<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ________ to ________
Commission File Number 000-24435
MICROSTRATEGY INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 51-0323571
(State of incorporation) (I.R.S. Employer Identification Number)
8000 Towers Crescent Drive, Vienna, VA 22182
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (703) 848-8600
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
The number of shares of the registrant's Class A Common Stock and Class B
Common Stock outstanding on August 1, 1999 was 9,112,060 and 29,105,465,
respectively.
<PAGE>
MICROSTRATEGY INCORPORATED
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets, June 30, 1999 (unaudited) and December 31, 1998............................ 1
Consolidated Statements of Operations and Comprehensive Income, Three Months ended June 30,
1999 and 1998 (unaudited)............................................................................. 2
Consolidated Statements of Operations and Comprehensive Income, Six Months ended June 30,
1999 and 1998 (unaudited)............................................................................. 3
Consolidated Statements of Cash Flows, Six Months ended June 30, 1999 and 1998 (unaudited).............. 4
Notes to Consolidated Financial Statements (unaudited).................................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 20
PART II--OTHER INFORMATION.................................................................................. 21
</TABLE>
<PAGE>
MICROSTRATEGY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS
June 30, December 31,
1999 1998
---- ----
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................................. $ 34,793 $ 27,491
Short-term investments ................................................................ 19,389 --
Accounts receivable, net .............................................................. 46,437 33,054
Prepaid expenses and other current assets ............................................. 4,755 2,914
--------- ---------
Total current assets ........................................................... 105,374 63,459
Property and equipment, net ........................................................... 21,472 13,773
Long-term accounts receivable ......................................................... 1,800 2,700
Deposits and other assets ............................................................. 2,473 2,757
--------- ---------
Total assets ................................................................... $ 131,119 $ 82,689
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ................................................. $ 13,169 $ 11,904
Accrued compensation and employee benefits ............................................ 8,002 7,356
Deferred revenue ...................................................................... 12,230 10,732
Dividend notes payable ................................................................ -- 5,000
--------- ---------
Total current liabilities ...................................................... 33,401 34,992
Deferred revenue ......................................................................... 3,034 746
Other long-term liabilities .............................................................. 671 671
--------- ---------
Total liabilities .............................................................. 37,106 36,409
--------- ---------
Commitments and contingencies
Stockholders' 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,
no shares issued or outstanding ....................................................... -- --
Class A Common Stock, par value $0.001 per share, 100,000,000 shares
authorized, 8,455,525 shares issued and outstanding at June 30, 1999;
5,052,110 shares issued and outstanding at December 31, 1998 .......................... 8 5
Class B Common Stock, par value $0.001 per share, 100,000,000 shares
authorized, 29,714,404 shares issued and outstanding at June 30, 1999;
30,633,114 shares issued and outstanding at December 31, 1998 ......................... 30 31
Additional paid-in capital ............................................................... 85,453 42,219
Accumulated other comprehensive income ................................................... 171 894
Accumulated earnings ..................................................................... 10,299 5,229
Deferred compensation .................................................................... (1,948) (2,098)
--------- ---------
Total stockholders' equity ............................................................... 94,013 46,280
--------- ---------
Total liabilities and stockholders' equity ............................................... $ 131,119 $ 82,689
========= =========
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
1
<PAGE>
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
----------------------------------
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Revenues:
Product licenses .................................................................... $ 31,057 $ 16,245
Product support ..................................................................... 14,581 7,545
------------ ------------
Total revenues ............................................................... 45,638 23,790
------------ ------------
Cost of revenues:
Product licenses .................................................................... 563 552
Product support ..................................................................... 7,906 4,113
------------ ------------
Total cost of revenues ....................................................... 8,469 4,665
------------ ------------
Gross margin ........................................................................... 37,169 19,125
Operating expenses: ------------ ------------
Sales and marketing ................................................................. 21,145 12,005
Research and development ............................................................ 6,088 2,776
General and administrative .......................................................... 5,363 2,600
------------ ------------
Total operating expenses ..................................................... 32,596 17,381
------------ ------------
Income from operations .............................................................. 4,573 1,744
Interest income ..................................................................... 671 84
Interest expense .................................................................... (51) (264)
Other expense, net .................................................................. (14) (45)
------------ ------------
Income before income taxes .......................................................... 5,179 1,519
Provision for income taxes .......................................................... 1,968 577
------------ ------------
Net income ............................................................................. $ 3,211 $ 942
============ ============
Other comprehensive (loss) income:
Foreign currency translation adjustment ............................................. (273) 59
Unrealized loss on investments, net of tax .......................................... (74) --
------------ ------------
Comprehensive income ................................................................... $ 2,864 $ 1,001
============ ============
Basic net income per share ............................................................. $ 0.08 $ 0.03
============ ============
Weighted average shares outstanding used in computing basic net income per
share ............................................................................... 38,026,186 31,836,613
============ ============
Diluted net income per share ........................................................... $ 0.08 $ 0.03
============ ============
Weighted average shares outstanding used in computing diluted net income per
share ............................................................................... 41,953,981 36,644,863
============ ============
Pro forma information (unaudited):
Income before income taxes, as reported ................................................ -- $ 1,519
Pro forma income taxes ................................................................. -- (577)
------------
Pro forma net income ................................................................... -- $ 942
============
Pro forma basic net income per share ................................................... -- $ 0.03
============
Pro forma diluted net income per share ................................................. -- $ 0.03
============
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
2
<PAGE>
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Six Months Ended
June 30
----------------------------------
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Revenues:
Product licenses .................................................................... $ 54,181 $ 30,527
Product support ..................................................................... 27,241 13,158
------------ ------------
Total revenues ............................................................... 81,422 43,685
------------ ------------
Cost of revenues:
Product licenses .................................................................... 1,083 1,090
Product support ..................................................................... 14,515 7,276
------------ ------------
Total cost of revenues ....................................................... 15,598 8,366
------------ ------------
Gross margin ........................................................................... 65,824 35,319
------------ ------------
Operating expenses:
Sales and marketing ................................................................. 37,919 22,833
Research and development ............................................................ 11,148 4,868
General and administrative .......................................................... 9,643 5,163
------------ ------------
Total operating expenses ..................................................... 58,710 32,864
------------ ------------
Income from operations .............................................................. 7,114 2,455
Interest income ..................................................................... 1,175 131
Interest expense .................................................................... (143) (501)
Other income (expense), net ......................................................... 32 (24)
------------ ------------
Income before income taxes .......................................................... 8,178 2,061
Provision for income taxes .......................................................... 3,108 577
------------ ------------
Net income ............................................................................. $ 5,070 $ 1,484
============ ============
Other comprehensive (loss) income:
Foreign currency translation adjustment
(608) 63
Unrealized loss on investments, net of tax .......................................... (74) --
------------ ------------
Comprehensive income ................................................................... $ 4,388 $ 1,547
============ ============
Basic net income per share ............................................................. $ 0.14 $ 0.05
============ ============
Weighted average shares outstanding used in computing basic net income per
Share ............................................................................... 37,463,246 30,885,791
============ ============
Diluted net income per share ........................................................... $ 0.12 $ 0.04
============ ============
Weighted average shares outstanding used in computing diluted net income per
Share ............................................................................... 41,733,561 35,426,161
============ ============
Pro forma information (unaudited):
Income before income taxes, as reported ................................................ -- $ 2,061
Pro forma income taxes ................................................................. -- (783)
------------
Pro forma net income ................................................................... -- $ 1,278
============
Pro forma basic net income per share ................................................... -- $ 0.04
============
Pro forma diluted net income per share ................................................. -- $ 0.04
============
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
3
<PAGE>
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------
1999 1998
-----------------------------
(Unaudited)
<S> <C> <C>
Operating activities:
Net income .................................................................................. $ 5,070 $ 1,484
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization ............................................................... 2,771 1,258
Provision for doubtful accounts, net of write-offs and recoveries ........................... 773 --
Amortization of deferred compensation ....................................................... 150 49
Changes in operating assets and liabilities, net of effect of foreign exchange
rate changes:
Accounts receivable ......................................................................... (14,786) (6,454)
Prepaid expenses and other current assets ................................................... (1,954) (50)
Accounts payable and accrued expenses, compensation and benefits ............................ 2,457 639
Deferred revenue ............................................................................ 4,072 966
Deposits and other assets ................................................................... (85) (3)
Long-term accounts receivables .............................................................. 900 --
-------- --------
Net cash used in operating activities ..................................................... (632) (2,111)
-------- --------
Investing activities:
Acquisition of property and equipment ....................................................... (10,469) (2,492)
Purchase of short-term investments .......................................................... (22,491) --
Sales/maturities of short-term investments .................................................. 3,000 --
-------- --------
Net cash used in investing activities ..................................................... (29,960) (2,492)
-------- --------
Financing activities:
Proceeds from sale of Class A Common Stock and exercise of stock options, net of
offering costs ............................................................................ 43,236 48,950
Repayments on short-term line of credit, net ................................................ -- (4,508)
Payments of dividend notes payable .......................................................... (5,000) --
Proceeds from issuance of notes payable ..................................................... -- 862
Principal payments on notes payable ......................................................... -- (4,211)
-------- --------
Net cash provided by financing activities ................................................. 38,236 41,093
-------- --------
Effect of foreign exchange rate changes on cash and cash equivalents ...................... (342) (20)
-------- --------
Net increase in cash and cash equivalents ...................................................... 7,302 36,470
Cash and cash equivalents, beginning of year ................................................... 27,491 3,506
-------- --------
Cash and cash equivalents, end of period ....................................................... $ 34,793 $ 39,976
======== ========
Supplemental disclosure of noncash investing and financing activities:
Retirement of treasury stock ........................................................... $ -- $ 193
======== ========
Unrealized loss on investments ......................................................... $ 119 $ --
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest ................................................. $ 87 $ 536
======== ========
Cash paid during the year for income taxes ............................................. $ 500 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
4
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The consolidated balance sheet of MicroStrategy Incorporated (the
"Company") as of June 30, 1999, the related consolidated statements of
operations for the three and six month periods ended June 30, 1999 and 1998, and
the consolidated statements of cash flows for the six months ended June 30, 1999
and 1998 are unaudited. In the opinion of management, all adjustments
(consisting of normal recurring items) necessary for a fair presentation of such
financial statements have been included. Interim results are not necessarily
indicative of results for a full year.
The consolidated financial statements and notes are presented as required
by Form 10-Q and do not contain certain information included in the Company's
annual financial statements and notes. These financial statements should be read
in conjunction with the Company's audited financial statements and the notes
thereto for the year ended December 31, 1998 filed with the Securities and
Exchange Commission (the "Commission") in the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
(2) Public Offering
On February 10, 1999, the Company sold to the public 1,585,000 shares of
Class A Common Stock for approximately $40,100,000, net of expenses. In
addition, certain holders of Class B Common Stock converted 415,000 shares of
Class B Common Stock to Class A Common Stock in connection with their sale of
such shares in the public offering.
(3) Cash, Cash Equivalents and Short-Term Investments
Cash equivalents include high quality money market instruments, commercial
paper, U.S. agency notes and corporate notes. The Company considers all highly
liquid investments with an original maturity of three months or less when
purchased to be cash equivalents.
Short-term investments are comprised of readily marketable debt securities
with original maturities of more than three months when purchased. Where the
original maturity is more than one year, the securities are classified as
short-term investments if the Company's intention is to convert them to cash
within one year. All short-term investments are available-for-sale and are
stated at fair value with unrealized gains and losses included as a component of
stockholders' equity.
(4) 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.
(5) Income Taxes
Prior to the Company's initial public offering in June 1998 (the "Initial
Public Offering"), the Company had elected to be treated for federal and state
income tax purposes 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 had been provided in the financial statements
prior to consummation of the Initial Public Offering.
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 three and six month periods ended June 30, 1998.
5
<PAGE>
(6) Net Income Per Share
Reconciliations of the basic net income per share and diluted net income
per share computations for the three and six month periods ended June 30, 1999
and 1998 are as follows:
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
------------ ----------- ----------- ----------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C>
Net income ................................................. $ 3,211 $ 942 $ 5,070 $ 1,484
=========== =========== =========== ===========
Basic net income per share:
Weighted average common shares outstanding ............ 38,026,186 31,836,613 37,463,246 30,885,791
Basic net income per share ................................. $ 0.08 $ 0.03 $ 0.14 $ 0.05
=========== =========== =========== ===========
Diluted net income per share:
Weighted average common shares outstanding ............ 38,026,186 31,836,613 37,463,246 30,885,791
Dilutive impact of common shares issuable
upon exercise of stock options and warrants ......... 3,927,795 4,808,250 4,270,315 4,540,370
----------- ----------- ----------- -----------
Weighted average common shares assuming
dilution ............................................ 41,953,981 36,644,863 41,733,561 35,426,161
=========== =========== =========== ===========
Diluted net income per share ............................... $ 0.08 $ 0.03 $ 0.12 $ 0.04
=========== =========== =========== ===========
</TABLE>
Common stock equivalents are included in the computation of diluted net
income per share using the treasury stock method. During the three and six month
periods ended June 30, 1999 stock options granted by the Company to purchase
1,130,150 and 760,400 shares of Class A Common Stock, respectively, were not
included in the computation because the effect was anti-dilutive. During the
three and six month periods ended June 30, 1998 there were no stock options
granted by the Company with exercise prices greater than the average fair market
value of the shares of Class A Common Stock.
(7) Segment Information
The following table presents a summary of operations by geographic region,
including eliminations of all significant intercompany transactions:
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------------------ -------------------------------------
1999 1998 1999 1998
---------------- ---------------- ------------------- ---------------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C>
Revenue:
Domestic ................................... $ 36,612 $ 18,403 $ 64,732 $ 34,135
Europe ..................................... 9,026 5,387 16,690 9,550
-------- -------- -------- --------
Total Revenue .......................... $ 45,638 $ 23,790 $ 81,422 $ 43,685
======== ======== ======== ========
Operating income (loss):
Domestic ................................... $ 2,061 $ 1,700 $ 2,676 $ 3,154
Europe ..................................... 2,512 44 4,438 (699)
-------- -------- -------- --------
Total operating income ................. $ 4,573 $ 1,744 $ 7,114 $ 2,455
======== ======== ======== ========
Identifiable assets:
Domestic ................................... $111,896 $ 63,590 $111,896 $ 63,590
Europe ..................................... 19,223 11,669 19,223 11,669
-------- -------- -------- --------
Total assets ........................... $131,119 $ 75,259 $131,119 $ 75,259
======== ======== ======== ========
</TABLE>
Transfers of $2,030,000 and $1,446,000 for the three months ended June 30,
1999 and 1998, respectively, and of $3,788,000 and $2,494,000 for the six months
ended June 30, 1999 and 1998, respectively, from foreign to domestic operations
have been excluded from the above table and eliminated in the consolidated
financial statements.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We develop and sell enterprise decision support systems (DSS) software
products. We first released a full complement of DSS products in 1995. Since
this time, we have continued to focus significant resources on the development
of additional functionality and features to our DSS software products.
Since 1995, we have significantly increased our sales and marketing,
service and support, research and development and general and administrative
staff. Although our revenues have significantly increased in each of the last
twelve quarters, we experienced fluctuating operating margins during the six
months ended June 30, 1999 and during 1998, 1997 and 1996 primarily as a result
of increases in staff levels. We expect to continue to increase staffing levels
and incur additional associated costs in future periods. If we are unable to
achieve corresponding substantial revenue growth, we could suffer operating
losses in one or more quarters and may be unable to forecast such losses prior
to the end of any given quarter. In addition, we have experienced net losses and
losses from operations for the year ended December 31, 1996, and were only
marginally profitable for the years ended December 31, 1997 and December 31,
1995. While we have experienced significant percentage growth in revenues in
recent periods, prior percentage revenue growth rates should not be considered
as necessarily indicative of future growth rates or operating results.
Additionally, there are a number of factors that could materially affect
expected revenue and operating results for 1999 and subsequent periods. See
"Risk Factors."
Our revenues are derived from two principal sources: (i) product licenses
and (ii) fees for maintenance, technical support, education and consulting
services (collectively, "product support"). We recognized revenue in accordance
with Statement of Position 97-2 (SOP 97-2), "Software Revenue Recognition," as
amended by SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2"
and SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition." Product
license revenues are generally recognized upon the execution of a contract and
shipment of the related software product, provided that no significant
obligations remain outstanding on the part of the Company and the resulting
receivable is deemed collectible by management. Technical support revenues are
derived from customer support agreements generally entered into in connection
with initial product license sales and subsequent renewals. Fees for our
technical support plans are recorded as deferred revenue when billed to the
customer and recognized ratably over the term of the maintenance and support
agreement, which is typically one year. Fees for our education and consulting
services are recognized at the time the services are performed.
The sales cycle for our products may span nine months or more.
Historically, we have recognized a substantial portion of our revenues in the
last month of a quarter, with these revenues frequently concentrated in the last
two weeks of a quarter. Even minor delays in booking orders may have a
significant adverse impact on revenues for a particular quarter. To the extent
that delays are incurred in connection with orders of significant size, the
impact will be correspondingly greater. Moreover, we currently operate with
virtually no order backlog because our software products typically are shipped
shortly after orders are received. Product license revenues in any quarter are
substantially dependent on orders booked and shipped in that quarter. As a
result of these and other factors, our quarterly results have varied
significantly in the past and are likely to fluctuate significantly in the
future. Accordingly, we believe that quarter-to-quarter comparisons of our
results of operations are not necessarily indicative of the results to be
expected for any future period. See "Risk Factors--Quarterly Operating Results
May Fluctuate Significantly."
We license our software through our direct sales force and increasingly
through, or in conjunction with, Value Added Resellers (VARs), System
Integrators (SIs), and Original Equipment Manufacturers (OEMs). Channel partners
accounted for, directly or indirectly, approximately 32.8%, 35.0%, 27.5%, and
9.0% of our revenues for the six months ended June 30, 1999 and for the years
ended December 31, 1998, 1997 and 1996, respectively. Although we believe that
direct sales will continue to account for a majority of product license
revenues, we intend to increase the level of indirect sales activities. However,
there can be no assurance that our efforts to continue to expand indirect sales
will be successful. We also intend to continue to expand our international
operations and have committed, and continue to commit, significant management
time and financial resources to developing direct and indirect international
sales and support channels.
7
<PAGE>
The following table sets forth for the periods indicated the percentage of
total revenues represented by certain items reflected in our consolidated
statements of operations:
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ --------------------------
1999 1998 1999 1998
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Revenues:
Product licenses .................................. 68.1% 68.3% 66.5% 69.9%
Product support ................................... 31.9 31.7 33.5 30.1
------- ------- ------- -------
Total revenues ................................ 100.0 100.0 100.0 100.0
------- ------- ------- -------
Cost of revenues:
Product licenses .................................. 1.2 2.3 1.3 2.5
Product support ................................... 17.3 17.3 17.8 16.7
------- ------- ------- -------
Total cost of revenues ........................ 18.5 19.6 19.1 19.2
------- ------- ------- -------
Gross margin ......................................... 81.5 80.4 80.9 80.8
------- ------- ------- -------
Operating expenses:
Sales and marketing ............................... 46.3 50.5 46.6 52.3
Research and development .......................... 13.3 11.7 13.7 11.1
General and administrative ........................ 11.8 10.9 11.8 11.8
------- ------- ------- -------
Total operating expenses ...................... 71.4 73.1 72.1 75.2
------- ------- ------- -------
Income from operations ............................... 10.1 7.3 8.8 5.6
Interest income (expense), net ....................... 1.3 (0.7) 1.2 (0.8)
Other expense, net ................................... -- (0.2) -- (0.1)
Provision for income taxes ........................... 4.3 2.4 3.8 1.3
------- ------- ------- -------
Net income ........................................... 7.1% 4.0% 6.2% 3.4%
======= ======= ======= =======
</TABLE>
Comparison of Three Months Ended June 30, 1999 and 1998
Revenues
Total revenues increased to $45.6 million for the three months ended June
30, 1999 from $23.8 million for the three months ended June 30, 1998,
representing an increase of 91.8%. Total revenues consist of revenues derived
from sales of software product licenses and product support. There can be no
assurance that total revenues will continue to increase at the rates experienced
in prior periods.
Product License Revenues. Product license revenues increased to $31.1
million for the three months ended June 30, 1999 from $16.2 million for the
three months ended June 30, 1998, representing an increase of 91.2%. The
significant increase in product license revenues was due to growing market
acceptance of our software products and continued expansion of our sales and
marketing organization. Product license revenues constituted 68.1% and 68.3% of
total revenues for the three months ended June 30, 1999 and 1998, respectively.
Product Support Revenues. Product support revenues increased to $14.6
million for the three months ended June 30, 1999 from $7.5 million for the three
months ended June 30, 1998, representing an increase of 93.3%. Product support
revenues constituted 31.9% and 31.7% of total revenues for the three months
ended June 30, 1999 and 1998, respectively. The increase in product support
revenues was primarily due to the increase in product licenses sold, in
conjunction with several large consulting projects during the quarter. We expect
product support revenues as a percentage of total revenues to fluctuate on a
period to period basis, but generally not to vary significantly from the
percentage of total revenues achieved in prior quarters.
International Revenues. International revenues were $9.0 million and $5.4
million for the three months ended June 30, 1999 and 1998, respectively,
representing approximately 19.8% and 22.6% of total revenues, respectively. We
opened sales offices in Australia, Canada and Italy in 1998 and in Austria,
France, the Netherlands, Germany, United Kingdom and Spain prior to 1998.
8
<PAGE>
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 $0.6 million for both the three months ended June 30, 1999 and 1998,
representing 1.8% and 3.4% of total product license revenues, respectively. The
decrease in total cost of product license revenues as a percentage of total
product license revenues was due to economies of scale realized by producing
larger volumes of product materials and decreased shipping costs due to an
increase in the percentage of customers reproducing licenses at their sites. We
anticipate that the cost of product license revenues will continue to increase
as product license revenues increase, but decrease as a percentage of product
license revenues. However, in the event that we enter into any royalty
arrangements with strategic partners in the future, cost of product license
revenues as a percentage of total product license revenues may increase.
Cost of Product Support Revenues. Cost of product support revenues consists
of the costs of providing technical support, education and consulting services
to customers and partners. Cost of product support revenues was $7.9 million and
$4.1 million during the three months ended June 30, 1999 and 1998, representing
54.2% and 54.5% of total product support revenues, respectively. The increase in
cost of product support revenues was primarily due to the increase in product
licenses sold and, thus, an increase in the number of personnel providing
consulting, education, and technical support to customers. We expect to continue
to increase the number of customer education and implementation consultants in
the future, as well as technical support personnel. To the extent that our
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 $21.1 million and $12.0
million for the three months ended June 30, 1999 and 1998, representing 46.3%
and 50.5% of total revenues, respectively. The increase in sales and marketing
expenses was primarily the result of increased staffing levels in the sales
force, increased commissions earned and increased promotional activities, trade
show participation and general marketing efforts. We believe that it is
critically important to gain market share among high-end customers. We have
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 seek to acquire market share.
Research and Development Expenses. Research and development expenses
consist primarily of salaries and benefits of software engineering personnel,
depreciation of equipment and expendable equipment purchases. Research and
development expenses were $6.1 million and $2.8 million for the three months
ended June 30, 1999 and 1998, representing 13.3% and 11.7% of total revenues,
respectively. The increase in research and development expenses was primarily
due to additional hiring of research and development personnel and continued
development of new products and product releases. We expect that research and
development expenses will continue to increase as we continue to invest in
developing new products, applications and product enhancements. During 1998 and
for the six months ended June 30, 1999, the costs incurred between the
establishment of technological feasibility and general availability of our
products were not material and, therefore, have been expensed.
General and Administrative Expenses. General and administrative expenses
include the personnel and other costs of our finance, human resources,
information systems, administrative and executive departments as well as outside
professional fees. General and administrative expenses were $5.4 million and
$2.6 million for the three months ended June 30, 1999 and 1998, representing
11.8% and 10.9% of total revenues, respectively. The increase in general and
administrative expenses was primarily the result of increased staff levels and
related costs associated with the growth of our business during these periods.
Although we expect that general and administrative expenses will continue to
increase in the foreseeable future, such expenses are not expected to
significantly vary as a percentage of total revenues in the future.
Provision for Income Taxes. Prior to consummation of the Initial Public
Offering, we had elected to be treated as a Subchapter S corporation for federal
and state income tax purposes. Under Subchapter S, our income was allocated and
taxable to our individual stockholders rather than to us. Accordingly, no
federal or state income taxes have been provided for in the financial statements
for any periods prior to consummation of the Initial Public Offering.
Our S corporation status terminated shortly prior to consummation of the
Initial Public Offering at which time we became subject to federal and state
corporate income taxation as a Subchapter C corporation. As a result, we now
account for income taxes as a Subchapter C corporation and have adopted SFAS No.
109, "Accounting for Income Taxes." We recorded income tax expense of $2.0
million for the three months ended June 30, 1999. The adoption of SFAS No. 109
did
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not have a material impact on our operating results.
Comparison of Six Months Ended June 30, 1999 and 1998
Revenues
Total revenues increased to $81.4 million for the six months ended June 30,
1999 from $43.7 million for the six months ended June 30, 1998, representing an
increase of 86.4%.
Product License Revenues. Product license revenues increased to $54.2
million for the six months ended June 30, 1999 from $30.5 million for the six
months ended June 30, 1998, representing an increase of 77.5%. The significant
increase in product license revenues was due to growing market acceptance of our
software products and continued expansion of our sales and marketing
organization. Product license revenues constituted 66.5% and 69.9% of total
revenues for the six months ended June 30, 1999 and 1998, respectively.
Product Support Revenues. Product support revenues increased to $27.2
million for the six months ended June 30, 1999 from $13.2 million for the six
months ended June 30, 1998, representing an increase of 107.0%. Product support
revenues constituted 33.5% and 30.1% of total revenues for the six months ended
June 30, 1999 and 1998, respectively. The increase in product support revenues
was primarily due to the increase in product licenses sold, in conjunction with
several large consulting projects during 1999.
International Revenues. International revenues were $16.7 million and $9.6
million for the six months ended June 30, 1999 and June 30, 1998, representing
approximately 20.5% and 21.9% of total revenues, respectively.
Costs and Expenses
Cost of Product License Revenues. Cost of product license revenues was $1.1
million for both the six months ended June 30, 1999 and 1998, representing 2.0%
and 3.6% of total product license revenues, respectively. The decrease in total
cost of product license revenues as a percentage of total product license
revenues was due to economies of scale realized by producing larger volumes of
product materials and decreased shipping costs due to an increase in the
percentage of customers reproducing licenses at their sites.
Cost of Product Support Revenues. Cost of product support revenues was
$14.5 million and $7.3 million for the six months ended June 30, 1999 and 1998,
representing 53.3% and 55.3% of total product support revenues, respectively.
The increase in cost of product support revenues in 1999 was primarily due to
the increase in product licenses sold and, thus, an increase in the number of
personnel providing consulting, education, and technical support to customers.
Sales and Marketing Expenses. Sales and marketing expenses were $37.9
million and $22.8 million for the six months ended June 30, 1999 and 1998,
representing 46.6% and 52.3% of total revenues, respectively. The increase in
sales and marketing expenses was primarily the result of increased staffing
levels in the sales force, increased commissions earned and increased
promotional activities, trade show participation and general marketing efforts.
Research and Development Expenses. Research and development expenses were
$11.1 million and $4.9 million for the six months ended June 30, 1999 and 1998,
representing 13.7% and 11.1% of total revenues, respectively. The increase in
research and development expenses was primarily due to additional hiring of
research and development personnel and continued development of new products and
product enhancements.
General and Administrative Expenses. General and administrative expenses
were $9.6 million and $5.2 million for the six months ended June 30, 1999 and
1998, representing 11.8% of total revenues. The increase in general and
administrative expenses was primarily the result of increased staff levels and
related costs associated with the growth of our business during these periods.
Provision for Income Taxes. Prior to consummation of the Initial Public
Offering, we had elected to be treated as a Subchapter S corporation for federal
and state income tax purposes. Under Subchapter S, our income was allocated and
taxable to our individual stockholders rather than to us. Accordingly, no
federal or state income taxes have been provided for in the financial
statements, prior to consummation of the Initial Public Offering.
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Our S corporation status terminated shortly prior to consummation of the
Initial Public Offering at which time we became subject to federal and state
corporate income taxation as a Subchapter C corporation. As a result, we now
account for income taxes as a Subchapter C Corporation and have adopted SFAS No.
109, "Accounting for Income Taxes." We recorded income tax expense of $0.6
million for the six months ended June 30, 1998. Had we been taxed as a C
corporation for the entire six months ended June 30, 1998, we would have
recorded income tax expense of $0.8 million. The adoption of SFAS No. 109 did
not have a material impact on our operating results. As of June 30, 1998, our
deferred tax assets of approximately $1.5 million consist primarily of net
operating loss carryforwards related to foreign operations. We recorded a
valuation allowance amounting to the entire deferred tax asset balance due to
the lack of consistent earnings in its foreign operations and the uncertainty as
to whether the deferred tax asset is realizable.
Liquidity and Capital Resources
From inception until the Initial Public Offering, we primarily financed our
operations and met our capital expenditure requirements through cash flows from
operations and short- and long-term borrowings. We raised $48.7 million, net of
expenses, from our Initial Public Offering. On February 10, 1999, we raised an
additional $40.1 million, net of expenses, from the sale of 1,585,000 shares of
Class A Common Stock. As a result, on June 30, 1999 and December 31, 1998, we
had $34.8 million and $27.5 million of cash and cash equivalents, respectively.
Additionally, we had $19.4 million in short-term investments on June 30, 1999.
Cash used in operations was $0.6 million and $2.1 million for the six
months ended June 30, 1999 and 1998, respectively. The decrease in cash used in
operations during the six months ended June 30, 1999 compared to the same period
in 1998 was primarily attributable to a reduction of accounts receivable due to
increased collections efforts.
Cash used in investing activities was $30.0 and $2.5 million for the six
months ended June 30, 1999 and 1998, respectively. The increase in cash used in
investing activities during the six months ended June 30, 1999 compared to the
same period in 1998 reflected purchases of short-term investments and capital
expenditures related to the acquisition of computer and office equipment
required to support expansion of our operations. We expect to continue to
aggressively invest in capital expenditures to support the growth of the
Company. In particular, we expect significant capital investments in our new
business unit, Strategy.com, which is a personal intelligence network that
delivers personalized information via Internet, telephone and wireless devices.
Our financing activities provided cash of $38.2 million and $41.1 million
for the six months ended June 30, 1999 and 1998, respectively. The principal
source of cash from financing activities during the six months ended June 30,
1999 was from the additional sale of 1,585,000 share of Class A Common Stock in
which we raised $40.1 million, net of expenses. Prior to the sale of Class A
Common Stock and the Initial Public Offering, our principal source of cash from
financing activities was net borrowings from commercial lending institutions.
During December 1996, we entered into a loan agreement with a commercial bank
(the "Business Loan"). The Business Loan, as amended in September 1998, provided
for a $5.0 million revolving line of credit for general working capital
purposes. In July 1998, we repaid all net borrowings under the Business Loan. On
March 26, 1999, we signed an agreement to replace the Business Loan with a $25.0
million revolving line of credit ("Revolving Line"). Borrowings under the
Revolving Line will bear interest at a variable rate equal to LIBOR plus 1.0% to
1.75%, depending upon the ratio of funded debt to earnings. As of June 30, 1999,
no amounts were outstanding under the Revolving Line.
We declared a $10 million dividend to our shareholders prior to the Initial
Public Offering. The dividend was paid in the form of notes (the "Dividend
Notes") prior to the termination of our S corporation election, which occurred
immediately prior to the consummation of the Initial Public Offering. As of June
30, 1999, the entire $10.0 million of the Dividend Notes had been repaid.
We believe that the proceeds generated by the sale of Class A Common Stock
offered by us in our Initial Public Offering, our February 1999 public offering,
the available borrowings under the Revolving Line and the cash generated
internally by operations will satisfy our working capital requirements for the
foreseeable future.
Risk Factors
This quarterly report on Form 10-Q contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects," and similar
expressions
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are intended to identify forward-looking statements. There are a number of
factors that could cause actual results to differ materially from those
indicated by such forward-looking statements. Among these factors are the
following:
Limited Operating History; Uncertainty of Future Operating Results
We began shipping DSS Agent, the first product in our current product
family, in 1994, and we introduced many of our other products in 1995. Our
limited operating history makes predicting future operating results difficult,
if not impossible. In addition, we had net losses and losses from operations in
1996 and 1994 and were only marginally profitable in 1997 and 1995. Although our
revenues have grown in recent periods, we cannot be certain that we will sustain
or increase our revenues or improve our operating results in the future.
Quarterly Operating Results May Fluctuate Significantly
For a number of reasons, including those described below, our operating
results, revenues and expenses may vary significantly from quarter to quarter.
Fluctuations in Quarterly Operating Results. Our quarterly operating
-------------------------------------------
results may fluctuate as a result of:
. the size and timing of significant orders;
. the timing of new product announcements;
. changes in our pricing policies or those of our competitors;
. market acceptance of decision support software generally and of new and
enhanced versions of our products in particular;
. the length of our sales cycles;
. changes in our operating expenses;
. personnel changes;
. our success in expanding our direct sales force and adding to our
indirect distribution channels;
. the pace and success of our international expansion;
. delays or deferrals of customer implementation; and
. changes in foreign currency exchange rates.
Fluctuations in Revenues. In the past, we have typically recognized much of
------------------------
the revenue for any quarter in the last two to four weeks of that quarter. As a
result, even minor delays in booking orders near the end of a quarter can
adversely affect that quarter's revenues, particularly when large orders are
involved.
Because we ship most of our software products shortly after they are
ordered, we have almost no order backlog. Accordingly, product license revenues
for any quarter depend largely on orders booked and shipped in that quarter.
Product license revenues also fluctuate because the market for our products is
evolving rapidly and because sales cycles, which may last many months, vary
widely from customer to customer. Sales cycles are affected by many factors over
which we have little or no control, including:
. customers' budgetary constraints;
. the timing of budget cycles;
. concerns about the introduction of new products by us or our
competitors; and
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. potential downturns in the economy, which may reduce demand for
management information systems.
Product support revenues depend largely on maintenance revenues from
existing customers and will vary with those customers' maintenance needs.
Seasonal factors may also affect our revenues. For example, the pace of new
sales tends to slow in the summer.
Limited Ability to Adjust Expenses. Because we plan to expand our business,
----------------------------------
we expect our operating costs and expenses to increase substantially. Operating
costs and expenses we expect to increase include those associated with expanding
our technical support, research and development and sales and marketing
organizations. We also expect to devote substantial resources to expanding our
indirect sales channels and international operations. We base our operating
expense budgets on expected revenue trends. We may not be able to reduce the
operating costs and expenses associated with our expansion (or even the rate at
which those operating costs and expenses grow) in the short term even if
expected revenue trends match our actual revenues. As a result, variations in
the timing and amounts of revenue could materially adversely affect our
quarterly operating results.
Based on the above factors, we believe that quarter-to-quarter comparisons
of our operating results are not a good indication of our future performance. It
is likely that in one or more future quarters, our operating results may be
below the expectations of public market analysts and investors. In that event,
the price of our Class A Common Stock may fall.
Sales May Be Delayed or Lost Due to Long Sales and Implementation Cycles for Our
Products
To date, our customers have typically invested substantial time, money and
other resources and involved many people in the decision to license our software
products. As a result, we may wait nine months or more after first contact for
customers to place orders while they seek internal approval for, among other
things, the necessary capital expenditures. During this long sales cycle,
certain events may occur that affect the size or timing of the order or even
cause it to be canceled. For example, our competitors may introduce new
products, or the customer's own budget and purchasing priorities may change. It
is also possible that our customers will divert technology expenditures in 1999
to fund Year 2000 compliance plans. See "Year 2000 Issues; Potential Impact on
Customers."
Even after an order is placed, the time it takes to deploy our products
(the implementation cycle) varies widely from one customer to the next. The
implementation cycle can sometimes last several months, depending on the
customer's data warehousing and other requirements, and may begin only with a
pilot program. It may be difficult to deploy our products if the customer has
complicated deployment requirements, which typically involve integrating
databases, hardware and software from different vendors. If a customer hires a
third party to deploy our products, we cannot be sure that our products will be
deployed successfully.
These and other events affecting the sales and implementation cycles for
our products could materially adversely affect our business, operating results
or financial condition.
Increased Competition May Lead to Lower Prices, Reduced Gross Margins and Loss
of Market Share
The markets for decision support and Internet-based information services
are intensely competitive and subject to rapidly changing technology. In
addition, many of our competitors in these markets are offering (or may soon
offer) products and services that may compete with our information analysis and
broadcasting products.
Our most direct competitors in the markets for decision support and
Internet- based information services provide:
. decision support software;
. push products;
. browsers with webcasting functionality;
. electronic and Internet commerce systems;
. vertical Internet information systems;
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. wireless communications products;
. online services; and
. event-driven technology.
Each of these products or services is discussed more fully below.
Decision Support Software. In the decision support market, we compete with
vendors of relational online analytical processing software, such as Information
Advantage, Inc. and Platinum Technology Incorporated; vendors of desktop online
analytical processing, or OLAP, software, such as Business Objects S.A. and
Cognos Incorporated; and vendors of multidimensional OLAP software, such as
Oracle Corporation, Hyperion Solutions Corporation (which has entered into a
strategic relationship with International Business Machines Corporation),
Seagate Software, Inc. and SAS Institute Incorporated.
We expect continued growth and competition in this market. In addition, new
competitors may emerge. Microsoft Corporation, for example, has indicated that
it will introduce certain products in 1999 that may compete with ours.
Push Products. Our competitors in the push product market, including
PointCast Incorporated, Marimba, Inc. and BackWeb Technologies Inc., offer
technologies that deliver information over the Internet to recipients via Web
browsers and proprietary interfaces. Push product vendors mostly deliver
text-based information, such as news and sports, but often include some
number-based information, such as stock price updates. Marimba is expanding its
services to include the delivery of information and analysis from relational
data sources, which could provide us with increased competition in this market.
Browsers with Webcasting Functionality. Web browsers with channels or the
ability to webcast, such as Microsoft Internet Explorer or Netscape Navigator,
provide an infrastructure for automatically updating information on a
recipient's computer. This infrastructure is a competitive alternative to our
DSS Broadcaster product line (although we use the same infrastructure to enhance
our DSS Web product line).
Electronic and Internet Commerce Systems. Products and turn-key solutions
for electronic commerce, Internet commerce and electronic business, such as
those provided by IBM, Open Market Inc., USWeb/CKS Corp., Viant Corporation and
Sun Microsystems, Inc., can be used to provide Internet-based information
services. To the extent they can be used to deliver information and analysis
from relational database management systems, these products will compete with
ours.
Vertical Internet Information Systems. Microsoft Expedia, Microsoft
Investor, StockBoss, Microsoft CarPoint, Mercury Mail, TechWeb, ESavers (US
Airways, Inc.), C.O.O.L. (Continental Airlines, Inc.), Internet Travel Network
and others have developed custom applications and products to commercialize,
analyze and deliver specific information over the Internet. These systems are
usually tailored to one application, such as delivering stock prices, and cannot
easily be used for others, such as delivering airfares. However, they pose a
competitive risk because, as a group, they offer applications similar to some
that have been developed using our products.
Wireless Communications Products. Wireless communications and messaging
providers, such as AT&T Corp., Nextel Communications, Sprint Corporation, MCI
WorldCom, Inc., Iridium LLC, PageNet, Inc. and SkyTel Corp., offer a variety of
alpha-enabled mobile phones and pagers. It is possible that these companies will
someday offer custom-developed information services to their customers that will
compete with applications using our products and services.
Online Service Providers. Online service providers include America Online,
Inc., Microsoft's Microsoft Network, Prodigy, Inc., @Home Corporation and WebTV
Networks, Inc. (acquired by Microsoft). These companies provide text-based
information over the Internet and on proprietary online services. They could
develop applications that compete with the functionality of our products.
Event-Driven Technology. Providers of event notification systems include
TIBCO Finance Technology Inc., which sells a product that monitors stock tickers
and notifies subscribers when preset thresholds are crossed; Clarify Inc., which
handles loan applications with a financial system developed by SAP AG; BEA
Systems, Inc., which provides middleware; and Vitria Technology Inc., which
provides event-based workflow software. The technology resulting from these
systems
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has overlapped with our technology in the past and may do so in the future.
If a single competing vendor gains a large share of the relational database
management system market, we may find it more difficult to differentiate our
products. This may materially adversely affect our business, operating results
and financial condition.
Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing or other resources, and greater name
recognition than we do. In addition, many of our competitors have strong
relationships with current and potential customers and extensive knowledge of
the data warehouse industry. As a result, they may be able to respond more
quickly to new or emerging technologies and changes in customer requirements, or
to devote greater resources to the development, promotion and sale of their
products, than we can. Increased competition may lead to price cuts, reduced
gross margins and loss of market share. We cannot be sure that we will be able
to compete successfully against current and future competitors or that the
competitive pressures we face will not materially adversely affect our business,
operating results and financial condition.
Current and future competitors may also make strategic acquisitions or
establish cooperative relationships among themselves or with others. By doing
so, they may increase their ability to meet the needs of our potential
customers. Our current or future indirect channel partners may establish
cooperative relationships with our current or future competitors. Such
relationships may limit our ability to sell our products through certain
distribution channels. Accordingly, it is possible that new competitors or
alliances among current and future competitors may emerge and rapidly gain
significant market share. These developments could have a material adverse
effect on our margins and on our ability to obtain maintenance revenues for new
and existing product licenses on favorable terms.
Continued Growth Will Increase Demands on Resources
We have been expanding rapidly and we expect to continue expanding our
operations. The total number of our employees grew from 59 on January 1, 1995 to
1,208 on June 30, 1999, and we expect our number of employees to continue to
increase. We have placed significant demands on our administrative, operational,
financial, and personnel resources and expect to continue doing so. In
particular, we expect the current and planned growth of our international
operations to lead to increased financial and administrative demands. Expanded
facilities will complicate operations, managing relationships with new foreign
partners will mean additional administrative burdens, and managing foreign
currency risks will require expanded treasury functions. We may also need to
greatly expand our support organization to further develop indirect distribution
channels in different and broader markets and to accommodate growth in our
installed customer base. Failure to effectively manage our expansion could have
a material adverse effect on our business, operating results and financial
condition.
Need to Recruit Additional Skilled Personnel; Dependence on Key Personnel
Our future success depends on our continuing ability to attract, train,
assimilate and retain highly qualified personnel. Competition for these
personnel is intense. We may not be able to retain our current key employees or
attract, train, assimilate or retain other highly qualified personnel in the
future. Our future success also depends in large part on the continued service
of key management personnel, particularly Michael J. Saylor, our President and
Chief Executive Officer, and Sanju K. Bansal, our Executive Vice President and
Chief Operating Officer. Losing the services of one or more of these individuals
or other key personnel could materially adversely affect our business, operating
results and financial condition.
Dependence on New Versions, New Products and Rapid Technological Change
The market for our 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 quickly make existing products obsolete and unmarketable.
The emergence of new standards in related fields may also adversely affect
existing products. This could happen, for example, if new Web protocols emerged
that were incompatible with deployment of our DSS applications over the Web.
Although our DSS solutions allow the core database component to reside on nearly
all enterprise server hardware and operating system combinations (Mainframe,
AS/400, Unix, Windows NT and Windows), our application server component runs at
present only on the Windows NT operating system. Therefore, our ability to
increase sales may depend on the continued acceptance of the Windows NT
operating system. We cannot market our current DSS applications to potential
customers who use Unix operating systems as their application server. We would
have to invest substantial resources to develop a Unix product, and we cannot be
sure that we could introduce such a product on
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a timely or cost effective basis, if at all.
We believe that our future success depends largely on three factors: our
ability to continue to support a number of popular operating systems and
databases; our ability to maintain and improve our current product line; and our
ability to timely develop new products that achieve market acceptance, maintain
technological competitiveness and meet an expanding range of customer
requirements. DSS applications, however, are inherently complex, and it can take
a long time to develop and test major new products and product enhancements. In
addition, customers may delay their purchasing decisions because they anticipate
that new or enhanced versions of our products will soon become available.
Moreover, only a few of our customers to date have deployed our products in
environments that involve terabytes of data and thousands of active users. As
deployment in these complex environments becomes more widespread, unexpected
delays or other difficulties may arise. As a result, lengthy delays in the
general availability of new releases or significant problems in installing or
implementing new releases could arise that will have a material adverse effect
on our business, operating results and financial condition. We cannot be sure
that we will succeed in developing and marketing, on a timely and cost effective
basis, product enhancements or new products that respond to technological
change, evolving industry standards or customer requirements. Nor can we be sure
that we will not have difficulties that could delay or prevent the successful
development, introduction or marketing of these enhancements. Finally, we cannot
be sure that our new products and product enhancements will achieve market
acceptance.
Government Regulation and Other Legal Uncertainties
We are not directly regulated by any governmental agency, although we are
subject to the laws that generally apply to businesses. Certain U.S. and foreign
laws restricting the use of consumers' personal information may also apply to
us. Due to increasing use of the Internet and the dramatically increased access
to personal information made possible by technologies like ours, 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 ways that
adversely affect our business. The European Union Directive on Data Protection,
a comprehensive administrative and regulatory program controlling many aspects
of personal data collection and distribution, was required to be implemented by
its member nations in October 1998. This Directive limits the ability of
companies to collect, store and exchange personal data with other entities. In
response to consumer pressures, the U.S. Congress and various state legislatures
are considering legislation that would apply to us in areas such as privacy
protection. Because the United States may not currently provide a level of data
protection sufficient to meet the guidelines under the European Union Directive,
U.S. companies could be prohibited from obtaining personal data from or
exchanging such data with companies in Europe. The U.S. Department of Commerce
is currently negotiating with the European Commission to develop a set of "safe
harbor" principles under which U.S. companies could operate freely under the
European Union Directive. However, there can be no assurance that such a "safe
harbor" will be agreed upon, or that, if agreed upon, will permit us or our
customers to make such uses of consumer data as they currently make.
Although existing laws govern such issues as personal privacy over the
Internet or other public data networks, it is unclear whether they apply to us.
Most of these laws were adopted before the widespread use and commercialization
of the Internet and other public data networks. As a result, these laws do not
address the unique issues presented by these media.
Any new law or regulation or any expanded governmental enforcement of
existing regulations may limit our growth or increase our legal exposure, which
could have a material adverse effect on our business, financial condition and
results of operations.
Dependence on Growth of Market for Decision Support Software
All of our revenues have come from sales of decision support software and
related maintenance, consulting and training services. We expect these sales to
account for substantially all of our 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. Resistance
from consumer and privacy groups to increased commercial collection and use of
data on spending and other personal behavior may impair the further growth of
this market, as may other developments. We cannot be sure that this market will
continue to grow or that, even if it does grow, businesses will adopt our
solutions. We have spent, and intend to keep spending, considerable resources to
educate potential customers about decision support software generally and our
solutions in particular. However, we cannot be sure that these expenditures will
help our products achieve any additional market acceptance. If the market fails
to grow or grows more slowly than we currently expect, our business, operating
results and financial condition would be materially adversely affected.
Control by Existing Stockholders; Anti-Takeover Effect of Two Classes of Common
Stock
We have two classes of common stock: Class A Common Stock and Class B
Common Stock. Holders of our Class A Common Stock generally have the same rights
as holders of our Class B Common Stock, except that holders of Class A Common
Stock have one vote per share while holders of Class B Common Stock have ten
votes per share. As of June 30, 1999, holders of our Class B Common Stock owned
or controlled 29,714,404 shares of Class B Common Stock, or 97.2%
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of our voting power. Michael J. Saylor, our Chairman, President and Chief
Executive Officer, through his sole ownership and control of Alcantara LLC,
controlled 22,424,662 shares of Class B Common Stock and 50,000 shares of Class
A Common Stock, or 73.4% of our voting power as of June 30, 1999. Accordingly,
Mr. Saylor will be able to control MicroStrategy through his ability to
determine the outcome of elections of our directors, amend our Certificate of
Incorporation and Bylaws and take certain other actions requiring the vote or
consent of stockholders, including mergers, going private transactions and other
extraordinary transactions and their terms.
Our Certificate of Incorporation allows holders of Class B Common Stock
(almost all of whom are employees of our company or related parties) to transfer
shares of Class B Common Stock, subject to the approval of a majority of the
holders of outstanding Class B Common Stock. Mr. Saylor or a group of
stockholders possessing a majority of the outstanding Class B Common Stock
could, without seeking anyone else's approval, transfer voting control of
MicroStrategy to a third party. Such a transfer of control could have a material
adverse effect on our business prospects and financial condition. Mr. Saylor
will also be able to prevent a change of control of MicroStrategy, regardless of
whether holders of Class A Common Stock might otherwise receive a premium for
their shares over the then-current market price.
Reliance on Channel Partners
In addition to our direct sales force, we rely on channel partners, such as
original equipment manufacturers, system integrators and value-added resellers,
to license and support our products in the United States and internationally. In
particular, for the six months ended June 30, 1999 and for 1998, 1997 and 1996,
channel partners accounted directly or indirectly for 32.8%, 35.0%, 27.5% and 9%
of our total revenues, respectively. Our channel partners generally offer
customers the products of several different companies, including some products
that compete with ours. Although we believe that direct sales will continue to
account for a majority of product license revenues, we intend to increase the
level of indirect sales activities. However, there can be no assurance that our
efforts to continue to expand indirect sales will be successful.
We cannot be sure that we will attract strategic partners who will market
our products effectively and who will be qualified to provide timely and
cost-effective customer support and service. Our ability to achieve revenue
growth in the future will depend in part on our success in recruiting and
maintaining successful relationships with those strategic partners.
Risks Associated with Intellectual Property
We regard our software products as proprietary, and we rely 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 our proprietary rights. However, these
laws and contractual provisions provide only limited protection. We have no
patents no registered trademarks (other than MicroStrategy or QuickStrike) and
no registered copyrights (other than the EISToolkit 2.0 reference manual).
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain and use our products or technology. Policing
such unauthorized use is difficult, and we cannot be certain that we can prevent
it, particularly in countries where the laws may not protect our proprietary
rights as fully as in the United States.
As the number of software products in our target markets increases and the
functionality of these products further overlap, software developers may become
increasingly subject to infringement claims. Someone may even claim that our
technology infringes their proprietary rights. Any such claims, whether with or
without merit, can be time consuming and expensive to defend, may divert
management's attention and resources, could cause product shipment delays and
could require us to enter into costly royalty or licensing agreements. If
successful, a claim of product infringement against us and our inability to
license the infringed or similar technology could adversely affect our business.
Difficulties Associated with International Operations and Expansion
International sales accounted for 20.5%, 23.6%, 26.7%, and 11.1% of our
total revenue for the six months ended June 30, 1999 and for the years ended
December 31, 1998, 1997, and 1996, respectively. We plan to continue expanding
our international operations and to enter new international markets. This will
require significant management attention and financial resources and could
adversely affect our business, operating results or financial condition. In
order to expand international sales successfully in 1999 and beyond, we must set
up additional foreign operations, hire additional personnel and recruit
additional international resellers and distributors. We cannot be sure that we
will be able to do so in a timely manner, and our failure to do so may limit our
international sales growth. Nor can we be sure that we will be able to maintain
or increase international market demand for our products.
17
<PAGE>
There are certain risks inherent in our international business activities.
In addition to the currency fluctuations described below, these include:
. unexpected changes in regulatory requirements;
. tariffs and other trade barriers;
. costs of localizing products for foreign countries;
. lack of acceptance of localized products in foreign countries;
. longer accounts receivable payment cycles;
. difficulties in managing international operations;
. tax issues, including restrictions on repatriating earnings;
. weaker intellectual property protection; and
. the burden of complying with a wide variety of foreign laws.
These factors may have a material adverse effect on our future
international sales and, consequently, our results of operations.
Currency Fluctuations
Our international revenues and expenses are denominated in foreign
currencies, principally the British Pound Sterling and the German Deutsche Mark.
The functional currency of each of our foreign subsidiaries is our local
currency. Our foreign currency translation gains and losses have so far been
immaterial. However, future fluctuations in exchange rates between the U.S.
Dollar and foreign currencies may materially adversely affect our business,
results of operations and financial condition, particularly our operating
margins. We cannot accurately predict the impact of future exchange rate
fluctuations on our results of operations. To date, we have not hedged the risks
associated with these fluctuations. Although we may do so in the future, we
cannot be sure that any hedging techniques we may implement will be successful
or that our business, results of operations, financial condition and cash flows
will not be materially adversely affected by exchange rate fluctuations.
Possible Consequences of Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the European
Union set fixed conversion rates between their existing sovereign currencies and
the euro and adopted the euro as their legal currency. We have assessed the
impact of these events on our company. In particular, we have considered:
. the technical challenges of adapting our systems to accommodate
euro-denominated transactions;
. the competitive impact of cross-border price transparency, which may
make it more difficult for businesses to charge different prices for
the same products in different countries;
. the impact on currency exchange costs and currency exchange rate risk;
and
. the impact on existing contracts.
Based on our assessment, we do not believe the euro conversion will have a
material impact on our business; however, there can be no assurance that the
adoption of the euro will not have an adverse effect on our business, financial
condition, or results of operations.
Risk of Software Defects; Potential Product Liability for Software Defects
Software products as complex as ours may contain errors or defects,
especially when first or subsequent versions are released. Although we test our
products extensively, we have in the past discovered software errors in certain
of our new products after their introduction. While we have not experienced
material adverse effects from any such errors to date, we
18
<PAGE>
cannot be certain that, despite testing by us and by our current and potential
customers, errors will not be found in new products or releases after commercial
shipments begin. This could result in lost revenue or delays in market
acceptance, which could have a material adverse effect upon our business,
operating results and financial condition.
Our license agreements with customers typically contain provisions designed
to limit our exposure to product liability claims. It is possible, however, that
these limitation of liability provisions may not be effective under the laws of
certain domestic or international jurisdictions. Although there have been no
product liability claims against us to date, our license and support of products
may involve the risk of these claims. A successful product liability claim
against us could have a material adverse effect on our business, operating
results and financial condition.
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 in order for 20th century dates to be
distinguished from 21st century dates. As a result, before the end of this year,
computer systems and software used by many companies may need to be upgraded to
comply with these "Year 2000" requirements.
We have developed and largely implemented a Year 2000 readiness plan for
the current versions of most of our products. Accordingly, we believe that the
current versions of most of our products are Year 2000 compliant when configured
and used properly, provided that the underlying operating system of the host
machine and any other software used with or in the host machine or our products
are also Year 2000 compliant.
We began testing our own material internal information technology, or IT,
systems (including both our own software products and third-party software and
hardware technology) and our non-IT systems (such as our security system,
building equipment, and embedded microcontrollers) for Year 2000 compliance
beginning in the first quarter of 1999. We have completed the majority of the
testing of our mission critical systems with only minor issues encountered and
repaired as of June 30, 1999. To the extent that we are not able to test
technology provided by third-party vendors, we are asking them to assure us that
their systems are Year 2000 compliant.
Although we are not currently aware of any material operational issues or
costs associated with preparing our material internal IT and non-IT systems for
the Year 2000, we may experience material unanticipated problems and costs
caused by undetected errors or defects in the technology used in these systems.
While we cannot be sure that all our non-material systems will be Year 2000
compliant by 2000, we believe that failure of such systems will not have a
material adverse affect on our business, financial condition or results of
operations. We are currently developing a contingency plan to provide for the
remote possibility that our material systems will not achieve timely Year 2000
compliance.
We have funded most of our past Year 2000 compliance activities from cash
flows and have not allocated additional funds to making our products or internal
systems Year 2000 compliant. During 1999, we plan to spend approximately
$100,000 on preparing our internal systems for the Year 2000. We do not expect
to receive much outside assistance in completing our internal Year 2000 effort.
Apart from current versions of our products and our internal systems, we
have identified four potential Year 2000 problem areas.
First, we have not yet determined whether certain third-party software
incorporated in one of our products is Year 2000 compliant. Although we are not
currently aware of any material Year 2000 issues with these third-party software
products, undetected errors or defects, if they exist, may cause material
unanticipated problems and costs.
Second, some of our customers may be using a version of our software that
is not Year 2000 compliant. While we have tried to make sure that all our
customers are using Year 2000 compliant versions of our software, we cannot be
certain that they have installed these versions.
Third, not all platforms or versions of the operating systems that our
products currently support are Year 2000 compliant.
Fourth, certain customers have elected to operate systems in a two-digit
year date environment, which is not Year 2000 compliant.
19
<PAGE>
We do not currently have much information on the Year 2000 compliance
status of our customers. If our current or future customers do not become Year
2000 compliant, or if they divert technology expenditures (especially technology
expenditures that were reserved for enterprise decision support software) to
address Year 2000 compliance problems, our business, results of operations,
financial condition or cash flows could be materially adversely affected.
Since we are in the business of selling software, our risk of lawsuits
relating to Year 2000 issues with our products is likely to be greater than that
of companies in some other industries. Because computer systems may incorporate
components from different manufacturers, it may be difficult to determine which
component in a computer system may cause a Year 2000 problem.
As a result, we may be subjected to Year 2000-related lawsuits whether or
not our products and services are Year 2000 compliant. We cannot be certain at
this time what the outcomes or impact of any such lawsuits may be.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about our market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. We are exposed to the impact of
interest rate changes and foreign currency fluctuations.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily
to our cash equivalents and short-term investments. We do not use derivative
financial instruments for speculative or trading purposes. We invest our excess
cash in short-term, fixed income financial instruments. These fixed rate
investments are subject to interest rate risk and may fall in value if market
interest rates increase. If market interest rates were to increase immediately
and uniformly by 10% from the levels at June 30, 1999, the fair market value of
the portfolio would decline by an immaterial amount. We have the ability to hold
our fixed income investments until maturity, and therefore we do not expect our
operating results or cash flows to be materially affected by a sudden change in
market interest rates on our investment portfolio.
Foreign Currency Risk
We face exposure to adverse movements in foreign currency exchange rates.
Our international revenues and expenses are denominated in foreign currencies,
principally the British Pound Sterling and the German Deutsche Mark. The
functional currency of each of our foreign subsidiaries is the local currency.
Our international business is subject to risks typical of an international
business, including, but not limited to differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility. Based on our
overall currency rate exposure at June 30, 1999, a 10% change in foreign
exchange rates would have had an immaterial effect on our financial position,
results of operations and cash flows. To date, we have not hedged the risks
associated with foreign exchange exposure. Although we may do so in the future,
we cannot be sure that any hedging techniques we may implement will be
successful or that our business, results of operations, financial condition and
cash flows will not be materially adversely affected by exchange rate
fluctuations. To date, our foreign currency gains and losses have been
immaterial.
20
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company sold 4,440,000 shares of its Class A Common Stock on June
16, 1998 pursuant to a Registration Statement on Form S-1 (Registration No.
333-49899), which was declared effective by the Securities Exchange Commission
on June 10, 1998 (the "Effective Date"). Certain stockholders of the Company
sold an aggregate of 160,000 shares of Class A Common Stock pursuant to such
registration statement. The managing underwriters of the Initial Public Offering
were Merrill Lynch & Co., Hambrecht & Quist, and Friedman, Billings, Ramsey &
Co., Inc. The aggregate gross proceeds raised in the Initial Public Offering
from the sale of Class A Common Stock by the Company and the selling
shareholders were $53.3 million and $1.9 million, respectively. The Company's
total expenses in connection with the Initial Public Offering were approximately
$4.6 million, of which $3.7 million was for underwriting discounts and
commissions and approximately $0.9 milion was for other expenses. The Company's
net proceeds from the Initial Public Offering were approximately $48.7 million.
From the Effective Date through June 30, 1999, the Company used $13.6 million of
such net proceeds to repay all net borrowings under the Business Loan. In
addition, the Company used $10.0 million of such net proceeds to repay all of
the borrowings under the Company's $10.0 million Dividend Notes which were
issued to certain shareholders of the Company prior to the consummation of the
Initial Public Offering. Approximately $9.5 million of the $10.0 million
dividend payment was paid to certain officers, directors and 10% shareholders of
the Company. As of August 1, 1999 the Company had used all proceeds from the
Initial Public Offering to support the growth of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on May 21, 1999. The
following proposals were adopted by the vote specified below:
[CAPTION]
<TABLE>
Against/ Broker
Proposal For Withheld Abstain Non-Votes
-------- --- -------- ------- ---------
<S> <C> <C> <C> <C>
1. Election of Directors:
Michael J. Saylor 285,917,958 24,128
Sanju K. Bansal 285,917,958 24,128
Frank A. Ingari 285,917,958 24,128
Jonathan J. Ledecky 285,917,958 24,128
Ralph S. Terkowitz 285,917,958 24,128
2. Approval of the Company's 1999 Stock
Option Plan 281,055,607 1,218,447 38,694 3,629,338
3. Ratification of PricewaterhouseCoopers LLP
as Independent Auditors 285,929,730 8,222 4,134
</TABLE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
3.1* Form of Amended and Restated Certificate of Incorporation of the
Company
3.2* Form of Restated Bylaws of the Company
4.1* Form of Certificate of Class A Common Stock of the Company
10.1 Credit Agreement between NationsBank, N.A. and the Company dated
March 26, 1999
10.2 Modification to Credit Agreement between NationsBank, N.A. and the
Company dated July 12, 1999
10.3 1999 Stock Option Plan of the Company
27.1 Financial Data Schedule
- -----------------
* Incorporated by reference from the Company's Registration Statement on Form
S-1 (Registration No. 333-49899).
B. REPORTS ON FORM 8-K
On June 2, 1999, the Company filed a Current Report on Form 8-K, dated
May 27, 1999, announcing that the Company had entered into an agreement
with Ameritrade Holding Corporation.
21
<PAGE>
All other items are omitted because they are not applicable or the answers are
none.
22
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
3.1* Form of Amended and Restated Certificate of Incorporation of the
Company
3.2* Form of Restated Bylaws of the Company
4.1* Form of Certificate of Class A Common Stock of the Company
10.1 Credit Agreement between NationsBank, N.A. and the Company dated
March 26, 1999
10.2 Modification to Credit Agreement between NationsBank, N.A. and
the Company dated July 12, 1999
10.3 1999 Stock Option Plan of the Company
27.1 Financial Data Schedule
- -----------------
* Incorporated by reference from the Company's Registration Statement on Form
S-1 (Registration No. 333-49899).
23
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
MICROSTRATEGY INCORPORATED
By: /s/ Michael J. Saylor
-----------------------------------------
Michael J. Saylor
President and Chief Executive Officer
By: /s/ Mark S. Lynch
-----------------------------------------
Mark S. Lynch
Chief Financial Officer
Date: August __, 1999
24
<PAGE>
CREDIT AGREEMENT
This CREDIT AGREEMENT (as amended, supplemented or modified from time
to time, this "Agreement") is dated as of March 26, 1999 and is between
MICROSTRATEGY INCORPORATED and NATIONSBANK, N.A.
The parties hereto agree as follows:
ARTICLE I
GENERAL DEFINITIONS
Section 1.1. Definitions. The following terms, as used herein, have
-----------
the following meanings:
"Affiliate" means (i) any Person that directly, or indirectly through
one or more intermediaries, controls the Borrower (a "Controlling Person") or
(ii) any Person (other than the Borrower or a Subsidiary) which is controlled by
or is under common control with a Controlling Person, and if such Person is an
individual, any member of the immediate family (including parent, spouse,
children and siblings) of such individual and any trust whose principal
beneficiary is such individual or one or more members of such immediate family
and any Person who is controlled by any such member or trust. As used herein,
the term "control" means possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of a Person, whether
through the ownership of voting securities, by contract, or otherwise.
"Application" means any Application and Agreement for Standby Letter
of Credit executed and delivered by the Company to the Bank in accordance with
the terms and conditions of this Agreement, substantially in the form of Exhibit
B hereto and appropriately completed, including all extensions, supplements and
modifications thereto, and renewals thereof; and "Applications" means all of
said applications.
"Bank" means NationsBank, N.A., a national banking association, and
its successors and assigns.
"Borrower" means MicroStrategy Incorporated, a Delaware corporation,
and its successors.
"Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks in Virginia are authorized by law to close.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commitment" has the meaning set forth in Section 2.1(a).
"Consolidated Subsidiary" means at any date any Subsidiary or other
entity the accounts of which would be consolidated with those of the Borrower in
its consolidated financial statements as of such date.
"Controlled Group" means all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with the Borrower, are treated as a single
employer under Section 414(b) or 414(c) of the Code.
"Debt" means, collectively, and includes, with respect to any
specified Person (a) indebtedness or liability for borrowed money whether by
loan, the issuance and sale of debt securities or the sale of assets to another
Person subject to an understanding or agreement, contingent or otherwise, to
repurchase such assets from such Person, or for the deferred purchase price of
property or services; (b) obligations of a lessee under a capital lease; (c)
obligations to reimburse the issuer of letters of credit or acceptances; (d)
Debt of others guaranteed by such Person; (e) obligations under interest rate
swap, cap or collar agreements or other similar agreements or arrangements
designed to protect that Person against fluctuations in interest rates; (f)
obligations under any foreign exchange contract, currency swap agreements or
other similar agreements or arrangements designed to protect that Person against
fluctuations in currency values; (g) obligations secured by any Lien on property
owned by the specified Person, whether or not the obligations have been assumed,
provided that the amount of such Debt shall be limited to the lesser of (i) the
outstanding principal balance of
<PAGE>
such Debt or (ii) the fair market value of the property of such Person securing
such Debt; and (h) the purchaser's obligations under seller-take-back
transactions.
"Default" means any condition or event which constitutes an Event of
Default or which, with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"$" means U.S. Dollars.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Effective Date" means the date on which this Agreement becomes
effective in accordance with Section 8.8.
"Event of Default" has the meaning set forth in Section 7.1.
"GAAP" means generally accepted accounting principles in the United
States.
"Investment" means any transaction, or any series of related
transactions, consummated after the date of this Agreement, by which the
Borrower or any of its Subsidiaries (a) directly or indirectly purchases or
otherwise acquires any of the capital stock of a corporation, (b) directly or
indirectly purchases or otherwise acquires any ownership interest in any Person
that is not a corporation, (c) directly or indirectly purchases or otherwise
acquires any assets, obligations, or other securities of, or makes any capital
contribution to, or otherwise invests in or acquires any interest in, any
Person, (d) directly or indirectly makes or acquires any loan or advance, or an
interest in any loan or advance, to any Person, or (e) directly or indirectly
participates as a partner or joint venturer with any Person.
"Letter of Credit" means any Irrevocable Standby Letter of Credit
issued by the Bank for the account of the Borrower pursuant to the terms hereof
and of an Application, including all extensions, supplements and modifications
thereto, and renewals thereof; and "Letters of Credit" means all of said letters
of credit.
"Letter of Credit Loans" has the meaning set forth in Section 2.1(b).
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset.
For the purposes of this Agreement, a Person shall be deemed to own subject to a
Lien any asset which it has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement relating to such asset.
"Loan" means a loan made by the Bank to the Borrower pursuant to this
Agreement and the Note or an Application, and "Loans" means all of such Loans.
"Note" has the meaning set forth in Section 2.3(a).
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Permitted Liens" means the Liens referred to in clauses (i) through
(v) of Section 6.8.
"Person" means an individual, a corporation, a partnership, a limited
liability company, an association, a trust or any other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
"Plan" means at any time an employee pension benefit plan which is
covered by Title IV of ERISA or subject to the minimum funding standards under
Section 412 of the Code and is either (i) maintained by a member of the
Controlled Group for employees of a member or members of the Controlled Group or
(ii) maintained pursuant to a collective bargaining agreement or any other
arrangement under which more than one employer makes contributions and to which
a member of the Controlled Group is then making or accruing an obligation to
make contributions or has within the preceding five plan years made
contributions.
"Revolving Credit Period" means the period from and including the
Effective Date to but excluding May 31, 2001.
-2-
<PAGE>
"Subsidiary" means any corporation or other entity of which securities
or other ownership interests having ordinary voting power to elect a majority of
the board of directors or other persons performing similar functions are at the
time directly or indirectly owned by the Borrower.
"Tax" means any fee (including license, filing and registration fee),
tax (including any income, gross receipts, franchise, sales, use or real,
personal, tangible or intangible property tax), interest equalization or stamp
tax, assessment, levy, impost, duty, charge or withholding of any kind or nature
whatsoever, imposed or assessed by any governmental body, agency or official,
together with any penalty, fine or interest thereon.
"Unfunded Vested Liabilities" means, with respect to any Plan at any
time, the amount (if any) by which (i) the present value of all vested
nonforfeitable benefits under such Plan exceeds (ii) the fair market value of
all Plan assets allocable to such benefits, all determined as of the then most
recent valuation date for such Plan, but only to the extent that such excess
represents a potential liability of a member of the Controlled Group to the PBGC
or the Plan under Title IV of ERISA.
"Wholly-Owned Consolidated Subsidiary" means any Consolidated
Subsidiary all of the shares of capital stock or other ownership interests of
which (except directors' qualifying shares) are at the time directly or
indirectly owned by the Borrower.
Section 1.2. Accounting Terms and Determinations. Unless otherwise
-----------------------------------
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared, in accordance with GAAP as
in effect from time to time, applied on a basis consistent (except for changes
concurred in by the Borrower's independent public accountants) with the most
recent audited consolidated financial statements of the Borrower and its
Consolidated Subsidiaries delivered to the Bank.
ARTICLE II
THE CREDIT
Section 2.1. Commitment to Make Loans.
------------------------
(a) Revolving Commitment. The Bank agrees, on the terms and
--------------------
conditions set forth in this Agreement, to make loans ("Loans") to the Borrower
from time to time during the Revolving Credit Period in an aggregate principal
amount not to exceed $25,000,000.00 at any one time outstanding (such amount, as
it may be reduced from time to time pursuant to Section 2.5, being herein
referred to as the "Commitment"). Subject to the foregoing, the Borrower may
borrow under this Section 2.1, prepay and reborrow.
(b) Letter of Credit Subfeature. As a subfeature under the
---------------------------
Commitment, the Bank agrees, on the terms and conditions set forth in this
Agreement and in the applicable Applications, to make Loans to the Borrower by
issuing Letters of Credit for the account of the Borrower ("Letter of Credit
Loans"). At no time shall the aggregate of (i) the undrawn amount of all
outstanding Letters of Credit, plus (ii) all amounts paid by the Bank in
connection with drawings under Letters of Credit for which the Bank has not been
reimbursed (including by any Loan hereunder), exceed the lesser of $5,000,000.00
(or the equivalent in foreign currency, as determined by the Bank in its sole
discretion) and the unused Commitment (the "Letter of Credit Commitment"). Each
Letter of Credit shall be issued for a term not to exceed one (1) year, although
any Letter of Credit may be automatically renewed in accordance with the terms
and conditions of said Letter of Credit and the related Application. A Letter
of Credit may be denominated in U.S. Dollars, Canadian Dollars, Pounds Sterling,
Dutch Guilders, Spanish Pesetas, Austrian Schillings, Italian Lira, German
Deutschmarks, French Francs, or the European Union's single currency ("Euro").
Each draft paid by the Bank under a Letter of Credit shall, if such amount is
available under the Commitment, be deemed a Loan under the Revolving Commitment
and shall accrue interest at the rate then applicable under the Note. Subject
to the foregoing, the Borrower may borrow under this subparagraph (b), prepay
and reborrow.
Section 2.2. Method of Borrowing. The Borrower shall give the
-------------------
Bank notice not later than 11:00 a.m. (Eastern Time) on the date of each
proposed borrowing hereunder, specifying the date on which it proposes to borrow
(which shall be a Business Day), the amount of the Loan to be borrowed, (for a
Letter of Credit Loan) the denomination of the Letter of Credit, and (for other
than Letter of Credit Loans) the Borrower's deposit account at the Bank into
which such amount is to be deposited. The notices described in this Section 2.2
may be written, oral, or telephonic, and may be given to the Bank by anyone
reasonably believed by the Bank to have the authority to give such notice.
-3-
<PAGE>
Not later than 2:00 p.m. (Eastern Time) on the date so specified, the Bank shall
(unless it determines that any applicable condition specified in this Agreement
has not been satisfied and has provided notice thereof to the Borrower) issue
the Letter of Credit or (for other than Letter of Credit Loans) deposit the
amount of the requested Loan, in immediately available funds in McLean,
Virginia, to the Borrower in said deposit account.
Section 2.3. Note.
----
(a) The Loans, other than Letter of Credit Loans, shall be evidenced
by, and repayable with interest in accordance with, a single note substantially
in the form of Exhibit A hereto and appropriately completed (the "Note").
(b) The Bank shall record, and prior to any transfer of the Note shall
endorse on the schedule forming a part thereof appropriate notations to
evidence, the date and amount of each Loan and the date and amount of each
payment of principal made by the Borrower with respect thereto; provided,
--------
however, that any failure of the Bank to make such a notation or any error
- -------
therein shall not in any manner affect the obligation of the Borrower to repay
the Loans in accordance with the terms of the Note. The Borrower hereby
irrevocably authorizes the Bank so to endorse the Note and to attach to and make
part of the Note a continuation of any such schedule as and when required.
Section 2.4. Fees.
----
(a) Unused Fee. During the Revolving Credit Period, the Borrower
----------
shall pay to the Bank an unused line fee at the rate of one-fifth of one percent
(0.20%) per annum on the unused portion of the Commitment. Such fee shall
accrue from and including the Effective Date to but excluding the last day of
the Revolving Credit Period and shall be payable quarterly in arrears on March
31, June 30, September 30 and December 31 of each year, commencing June 30,
1999, and on the last day of the Revolving Credit Period.
(b) Commitment Fee. On the Effective Date, the Borrower shall pay to
--------------
the Bank the remainder of the $25,000.00 commitment fee, in the amount of
$12,500.00.
(c) Letter of Credit Fees. During the Revolving Credit Period, the
---------------------
Borrower shall pay to the Bank a letter of credit fee at the rate of one percent
(1.0%) per annum of the average undrawn amount of Letters of Credit outstanding
during each consecutive three-month period commencing with the Effective Date.
The average undrawn amount of Letters of Credit for any three-month period shall
be determined by adding together the aggregate undrawn amount (in U.S. Dollar
equivalent) of each Letter of Credit outstanding on each day of said period and
dividing by the number of days in such period. Said fee shall accrue from and
including the Effective Date to but excluding the last day of the Revolving
Credit Period and shall be payable quarterly in arrears on March 31, June 30,
September 30 and December 31 of each year, commencing June 30, 1999, and on the
last day the last Letter of Credit is outstanding.
Section 2.5. Optional Termination or Permanent Reduction of the
--------------------------------------------------
Commitment. The Borrower may, upon at least three Business Days' notice to the
- ----------
Bank, (i) terminate at any time, or (ii) permanently reduce, not more frequently
than once per year, by an aggregate amount of $1,000,000 or more, the unused
portion of the Commitment. If the Commitment is terminated in its entirety, any
accrued unused fee shall be payable on the effective date of such termination.
Section 2.6. Optional Prepayments. The Borrower may prepay the
--------------------
Loans in whole or in part at any time, by paying the principal amount to be
prepaid together with accrued interest thereon to the date of prepayment.
ARTICLE III
CONDITIONS TO LOANS
The obligation of the Bank to make each Loan is subject to the
satisfaction of the following conditions:
Section 3.1. All Loans. In the case of each Loan:
---------
(i) receipt by the Bank of notice of borrowing as required by
Section 2.2;
-4-
<PAGE>
(ii) the fact that no Default has occurred and is continuing or
would result from such Loan; and
(iii) the fact that the representations and warranties of the
Borrower contained in this Agreement shall be true on and as of the date of
such Loan (other than those which relate to a specific date or which have
become untrue due to changes otherwise permitted hereunder).
Each borrowing hereunder shall be deemed to be a representation and warranty by
the Borrower on the date thereof that the facts hereinabove set forth in clauses
(ii) and (iii) of this Section are true as of such date.
Section 3.2. First Loan. In the case of the first Loan:
----------
(i) receipt by the Bank of a duly executed Note, dated on or
before the date of such Loan, complying with the provisions of Section 2.3;
(ii) all legal matters incident to this Agreement and the Note,
and the transactions contemplated hereby and thereby shall be reasonably
satisfactory to Mays & Valentine, L.L.P., counsel for the Bank;
(iii) receipt by the Bank of (A) a copy of the Borrower's
certificate of incorporation, as amended, certified by the appropriate
office of the State of Delaware; (B) a certificate of such office, dated as
of a recent date, as to the good standing and charter documents of the
Borrower on file; and (C) a certificate of the Secretary or an Assistant
Secretary of the Borrower dated the date of such Loan and certifying (1)
that the certificate of incorporation of the Borrower has not been amended
since the date of the last amendment thereto indicated on the certificate
furnished pursuant to clause (B) above, (2) as to the absence of
dissolution or liquidation proceedings by or (to the Borrower's knowledge)
against the Borrower, (3) that attached thereto is a true and complete copy
of the by-laws of the Borrower as in effect on the date of such
certification, (4) that attached thereto is a true, correct and complete
copy of resolutions adopted by the board of directors of the Borrower
authorizing the execution, delivery and performance of this Agreement and
the Note and that said resolutions have not been amended and are in full
force and effect on the date of such certificate and (5) as to the
incumbency and specimen signatures of each officer of the Borrower
executing this Agreement and the Note, or any other document delivered in
connection herewith or therewith;
(iv) receipt by the Bank of an opinion of Hale and Dorr, LLP,
counsel for the Borrower, substantially in the form of Exhibit C hereto and
covering such additional matters relating to the transactions contemplated
hereby as the Bank may reasonably request;
(v) receipt by the Bank of a certificate signed by the
President of the Borrower, to the effect set forth in clauses (ii) and
(iii) of Section 3.1; and
(vi) receipt by the Bank of all documents it may reasonably
request relating to the existence of the Borrower and its authority to
execute, deliver and perform this Agreement, the Note and the Applications
and the validity of this Agreement, the Note and the Applications and any
other matters relevant hereto or thereto, all in form and substance
reasonably satisfactory to the Bank.
Section 3.3. Letter of Credit Loans. In the case of each Letter of
----------------------
Credit Loan (and in addition to the requirements of Section 3.1):
(i) receipt by the Bank of a duly executed Application,
together with all agreements and documents required to be delivered to the
Bank as set forth therein.
All documents and opinions referred to in this Article shall be in form and
substance reasonably satisfactory to the Bank and its counsel.
-5-
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants that:
Section 4.1. Corporate Existence and Power. The Borrower is a
-----------------------------
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware, and has all corporate powers and all material
governmental licenses, authorizations, consents and approvals required to carry
on its business as now conducted. The Borrower and each Subsidiary is duly
qualified as a foreign corporation, licensed and in good standing in each
jurisdiction in which the failure to so qualify or be licensed, as the case may
be, in the aggregate, could reasonably be expected to have a material adverse
effect on the business, financial position, results of operations or properties
of the Borrower and its Consolidated Subsidiaries, considered as a whole.
Section 4.2. Corporate and Governmental Authorization; Contravention.
-------------------------------------------------------
The execution, delivery and performance by the Borrower of this Agreement, the
Note and the Applications are within its corporate power, have been duly
authorized by all necessary corporate action, require no action by or in respect
of, or filing with, any governmental body, agency or official and do not
contravene, or constitute (with or without the giving of notice or lapse of time
or both) a default under, any provision of applicable law or of the articles of
incorporation or by-laws of the Borrower or of any material agreement, or any
judgment, injunction, order, decree or other instrument binding upon or
affecting the Borrower or result in the creation or imposition of any Lien on
any of its assets.
Section 4.3. Binding Effect. This Agreement constitutes a valid and
--------------
binding agreement of the Borrower and the Note and each Application, when
executed and delivered in accordance with this Agreement, will constitute the
valid and binding obligation of the Borrower, in each case enforceable against
the Borrower in accordance with its terms, except as (i) the enforceability
hereof and thereof may be limited by bankruptcy, insolvency or similar laws
affecting creditors' rights generally and (ii) rights of acceleration and the
availability of equitable remedies may be limited by equitable principles of
general applicability.
Section 4.4. Financial Information.
---------------------
(a) The audited consolidated balance sheet of the Borrower and its
Consolidated Subsidiaries as of December 31, 1997 for the fiscal year then
ended, reported on by Coopers & Lybrand, a copy of which has been delivered to
the Bank, fairly present, in conformity with GAAP, the consolidated financial
position of the Borrower and its Consolidated Subsidiaries as of such date and
their results of operations and changes in financial position for such fiscal
year. As of the date of such financial statements, the Borrower and its
Consolidated Subsidiaries did not have any material contingent obligation,
contingent liability or liability for Taxes, long-term lease or unusual forward
or long-term commitment, which is not reflected in any of such financial
statements or notes thereto.
(b) The unaudited consolidated balance sheet of the Borrower and its
Consolidated Subsidiaries as of December 31, 1998 for the twelve months then
ended, a copy of which has been delivered to the Bank, fairly present, in
conformity with GAAP applied on a basis consistent with the financial statements
referred to in clause (a) of this Section, the consolidated financial position
of the Borrower and its Consolidated Subsidiaries as of such date and their
results of operations and changes in financial position for such twelve-month
period (subject to normal year-end adjustments).
(c) Since December 31, 1998, there has been no material adverse change
in the business, financial position or results of operations of the Borrower and
its Consolidated Subsidiaries, considered as a whole.
Section 4.5. Litigation. To the knowledge of the Borrower, there is
----------
no action, suit or proceeding pending against, or threatened against or
affecting, the Borrower or any of its Consolidated Subsidiaries before any
court, governmental body, agency or official in which there is a reasonable
possibility of an adverse decision which could reasonably be expected to
materially adversely affect the business, financial position or results of
operations of the Borrower and its Consolidated Subsidiaries, taken as a whole,
or which in any manner draws into question the validity of any material
provision of this Agreement, the Note, or any Application and there is no basis
known to the Borrower for any such action, suit or proceeding.
Section 4.6. Marketable Title. The Borrower has good and
----------------
marketable title to all its properties and assets subject to no Lien, except
Permitted Liens.
-6-
<PAGE>
Section 4.7. Filings. All actions by or in respect of, and all
-------
filing with, any governmental body, agency or official required in connection
with the execution, delivery and performance by the Borrower of this Agreement,
the Note and the Applications, or necessary for the validity or enforceability
thereof against the Borrower or for the protection or perfection of the rights
and interests of the Bank thereunder, will, prior to the date of delivery
thereof, have been duly taken or made, as the case may be.
Section 4.8. Regulation U. The proceeds of the Loans will be used by
------------
the Borrower only for the purposes set forth in Section 6.11 hereof. None of the
Loan proceeds will be used, directly or indirectly, for the purpose of (i)
purchasing or carrying any margin stock or for the purpose of reducing or
retiring any indebtedness which was originally incurred to purchase or carry
margin stock or for any other purchase which might constitute the Loans a
"purpose credit" within the meaning of Regulation U or Regulation X of the Board
of Governors of the Federal Reserve System; or (ii) acquiring any equity
security of a class which is registered pursuant to Section 12 of the Securities
Exchange Act of 1934.
Section 4.9. Taxes. The Borrower and its Subsidiaries have filed all
-----
United States Federal income tax returns and all other material tax returns
which are required to be filed by them and have paid (or made adequate provision
for the payment of) all Taxes due pursuant to such returns or pursuant to any
assessment received by the Borrower or any Subsidiary, except where the payment
of such Tax is being disputed in good faith and adequate reserves have been
established in accordance with GAAP. The charges, accruals and reserves on the
books of the Borrower and its Subsidiaries in respect of Taxes or other
governmental charges are, in the opinion of the Borrower, adequate.
Section 4.10. Subsidiaries. Each of the Borrower's corporate
------------
Subsidiaries is a corporation duly incorporated, validly existing and in good
standing under the laws of its jurisdiction of incorporation.
Section 4.11. Real Estate. Neither the Borrower nor any Subsidiary
-----------
of the Borrower owns any real property.
Section 4.12. Year 2000 Compliance. The Borrower (i) has begun
--------------------
analyzing the operations of the Borrower and its Subsidiaries that could be
adversely affected by the failure to become "Year 2000 Compliant" (as defined by
the British Standard Institute); and (ii) is in the process of developing a plan
for becoming Year 2000 Compliant in a timely manner. The Borrower reasonably
believes that it will become Year 2000 Compliant for its operations and those of
its Subsidiaries on a timely basis except to the extent that a failure to do so
could not reasonably be expected to have a material adverse effect upon the
financial condition of the Borrower.
Section 4.13. Disclosure. To the best of the Borrower's knowledge,
----------
none of this Agreement, any schedule or exhibit hereto or document, certificate,
report, or other written information furnished to the Bank by or at the
direction of the Borrower in connection herewith or with the consummation of the
transactions contemplated hereby contains any material misstatement of fact or
omits to state a material fact necessary to make the statements contained herein
or therein not misleading at the time such were made. To the best of the
Borrower's knowledge, there is no fact materially adversely affecting the
assets, business, financial position or results of operations of the Borrower
which has not been set forth in a footnote included in the financial statements
referred to in Section 4.4(a) or in an exhibit or schedule thereto.
ARTICLE V
FINANCIAL COVENANTS
The Borrower agrees that so long as the Bank is committed to make
Loans hereunder, or honor any Letter of Credit, or any amount payable hereunder
or under the Note or any Application remains unpaid:
Section 5.1. Certain Definitions. As used in this Article V and
-------------------
elsewhere in this Agreement, the following terms have the following meanings:
"Capital Leases" means all leases that should be capitalized on the
balance sheet of the lessee prepared in accordance with GAAP.
-7-
<PAGE>
"Current Maturities of Long -Term Debt means, as of any date, the
aggregate amount of principal payments (including, without limitation, the
portion of any obligation under Capital Leases allocable to amortization in
accordance with GAAP) in respect of Long-Term Debt which are, in accordance with
GAAP, properly classified as of such date as current liabilities.
"Current Maturity Coverage Ratio" means, at any time, the ratio of
(a) Net Income, plus depreciation, plus Current Taxes, plus Interest Expense,
minus dividends and other distributions paid to shareholders, of the Borrower
and its Consolidated Subsidiaries, to (b) Current Maturities of Long-Term Debt
(excluding the Loans), plus Interest Expense, plus the current portion of
Capital Leases, of the Borrower and its Consolidated Subsidiaries.
"Current Taxes" means, for any period, Taxes paid in such period
(rather than merely accrued or deferred.)
"EBITDA" shall mean, for any period, the sum for the Borrower and its
Consolidated Subsidiaries (determined without duplication in accordance with
GAAP) of (a) Net Income for such period, plus (b) Taxes, Interest Expense,
----
depreciation and amortization for such period
"Funded Debt" means at any date, with respect to any Person, all
interest-bearing Debt of such Person at such date.
"Funded Debt Ratio" means, at any time, the ratio of (a) Funded Debt
of the Borrower and its Consolidated Subsidiaries, to (b) EBITDA of the Borrower
and its Consolidated Subsidiaries.
"Interest Expense" means, for any period, all interest in respect of
Funded Debt (including the interest component of any payments in respect of
obligations of a lessee under Capital Leases) of the Borrower and its
Consolidated Subsidiaries (determined without duplication in accordance with
GAAP) accrued or capitalized during such period.
"Long-Term Debt" means as of any date, those Funded Debts scheduled to
mature more than one year from such date and which are classified properly as
long-term debt in accordance with GAAP.
"Net Income" means, for any Person for any period, the consolidated
net income (or deficit) of such Person and its Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP; provided that there
shall be excluded from the calculation thereof any extraordinary, unusual or
non-recurring gains or losses during such period in accordance with GAAP.
Section 5.2. Current Maturity Coverage Ratio. For each 12-month
-------------------------------
period ending on the last day of each fiscal quarter of the Borrower, commencing
December 31, 1998, the Borrower shall maintain a Current Maturity Coverage Ratio
of not less than 1.25 to 1.0.
Section 5.3. Funded Debt Ratio. For each 12-month period ending on
-----------------
the last day of each fiscal quarter of the Borrower, commencing December 31,
1998, the Borrower shall maintain a Funded Debt Ratio of not greater than 3.5 to
1.0.
ARTICLE VI
OTHER COVENANTS
The Borrower agrees that so long as the Bank is committed to make
Loans hereunder, or honor any Letter of Credit, or any amount payable hereunder
or under the Note or any Application remains unpaid:
Section 6.1. Information. The Borrower will deliver or cause to be
-----------
delivered to the Bank:
(i) as soon as available and in any event within 150 days
after the end of each fiscal year of the Borrower, a consolidated balance
sheet of the Borrower and its Consolidated Subsidiaries as of the end of
such fiscal year and the related statements of income and cash flow for
such fiscal year, setting forth in each case in comparative form the
figures for the previous fiscal year, all in reasonable detail and
accompanied by an opinion thereon by such independent public accountants as
are reasonably satisfactory to the Bank, which opinion shall state that
such consolidated financial statements present fairly the consolidated
-8-
<PAGE>
financial position of the Borrower and its Consolidated
Subsidiaries as of the date of such financial statements and the
results of their operations for the period covered by such
financial statements in conformity with GAAP applied on a
consistent basis (except for changes in the application of which
such accountants concur) and shall not contain any "going
concern" or like qualification or exception;
(ii) as soon as available and in any event within 45
days after the end of each of the first three quarters of each
fiscal year of the Borrower, a consolidated balance sheet of the
Borrower and its Consolidated Subsidiaries and the related
consolidated statements of income and cash flow for such quarter
and for the portion of the Borrower's fiscal year ended at the
end of such quarter, setting forth in each case in comparative
form the figures for the corresponding quarter and the
corresponding portion of the Borrower's previous fiscal year, all
certified (subject to normal year-end audit adjustments and
subject to footnotes) as complete and correct by the chief
financial officer or chief accounting officer of the Borrower;
(iii) simultaneously with the delivery of each set of
financial statements referred to in clauses (i) and (ii) above, a
certificate of the chief financial officer or chief accounting
officer of the Borrower, substantially in the form of Exhibit E
hereto and appropriately completed;
(iv) forthwith upon the occurrence of any Default, a
certificate of the chief financial officer or chief accounting
officer of the Borrower setting forth the details thereof and the
action which the Borrower is taking or proposes to take with
respect thereto;
(v) as soon as reasonably practicable after
obtaining knowledge of the commencement of, or of a material
threat of the commencement of, an action, suit or proceeding
against the Borrower or any of its Subsidiaries which could
reasonably be expected to materially adversely affect the
business, properties, financial position or results of operations
of the Borrower and its Consolidated Subsidiaries, considered as
a whole, or which in any manner questions the validity of any
material provision of this Agreement, the Note, any Application
or any of the other transactions contemplated hereby or thereby,
the nature of such pending or threatened action, suit or
proceeding and such additional information as may be reasonably
requested by the Bank;
(vi) as soon as reasonably practicable after
obtaining knowledge of, or of a material possibility of, any
actual or potential contingent liability of the Borrower or any
of its Subsidiaries which is in excess of the applicable
insurance coverage therefor by $500,000, the nature of such
contingent liability and such additional information as may be
reasonably requested by the Bank;
(vii) promptly upon transmission thereof, copies of
all press releases and other statements made available generally
by the Borrower or its Subsidiaries to the public concerning
material developments in the results of operations, financial
condition, business or prospects of the Borrower or its
Subsidiaries;
(viii) promptly upon receipt thereof, copies of each
report submitted to the Borrower or any of its Consolidated
Subsidiaries by independent public accountants in connection with
any annual, interim or special audit made by them of the books of
the Borrower or any of its Consolidated Subsidiaries including,
without limitation, each report submitted to the Borrower or any
of its Consolidated Subsidiaries concerning its accounting
practices and systems and any final comment letter submitted by
such accountants to management in connection with the annual
audit of the Borrower and its Consolidated Subsidiaries; and
(ix) as soon as available, and in any event within 30
days after the beginning of each fiscal year, a copy of the
Borrower's formally adopted annual budget or other form of
Borrower's consolidated financial projections for said fiscal
year; and
-9-
<PAGE>
(x) from time to time such additional information regarding
the financial position, results of operations or business of the Borrower
or any of its Subsidiaries as the Bank may reasonably request.
Section 6.2. Payment of Obligations. The Borrower will, and will
----------------------
cause each of its Subsidiaries to, pay and discharge, as the same shall become
due and payable, (i) all their respective obligations and liabilities, including
all claims or demands of materialmen, mechanics, carriers, warehousemen,
landlords and other like persons which, in any such case, if unpaid, might by
law give rise to a Lien upon any of their properties or assets, and (ii) all
lawful Taxes, assessments and charges or levies made upon their properties or
assets, by any governmental body, agency or official except where any of the
items in clause (i) or (ii) of this Section 6.2 may be diligently contested in
good faith by appropriate proceedings, and the Borrower or such Subsidiary shall
have set aside on its books, if required under GAAP, appropriate reserves for
the accrual of any such items.
Section 6.3. Maintenance of Property; Insurance. The Borrower
----------------------------------
will keep, and will cause each of its Subsidiaries to keep, all property useful
and necessary in their respective businesses in good working order and
condition, subject to ordinary wear and tear and obsolescence; will maintain
with financially sound and reputable insurance companies, insurance on all their
respective properties in at least such amounts and against at least such risks
(and with such risk retentions) as are usually insured against by companies
engaged in the same or a similar business; and will furnish to the Bank upon
request full information as to the insurance carried.
Section 6.4. Conduct of Business and Maintenance of Existence. The
------------------------------------------------
Borrower will continue, and will cause each of its Subsidiaries to continue, to
engage in business of the same general type as now conducted by the Borrower or
such Subsidiary, and will preserve, renew and keep in full force and effect, and
will cause each of its Subsidiaries to preserve, renew and keep in full force
and effect, their respective corporate existence and their respective rights,
privileges and franchises necessary or desirable in the normal conduct of
business.
Section 6.5. Compliance with Laws. The Borrower will remain in
--------------------
material compliance, and will cause each of its Subsidiaries to remain in
material compliance, with all applicable laws, ordinances, rules, regulations,
and requirements of governmental authorities (including, without limitation,
ERISA and the rules and regulations thereunder) except where the necessity of
compliance therewith is contested in good faith by appropriate proceedings.
Section 6.6. Accounting; Inspection of Property, Books and Records.
-----------------------------------------------------
The Borrower will keep, and will cause each of its Subsidiaries to keep, proper
books of record and account in which full, true and correct entries in
conformity with GAAP shall be made of all dealings and transactions in relation
to their respective businesses and activities, will maintain, and will cause
each of its Subsidiaries to maintain, their respective fiscal reporting periods
on the present basis and will permit, and will cause each of its Subsidiaries to
permit, representatives of the Bank to visit and inspect any of their respective
properties during the Borrower's normal business hours, to examine and make
abstracts from any of their respective books and records and to discuss their
respective affairs, finances and accounts with their officers, employees and
independent public accountants, all at such reasonable times and as often as may
reasonably be desired. The Bank shall maintain the confidentiality of all
Confidential Information in accordance with its standard procedures adopted by
it in good faith to protect confidential information of third parties delivered
to it. As used herein, the term "Confidential Information" means information
delivered to the Bank by or on behalf of the Borrower or any Subsidiary in
connection with the transactions contemplated by or otherwise pursuant to this
Agreement that is proprietary in nature and that was clearly marked or labeled
when received by the Bank as being confidential information of the Borrower or
such Subsidiary; provided, that such term does not include information (i) that
--------
was publicly known or otherwise known to the Bank prior to the time of such
disclosure, (ii) that subsequently becomes publicly known through no act or
omission of the Bank or any Person acting on the Bank's behalf, (iii) that
otherwise becomes known to the Bank other than through disclosure by the
Borrower or any Subsidiary, or (iv) that constitutes financial statements
delivered to the Bank that are otherwise publicly available; and provided
--- --------
further, that the Bank may disclose Confidential Information (v) if required for
- -------
regulatory purposes, (w) pursuant to court order, (x) for any reason to its
attorneys, accountants and auditors, who shall treat said information as
confidential (y) to Participants and Assignees under Section 8.6 for the
purposes set forth in said Section, who shall agree to treat said information as
"Confidential Information" in accordance with this Section, or (z) as necessary
for the enforcement of its rights under this Agreement; and provided further,
--- -------- -------
that any of such information that is not clearly marked or labeled when received
by the Bank as being confidential information of the Borrower or such Subsidiary
shall nonetheless be treated by the
-10-
<PAGE>
Bank in accordance with it normal procedures for handling information given to
it by a borrower or prospective borrower.
Section 6.7. Debt. The Borrower and its Consolidated Subsidiaries
----
will not incur or at any time be liable with respect to any Debt in excess of
$750,000 in the aggregate at any time, except (i) Debt outstanding under this
Agreement, the Applications and the Note, and (ii) Debt secured by a Permitted
Lien.
Section 6.8. Restriction on Liens. The Borrower will not, and will
--------------------
not permit any of its Subsidiaries to at any time create, assume or suffer to
exist any Lien on any property or asset now owned or hereafter acquired by the
Borrower or any of its Subsidiaries or assign or subordinate any present or
future right to receive assets except:
(i) any Liens created by a Capital Lease or
operating lease, but only as to the leased property;
(ii) any purchase money security interest on any
capital asset of the Borrower or any of its Subsidiaries if such
purchase money security interest attaches to such capital asset
concurrently with the acquisition thereof and if the Debt secured
by such purchase money security interest does not exceed 100% of
the lesser of the cost or fair market value as of the time of
acquisition of the asset covered thereby to the Borrower or such
Subsidiary; provided, that no such purchase money security
--------
interest shall extend to or cover any property or asset of the
Borrower or such Subsidiary other than the related asset;
(iii) Liens securing Taxes, assessments or
governmental charges or levies or the claims or demands of
materialmen, mechanics, carriers, warehousemen, landlords and
other like persons; provided with respect to Taxes, assessments
--------
or governmental charges or levies or claims or demands secured by
such Liens, payment of which is not at the time required by
Section 6.2;
(iv) Liens not securing Debt which are incurred in
the ordinary course of business in connection with workmen's
compensation, unemployment insurance, social security and other
like laws; and
(v) any Lien arising pursuant to any order of
attachment, distraint or similar legal process arising in
connection with court proceedings so long as the execution or
other enforcement thereof is effectively stayed and the claims
secured thereby are being contested in good faith by appropriate
proceedings, or such claims are not in excess of available
insurance coverage by more than $500,000.
Section 6.9. Consolidations, Mergers and Sales of Assets. The
-------------------------------------------
Borrower will not (i) consolidate or merge with or into any other Person or (ii)
except for Investments, sell, lease or otherwise transfer all or any substantial
part of its assets to any Person other than a Wholly-Owned Consolidated
Subsidiary. The Borrower will not permit any of its Subsidiaries to consolidate
or merge with or into, or transfer all or any substantial part of its assets to,
any Person other than the Borrower or a Wholly-Owned Consolidated Subsidiary.
Section 6.10. Transactions with Other Persons. The Borrower will
-------------------------------
not, and will not permit any of its Subsidiaries to, enter into any agreement
with any Person whereby any of them shall agree to any restriction on the
Borrower's right to amend or waive any of the provisions of this Agreement.
Section 6.11. Use of Proceeds. The proceeds of the Loans will be
---------------
used by the Borrower to support the working capital needs of the Borrower and to
make Investments. None of the proceeds of the Loans will be used, directly or
indirectly, for the purpose, whether immediate, incidental or ultimate, of
purchasing or carrying any "margin stock" within the meaning of Regulation U.
Section 6.12. Independence of Covenants. All covenants contained
-------------------------
herein shall be given independent effect so that if a particular action or
condition is not permitted by any of such covenants, the fact that such action
or condition would be permitted by an exception to, or otherwise be within the
limitations of another covenant shall not avoid the occurrence of a Default if
such action is taken or condition exists.
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<PAGE>
Section 6.13. Restrictions With Respect to Investments. Each
----------------------------------------
Investment with respect to which a Loan is made must comply with all of the
following conditions on or before the date of Investment:
(i) The entity in which the Investment is made shall
be in substantially the same or a related line of business as the
Borrower or any of its Subsidiaries.
(ii) No Default shall have occurred and be continuing.
Section 6.14. Change in Management. Without the prior written
--------------------
consent of the Bank, Michael J. Saylor shall not for any reason cease to be the
President, Chief Executive Officer and majority shareholder of the Borrower.
Section 6.15. Year 2000 Compliance. The Borrower shall promptly
--------------------
notify the Bank in the event the Borrower determines that any computer
application which is material to the operations of the Borrower or its
Subsidiaries will not be fully Year 2000 Compliant (as defined in Section 4.12)
on a timely basis, except to the extent that such failure could not reasonably
be expected to have a material adverse effect upon the financial condition of
the Borrower and its Subsidiaries, taken as a whole.
ARTICLE VII
DEFAULTS
Section 7.1. Events of Default. If one or more of the following
-----------------
events ("Events of Default") shall have occurred:
(i) the Borrower shall fail to pay when due any
principal of or interest on any Loan, any fee or any other amount
payable hereunder or under the Note or any Application;
(ii) the Borrower shall fail to observe or perform
any covenant contained in Article V or in Section 6.7, 6.8, 6.9,
6.10, 6.11, 6.13, 6.14, or 6.15;
(iii) the Borrower shall fail to observe or perform
any covenant or agreement contained in this Agreement (other than
those covered by clauses (i) or (ii) above) for 30 days after the
earlier to occur of (A) the date written notice thereof is given
to the Borrower by the Bank, or (B) the date notice thereof
should have been given to the Bank pursuant to Section 6.1(iv);
(iv) any representation, warranty, certification or
statement made by the Borrower in this Agreement or any
Application or by the Borrower in any certificate, financial
statement or other document delivered pursuant hereto or thereto
shall prove to have been incorrect in any material respect when
made;
(v) the Borrower or any Subsidiary of the Borrower
shall fail to make any payment in respect of any Debt (other than
the Note) in excess of $500,000 when due or within any applicable
grace period;
(vi) any event or condition shall occur which results
in the acceleration of the maturity of any Debt in excess of
$500,000 of the Borrower or any Subsidiary of the Borrower or
enables (or, with the giving of notice or lapse of time or both,
would enable) the holder of such Debt in excess of $500,000 or
any Person acting on such holder's behalf to accelerate the
maturity thereof;
(vii) the Borrower or any Subsidiary of the Borrower
shall commence a voluntary case or other proceeding seeking
liquidation, reorganization or other relief with respect to
itself or its debts under any bankruptcy, insolvency or other
similar law now or hereafter in effect or seeking the appointment
of a trustee, receiver, liquidator, custodian or other similar
official of it or any substantial part of its property, or shall
consent to any such relief or to the appointment of or taking
possession by any such official in an involuntary case or other
proceeding commenced against it, or shall make a
-12-
<PAGE>
general assignment for the benefit of creditors, or shall fail
generally to pay its debts as they become due, or shall take any
corporate action to authorize any of the foregoing;
(viii) an involuntary case or other proceeding shall
be commenced against the Borrower or any Subsidiary of the
Borrower seeking liquidation, reorganization or other relief with
respect to it or its Debts under any bankruptcy, insolvency or
other similar law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian or
other similar official of it or any substantial part of its
property, and such involuntary case or other proceeding shall
remain undismissed and unstayed for a period of 60 days; or an
order for relief shall be entered against the Borrower or any
Subsidiary of the Borrower under the federal bankruptcy laws as
now or hereafter in effect;
(ix) any member of the Controlled Group shall fail
to pay when due an amount or amounts aggregating in excess of
$100,000 which it shall have become liable to pay to the PBGC,
any Plan or any Plan trustee under Title IV of ERISA or (S) 412
of the Code; or notice of intent to terminate a Plan or Plans
having aggregate Unfunded Vested Liabilities in excess of
$100,000 (collectively, a "Material Plan") shall be provided
under Title IV of ERISA by any member of the Controlled Group,
any plan administrator or any combination of the foregoing; or
the PBGC shall institute proceedings under Title IV of ERISA to
terminate or to cause a trustee to be appointed to administer any
Material Plan or a proceeding shall be instituted by a fiduciary
of any Material Plan against any member of the Controlled Group
to enforce Section 515 of ERISA and such proceeding shall not
have been dismissed within 30 days thereafter; or a condition
shall exist by reason of which the PBGC would be entitled to
obtain a decree adjudicating that any Material Plan must be
terminated; or
(x) one or more judgments or orders for the payment
of money in excess of $500,000 over the limit of applicable
insurance coverage shall be rendered against the Borrower or any
Subsidiary of the Borrower and such judgment or order shall
continue unsatisfied and unstayed for a period of 30 days;
then, and in every such event, the Bank, at its option, may by notice to the
Borrower terminate the Commitment and it shall thereupon terminate, and may, at
its option, by notice to the Borrower declare the Note (together with accrued
interest thereon) to be, and the Note shall thereupon become, immediately due
and payable without presentment, demand, protest or other notice of any kind,
all of which are hereby waived by the Borrower; provided that in the case of any
--------
of the Events of Default specified in paragraph (vii) or (viii) above with
respect to the Borrower, without any notice to the Borrower or any other act by
the Bank, the Commitment shall thereupon terminate and the Note (together with
accrued interest thereon) shall become immediately due and payable without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by the Borrower. Upon the occurrence and during the continuance
of any Event of Default, then, or at any time after the happening of the same,
the Bank may, at its option, demand that the Borrower, within ten (10) days of
such demand, arrange for the cancellation of each outstanding Letter of Credit
such that the Bank has no further liability under any Letter of Credit, or in
the event the Borrower fails to procure the cancellation of any Letter of Credit
within such ten (10) day period, demand that the Borrower pay to the Bank, as
cash collateral, the remaining amounts available to be drawn, if any, under all
Letters of Credit not so canceled and such amounts shall thereupon become
immediately due and payable. In the event the Borrower pays to the Bank or the
Bank collects from the Borrower sums representing the remaining amounts
available to be drawn under said outstanding Letters of Credit, the Bank shall
hold such sums in an interest-bearing account as security for the Borrower's
obligation to reimburse the Bank for amounts paid by the Bank under the Letters
of Credit or otherwise due hereunder. Upon the expiration of each of the
Letters of Credit and the Bank's reasonable determination that it has no further
liability thereunder, and provided the Borrower shall have no other unpaid debt
to the Bank under this Agreement, the Bank shall repay such sums to the Borrower
to the extent they exceed the remaining amounts actually paid by the Bank under
said Letter of Credit. The Bank's rights under this Section 7.1 are in addition
to other rights and remedies which the Bank may have.
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<PAGE>
ARTICLE VIII
MISCELLANEOUS
Section 8.1. Notices. All notices, requests and other communications
-------
to a party hereunder shall be in writing and shall be given to such party at its
address set forth on the signature pages hereof or such other address as such
party may hereafter specify for the purpose by notice to the other. Each such
notice, request or other communication shall be effective when delivery to the
addressee, at the address specified in this Section is accepted or refused
provided that notices under Section 2.2 shall not be effective until received.
- --------
Section 8.2. No Waivers. No failure or delay by the Bank in
----------
exercising any right, power or privilege hereunder or under the Note shall
operate as a waiver thereof nor shall any single or partial exercise thereof
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies herein provided shall be
cumulative and not exclusive of any rights or remedies provided by law.
Section 8.3. Expenses.
--------
(a) The Borrower shall pay all out-of-pocket expenses of the Bank,
including: (i) $10,000 in fees, plus disbursements, of counsel for the Bank in
connection with the preparation of this Agreement and the other documents
contemplated hereby to be prepared by the Bank's counsel; (ii) reasonable fees
and disbursements of counsel for the Bank, in connection with the enforcement of
this Agreement, any waiver or consent hereunder or any amendment hereof or any
Default or alleged Default hereunder; and (iii) if an Event of Default occurs,
all reasonable out-of-pocket expenses incurred by the Bank, including reasonable
fees and disbursements of counsel, in connection with such Event of Default and
collection and other enforcement proceedings resulting therefrom. The Borrower
shall indemnify the Bank against any transfer Taxes, documentary Taxes,
assessments or charges made by any governmental authority by reason of the
execution and delivery of this Agreement, any Application, or the Note.
(b) If the Bank shall determine that the adoption after the date
hereof of any law, rule, regulation or guidelines regarding capital adequacy, or
any change in any of the foregoing or in the interpretation or administration of
any of the foregoing by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by the Bank with any request or directive regarding capital adequacy (whether or
not having the force of law) of any such authority, central bank or comparable
agency, has or would have the effect of reducing the rate of return on the
Bank's capital or the capital of any Person controlling the Bank as a
consequence of the Bank's obligations hereunder to a level below that which the
Bank or such Person could have achieved but for such law, change or compliance
(taking into consideration the Bank's policies with respect to capital adequacy)
by an amount deemed by the Bank to be material, then from time to time within
ten days after written demand by the Bank, the Borrower shall pay to the Bank
such additional amount or amounts as will compensate the Bank for such reduction
with respect to the Obligations hereunder; provided, any such amounts shall not
--------
be for periods greater than 60 days prior to such demand by the Bank. A
certificate of the Bank claiming compensation under this Section 8.3(b) and
setting forth the additional amount or amounts to be paid to it hereunder shall
be conclusive in the absence of manifest error. In determining any such amount,
the Bank may use any reasonable averaging and attribution methods.
Section 8.4. Right of Set-Off. Upon the occurrence and during the
----------------
continuance of any Event of Default, the Bank is hereby authorized at any time
and from time to time, to the fullest extent permitted by law, to set off and
apply any and all deposits (general or special, time or demand, provisional or
final) at any time held and other indebtedness at any time owing by the Bank to
or for the credit or the account of the Borrower against any and all of the
obligations now or hereafter existing under this Agreement, the Note or any
Application, irrespective of whether or not the Bank shall have made any demand
hereunder or under the Note and although such obligation may be unmatured. The
rights of the Bank under this Section 8.4 are in addition to other rights and
remedies (including, without limitation, other rights of set-offs) which the
Bank may have. The Borrower agrees, to the fullest extent it may effectively do
so under applicable law, that any holder of a participation in any Note may
exercise rights of set-off or counterclaim or other rights with respect to such
participation as fully as if such holder of a participation were a direct
creditor of the Borrower in the amount of such participation.
Section 8.5. Amendments and Waivers. Any provision of this Agreement
----------------------
or of the Note or any Application may be amended or waived if, but only if, such
amendment or waiver is in writing and is signed by the Borrower and the Bank.
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<PAGE>
Section 8.6. Successors and Assigns. (a) The provisions of this
----------------------
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns, except that the Borrower may not
assign or otherwise transfer any of its rights under this Agreement without the
prior written consent of the Bank.
(b) The Bank may at any time grant to one or more banks or other
institutions (each a "Participant") participating interests in the Commitment or
in any or all of the Loans or the Note. In the event of any such grant by the
Bank of a participating interest to a Participant, whether or not upon notice to
the Borrower, the Bank shall remain responsible for the performance of its
obligations hereunder, and the Bank shall continue to deal solely and directly
with the Borrower in connection with the Bank's rights and obligations under
this Agreement. Any agreement pursuant to which the Bank may grant such a
participating interest shall provide that the Bank shall retain the sole right
and responsibility to enforce the obligations of the Borrower hereunder
including, without limitation, the right to approve any amendment, modification
or waiver of any provision of this Agreement; provided that such participation
--------
agreement may provide that the Bank will not agree to any modification,
amendment or waiver of this Agreement which would have the effect of (i)
increasing, decreasing or extending the Commitment or subjecting the Bank to any
additional obligation, (ii) reducing the principal of or rate of interest on any
Loan, (iii) postponing the date fixed for any payment of principal of or
interest on any Loan or fees hereunder or under the Note, or (iv) extending the
Revolving Credit Period, without the consent of the Participant. An assignment
or other transfer which is not permitted by subsection (c) or (d) below shall be
given effect for purposes of this Agreement only to the extent of a
participating interest granted in accordance with this subsection (b).
(c) The Bank may at any time assign to one or more banks or other
institutions (each an "Assignee") all, or a proportionate part of all, of its
rights and obligations under this Agreement and the Note, and such Assignee
shall assume such rights and obligations, pursuant to an instrument executed by
such Assignee and the Bank, with (and subject to) the consent of the Borrower;
provided that if an Assignee is an affiliate of the Bank, no such consent shall
- --------
be required. Upon execution and delivery of such an instrument (including the
consent of the Borrower) and payment by such Assignee to the Bank of an amount
equal to the purchase price agreed between the Bank and such Assignee, such
Assignee shall become a Bank party to this Agreement and shall have all the
rights and obligations of a Bank with a Commitment as set forth in such
instrument of assumption, and the transferor Bank shall be released from its
obligations hereunder to a corresponding extent, and no further consent or
action by any party shall be required. Upon the consummation of any assignment
pursuant to this subsection (c), the transferor Bank and the Borrower shall make
appropriate arrangements so that, if required, a new Note or Notes is issued to
the Assignee. If the Assignee is not incorporated under the laws of the United
States of America or a state thereof, it shall, prior to the first date on which
interest or fees are payable hereunder for its account deliver to the Borrower
certification as to exemption from deduction or withholding of any United States
federal income taxes.
(d) The Bank may at any time assign all or any portion of its rights
under this Agreement and the Note to a Federal Reserve Bank. No such assignment
shall release the Bank from its obligations hereunder.
(e) The Bank may furnish any information concerning the Borrower in
its possession from time to time to Assignees and Participants (including
prospective Assignees and Participants) and may furnish such information in
response to credit inquiries consistent with general banking practice, which
actual or prospective Participant or Assignee shall first have agreed to be
bound by the confidentiality provisions of Section 6.6 as if a party hereto.
Section 8.7. Virginia Law. This Agreement and the Notes shall be
------------
governed by and construed in accordance with the laws of the Commonwealth of
Virginia without reference to conflicts of laws principles.
Section 8.8. Counterparts; Effectiveness. This Agreement may be
---------------------------
signed in any number of counterparts, each of which shall be an original, with
the same effect as if the signatures thereto and hereto were upon the same
instrument. This Agreement shall become effective when the Bank shall have
received counterparts hereof signed by both parties.
Section 8.9. Enforcement of Arbitration; Submission to Jurisdiction.
------------------------------------------------------
Any legal action or proceeding to enforce an arbitration award pursuant to
Section 8.10 shall be brought in the courts of the Commonwealth of Virginia in
Fairfax County, Virginia or of the United States of America for the Eastern
District of Virginia and in no other courts, and by execution and delivery of
this Agreement the Borrower hereby accepts for itself and in respect of its
property, generally and
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<PAGE>
unconditionally, the jurisdiction of the aforesaid courts. The Borrower hereby
irrevocably and unconditionally waives any objection, including without
limitation, any objection to the laying of venue or based on the grounds of the
forum non conveniens which it now or hereafter may have to the bringing of any
- ----- --- ----------
action or proceeding in such respective jurisdictions.
Section 8.10. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG
-----------
THE PARTIES HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING
TO THIS AGREEMENT OR ANY 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" 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 AGREEMENT 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 FAIRFAX
-------------
COUNTY, VIRGINIA, 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 AGREEMENT OR
(II) BE A WAIVER BY 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
(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 AGREEMENT. NEITHER THIS
EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION
FOR FORECLOSURE OR PROVISIONAL OR 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.
Section 8.11. Entire Agreement; Conflicts. This Agreement, the Note,
---------------------------
Applications and other loan documents set forth the entire agreement of the
parties with respect to the subject matter hereof and thereof and supersede all
previous understandings, written or oral, in respect thereof. Any conflict
between a term of this Agreement and a term of any Application shall be resolved
in favor of the term as set forth in this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized officers as of the day and year
first above written.
MICROSTRATEGY INCORPORATED [SEAL]
8000 Towers Crescent Drive, Suite 1400
Vienna, Virginia 22182
By /s/ Michael J. Saylor
---------------------------------
Name: Michael J. Saylor
Title: President and Chief
Executive Officer
NATIONSBANK, N.A. [SEAL]
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<PAGE>
8300 Greensboro Drive, Suite 550
McLean, Virginia 22102
By /s/ Christopher Gage Morse
--------------------------------
Christopher Gage Morse,
Assistant Vice President
-17-
<PAGE>
REVOLVING
COMMERCIAL NOTE
$25,000,000.00 March 26, 1999
FOR VALUE RECEIVED, the undersigned (the "Borrower") promises to pay
to the order of NATIONSBANK, N.A., a national banking association (the "Bank,"
which term shall include any holder of this Note) without offset, at the Bank's
office located at 8300 Greensboro Drive, Suite 550, McLean, Virginia 22102 (or
at such other address as the Bank shall designate), not later than May 31, 2001
(the "Date of Maturity"), the principal sum of Twenty-five Million and no/100
Dollars ($25,000,000.00) (hereinafter called "Principal Sum"), or so much of
that sum as the Bank may advance, and subject to the provisions of Section 2.5
of the Credit Agreement, together with interest on the principal balance
outstanding from time to time at the rate provided in this Note.
INTEREST RATE. This Note shall bear interest on the principal balance
outstanding from time to time, from the date of this Note until paid in full, at
a variable rate equal to the LIBOR Rate plus the Variance. The "LIBOR Rate"
means that variable rate of interest (rounded upwards, if necessary, to the
nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as
the three-month London interbank offered rate for deposits in U.S. Dollars at
approximately 11:00 a.m. (London time) on the second preceding business day, as
adjusted from time to time in the Bank's sole discretion for then-applicable
reserve requirements, deposit insurance assessment rates and other regulatory
costs. If, for any reason, such rate is not available, the term "LIBOR Rate"
shall mean the fluctuating rate of interest equal to the three-month rate of
interest (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing
on Reuters Screen LIBO Page as the three-month London interbank offered rate for
deposits in Dollars at approximately 11:00 a.m. (London time) on the second
preceding business day as adjusted from time to time in the Bank's sole
discretion for then-applicable reserve requirements, deposit insurance
assessment rates and other regulatory costs; provided, however, if more than one
rate is specified on Reuters Screen LIBO Page, the applicable rate shall be the
arithmetic mean of all such rates. As used herein, "Variance" means that rate
per annum which varies in accordance with the Funded Debt Ratio, as determined
by the then most recent financial statements delivered to the Bank in accordance
with Section 6.1(i) or (ii) (each, a "Financial Statement") of the Credit
Agreement. If, in accordance with a Financial Statement of the Borrower
delivered to the Bank, (a) the Funded Debt Ratio for the reported fiscal quarter
was less than or equal to 1.0 to 1.0, then the Variance shall be 1.00%; (b) the
Funded Debt Ratio for the reported fiscal quarter was greater than 1.0 to 1.0
but less than or equal to 2.0 to 1.0, then the Variance shall be 1.25%; (c) the
Funded Debt Ratio for the reported fiscal quarter was greater than 2.0 to 1.0
but less than or equal to 3.0 to 1.0, then the Variance shall be 1.50%; and (d)
the Funded Debt Ratio for the reported fiscal quarter was greater than 3.0 to
1.0 but less than or equal to 3.5 to 1.0, then the Variance shall be 1.75%;
provided, that until delivery of the Financial Statement for the period ending
- --------
March 31, 1999, the Variance shall be 1.0%.
The interest rate on this Note will change in accordance with changes in the
LIBOR Rate and the Funded Debt Ratio. The interest rate in any fiscal quarter of
the Borrower (an "Interest Period") will be the LIBOR Rate in effect on the last
day of the fiscal quarter immediately preceding said Interest Period, plus the
Variance as determined by the Financial Statement delivered to the Bank covering
such preceding fiscal quarter. Any change in the interest rate will become
effective on the first day of the Interest Period and remain fixed for said
Interest Period. Interest on this Note shall be calculated on the basis of a
360-day year, for the actual number of days elapsed.
Upon the maturity of this Note (whether scheduled, by acceleration, or
otherwise) this Note shall bear interest, payable on demand, for each day until
paid at a rate per annum equal to the sum of 4.0% plus the otherwise applicable
interest rate.
PAYMENT OF INTEREST. Interest accrued shall be payable beginning April
26, 1999, and on the same day of each consecutive month thereafter until this
Note is paid in full.
PREPAYMENT. The Borrower may pay the whole or any part of the
outstanding indebtedness evidenced by this Note at any time without penalty by
paying the principal amount to be prepaid together with accrued interest thereon
to the date of prepayment.
ADVANCES. If no Default (as defined in the Credit Agreement) has
occurred and is continuing, and subject to the other requirements of the Credit
Agreement, the Borrower may borrow at any time and from time to time from the
date hereof to the Date of Maturity, such amounts as the Borrower may request,
provided the unpaid principal balance at any given time does not exceed the
Page 1 of 3
<PAGE>
Principal Sum. Subject to the foregoing, the Borrower may borrow under this
Note, prepay and reborrow. Advances may be made by credit to the Borrower's
deposit account with the Bank, and if so, the Borrower shall be liable to the
Bank for such advance without regard to the proper authorization for the
advance.
ACCELERATION. At the option of the Bank, upon the occurrence of an
Event of Default as defined in the Credit Agreement, the full amount remaining
unpaid on this Note shall become immediately due and payable without
presentment, demand or notice of any kind; no additional advances shall be made
to the Borrower under this Note; and the Bank may exercise any or all remedies
available to it under applicable law and the Credit Agreement.
ACCOUNT RECORD. The Bank shall maintain records of the dates and
amounts of advances of principal and payments of principal and interest, the
date to which interest has been paid, accrued interest, the unpaid principal
balance, and any other account information. Such records shall be maintained
unilaterally by the Bank without notice to the Borrower and shall be presumed to
be correct, provided, however, any failure of the Bank to maintain such records
or any error therein or in any notice hereunder shall not in any manner affect
the obligation of the Borrower to pay this Note in accordance with the terms
hereof.
IMMEDIATELY AVAILABLE FUNDS. The principal of and interest on this
Note shall be payable in immediately available funds in lawful money of the
United States which shall be legal tender for public and private debts at the
time of payment. The making of any payment in other than immediately available
funds which the Bank, at its option, elects to accept shall be subject to
collection, and interest shall continue to accrue until the funds by which
payment is made are available to the Bank for its use.
APPLICATION OF PAYMENTS. Payments will be applied to interest, late
charges and other charges due at the time such payments are received, and
principal, in that order. All payments shall be applied to satisfaction of
scheduled payments in the order in which they become due.
WAIVER. The Borrower and any indorser of this Note, to the extent
permitted by law and except as otherwise provided herein, in the Credit
Agreement or in any Loan Document, (i) waive presentment, demand, protest and
notice of dishonor and protest, (ii) waive the benefit of their homestead
exemptions as to this debt, (iii) waive any right which they may have to require
the Bank to proceed against any other Person or any collateral given to secure
the payment of this Note, and (iv) agree that, without notice to the Borrower or
any indorser and without affecting the liability of the Borrower or any
indorser, the Bank, at any time or times, may grant extensions of the time for
any payment due on this Note or any other indulgence or forbearance, release any
Person from the obligation to make payments on this Note, permit the renewal of
this Note, or permit the substitution, exchange or release of any security for
this Note.
LATE CHARGE; ATTORNEYS' FEES. If the Borrower fails to pay any amount
due under this Note within 10 days of the date due, the Borrower shall pay to
the Bank on demand a late charge equal to five percent (5%) of the amount due.
The Borrower shall pay to the Bank on demand all costs incurred by the Bank, and
reasonable attorneys' fees, in the collection or enforcement of this Note upon
the occurrence of an Event of Default, whether or not suit is brought.
SET-OFF. The Bank will have the right, in addition to all other
remedies permitted by law (including, without limitation, other rights of set-
off), during the continuance of an Event of Default and after 2 days' written
notice to the Borrower, to set off the amount now or hereafter due under this
Note or due under any other obligation of the Borrower to the Bank against any
and all accounts, credits, money, securities, or other property now or hereafter
on deposit with, held by, or in the possession of the Bank to the credit or for
the account of the Borrower, without notice to or consent by the Borrower. In
addition to the right of set-off, to secure the payment of this Note the
Borrower assigns and grants to the Bank a security interest in all accounts,
credits, money, securities, or other property now or hereafter on deposit with,
held by, or in the possession of the Bank to the credit or for the account of
the Borrower.
DEFINITIONS. Terms used herein and defined in that certain Credit
Agreement dated as of March 26, 1999 between the Borrower and the Bank (as said
agreement may from time to time be amended, extended, supplemented and replaced,
the "Credit Agreement") shall have their respective meanings herein as therein
defined.
Page 2 of 3
<PAGE>
ADDITIONAL TERMS.
ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES
------------
HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS
NOTE, 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" 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 MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED
PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS
INSTRUMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION.
(i) SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN FAIRFAX
-------------
COUNTY, VIRGINIA, 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 NOTE; OR (II)
BE A WAIVER BY 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 (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. NEITHER THIS
EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION
FOR FORECLOSURE OR PROVISIONAL OR 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.
The proceeds of this Note shall be used to acquire or carry on a
business, professional, investment, or commercial enterprise or activity.
This Note is the "Note" referred to in the Credit Agreement. Reference
is made to the Credit Agreement for other provisions applicable to this Note.
This Note shall be governed by and construed in accordance with the
laws of the Commonwealth of Virginia without reference to conflicts of laws
principles.
WITNESS the following signature and seal:
MICROSTRATEGY INCORPORATED [SEAL]
8000 Towers Crescent Drive, Suite 1400
Vienna, Virginia 22182
By: /s/ Michael J. Saylor
--------------------------------------------
Name: Michael J. Saylor
Title: President and Chief Executive
Officer
Page 3 of 3
<PAGE>
[NationsBank, N.A. Letterhead]
July 12, 1999
MicroStrategy Incorporated
8000 Towers Crescent Drive
Vienna, Virginia 22182
Attn: Mr. Michael J. Saylor, Chief Executive Officer
Re: Modification to Credit Agreement dated as of March 26, 1999
Dear Mr. Saylor:
Reference is made to that certain Credit Agreement dated March 26, 1999
(the "Credit Agreement") between MicroStrategy Incorporated and NationsBank,
N.A. All capitalized terms not otherwise defined herein shall have the meaning
ascribed to them in the Credit Agreement.
This is to confirm our agreement that Section 6.7 of the Credit Agreement
is hereby amended by inserting the following at the end of such section
immediately after the words "Permitted Lien": ", and (iii) Debt owing by the
Borrower and/or any Consolidated Subsidiaries to the Borrower and/or any
Consolidated Subsidiaries, including, without limitation, Debt owed by the
Borrower to Aventine Incorporated". This amendment shall be effective as of
March 26, 1999.
Except as otherwise modified hereby, the terms and provisions of the Credit
Agreement are hereby ratified and confirmed.
Please acknowledge your agreement to the foregoing amendment to the Credit
Agreement by countersigning a copy of this letter where indicated below.
Very truly yours,
NATIONSBANK, N.A.
By: /s/ Katherine A. Marcotte
-------------------------
Its: Katherine A. Marcotte
Senior Vice President
ACKNOWLEDGED AND AGREED:
MICROSTRATEGY INCORPORATED
By: /s/ Michael J. Saylor
---------------------
Its: Chief Executive Officer and President
<PAGE>
MICROSTRATEGY INCORPORATED
1999 STOCK OPTION PLAN
----------------------
1. Purpose
-------
The purpose of this 1999 Stock Option Plan (the "Plan") of MicroStrategy
Incorporated, a Delaware corporation (the "Company"), is to enhance the
Company's ability to attract, retain and motivate persons who make (or are
expected to make) important contributions to the Company by providing such
persons with equity ownership opportunities and performance-based incentives and
thereby better aligning the interests of such persons with those of the
Company's stockholders. Except where the context otherwise requires, the term
"Company" shall include any of the Company's present or future subsidiary
corporations as defined in Section 424(f) of the Internal Revenue Code of 1986,
as amended, and any regulations promulgated thereunder (the "Code").
2. Eligibility
-----------
All of the Company's employees, officers, consultants and advisors (and any
individuals who have accepted an offer for employment) are eligible to be
granted options (each, an "Award") under the Plan. Each person who has been
granted an Award under the Plan shall be deemed a "Participant".
3. Administration, Delegation
--------------------------
(a) Administration by Board of Directors. The Plan will be administered by
------------------------------------
the Board of Directors of the Company (the "Board"). The Board shall have
authority to grant Awards and to adopt, amend and repeal such administrative
rules, guidelines and practices relating to the Plan as it shall deem advisable.
The Board may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Award in the manner and to the extent it shall
deem expedient to carry the Plan into effect and it shall be the sole and final
judge of such expediency. All decisions by the Board shall be made in the
Board's sole discretion and shall be final and binding on all persons having or
claiming any interest in the Plan or in any Award. No director or person acting
pursuant to the authority delegated by the Board shall be liable for any action
or determination relating to or under the Plan made in good faith.
(b) Delegation to Executive Officers. To the extent permitted by
--------------------------------
applicable law, the Board may delegate to one or more executive officers of the
Company the power to make Awards and exercise such other powers under the Plan
as the Board may determine, provided that the Board shall fix the maximum number
of shares subject to Awards and the maximum number of shares for any one
Participant to be made by such executive officers.
(c) Appointment of Committees. To the extent permitted by applicable law,
-------------------------
the Board may delegate any or all of its powers under the Plan to one or more
committees or subcommittees of the Board (a "Committee"). All references in the
Plan to the "Board" shall mean the Board or a Committee of the Board or the
executive officer referred to in Section 3(b) to the extent that the Board's
powers or authority under the Plan have been delegated to such Committee or
executive officer.
4. Stock Available for Awards
--------------------------
(a) Number of Shares. Subject to adjustment under Section 6, Awards may be
----------------
made under the Plan for up to 2,500,000 shares of Class A Common Stock, $0.001
par value per share, of the Company (the "Common Stock"). If any Award expires
or is terminated, surrendered or canceled without having been fully exercised or
is forfeited in whole or in part or results in any Common Stock not being
<PAGE>
issued, the unused Common Stock covered by such Award shall again be available
for the grant of Awards under the Plan, subject, however, in the case of
Incentive Stock Options (as hereinafter defined), to any limitation required
under the Code. Shares issued under the Plan may consist in whole or in part of
authorized but unissued shares or treasury shares.
(b) Per-Participant Limit. Subject to adjustment under Section 6, for
---------------------
Awards granted after the Common Stock is registered under the Securities
Exchange Act of 1934 (the "Exchange Act"), the maximum number of shares of
Common Stock with respect to which an Award may be granted to any Participant
under the Plan shall be 500,000 per calendar year. The per-Participant limit
described in this Section 4(b) shall be construed and applied consistently with
Section 162(m) of the Code.
5. Stock Options
-------------
(a) General. The Board may grant options to purchase Common Stock (each,
-------
an "Option") and determine the number of shares of Common Stock to be covered by
each Option, the exercise price of each Option and the conditions and
limitations applicable to the exercise of each Option, including conditions
relating to applicable federal or state securities laws, as it considers
necessary or advisable. An Option which is not intended to be an Incentive
Stock Option (as hereinafter defined) shall be designated a "Nonstatutory Stock
Option".
(b) Incentive Stock Options. An Option that the Board intends to be an
-----------------------
"incentive stock option" as defined in Section 422 of the Code (an "Incentive
Stock Option") shall only be granted to employees of the Company and shall be
subject to and shall be construed consistently with the requirements of Section
422 of the Code. The Company shall have no liability to a Participant, or any
other party, if an Option (or any part thereof) which is intended to be an
Incentive Stock Option is not an Incentive Stock Option.
(c) Exercise Price. The Board shall establish the exercise price at the
--------------
time each Option is granted and specify it in the applicable option agreement.
(d) Duration of Options. Each Option shall be exercisable at such times
-------------------
and subject to such terms and conditions as the Board may specify in the
applicable option agreement.
(e) Exercise of Option. Options may be exercised by delivery to the
------------------
Company of a written notice of exercise signed by the proper person or by any
other form of notice (including electronic notice) approved by the Board
together with payment in full as specified in Section 5(f) for the number of
shares for which the Option is exercised.
(f) Payment Upon Exercise. Common Stock purchased upon the exercise of an
---------------------
Option granted under the Plan shall be paid for as follows:
(1) in cash or by check, payable to the order of the Company;
(2) except as the Board may, in its sole discretion, otherwise provide in
an option agreement, by (i) delivery of an irrevocable and unconditional
undertaking by a creditworthy broker to deliver promptly to the Company
sufficient funds to pay the exercise price or (ii) delivery by the Participant
to the Company of a copy of irrevocable and unconditional instructions to a
creditworthy broker to deliver promptly to the Company cash or a check
sufficient to pay the exercise price;
(3) to the extent permitted by the Board, in its sole discretion, by
delivery of shares of Common Stock owned by the Participant valued at their fair
market value as determined by (or in a
2
<PAGE>
manner approved by) the Board in good faith ("Fair Market Value"), provided (i)
such method of payment is then permitted under applicable law and (ii) such
Common Stock was owned by the Participant at least six months prior to such
delivery;
(4) to the extent permitted by the Board, in its sole discretion by (i)
delivery of a promissory note of the Participant to the Company on terms
determined by the Board, or (ii) payment of such other lawful consideration as
the Board may determine; or
(5) by any combination of the above permitted forms of payment.
(g) Buyout Provisions. The Board may at any time offer to purchase for a
-----------------
payment in cash, promissory note or shares of Common Stock, an Option previously
granted, based on such terms and conditions as the Board shall establish and
communicate to the Participant at the time that such offer is made.
6. Adjustments for Changes in Common Stock and Certain Other Events
----------------------------------------------------------------
(a) Changes in Capitalization. In the event of any stock split, reverse
-------------------------
stock split, stock dividend, recapitalization, combination of shares,
reclassification of shares, spin-off or other similar change in capitalization
or event, or any distribution to holders of Common Stock other than a normal
cash dividend, (i) the number and class of securities available under this Plan,
(ii) the per-Participant limit set forth in Section 4(b), (iii) the number and
class of securities and exercise price per share subject to each outstanding
Option, and (iv) the terms of each other outstanding Award shall be
appropriately adjusted by the Company (or substituted Awards may be made, if
applicable) to the extent the Board shall determine, in good faith, that such an
adjustment (or substitution) is necessary and appropriate. If this Section 6(a)
applies and Section 6(c) also applies to any event, Section 6(c) shall be
applicable to such event, and this Section 6(a) shall not be applicable. 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 Award.
(b) Liquidation or Dissolution. In the event of a proposed liquidation or
--------------------------
dissolution of the Company, the Board shall upon written notice to the
Participants provide that all then unexercised Options will (i) become
exercisable in full as of a specified time at least 10 business days prior to
the effective date of such liquidation or dissolution and (ii) terminate
effective upon such liquidation or dissolution, except to the extent exercised
before such effective date. The Board may specify the effect of a liquidation
or dissolution on any Award granted under the Plan at the time of the grant of
such Award.
(c) Acquisition Events
------------------
(1) Definition. An "Acquisition Event" shall mean:
----------
(a) any merger or consolidation of the Company with or into
another entity as a result of which the Common Stock is
converted into or exchanged for the right to receive cash,
securities or other property; or
(b) any exchange of shares of the Company for cash, securities
or other property pursuant to a statutory share exchange
transaction.
(2) Effect on Options. Upon the occurrence of an Acquisition Event, or the
-----------------
execution by the Company of any definitive agreement with respect to an
Acquisition Event, the Board
3
<PAGE>
shall provide that all outstanding Options shall be assumed, or equivalent
options shall be substituted, by the acquiring or succeeding corporation (or an
affiliate thereof); provided that if the acquiring or succeeding corporation
-------- ----
(or an affiliate thereof) does not agree to assume, or substitute for, such
Options, then the Board shall, upon written notice to the Participants, provide
that all of the then unexercised Options will become exercisable in full as of a
specified time prior to the Acquisition Event, and will terminate immediately
prior to the occurrence of the Acquisition Event, except to the extent exercised
by the Participants before the consummation of such Acquisition Event; provided,
--------
however, that in the event of an Acquisition Event under the terms of which
- -------
holders of Common Stock will receive upon consummation thereof a cash payment
for each share of Common Stock surrendered pursuant to such Acquisition Event
(the "Acquisition Price"), then the Board may instead provide that all
outstanding Options shall terminate upon consummation of such Acquisition Event
and that each Participant shall receive, in exchange therefor, a cash payment
equal to the amount (if any) by which (A) the Acquisition Price multiplied by
the number of shares of Common Stock subject to the outstanding Options held by
such Participant (whether or not exercisable), exceeds (B) the aggregate
exercise price of such Options. For purposes hereof, an Option shall be
considered to be assumed if, following consummation of the Acquisition Event,
the Option confers the right to purchase, for each share of Common Stock subject
to the Option immediately prior to the consummation of the Acquisition Event,
the consideration (whether cash, securities or other property) received as a
result of the Acquisition Event by holders of Common Stock for each share of
Common Stock held immediately prior to the consummation of the Acquisition Event
(and if holders were offered a choice of consideration, the type of
consideration chosen by the holders of a majority of the outstanding shares of
Common Stock); provided, however, that if the consideration received as a result
-------- -------
of the Acquisition Event is not solely common stock of the acquiring or
succeeding corporation (or an affiliate thereof), the Company may, with the
consent of the acquiring or succeeding corporation, provide for the
consideration to be received upon the exercise of Options to consist solely of
common stock of the acquiring or succeeding corporation (or an affiliate
thereof) equivalent in fair market value to the per share consideration received
by holders of outstanding shares of Common Stock as a result of the Acquisition
Event.
7. General Provisions Applicable to Awards
---------------------------------------
(a) Transferability of Awards. Except as the Board may otherwise determine
-------------------------
or provide in an Award, Awards shall not be sold, assigned, transferred, pledged
or otherwise encumbered by the person to whom they are granted, either
voluntarily or by operation of law, except by will or the laws of descent and
distribution, and, during the life of the Participant, shall be exercisable only
by the Participant. References to a Participant, to the extent relevant in the
context, shall include references to authorized transferees.
(b) Documentation. Each Award shall be evidenced by a written instrument
-------------
in such form as the Board shall determine. Each Award may contain terms and
conditions in addition to those set forth in the Plan.
(c) Board Discretion. Except as otherwise provided by the Plan, each Award
----------------
may be made alone or in addition or in relation to any other Award. The terms
of each Award need not be identical, and the Board need not treat Participants
uniformly.
(d) Termination of Status. The Board shall determine the effect on an
---------------------
Award of the disability, death, retirement, authorized leave of absence or other
change in the employment or other status of a Participant and the extent to
which, and the period during which, the Participant, the Participant's legal
representative, conservator or guardian may exercise rights under the Award.
4
<PAGE>
(e) Withholding. Each Participant shall pay to the Company, or make
-----------
provision satisfactory to the Board for payment of, any taxes required by law to
be withheld in connection with Awards to such Participant no later than the date
of the event creating the tax liability. Except as the Board may otherwise
provide in an Award, when the Common Stock is registered under the Exchange Act,
Participants may, to the extent then permitted under applicable law, satisfy
such tax obligations in whole or in part by delivery of shares of Common Stock,
including shares retained from the Award creating the tax obligation, valued at
their Fair Market Value. The Company may, to the extent permitted by law,
deduct any such tax obligations from any payment of any kind otherwise due to a
Participant.
(f) Amendment of Award. The Board may amend, modify or terminate any
------------------
outstanding Award, including but not limited to, substituting therefor another
Award of the same or a different type, changing the date of exercise or
realization, and converting an Incentive Stock Option to a Nonstatutory Stock
Option, provided that the Participant's consent to such action shall be required
unless the Board determines that the action, taking into account any related
action, would not materially and adversely affect the Participant.
(g) Conditions on Delivery of Stock. The Company will not be obligated to
-------------------------------
deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares previously delivered under the Plan until (i) all
conditions of the Award have been met or removed to the satisfaction of the
Company, (ii) in the opinion of the Company's counsel, all other legal matters
in connection with the issuance and delivery of such shares have been satisfied,
including any applicable securities laws and any applicable stock exchange or
stock market rules and regulations, and (iii) the Participant has executed and
delivered to the Company such representations or agreements as the Company may
consider appropriate to satisfy the requirements of any applicable laws, rules
or regulations.
(h) Acceleration. The Board may at any time provide that any Options shall
------------
become immediately exercisable in full or in part or that any other Awards may
become exercisable in full or in part or free of some or all restrictions or
conditions, or otherwise realizable in full or in part, as the case may be.
8. Miscellaneous
-------------
(a) No Right To Employment or Other Status. No person shall have any claim
--------------------------------------
or right to be granted an Award, and the grant of an Award shall not be
construed as giving a Participant the right to continued employment or any other
relationship with the Company. The Company expressly reserves the right at any
time to dismiss or otherwise terminate its relationship with a Participant free
from any liability or claim under the Plan, except as expressly provided in the
applicable Award.
(b) No Rights As Stockholder. Subject to the provisions of the applicable
------------------------
Award, no Participant shall have any rights as a stockholder with respect to any
shares of Common Stock to be distributed with respect to an Award until becoming
the record holder of such shares. Notwithstanding the foregoing, in the event
the Company effects a split of the Common Stock by means of a stock dividend and
the exercise price of and the number of shares subject to such Option are
adjusted as of the date of the distribution of the dividend (rather than as of
the record date for such dividend), then an optionee who exercises an Option
between the record date and the distribution date for such stock dividend shall
be entitled to receive, on the distribution date, the stock dividend with
respect to the shares of Common Stock acquired upon such Option exercise,
notwithstanding the fact that such shares were not outstanding as of the close
of business on the record date for such stock dividend.
(c) Effective Date and Term of Plan. The Plan shall become effective on
-------------------------------
the date on which it is adopted by the Board, but no Award granted to a
Participant designated by the Board as subject to
<PAGE>
Section 162(m) of the Code by the Board shall become exercisable, vested or
realizable, as applicable to such Award, unless and until the Plan has been
approved by the Company's stockholders to the extent stockholder approval is
required by Section 162(m) (including the vote required under Section 162(m)).
No Awards shall be granted under the Plan after the completion of ten years from
the earlier of (i) the date on which the Plan was adopted by the Board or (ii)
the date the Plan was approved by the Company's stockholders, but Awards
previously granted may extend beyond that date.
(d) Amendment of Plan. The Board may amend, suspend or terminate the Plan
-----------------
or any portion thereof at any time, provided that to the extent required by
Section 162(m) of the Code, no Award granted after the date of such amendment to
a Participant designated as subject to Section 162(m) by the Board shall become
exercisable, realizable or vested, as applicable to such Award (to the extent
that such amendment to the Plan was required to grant such Award to a particular
Participant), unless and until such amendment shall have been approved by the
Company's stockholders as required by Section 162(m) (including the vote
required under Section 162(m)).
(e) Governing Law. The provisions of the Plan and all Awards made
-------------
hereunder shall be governed by and interpreted in accordance with the laws of
the Commonwealth of Virginia, without regard to any applicable conflicts of law.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-06-1999
<CASH> 34,793,000
<SECURITIES> 19,389,000
<RECEIVABLES> 48,647,000
<ALLOWANCES> 2,210,000
<INVENTORY> 0
<CURRENT-ASSETS> 105,374,000
<PP&E> 28,745,000
<DEPRECIATION> 7,273,000
<TOTAL-ASSETS> 131,119,000
<CURRENT-LIABILITIES> 33,401,000
<BONDS> 0
0
0
<COMMON> 38,000
<OTHER-SE> 93,975,000
<TOTAL-LIABILITY-AND-EQUITY> 131,119,000
<SALES> 54,181,000
<TOTAL-REVENUES> 81,422,000
<CGS> 1,083,000
<TOTAL-COSTS> 15,598,000
<OTHER-EXPENSES> 58,710,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 143,000
<INCOME-PRETAX> 8,178,000
<INCOME-TAX> 3,108,000
<INCOME-CONTINUING> 5,070,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,070,000
<EPS-BASIC> 0.14
<EPS-DILUTED> 0.12
</TABLE>
