or (b) notice
from the Company that a payment is due by the Company to the appropriate Taxing
Authority.
ARTICLE IV.
CONTESTS/COOPERATION
4.1 Contests. Whenever the Stockholders or the Company becomes aware
of an issue which it believes a Final Determination of which could give rise to
payment or indemnification from the other party under Article III, the
Stockholders or the Company (as the case may be) shall promptly give notice of
the issue to the other party. The indemnitor and its representatives, at the
indemnitor's expense, shall be entitled to participate in all conferences,
meetings, or proceedings with the IRS or other taxing authority with respect to
the issue.
The parties agree to consult and cooperate with each other in the
negotiation and settlement or litigation of any adjustment that may give rise to
any payment or an indemnification payment under this Agreement. All decisions
with respect to such negotiation and settlement or litigation shall be made by
the parties after full, good faith consultation or pursuant to the dispute
resolution provisions of Section 4.2.
4.2. Dispute Resolution. If the parties are, after negotiation in
good faith, unable to agree upon the appropriate application of this Agreement,
the controversy shall be settled by the "Big 6" (or equivalent) accounting firm
(the "Accounting Firm") agreed to by the
-5-
<PAGE>
Company and the Stockholders. The decision of the Accounting Firm shall be
final, and each of the Company and the Stockholders agree immediately to pay to
the other any amount due under this Agreement pursuant to such decision. The
expenses of the Accounting Firm shall be borne one-half by the Company and one-
half by the Stockholders unless the Accounting Firm specifies otherwise.
Each of the Company and the Stockholders agree that (i) in the event
that any of them receives notice, whether orally or in writing, of any federal,
state, local or foreign tax examinations, claims, settlements, proposed
adjustments or related matters that may affect in any way the liability of a
party under this Agreement, it shall within ten days notify the other parties in
writing thereof (provided that any failure to give such notice shall not reduce
a party's right to indemnification under this Agreement except to the extent of
actual damage incurred by the other parties as a result of such failure), and
(ii) the party or parties (the "Indemnifying party") who would be required to
indemnify the other party or parties (the "Indemnified party") shall be entitled
at its reasonable discretion and sole expense to handle, control and compromise
or settle the defense of any matter which may give rise to a liability under
this Agreement, provided that the Indemnifying Party from time to time provides
assurances reasonably satisfactory to the Indemnified party that (1) the
Indemnifying party is financially capable of pursuing such defense to its
conclusion, and (2) such defense is actually being pursued in a reasonable
manner.
4.3. Cooperation. The parties will make available to one another, as
reasonably requested, and to any taxing authority, all information, records or
documents relating to the liability for taxes covered by this Agreement and will
preserve such information, records or documents until the expiration of any
applicable statute of limitations or extensions thereof. The party requesting
such information shall reimburse the other party for all reasonable out-of-
pocket costs incurred in producing such information.
4.4. Costs. Except to the extent otherwise provided therein, each
party shall bear its own costs in administering this Agreement.
4.5. Interest on Overdue Payments. Any payment pursuant to this
Agreement not made when due under this Agreement shall bear interest at the rate
of 10% per annum until paid.
ARTICLE V.
MISCELLANEOUS
5.1. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which
counterparts collectively shall constitute an instrument representing the
Agreement between the parties hereto.
5.2. Construction of Terms. Nothing herein expressed or implied is
intended, or shall be construed, to confer upon or give any person, firm or
corporation, other than the parties hereto or their respective successors and
assigns, any rights or remedies under or by reason of this Agreement.
-6-
<PAGE>
5.3. Governing Law. This Agreement and the legal relations between
the parties hereto shall be governed by and construed in accordance with the
substantive laws of the State of Virginia without regard to Virginia choice of
law rules.
5.4. Amendment and Modification. This Agreement may be amended,
modified or supplemented only by a written agreement executed by the parties.
5.5. Assignment. Except by operation of law or in connection with
the sale of all or substantially all the assets of a party, this Agreement shall
not be assignable, in whole or in part, directly or indirectly, by the
Stockholders without the written consent of the Company or by the Company
without the written consent of the Stockholder. Any attempt to assign any rights
or obligations arising under this Agreement without such consent shall be void.
However, the provisions of this Agreement shall be binding upon inure to the
benefit of, and be enforceable by the parties and their respective successors
and permitted assigns.
5.6. Interpretation. The title, article and section headings
contained in this Agreement are solely for the purpose of reference, are not
part of the agreement of the parties and shall not in any way affect the meaning
or interpretation of this Agreement.
5.7. Severability. In the event that any one or more of the
provisions of this Agreement shall be held to be illegal, invalid or
unenforceable in any respect, the same shall not in any respect affect the
validity, legality or enforceability of the remainder of this Agreement, and the
parties shall use their best efforts to replace such illegal, invalid or
unenforceable provisions with an enforceable provision approximating, to the
extent possible, the original intent of the parties.
5.8. Entire Agreement. This Agreement embodies the entire agreement
and understanding of the parties hereof in respect to the subject matter
contained herein. There are no representations, promises, warranties,
covenants, or undertakings, other than those expressly set forth or referred to
herein. This Agreement supersedes all prior agreements and the understandings
between the parties with respect to such subject matter.
5.9. Further Assurances. Subject to the provisions of this
Agreement, the parties shall acknowledge such other instruments and documents,
and take all other actions, as may be reasonably required in order to effectuate
the purposes of this Agreement.
5.10. Parties in Interest. Except as herein otherwise specifically
provided, nothing in this Agreement expressed or implied is intended to confer
any right or benefit upon any person, firm, or corporation other than the
parties and their respective successors and permitted assigns.
5.11. Waivers, Etc. No failure or delay on the part of the parties
in exercising any power or right under this Agreement shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right or power, or
any abandonment or discontinuance of steps to enforce such right or power,
preclude any other or further exercise thereof or the exercise of any other
right or power. No modification or waiver of any provision of this Agreement
nor consent
-7-
<PAGE>
to any departure by the parties therefrom shall in any event be effective unless
it shall be in writing, and then such waiver or consent shall be effective only
in the specific instance and for the purpose which given.
5.12. Set-off. All payments to be made by any party under this
Agreement shall be made without set-off, counterclaim, or withholding, all of
which are expressly waived.
5.13. Change of Law. If, due to any change in applicable law or
regulations or the interpretation thereof by any court or other governing body
having jurisdiction subsequent to the date of this Agreement, performance of any
provision of this Agreement shall be impracticable or impossible, the parties
shall use their best efforts to find an alternative means to achieve the same or
substantially the same results as are contemplated by such provision.
5.14. Headings. Descriptive headings are for convenience only and
shall not control or affect the meaning of any provision of this Agreement.
5.15. Counterparts. For the convenience of the parties, any number
of counterparts of this Agreement may be executed by the parties and each
executed counterpart shall be an original instrument.
5.16. Notices. All notices provided for in this Agreement shall be
validly given if in writing and delivered personally or sent by registered mail,
postage prepaid
if to the Company, at:
General Counsel
MicroStrategy Incorporated
8000 Towers Crescent Drive
Vienna, VA 22182
copy to:
Ropes & Gray
One International Place
Boston, MA 02110-2624
if to the Stockholders, to:
Michael J. Saylor
1807 Vance Place
Vienna, VA 22182
Sanju Bansal
8556 Westown Way
Vienna, VA 22182
-8-
<PAGE>
Thomas P. Spahr
1785 Dawson Street
Vienna, VA 22182
Yimin Zhuang
7965 Tyson Oaks Circle
Vienna, VA 22182
Charles A. Veley
2919 Pacific Avenue, #5
San Francisco, CA 94115
Eduardo S. Sanchez
70 Fern Bank Road, Ascot
Berkshire, SL5 8HE UK
Siddhartha Banerjee
1625 N. Stafford Street
Arlington, VA 22207
Edward Yurcisin
3238 Arrowhead Circle, Apt. K
Fairfax, VA 22030
Stephen S. Trundle
3334 Beechtree Lane
Falls Church, VA 22042
Eileen Angeloni
201 Chaingate Circle
Landenberg, PA 19350
Manish Acharya
2800 Wisconsin Avenue, #1607
Bethesda, MD 20814
David B. Sherwood
5501 Little Falls Road
Arlington, VA 22207
or to such other addresses as any party may, from time to time, designate in a
written notice given in a like manner. Notice given by mail shall be deemed
delivered five calendar days after the date mailed.
5.17. Termination of Agreement. This Agreement shall terminate and
be void, as if it never had been executed, if the Closing Date shall occur after
March 31, 1998.
-9-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
MICROSTRATEGY INCORPORATED
By:______________________________________
Mark Lynch
Chief Financial Officer
STOCKHOLDERS
By:_______________________________________
Michael J. Saylor
By:_______________________________________
Thomas P. Spahr
By:_______________________________________
Sanju K. Bansal
By:_______________________________________
Yimin Zhuang
By:_______________________________________
Charles A. Veley
By:_______________________________________
Eduardo S. Sanchez
By:_______________________________________
Siddartha Banerjee
By:_______________________________________
Edward S. Yurcisin
By:_______________________________________
Stephen S. Trundle
By:_______________________________________
Eileen Angeloni
By:_______________________________________
Manish G. Acharya
-10-
<PAGE>
By:_______________________________________
David B. Sherwood
-11-
<PAGE>
SCHEDULE A
Michael J. Saylor
Thomas P. Spahr
Sanju K. Bansal
Yimin Zhuang
Charles A. Veley
Eduardo S. Sanchez
Siddartha Banerjee
Edward S. Yurcisin
Stephen S. Trundle
Eileen Angeloni
Manish G. Acharya
David B. Sherwood
-12-
<PAGE>
Exhibit 21.1
SUBSIDIARIES
Name of Subsidiary Jurisdiction of Incorporation
------------------ -----------------------------
1. MicroStrategy Deutschland GmbH Germany
2. MicroStrategy Limited United Kingdom
3. MicroStrategy France SARL France
4. MicroStrategy Iberica, S.A. Spain
5. MicroStrategy Benelux B.V. Netherlands
6. MicroStrategy GmbH Austria
7. MicroStrategy Italy S.r.l. Italy
8. MicroStrategy Canada Incorporated Canada
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1
of our reports dated January 30, 1998, except for notes 4 and 8, as to which the
date is May 8, 1998, on our audits of the consolidated financial statements and
financial statement schedule of MicroStrategy Incorporated. We also consent to
the reference to our firm under the captions "Experts" and "Selected
Consolidated Financial Data".
Coopers & Lybrand L.L.P.
McLean, Virginia
May 21, 1998
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