<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended March 31, 2000
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From __________ to __________
Commission File Number 000-24435
MICROSTRATEGY INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation)
51-0323571
(I.R.S. Employer Identification Number)
8000 Towers Crescent Drive
Vienna, VA
(Address of Principal Executive Offices)
22182
(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 May 1, 2000 was 24,358,362 and 55,179,115,
respectively.
<PAGE>
MICROSTRATEGY INCORPORATED
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2000 (unaudited) and December 31, 1999........ 1
Consolidated Statements of Operations For the Three Months Ended March 31, 2000
and 1999 (unaudited)..................................................................... 2
Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2000
and 1999 (unaudited)..................................................................... 3
Notes to Consolidated Financial Statements (unaudited).................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................ 28
Part II. OTHER INFORMATION.........................................................................
Item 1. Legal Proceedings......................................................................... 29
Item 6. Exhibits and Reports on Form 8-K.......................................................... 29
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MICROSTRATEGY INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------------- -------------------
(unaudited) (Restated)
See Note 2
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents...................................................... $ 17,534 $ 25,941
Short-term investments......................................................... 37,226 42,418
Accounts receivable, net....................................................... 35,348 37,586
Prepaid expenses and other current assets...................................... 12,301 15,461
-------- --------
Total current assets.......................................................... 102,409 121,406
Property and equipment, net..................................................... 39,824 30,594
Goodwill and other intangible assets, net of accumulated amortization of
$4,408 and $503, respectively.................................................. 43,293 47,154
Deposits and other assets....................................................... 7,696 4,214
-------- --------
Total assets.................................................................. $193,222 $203,368
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses.......................................... $ 23,655 $ 15,357
Accrued compensation and employee benefits..................................... 16,321 14,912
Deferred revenue and advance payments.......................................... 36,127 38,028
-------- --------
Total current liabilities..................................................... 76,103 68,297
Deferred revenue and advance payments........................................... 34,514 33,255
-------- --------
Total liabilities............................................................. 110,617 101,552
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $0.001 per share, 5,000 shares authorized;
no shares issued or outstanding............................................... -- --
Class A common stock, par value $0.001 per share, 100,000 shares
authorized; 24,170 and 22,384 shares issued and outstanding, respectively..... 24 22
Class B common stock, par value $0.001 per share, 100,000 shares
authorized; 55,279 and 55,867 shares issued and outstanding, respectively..... 55 56
Additional paid-in capital..................................................... 143,321 138,943
Accumulated other comprehensive income......................................... 10,835 1,643
Deferred compensation.......................................................... (827) (895)
Accumulated deficit............................................................ (70,803) (37,953)
-------- --------
Total stockholders' equity.................................................... 82,605 101,816
-------- --------
Total liabilities and stockholders' equity.................................... $193,222 $203,368
======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
1
<PAGE>
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2000 and 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------------
2000 1999
------------- -----------
(Restated)
See Note 2
(unaudited) (unaudited)
<S> <C> <C>
Revenues:
Product licenses............................................................ $ 26,011 $16,418
Product support and other services.......................................... 24,604 12,904
-------- -------
Total revenues............................................................ 50,615 29,322
Cost of revenues:
Product licenses............................................................ 605 520
Product support and other services.......................................... 15,761 6,609
-------- -------
Total cost of revenues.................................................... 16,366 7,129
-------- -------
Gross profit................................................................. 34,249 22,193
-------- -------
Operating expenses:
Sales and marketing......................................................... 41,512 16,754
Research and development.................................................... 16,200 5,061
General and administrative.................................................. 12,118 4,233
Amortization of goodwill and other intangible assets........................ 3,906 20
-------- -------
Total operating expenses.................................................. 73,736 26,068
-------- -------
Loss from operations......................................................... (39,487) (3,875)
Interest income.............................................................. 460 504
Interest expense............................................................. (3) (92)
Other income, net............................................................ 6,430 46
-------- -------
Loss before income taxes..................................................... (32,600) (3,417)
Provision for income taxes................................................... 250 387
-------- -------
Net loss..................................................................... $(32,850) $(3,804)
======== =======
Basic and diluted net loss per share......................................... $ (0.42) $ (0.05)
======== =======
Weighted average shares used in computing basic and diluted net loss per
share....................................................................... 78,926 72,779
======== =======
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
2
<PAGE>
MICROSTRATEGY INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2000 and 1999
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
2000 1999
------------ ------------
(Restated)
See Note 2
(unaudited) (unaudited)
<S> <C> <C>
Operating activities:
Net loss................................................................. $(32,850) $ (3,804)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization............................................ 6,131 1,390
Provision for doubtful accounts.......................................... 507 60
Amortization of deferred compensation.................................... 67 67
Realized gain on sales of short-term investments......................... (6,431) --
Changes in operating assets and liabilities:
Accounts receivable................................................... 1,370 4,658
Prepaid expenses and other current assets............................. 3,107 (805)
Deposits and other assets............................................. (3,681) (271)
Accounts payable and accrued expenses, compensation and benefits...... 9,928 (1,503)
Deferred revenue and advance payments................................. (1,898) (953)
-------- --------
Net cash used in operating activities............................... (23,750) (1,161)
-------- --------
Investing activities:
Purchases of property and equipment...................................... (9,937) (4,751)
Purchases of short-term investments...................................... (1,496) (16,487)
Maturities of short-term investments..................................... 5,500 --
Sales of short-term investments.......................................... 17,204 --
-------- --------
Net cash provided by (used in) investing activities................. 11,271 (21,238)
-------- --------
Financing activities:
Proceeds from sale of Class A common stock and exercise of
stock options, net of offering costs.................................... 4,379 42,782
Payments of dividend notes payable....................................... -- (2,500)
-------- --------
Net cash provided by financing activities........................... 4,379 40,282
-------- --------
Effect of foreign exchange rate changes on cash and cash
equivalents........................................................ (307) (251)
-------- --------
Net (decrease) increase in cash and cash equivalents...................... (8,407) 17,632
Cash and cash equivalents, beginning of period............................ 25,941 27,491
-------- --------
Cash and cash equivalents, end of period.................................. $ 17,534 $ 45,123
======== ========
Supplemental disclosure of noncash investing and financing activities:
Change in unrealized gain on short-term investments, net of tax.......... $ 9,571 $ --
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest................................. $ -- $ 54
======== ========
Cash paid during the period for income taxes............................. $ 47 $ 460
======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
<PAGE>
MICROSTRATEGY INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) Basis of Presentation
The consolidated balance sheet of MicroStrategy Incorporated as of March
31, 2000, the related consolidated statements of operations for the three month
periods ended March 31, 2000 and 1999, and the consolidated statements of cash
flows for the three month periods ended March 31, 2000 and 1999 are unaudited.
In the opinion of management, all adjustments (consisting of normal recurring
items) necessary for a fair presentation of such financial statements have been
included. Interim results are not necessarily indicative of results for a full
year.
The consolidated financial statements and notes are presented as required
by Form 10-Q and do not contain certain information included in the Company's
annual financial statements and notes. These financial statements should be read
in conjunction with the Company's audited financial statements and the notes
thereto filed with the Securities and Exchange Commission ("SEC") in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
(2) Restatement of Financial Statements
Subsequent to the filing of a registration statement on Form S-3 with the
SEC which included the Company's audited financial statements for the years
ended December 31, 1999, 1998 and 1997, the Company became aware that the timing
and amount of reported earned revenues from license transactions in 1999, 1998
and 1997 required revision.
As discussed in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999 in Note 3 of the Notes to Consolidated Financial
Statements, these revisions primarily addressed the recognition of revenue for
certain software arrangements which should be accounted for under the
subscription method or the percentage of completion method, which spread the
recognition of revenue over the entire contract period. The effect of these
revisions is to defer the time in which revenue is recognized for large, complex
contracts that combine both products and services. These revisions also resulted
in a substantial increase in the amount of deferred revenue reflected on the
Company's balance sheet as of December 31, 1999. Additionally, these revisions
include the effects of changes in the reporting periods when revenue from
certain contracts are recognized. In the course of reviewing its revenue
recognition on various transactions, the Company became aware that, in certain
instances, the Company had recorded revenue on certain contracts in one
reporting period where customer signature and delivery had been completed, but
where the contract may not have been fully executed by the Company in that
reporting period. The Company subsequently reviewed license agreements executed
near the end of the quarter ended March 31, 1999 and determined that revisions
to its reported revenues for the quarter ended March 31, 1999 were necessary,
primarily to ensure that all agreements for which the Company was recognizing
revenue in a reporting period were executed by both parties no later than the
end of the reporting period in which the revenue is recognized. The effect of
all revisions for the three months ended March 31, 1999 was to reduce total
revenues by $6.5 million.
Additionally, the Company also made certain revisions to its balance sheet
as of December 31, 1999. These revisions are discussed in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999 in Note 3 of the Notes
to Consolidated Financial Statements.
Accordingly, such financial statements for the periods presented in this
Form 10-Q have been restated as follows (in thousands):
4
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1999
----------------------------------
As Reported Restated
--------------- -----------------
<S> <C> <C>
Statements of Operations Data
Revenues:
Product licenses............................................. $23,124 $16,418
Product support and other services........................... 12,660 12,904
Income (loss) from operations................................. 2,541 (3,875)
Provision for income taxes.................................... 1,140 387
Net income (loss)............................................. 1,859 (3,804)
Net income (loss) per share:
Basic........................................................ 0.03 (0.05)
Diluted...................................................... 0.02 (0.05)
</TABLE>
(3) Recent Accounting Pronouncements
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation (FIN) No. 44, "Accounting for Certain Transactions Involving
Stock Compensation - An Interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of APB Opinion No. 25 and, among other issues, clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a non-
compensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on its
financial position or results of operations.
(4) Short-term Investments
In December 1999, the Company received 824,742 shares (adjusted for a two-
for-one stock split) of Exchange Applications stock, valued at $21.5 million, in
consideration for the sale of MicroStrategy software, technical support and
consulting services. In March 2000, the Company sold 412,372 of these shares at
an average price of $41.72 per share, which resulted in a realized gain of $6.4
million.
During May 2000, the Company sold its economic interest in the remaining
412,370 shares of Exchange Applications stock to a financial institution for
approximately $5.9 million, from which the Company expects to recognize a
realized loss of approximately $4.9 million. Overall, the Company has sold all
of its economic interest in the shares it received in December 1999 for an
expected total net gain of approximately $1.5 million.
(5) Accounts Receivable
Accounts receivable, net of allowances, consist of the following, as of (in
thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
Billed and billable................................... $ 75,292 $ 66,181
Less deferred revenue................................. (36,108) (25,266)
-------- --------
39,184 40,915
Less allowance for doubtful accounts.................. (3,836) (3,329)
-------- --------
$ 35,348 $ 37,586
======== ========
</TABLE>
(6) Bank Borrowings
In March 1999, the Company entered into a line of credit agreement with a
commercial bank which provides for a $25.0 million unsecured revolving line of
credit for general working capital purposes. As of March 31, 2000, no amounts
were outstanding under the line of credit; however, borrowing capacity was
reduced by $3.8 million of letters of credit.
5
<PAGE>
The line of credit agreement required the Company to comply with certain
financial covenants. The Company was not in compliance with all of the
covenants contained in the line of credit agreement as of March 31, 2000.
However, the Company has previously received a waiver through April 30, 2000.
On May 15, 2000, the Company entered into a modification of the line of credit
agreement which, among other things, increased the line of credit TO $28.6
million, removed any financial covenants and cured any financial covenant
defaults. The modification is effective as of March 30, 2000. The modified
line of credit is guaranteed by both the Company's Chief Executive Officer
("CEO") and an entity controlled by him, and the guaranty by the entity is
secured by certain of its assets. The modified line of credit bears interest at
LIBOR plus 1.75%, includes a 0.2% unused line of credit fee, requires monthly
payments of interest, and expires on May 31, 2001. Draw downs under the
modified line of credit are subject to the Company providing certain items such
as an opinion of counsel relating to the pledged collateral. The Company
currently has $7.4 million of letters of credit under the line of credit. The
CEO's guarantee of this line is effective during the entire term of the loan.
The CEO does not receive any compensation from providing that guarantee and
collateral.
(7) Deferred Revenue and Advance Payments
Deferred revenue and advance payments from customers consist of the
following, as of (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------- -----------
<S> <C> <C>
Current:
Deferred product revenue.................................. $ 35,808 $ 38,164
Deferred product support and other services revenue....... 35,582 24,267
-------- --------
71,390 62,431
Less amount in accounts receivable........................ (35,263) (24,403)
-------- --------
$ 36,127 $ 38,028
======== ========
Non-current:
Deferred product revenue.................................. $ 10,108 $ 9,461
Deferred product support and other services revenue....... 25,251 24,657
-------- --------
35,359 34,118
Less amount in accounts receivable........................ (845) (863)
-------- --------
$ 34,514 $ 33,255
======== ========
</TABLE>
(8) Commitments and Contingencies
As of March 31, 2000, the Company had $6.0 million in commitments for
computer software and equipment, $10.0 million in marketing agreements, and $3.6
million in commitments for future operating expenses.
(9) Litigation
The Company is a defendant in numerous purported class action suits in
which the Company and several of its officers are alleged to have violated
Section 10(b) of the Securities Exchange Act of 1934, as amended (the "1934
Act"), Rule 10(b) (5) promulgated thereunder and Section 20(a) of the 1934 Act.
The complaints do not specify the amount of the damages sought. Accordingly, the
Company is unable to determine or estimate the outcome at this time. It is
possible that the Company may be required to pay substantial damages or
settlement costs which could have a material adverse effect on the Company's
financial condition or results of operations. The Company has not yet filed any
responsive pleadings, but intends to defend the matter vigorously.
In March 2000, the Company was notified that the SEC had issued a formal
order of private investigation in connection with matters relating to the
Company's restatement of its financial results. The SEC has requested that the
Company provide the SEC with certain documents concerning the Company's revision
of its financial results and financial reporting documents. The SEC indicated
that its inquiry should not be construed as an indication by the SEC or its
staff that any violation of law has occurred, nor as an adverse reflection upon
any person, entity or security. The Company is cooperating with the SEC in
connection with this investigation and its outcome cannot yet be determined.
The Company is also involved in other legal proceedings through the normal
course of business. Management believes that any unfavorable outcome related to
these other proceedings will not have a material effect on the Company's
financial position, results of operations or cash flows.
6
<PAGE>
(10) Comprehensive Loss
Comprehensive loss includes foreign currency translation adjustments and
unrealized gains and losses on short-term investments, net of related tax
effects, that have been excluded from net loss and reflected in stockholders'
equity as accumulated other comprehensive income.
Comprehensive loss for the three months ended March 31, 2000 and 1999 is
calculated as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------
2000 1999
--------------- ----------------
<S> <C> <C>
Net loss................................................ $(32,850) $(3,804)
Foreign currency translation losses..................... (379) (331)
Unrealized gain on short-term investments,
net of applicable taxes............................... 9,571 --
-------- -------
Total comprehensive loss................................ $(23,658) $(4,135)
======== =======
</TABLE>
(11) Basic and Diluted Net Loss Per Share
Basic net loss per share is determined by dividing the net loss applicable
to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted net loss per share is determined by
dividing the net loss applicable to common stockholders by the weighted average
number of common shares and potential common shares outstanding during the
period. Potential common shares are included in the diluted net loss per share
calculation when dilutive. Potential common shares consisting of common stock
issuable upon exercise of outstanding common stock options and warrants are
computed using the treasury stock method. The Company's net loss per share
calculation for basic and diluted is based on the weighted average common shares
outstanding. There are no reconciling items in the numerator and denominator of
the Company's net loss per share calculation. Employee stock options of
12,688,504 and 11,484,104 and warrants of 100,000 and 100,000 for the three
months ended March 31, 2000 and 1999, respectively, have been excluded from the
net loss per share calculation because their effect would be anti-dilutive.
(12) Segment Information
The Company applies provisions of SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information." SFAS No. 131 requires certain
disclosures about operating segments, products and services, geographic areas,
and major customers. The method for determining what information to report is
based on the way that management organizes the operating segments within the
Company for making operational decisions and assessments of financial
performance. The Company's chief operating decision maker is considered to be
the Company's CEO. The CEO reviews financial information presented on a
consolidated basis accompanied by disaggregated information about revenues by
operating segments for purposes of making operating decisions and assessing
financial performance.
The Company has two operating segments, MicroStrategy Platform and
Strategy.com. MicroStrategy Platform provides scalable, sophisticated and
maintainable solutions that enable businesses to develop and deploy intelligent
e-business systems. Revenues are derived from sales of product licenses and
product support and other services, including technical support, education and
consulting and hosting services. Strategy.com delivers personalized information
to consumers through its personal intelligence network via the web, wireless
applications, protocol-enabled devices, e-mail, mobile phone, fax, pager and
regular telephone. Strategy.com syndicates its channels through network
affiliates and offers them to consumers directly through its website. Revenues
are derived from network affiliate fees, OEM and subscription fees, advertising
fees and transaction fees. The Company began operating its business as two
segments in the latter part of 1999. Revenues were recognized for Strategy.com
beginning in 2000. Prior years' segment information has been restated to reflect
the operations of Strategy.com.
The accounting policies of both segments are the same as those described in
the summary of significant accounting policies in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
7
<PAGE>
Certain corporate support costs are allocated to Strategy.com based on factors
such as headcount, gross asset value and the specific level of activity directly
related to such costs.
The following summary discloses certain financial information regarding the
Company's operating segments (in thousands):
<TABLE>
<CAPTION>
MicroStrategy
Platform Strategy.com Consolidated
------------- ----------------- -----------------
<S> <C> <C> <C>
Three Months Ended March 31, 2000
Total license and service revenues......... $ 50,502 $ 113 $ 50,615
Gross profit............................... 34,343 (94) 34,249
Depreciation and amortization.............. 5,360 771 6,131
Operating expenses......................... 62,352 11,384 73,736
Loss from operations....................... (28,009) (11,478) (39,487)
Total assets............................... 182,608 10,614 193,222
Three Months Ended March 31, 1999
Total license and service revenues......... $ 29,322 $ -- $ 29,322
Gross profit............................... 22,193 -- 22,193
Depreciation and amortization.............. 1,370 20 1,390
Operating expenses......................... 25,625 443 26,068
Loss from operations....................... (3,432) (443) (3,875)
Total assets............................... 109,318 453 109,771
</TABLE>
The following summary discloses total revenues and long-lived assets,
excluding long-term deferred tax assets, relating to the Company's geographic
regions (in thousands):
<TABLE>
<CAPTION>
Domestic International Consolidated
------------------- ------------------- -------------------
<S> <C> <C> <C>
Three Months Ended March 31, 2000
Total license and service revenues......... $39,185 $11,430 $50,615
Long-lived assets.......................... 85,615 3,423 89,038
Three Months Ended March 31, 1999
Total license and service revenues......... $21,710 $ 7,612 $29,322
Long-lived assets.......................... 17,883 2,109 19,992
</TABLE>
Transfers of $2.4 million and $1.7 million for the three months ended March
31, 2000 and 1999, respectively, from international to domestic operations have
been excluded from the above table and eliminated in the consolidated financial
statements.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We are a leading worldwide provider of intelligent e-business software and
related services that enable the transaction of one-to-one electronic business
through web, wireless and communication channels. Our product line enables both
proactive and interactive delivery of information from large-scale databases.
Our objective is to provide the largest 2000 enterprises in the world, leading
Internet businesses and high-volume data providers with a software platform to
develop solutions that deliver insight and intelligence to their enterprises,
customers and supply-chain partners.
Our software platform enables users to query and analyze the most detailed,
transaction-level databases, turning data into business intelligence. In
addition to supporting internal enterprise users, the platform delivers critical
business information beyond corporate boundaries to customers, partners and
supply chain constituencies through a broad range of communication channels such
as the Internet, e-mail, telephones and wireless communications devices. Our
platform is ideal for developing e-business solutions that are personalized and
proactive and that reach millions of users. We also offer a comprehensive set of
consulting, education and technical support services for our customers and
partners.
In July 1999, we launched a new business unit called Strategy.com.
Strategy.com is our personal intelligence network, a new form of media that
brings speed to transactions by actively delivering highly personalized,
relevant and timely information to individuals through a wide variety of
delivery methods, including e-mail, telephone and wireless devices. The
Strategy.com network leverages the MicroStrategy software platform and is
organized around a suite of information channels. The network currently operates
Finance, News and Weather Channels and plans to launch additional information
channels in the future. Strategy.com syndicates its channels through other
companies that serve as network affiliates and network associates, which we
refer to collectively as affiliates. Affiliates offer the Strategy.com channels
and services on a co-branded basis directly to their customers and in turn share
with Strategy.com a percentage of revenues they generate. Strategy.com also
provides application maintenance, development, customer billing, hosting and
support services for these channels, enabling affiliates to focus on their core
businesses. Strategy.com has established approximately 150 network affiliate
agreements with leading Internet companies, communications carriers, media
companies and financial institutions and now has approximately 350,000
subscribers for its Strategy.com network.
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 over the last three years, we
experienced fluctuating operating margins during 1997, 1998 and 1999 primarily
as a result of increases in staff levels. We expect to continue to increase
staff levels and incur additional associated costs in future periods. In
addition, we intend to aggressively pursue financing to allow us to invest
significant resources to market, operate and develop Strategy.com. We expect
that such ongoing investment in Strategy.com would result in significantly
increased operating losses.
Our revenues historically have been derived from two principal sources, fees
for product licenses and fees for maintenance, technical support, education and
consulting services, which we refer to collectively as product support and other
services. We recognize revenue in accordance with Statement of Position ("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," and SOP 81-1, "Accounting for Performance
of Construction-Type and Certain Production-Type Contracts," as applicable.
Product license revenues are generally recognized upon the execution of a
contract and shipment of the related software product if no significant
obligations remain outstanding on our part 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 services are displayed as
deferred revenue when paid by the customer and recognized ratably over the term
of the
9
<PAGE>
maintenance and support agreement, which is typically one year. We also record
as deferred revenue the fair value of implicit maintenance arrangements when
resellers or other customers that sell our software to end users offer these end
users the right to receive the then current version of our software at the time
of resale. Certain of these agreements extend over several years. Fees for our
education and consulting services are typically recognized at the time the
services are performed.
Revenues recognized from multiple-element software arrangements are allocated
to each element of the arrangement based on the relative fair values of the
elements, such as software products, upgrades, enhancements, technical support,
installation or education. The determination of fair value of each element is
based on objective evidence based on historical sales of the individual element
by us to other customers. If such evidence of fair value for each element of the
arrangement does not exist, all revenue from the arrangement is deferred until
such time that evidence of fair value does exist or until all elements of the
arrangement are delivered.
Customers at times require consulting and implementation services which
include evaluating their business needs, identifying resources necessary to meet
their needs and installing the solution to fulfill their needs. When the
software license arrangement requires the Company to provide significant
consulting services to produce, customize or modify software or when the
customer considers these services essential to the functionality of the software
product, both the product license revenue and product support and other services
revenue are recognized in accordance with the provisions of SOP 81-1. The
Company recognizes revenue from these arrangements using the percentage of
completion method and, therefore, both product license and product support and
other services revenue are recognized as work progresses. If the software
license arrangement obligates the Company to the delivery of unspecified future
products, then revenue is recognized on the subscription basis, ratably over the
term of the contract.
Beginning initially in the fourth quarter of 1998 we began to sell our
products and services to customers for large scale e-commerce applications and
have continued to enter into similar transactions through the current quarter.
In contrast to earlier periods in which our typical customer transaction
involved a stand-alone software license and maintenance, these transactions
typically involve multiple software products and services for use by very large
numbers of end users across web, wireless and voice communications channels, and
often incorporate elements from our Strategy.com network. These multiple element
transactions also often include significant implementation and other consulting
work and may also include our providing the customer with hosting services, in
which we manage the operation of hosting the customer's specific e-commerce
application. Customers often use our products and services in a variety of ways,
including internal use, integration with their own products for resale to end
users and creation of e-commerce applications. These arrangements typically lead
to our recording revenue from multiple sources, including product license fees,
product support fees and royalties based on advertising, e-commerce transactions
or the resale of solutions that incorporate our software platform.
These large, multiple element transactions typically involve more complex
licensing and product support arrangements than the software licensing and
product support arrangements that comprised the bulk of our revenues in earlier
periods. Based on the revenue recognition criteria established in SOP 97-2 and
SOP 81-1, revenue from many of these large, multiple element contracts is not
recognizable upon full execution and delivery of the software product as in the
past, but instead is initially recorded as deferred revenue upon receipt of
cash, with product revenue recognized using the percentage of completion method
based on cost inputs or ratably over the entire term of the contract. As a
result of the size and complexity of these transactions, our results for any
quarter may depend significantly on the types of customer transactions that we
enter into during the quarter and on the mix of product licenses, support
agreements, implementation work and other specific terms of each transaction,
each of which may have a significant effect on the manner in which we recognize
revenue from the transaction.
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. Product license revenues in any quarter can be
dependent on orders booked and shipped in that quarter. As a result of these and
other factors, our quarterly
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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.
We license our software through our direct sales force and increasingly
through, or in conjunction with, value-added resellers, system integrators and
original equipment manufacturers. Channel partners accounted for, directly or
indirectly, approximately 40.4%, 39.2%, 33.6% and 27.0% of our revenues for the
three months ended March 31, 2000 and the years ended December 31, 1999, 1998
and 1997, 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.
Our operations and prospects have been and will be significantly affected by
the developments relating to our revision to our 1999, 1998 and 1997 financial
statements described in Note 2 of the Notes to Consolidated Financial
Statements. As previously reported in our Annual Report on Form 10-K for the
year ended December 31, 1999, numerous separate complaints purporting to be
class actions were filed in federal courts in various jurisdictions alleging
that we and certain of our officers and directors violated various securities
laws and in March 2000, we were notified that the SEC had issued a formal order
of private investigation in connection with the matters relating to our
restatement of our financial results. These legal proceedings are more fully
described in Note 9 of the Notes to Consolidated Financial Statements and in
"Other Information-Legal Proceedings" of Part II of this Quarterly Report on
Form 10-Q. The revision to our financial statements and these legal proceedings
could have a material adverse effect on our business, financial condition and
results of operations. See "Risk Factors" discussed below.
Results of Operations
The following table sets forth for the periods indicated the percentage of
total revenues represented by certain items reflected in our consolidated
statements of operations:
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------
2000 1999
------- ------
(Restated)(1)
<S> <C> <C>
Statements of Operations Data
Revenues:
Product licenses............................................. 51.4% 56.0%
Product support and other services........................... 48.6 44.0
------ ------
Total revenues.............................................. 100.0 100.0
Cost of revenues:
Product licenses............................................. 1.2 1.8
Product support and other services........................... 31.1 22.5
------ ------
Total cost of revenues...................................... 32.3 24.3
------ ------
Gross profit.................................................. 67.7 75.7
Operating expenses:
Sales and marketing.......................................... 82.0 57.1
Research and development..................................... 32.0 17.3
General and administrative................................... 24.0 14.4
Amortization of goodwill and other intangible assets......... 7.7 0.1
------ ------
Total operating expenses.................................... 145.7 88.9
Loss from operations.......................................... (78.0) (13.2)
Interest income............................................... 0.9 1.7
Interest expense.............................................. (--) (0.3)
Other income, net............................................. 12.7 0.1
Provision for income taxes.................................... 0.5 1.3
------ ------
Net loss...................................................... (64.9)% (13.0)%
====== ======
</TABLE>
______________________
(1) See Note 2 of the Notes to Consolidated Financial Statements regarding
restatement of 1999, 1998 and 1997 financial statements.
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Comparison of the Three Months Ended March 31, 2000 and 1999
Revenues
Total revenues consist of revenues derived from sales of product licenses and
product support and other services, including technical support, education and
consulting services. Total revenues increased from $29.3 million to $50.6
million for the three months ended March 31, 1999 and 2000, respectively,
resulting in an increase of 72.6%. As discussed in Note 2 of the Notes to
Consolidated Financial Statements, revenues were restated to reduce reported
revenues for the quarter ended March 31, 1999 by $6.5 million, primarily to
ensure that all agreements for which we recognized revenue in the quarter ended
March 31, 1999 were fully executed by the end of the period. Additionally, as a
result of restatement revisions, $5.1 million of the revenues recognized in the
quarter ended March 31, 2000 were attributable to contracts that we had not
fully executed by December 31, 1999. These revenues are primarily product
license revenues. There can be no assurance that total revenues will continue
to increase at the rates experienced in prior periods. Additionally, based on
the revenue recognition criteria established in SOP 97-2 and SOP 81-1, revenue
from many of the large, multiple element arrangements is recorded as deferred
revenue upon receipt of cash, with both product license revenues and product
support and other services revenues recognized using the percentage of
completion method based on cost inputs or ratably over the entire term of the
contract or over the hosting period, as applicable.
In 1999, we launched the Strategy.com Finance, News and Weather Channels and
plan to launch additional information channels in the future. We have not
recognized revenues related to Strategy.com until 2000 in which, during the
three months ended March 31, 2000, we recognized $113,000 in subscription
revenues which are included in product support and other services revenues. We
expect to begin earning more significant network affiliate, OEM and
subscription, advertising, hosting, transaction and other fees from our
Strategy.com service by the end of 2000.
Product License Revenues. Product license revenues increased from $16.4
million to $26.0 million for the three months ended March 31, 1999 and 2000,
respectively, resulting in an increase of 58.4%. The increase in product
license revenues was due to continued demand for our core products, new product
offerings supporting intelligent e-business solutions and increasing market
demand for intelligent e-business solutions. As discussed above, the effect of
our restatement of reported revenues was to reduce reported product license
revenues for the quarter ended March 31, 1999 and increase product license
revenues for the quarter ended March 31, 2000 to ensure that all agreements were
fully executed by the end of the respective periods in which such revenues are
recognized. We are attracting new customers and our existing customer base is
purchasing additional licenses and new products to support their e-business
solutions. As we continue to pursue our new business model of larger-scale,
multiple element transactions, we expect product license revenues as a
percentage of total revenues to fluctuate on a period-to-period basis, and may
vary significantly from the percentage of total revenues achieved in prior
years. There can be no assurance that we will be able to maintain or continue to
increase market acceptance for our family of products.
Product Support and Other Services Revenues. Product support and other
services revenues increased from $12.9 million to $24.6 million for the three
months ended March 31, 1999 and 2000, respectively, resulting in an increase of
90.7%. The increase in product support and other services revenues was primarily
due to the increase in product licenses sold as well as an increase in large
scale e-commerce applications which require significant implementation and other
consulting work. As a result of the above mentioned trends, we expect product
support and other services revenues as a percentage of total revenues to
fluctuate on a period-to-period basis and vary significantly from the percentage
of total revenues achieved in prior years.
International Revenues. International revenues increased from $7.6 million
to $11.4 million for the three months ended March 31, 1999 and 2000,
respectively, resulting in an increase of 50.2%. The increase in these revenues
is due to the expansion of our international operations, new product offerings
and growing international market acceptance of our software products. We opened
sales offices in Brazil in 1999, in Canada and Italy in 1998 and in Austria,
France, the Netherlands, Germany, United Kingdom and Spain prior to 1998. We
anticipate that international revenues will continue to account for a
significant amount of total revenues and management expects to continue to
commit significant time and financial resources to the maintenance and ongoing
development of direct and indirect international sales and support channels. We
may not be able to maintain or continue to increase international market
acceptance for our family of products.
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<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 expenses and royalties paid to third party software vendors. Cost of
product license revenues increased from $0.5 million to $0.6 million for the
three months ended March 31, 1999 and 2000, respectively. As a percentage of
product license revenues, however, cost of product license revenues decreased
from 3.2% to 2.3% for the three months ended March 31, 1999 and 2000,
respectively. The decrease in cost of product license revenues as a percentage
of product license revenues was due to economies of scale realized by producing
larger volumes of product materials and decreased materials costs due to an
increase in the percentage of customers reproducing product documentation 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 and Other Services Revenues. Cost of product support
and other services revenues consists of the costs of providing technical
support, education and consulting services to customers and partners. Cost of
product support and other services revenues increased from $6.6 million to $15.8
million for the three months ended March 31, 1999 and 2000, respectively. As a
percentage of product support and other services revenues, cost of product
support and other services revenues increased from 51.2% to 64.1% for the three
months ended March 31, 1999 and 2000, respectively. The increase in cost of
product support and other services revenues was primarily due to the increase in
the number of personnel providing consulting, education and technical support to
customers as a result of the increase in product licenses sold, new large scale
e-commerce applications and complex Strategy.com deployments. The total cost of
product support and other services revenues increased as a percentage of product
support and other services revenues due to the increased use of third parties to
perform consulting services and an increase in consulting services which are at
lower margins.
We expect to continue to increase the number of customer education and
implementation consultants and technical support personnel in the future. To the
extent that our product support and other services revenues do not increase at
anticipated rates, the hiring of additional consultants and technical support
personnel could increase the cost of product support and other services revenues
as a percentage of product support and other services revenues. Also, to the
extent that we cannot hire adequate numbers of support personnel to meet demand,
we may need to rely more heavily on third parties to perform consulting
services, further increasing cost of product support and other services revenues
as a percentage of product support and other services revenues. In addition,
the cost of providing hosting services and operating the Strategy.com network
may become more significant as we build up our customer base, further increasing
cost of product support and other services revenues as a percentage of product
support and other services revenues.
Sales and Marketing Expenses. Sales and marketing expenses include personnel
costs, commissions, office facilities, travel, advertising, public relations
programs and promotional events, such as trade shows, seminars and technical
conferences. Sales and marketing expenses increased from $16.8 million to $41.5
million for the three months ended March 31, 1999 and 2000, respectively. As a
percentage of total revenues, sales and marketing expenses increased from 57.1%
to 82.0% for the three months ended March 31, 1999 and 2000, respectively. The
increase in sales and marketing expenses was primarily the result of increased
staffing levels in the sales force, increased commissions earned, increased
promotional activities and advertising, increased marketing efforts for
Strategy.com and other general marketing efforts. During the three month period
ended March 31, 2000, we invested heavily in advertising, including a national
television and print advertising campaign and other marketing efforts in order
to create better market awareness of the value-added potential of our product
suite and Strategy.com and to seek to acquire market share. Provided we raise
additional external financing, we will continue to substantially increase our
investment in sales and marketing over the next twelve months. See "Comparison
of the Three Months Ended March 31, 2000 and 1999-Liquidity and Capital
Resources" discussed below.
Research and Development Expenses. Research and development expenses consist
primarily of salaries and benefits of software engineering personnel,
depreciation of equipment and other costs. Research and development expenses
increased from $5.0 million to $16.2 million for the three months ended March
31, 1999
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<PAGE>
and 2000, respectively. As a percentage of total revenues, research and
development expenses increased from 17.3% to 32.0% for the three months ended
March 31, 1999 and 2000, respectively. The increase in research and development
expenses was primarily due to hiring additional research and development
personnel to continue development of Strategy.com channels, new products,
product releases and e-commerce technology. We intend to substantially increase
our investment over the next twelve months to develop other channels as part of
our suite of information channels of our Strategy.com network subject to our
securing additional external financing. In addition, we expect that research and
development expenses will continue to increase as we continue to invest in
developing new products, applications and product enhancements for our existing
platform business and the Strategy.com network.
General and Administrative Expenses. General and administrative expenses
include 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 increased from $4.2
million to $12.1 million for the three months ended March 31, 1999 and 2000,
respectively. As a percentage of total revenues, general and administrative
expenses increased from 14.4% to 24.0% for the three months ended March 31, 1999
and 2000, respectively. The increase in general and administrative expenses was
primarily the result of increased staff levels, costs associated with the growth
of our business and an increase in outside professional fees. We expect that
general and administrative expenses will continue to increase in the foreseeable
future.
Amortization of Goodwill and Other Intangible Assets. In December 1999, in
connection with the purchase of intellectual property and other tangible and
intangible assets relating to NCR's Teracube project, we allocated $46.8 million
to tangible and intangible assets. The preliminary allocation to the intangible
assets, which include assembled work force, agreements not to compete and other
intangible assets, was $46.6 million. As a result, we have incurred and will
continue to incur substantially increased amortization expense in periods
subsequent to December 1999. We believe the weighted average estimated useful
life of such assets, based upon the final allocation, will be less than five
years and anticipate the final allocation will be complete during the first half
of 2000.
In January 1998, we recorded $1.1 million for acquired intangible assets
representing the excess of the fair market value of the shares issued in
exchange for the non-controlling interests' shares in the foreign subsidiaries.
The intangible assets consist primarily of distribution channels, trade name and
customer lists and are being amortized on a straight-line basis over weighted
average useful lives of approximately 14 years.
As a result, we have recorded $3.9 million and $20,000 in amortization expense
for the three months ended March 31, 2000 and 1999, respectively, relating to
intangible assets.
Provision for Income Taxes. We recorded $0.3 million and $0.4 million of tax
expense for the three months ended March 31, 2000 and 1999. The provision for
both quarters relates to taxes payable in certain foreign jurisdictions where we
were profitable in 1999 and expect to be profitable in 2000.
Deferred Revenue
Deferred revenue represents product support and other services fees that are
collected in advance, product license and product support and other services
fees relating to multiple element software arrangements for which the fair value
of each element cannot be established or product license and product support and
other services fees relating to arrangements which require implementation
related services that are significant to the functionality of features of the
software product, including arrangements with subsequent hosting services.
Deferred revenue was $70.6 million as of March 31, 2000 compared to $71.3
million as of December 31, 1999. We expect to recognize approximately $36.1
million of this deferred revenue over the next 12 months; however, the timing
and ultimate recognition of our deferred revenue depends on our performance of
various service obligations. Because of the possibility of customer changes in
development schedules, delays in implementation and development efforts and the
need to satisfactorily perform product support and other services, deferred
revenue as of any particular date may not be representative of actual revenue
for any succeeding period.
14
<PAGE>
Liquidity and Capital Resources
From inception until our 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. On June 16, 1998, we raised
$48.2 million, net of offering costs, from our initial public offering, and we
raised an additional $40.1 million, net of offering costs, on February 10, 1999
from a public offering of 3,170,000 shares of Class A common stock. On March 31,
2000 and December 31, 1999, we had $54.8 million and $68.4 million of cash, cash
equivalents, and short-term investments, respectively.
Cash used in operations was $23.8 million and $1.2 million for the three
months ended March 31, 2000 and 1999, respectively. The increase in cash used in
operations from 1999 to 2000 was primarily attributable an increase in net loss
due to increased sales and marketing and other operating expenses. We intend to
aggressively pursue financing to allow us to invest significant resources to
market, develop and operate our core business and Strategy.com. Because of this
anticipated ongoing investment, we expect to use significant cash in operations.
Cash provided by investing activities was $11.3 million for the three months
ended March 31, 2000 and cash used in investing activities was $21.2 million for
the same period in 1999. In December 1999, we received 824,742 shares (adjusted
for a two-for-one stock split) of Exchange Applications, valued at $21.5
million, in consideration for the sale of MicroStrategy software, technical
support and application development. In March 2000, we sold 412,372 of these
shares at an average price of approximately $41.72 per share, which resulted in
a realized gain of $6.4 million. The increase in cash provided by investing
activities from 1999 to 2000 reflected the sale of these shares offset by
purchases of additional short-term investments and capital expenditures related
to the acquisition of computer and office equipment required to support
expansion of our operations and building of infrastructure to support
Strategy.com. During May 2000, we sold our economic interest in the remaining
412,370 shares of Exchange Applications stock to a financial institution for
approximately $5.9 million, from which we expect to recognize a realized loss of
approximately $4.9 million. Overall, we have sold our economic interest in the
shares we received in December 1999 for an expected total net gain of
approximately $1.5 million. As of March 31, 2000 we had $6.0 million in
commitments for computer software and equipment, $10.0 million in marketing
arrangements and $3.6 million for future operating expenses.
Our financing activities provided cash of $4.4 million and $40.3 million for
the three months ended March 31, 2000 and 1999, respectively. The principal
source of cash from financing activities during 1999 was from the sale of
3,170,000 shares of Class A common stock in which we raised $40.1 million, net
of offering costs. Prior to our initial public offering, we declared a $10.0
million dividend to our stockholders. The dividend was paid in the form of
notes, prior to the termination of our S corporation election, which occurred
immediately prior to the consummation of our initial public offering. As of
March 31, 2000, the entire $10.0 million of the dividend notes had been repaid.
In March 1999, we entered into a line of credit agreement with a commercial
bank which provides for a $25.0 million unsecured revolving line of credit for
general working capital purposes. As of March 31, 2000, no amounts were
outstanding under the line of credit; however, borrowing capacity was reduced by
$3.8 million of outstanding letters of credit.
The line of credit agreement required us to comply with certain financial
covenants. We were not in compliance with all of the covenants contained in the
line of credit agreement as of March 31, 2000. However, we have previously
received a waiver through April 30, 2000. On May 15, 2000, we entered into a
modification of the line of credit agreement which, among other things,
increased the line of credit to $28.6 million, removed any financial covenants
and cured any financial covenant defaults. The modification is effective as of
March 30, 2000. The modified line of credit is guaranteed by both the Company's
Chief Executive Officer and an entity controlled by him, and the guaranty by the
entity is secured by certain of its assets. The modified line of credit bears
interest at LIBOR plus 1.75%, includes a 0.2% unused line of credit fee,
requires monthly payments of interest, and expires on May 31, 2001. Draw downs
under the modified line of credit are subject to us providing certain items such
as an opinion of counsel relating to the pledged collateral. We currently have
$7.4 million of letters of credit outstanding under the line of credit. The
Chief Executive Officer's guarantee of this line is effective during the entire
term of the loan. The Chief Executive Officer does not receive any compensation
from providing that guarantee and collateral.
Additionally, in November 1999, we signed a three-year master lease agreement
to lease up to $40.0 million of computer equipment, of which we leased
approximately $17.8 million as of April 30, 2000. The
15
<PAGE>
lease bears interest at a rate equal to interest on three-year U.S. treasury
notes plus 1.5% to 2.0%. Future draw downs and interest rates under the lease
agreement are subject to our credit worthiness. Currently we are not able to
draw down additional amounts under the lease agreement, although we are seeking
modification of this lease in order to enable future draw downs.
We will require additional external financing through credit facilities, sale
of additional equity in MicroStrategy or Strategy.com or other financing
facilities to support our planned investment of significant resources to
continue to grow the MicroStrategy software platform business, to build the
Strategy.com personal intelligence network, and to increase both MicroStrategy
and Strategy.com brand awareness. There are no assurances that such financing
facilities would be available on acceptable terms. We believe that our existing
cash, cash generated internally by operations and the amended line of credit
entered into in May 2000 will meet our working capital requirements for at least
the next 12 months; provided that we would be required to modify our plans to
expand our business rapidly and would instead be required to conduct operations
with only minimal growth in Strategy.com and MicroStrategy, minimal capital
expenditures and minimal brand awareness expenditures.
Recent Accounting Pronouncements
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation (FIN) No. 44, "Accounting for Certain Transactions Involving
Stock Compensation - An Interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of APB Opinion No. 25 and, among other issues, clarifies the
following: the definition of an employee for purposes of applying APB Opinion
No. 25; the criteria for determining whether a plan qualifies as a non-
compensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. We do not
expect the application of FIN 44 to have a material impact on our financial
position or results of operations.
Risk Factors
The following important factors, among others, could cause actual results to
differ materially from those contained in forward-looking statements made in
this quarterly report on Form 10-Q or presented elsewhere by management from
time to time. The risks and uncertainties described below are not the only ones
facing our company. Additional risks and uncertainties not presently known to us
or that we currently deem immaterial may also impair our business operations.
If any of the events described in the following risks actually occur, our
business, financial condition or results of operations could be materially
adversely affected. In such case, the trading price of our Class A common stock
could decline and you may lose all or part of your investment.
We will need additional financing which could be difficult to obtain
We intend to grow our business rapidly, including investing substantial
amounts in our Strategy.com business and expect to incur operating losses for
the foreseeable future. Therefore, our ability to execute a business plan in
which our operations experience more than minimal growth will require
significant external financing in the future. Obtaining additional financing
will be subject to a number of factors, including:
. market conditions;
. our operating performance; and
. investor sentiment.
16
<PAGE>
These factors may make the timing, amount, terms and conditions of additional
financing unattractive to us. If we are unable to raise capital to fund our
growth, our business, operating results and financial condition would be
materially and adversely affected.
Our quarterly operating results, revenues and expenses may fluctuate
significantly, which could have an adverse effect on the market price of our
stock
For a number of reasons, including those described below, our operating
results, revenues and expenses may vary significantly from quarter to quarter.
These fluctuations could have an adverse effect on the market price of our Class
A common stock.
Fluctuations in Quarterly Operating Results. Our quarterly operating results
may fluctuate as a result of:
. the size, timing and execution of significant orders and shipments;
. the mix of products and services of customer orders, which can affect
whether we recognize revenue upon the signing and delivery of our software
products or whether revenue must be recognized as work progresses or over
the entire contract period;
. the timing of new product announcements;
. changes in our pricing policies or those of our competitors;
. market acceptance of business intelligence software generally and of new
and enhanced versions of our products in particular;
. the length of our sales cycles;
. changes in our operating expenses;
. personnel changes;
. our success in 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;
. changes in foreign currency exchange rates; and
. seasonal factors such as a lower pace of new sales in the summer.
Limited Ability to Adjust Expenses. Because we plan to expand our business,
we expect our operating expenses to increase substantially. In particular,
during 2000 we expect to increase significantly the costs associated with
marketing, developing and operating our Strategy.com network and 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. In the short term we may not be able
to reduce the actual operating expenses associated with our expansion.
Based on the above factors, we believe that quarter-to-quarter comparisons of
our operating results are not a good indication of our future performance. It is
possible that in one or more future quarters, our operating results may be below
the expectations of public market analysts and investors. In that event, the
trading price of our Class A common stock may fall.
We have recently introduced Strategy.com and it is uncertain whether it will
achieve widespread acceptance
17
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We have implemented the Finance, News and Weather Channels of our Strategy.com
networks. We plan to introduce additional channels as part of our suite of
information channels, but they are still in development. While we expect to
implement these additional channels on a commercial basis by the end of 2000, we
may encounter delays or difficulties in this commercial introduction. We expect
that a portion of our future revenue will depend on fees from subscribers for
the use of the Strategy.com network service, from products and services offered
through this network, and from royalties from affiliates who bundle our
Strategy.com network with their own product and service offerings. We have not,
to date, generated any material revenue from our Strategy.com network and may
not be able to do so in the future. If this service, or the products and
services offered through it, fail to achieve widespread customer acceptance, our
business, operating results and financial condition may be materially adversely
affected. In addition, revenue from Strategy.com would be adversely affected if
our affiliates do not perceive that the integration of our Strategy.com network
with their product and service offerings will increase demand for their products
and services or will otherwise be able to generate a sufficient return on their
investment in the use of our network.
We intend to make significant expenditures in developing our Strategy.com
network, which would result in us incurring operating losses
We plan to substantially increase the amounts we will expend on our
Strategy.com network compared to the expenses we have incurred to date, subject
to our securing additional financing. We would then substantially increase our
investment in Strategy.com over the next twelve months to market, develop and
operate Strategy.com and would expect operating losses to increase in 2000. We
also intend to continue making significant investments in Strategy.com after
2000 subject to our securing additional financing and therefore believe we will
continue to be unprofitable for the foreseeable future.
We may lose sales, or sales may be delayed, due to the long sales and
implementation cycles for our products, which would reduce our revenues
To date, our customers have typically invested substantial time, money and
other resources and involved many people in the decision to license our software
products. As a result, we may wait nine months or more after the first contact
with a customer for that customer to place an order while they seek internal
approval for the purchase of our products. During this long sales cycle, events
may occur that affect the size or timing of the order or even cause it to be
canceled. For example, our competitors may introduce new products, or the
customer's own budget and purchasing priorities may change.
Even after an order is placed, the time it takes to deploy our products varies
widely from one customer to the next. Implementing our product can sometimes
last several months, depending on the customer's needs and may begin only with a
pilot program. It may be difficult to deploy our products if the customer has
complicated deployment requirements, which typically involve integrating
databases, hardware and software from different vendors. If a customer hires a
third party to deploy our products, we cannot be sure that our products will be
deployed successfully.
Our employees, investors, customers, vendors and lenders may react adversely to
the revision of our 1999, 1998 and 1997 revenues and operating results
Our future success depends in large part on the support of our key employees,
investors, customers, vendors and lenders, who may react adversely to the
revision of our 1999, 1998 and 1997 revenues and operating results. The revision
of our 1999, 1998 and 1997 revenues and operating results has resulted in
substantial amounts of negative publicity about us. We may not be able to retain
key employees and customers if they lose confidence in us, and our vendors and
lenders may reexamine their willingness to do business with us. In addition,
investors may lose confidence, which may cause the trading price of our Class A
common stock to decrease. If we lose the services of our key employees or are
unable to retain and attract our existing and new customers, vendors and
lenders, our business, operating results and financial condition could be
materially and adversely affected.
Our recognition of deferred revenue is subject to future performance obligations
and may not be representative of actual revenues for succeeding periods
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Our deferred revenue was $70.6 million as of March 31, 2000. The timing and
ultimate recognition of our deferred revenue depends on our performance of
various service obligations. Because of the possibility of customer changes in
development schedules, delays in implementation and development efforts and the
need to satisfactorily perform product support services, deferred revenue at any
particular date may not be representative of actual revenue for any succeeding
period.
We face litigation that could have a material adverse effect on our business,
financial condition and results of operations
We and some of our directors and executive officers are named as defendants in
a number of private securities litigation matters. Although we intend to defend
these actions vigorously, no assurance can be given as to the outcomes. It is
possible that we may be required to pay substantial damages or settlement costs
which could have a material adverse effect on our financial condition or results
of operation. In addition, the SEC has issued a formal order of private
investigation in connection with matters relating to our restatement of our
financial results. The SEC has requested that we provide them with certain
documents concerning the revision of our financial results and financial
reporting documents. We are cooperating with the SEC in connection with this
investigation. Regardless of the outcome of any of these actions, it is likely
that we will incur substantial defense costs and that such actions will cause a
diversion of management time and attention.
We expect that our ability to borrow money under our master equipment lease
agreement will require waivers or amendments to that agreement
We signed a three-year master lease agreement to lease up to $40.0 million of
computer equipment, of which we have leased approximately $17.8 million as of
April 30, 2000. Future draw downs and interest rates under the lease agreement
are subject to our credit worthiness. Currently, we are not able to draw down
additional amounts under the lease agreement; however, we are working with the
lessor to enable future draw downs.
We face intense competition, which may lead to lower prices for our products,
reduced gross margins, loss of market share and reduced revenue
The markets for e-business, e-commerce, customer relationship management,
portals, business intelligence and Internet-based and wireless-based information
networks 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 products and our
Strategy.com network.
Our most direct competitors provide:
. e-business infrastructure software;
. customer relationship management products;
. e-commerce transaction systems;
. business intelligence products;
. web portals and information networks;
. vertical Internet portals and information networks; and
. wireless communications and wireless access protocol enabled products.
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Each of these market segments are discussed more fully below.
E-business Infrastructure Software. In the e-business infrastructure market,
BroadVision, E.piphany, Vignette, Net Perceptions, Broadbase, Art Technology
Group, Engage Technologies, Doubleclick and Personify all provide products that
compete directly or indirectly with our software platform. Many of these
companies provide alternatives to our technology for adding intelligence and
personalization to e-commerce applications. For example, customer information,
such as past purchases, clickstream data and stated preferences, can be used to
create a personalized e-commerce experience that targets customers with offers
and interactions to which they are more likely to respond.
Customer Relationship Management Products. Companies that deliver customer
relationship management products alone or in conjunction with e-commerce
applications, such as BroadVision, E.piphany, Vignette, and Siebel, compete with
our intelligent e-business products.
E-Commerce Transaction Systems. Products that support e-commerce
transactions, such as those provided by Microsoft, IBM, America Online's
Netscape division, BroadVision, Open Market, InterWorld, and Oracle could
provide competition for us. These products have the potential to extend their
capabilities to use customer information as the basis for generating targeted,
personalized product offers, which would compete with our e-business products.
Business Intelligence Products. In the business intelligence market, we
compete with providers of software used to enable businesses to analyze and
optimize their operations. In the enterprise category, which is generally
focused on large deployments, Information Advantage, which was recently acquired
by Sterling Software, competes with us. In the desktop analysis and reporting
category, we face competition from companies such as Business Objects, Cognos,
and Brio Technology. A third category includes products from companies such as
Oracle, Microsoft, and IBM that are generally bundled with or designed to work
with their own relational databases.
Web Portals and Information Networks. Web portals and information networks,
such as Microsoft Network, Yahoo, Lycos, Excite, America Online and
InfoSpace.com, offer an array of information that is similar to information
provided by Strategy.com. Strategy.com seeks to differentiate itself by:
. providing a greater level of personalization;
. allowing users to receive the precise information they want across the
broadest range of information delivery devices including through email,
wireless phone, pager, wireless access protocol enabled products, fax,
personal digital assistants and the telephone; and
. partnering with financial institutions, device manufacturers, Internet
companies, communication carriers, media companies and wireless companies,
to embed Strategy.com information services as an ingredient in their own
offerings.
One or more of these companies, however, could expand their offerings and
reduce our differentiation in these three areas.
Vertical Internet Portals and Information Networks. Expedia, Weather.com,
CNBC.com, ABC.com, ESPN.com, Microsoft Investor, StockBoss, Microsoft CarPoint,
InfoBeat, 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
providing news, sports or weather, but in the aggregate, they offer applications
similar to those provided by Strategy.com. Any one of these companies could
expand their offerings to more closely compete with Strategy.com.
Wireless Communications and Wireless Access Protocol Enabled Products.
Wireless communications providers, such as AT&T, Sprint, MCI WorldCom, Nextel
Communications, British Telecom, Deutsche Telekom, PageNet, Nokia, Ericsson,
Aether Systems, 3COM and Palm offer a variety of mobile phones and wireless
devices over which Strategy.com delivers information. These companies may
develop in-house
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information services or partner with other companies to deliver information that
is competitive to that offered by Strategy.com.
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 e-business
industry. As a result, they may be able to respond more quickly to new or
emerging technologies and changes in customer requirements or devote greater
resources to the development, promotion and sale of their products than we can.
Increased competition may lead to price cuts, reduced gross margins and loss of
market share. We cannot be sure that we will be able to compete successfully
against current and future competitors or that the competitive pressures we face
will not have a material adverse affect on our business, operating results and
financial condition.
Current and future competitors may also make strategic acquisitions or
establish cooperative relationships among themselves or with others. By doing
so, they may increase their ability to meet the needs of our potential
customers. Our current or prospective indirect channel partners may establish
cooperative relationships with our current or future competitors. These
relationships may limit our ability to sell our products through specific
distribution channels. Accordingly, it is possible that new competitors or
alliances among current and future competitors may emerge and rapidly gain
significant market share. These developments could harm our ability to obtain
maintenance revenues for new and existing product licenses on favorable terms.
Our business is expanding, and our failure to manage this expansion effectively,
as well as the strain on our resources, could have a material adverse effect on
our business, operating results and financial condition
We have been expanding rapidly and we expect to continue expanding our
operations subject to the availability of additional financing. Our total number
of employees has grown from 907 on December 31, 1998 to 2,055 on March 31, 2000
and we expect the 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. For example, 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 expand our support
organization to develop our indirect distribution channels in new and expanded
markets and to accommodate growth in our installed customer base. Failure to
manage our expansion effectively could have a material adverse effect on our
business, operating results and financial condition.
In addition, the development of our Strategy.com network could divert the time
and attention of our senior management from our other business. Michael J.
Saylor, our chairman, president and chief executive officer, currently is
responsible for the strategic planning and direction of both our MicroStrategy
Platform and Strategy.com businesses. If Mr. Saylor does not effectively manage
his time and attention between our businesses, it could materially adversely
affect our business, operating results and financial condition.
If we are unable to recruit or retain skilled personnel, or if we lose the
services of any of our key management personnel, our business, operating results
and financial condition would be materially adversely affected
Our future success depends on our continuing ability to attract, train,
assimilate and retain highly skilled personnel. Competition for these employees
is intense. We may not be able to retain our current key employees or attract,
train, assimilate or retain other highly skilled personnel in the future. Our
future success also depends in large part on the continued service of key
management personnel, particularly Michael J. Saylor, our chairman, president
and chief executive officer, and Sanju K. Bansal, our executive vice president
and chief operating officer. If we lose the services of one or both of these
individuals or other key personnel, or if we are unable to attract, train,
assimilate and retain the highly skilled personnel we need, our business,
operating results and financial condition could be materially adversely
affected.
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Our inability to develop and release product enhancements and new products to
respond to rapid technological change in a timely and cost-effective manner
would have a material adverse effect on our business, operating results and
financial condition
The market for our products is characterized by rapid technological change,
frequent new product introductions and enhancements, changing customer demands
and evolving industry standards. The introduction of products embodying new
technologies can quickly make existing products obsolete and unmarketable. We
believe that our future success depends largely on three factors:
. our ability to continue to support a number of popular operating systems
and databases;
. our ability to maintain and improve our current product line; and
. our ability to rapidly develop new products that achieve market acceptance,
maintain technological competitiveness and meet an expanding range of
customer requirements.
Business intelligence applications are inherently complex, and it can take a
long time to develop and test major new products and product enhancements. In
addition, customers may delay their purchasing decisions because they anticipate
that new or enhanced versions of our products will soon become available. We
cannot be sure that we will succeed in developing and marketing, on a timely and
cost-effective basis, product enhancements or new products that respond to
technological change, introductions of new competitive products or customer
requirements, nor can we be sure that our new products and product enhancements
will achieve market acceptance.
The emergence of new industry standards may adversely affect our ability to
market our existing products
The emergence of new industry standards in related fields may adversely affect
the demand for our existing products. This could happen, for example, if new web
standards and technologies emerged that were incompatible with customer
deployments of our MicroStrategy applications. Although the core database
component of our business intelligence solutions is compatible with nearly all
enterprise server hardware and operating system combinations, such as OS/390,
AS/400, Unix and Windows, our application server component runs only on the
Windows operating system. Therefore, our ability to increase sales currently
depends on the continued acceptance of the Windows operating system. We cannot
market our current business intelligence 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 a timely or cost effective basis, if at all.
The legal environment regarding collection and use of personal information is
uncertain and new laws or government regulations could have a material adverse
effect on our business, operating results and financial condition
Although some existing laws govern the collection and use of personal
information obtained through the Internet or other public data networks, it is
unclear whether they apply to us and our products. Most of these laws were
adopted before the widespread use and commercialization of the Internet and
other public data networks. As a result, the laws do not address the unique
issues presented by these media.
Due to increasing use of the Internet and the dramatically increased access to
personal information made possible by technologies like ours, the U.S. federal
and various state and foreign governments have recently proposed limitations on
the collection and use of personal information of users of the Internet and
other public data networks.
Although we attempt to obtain permission from users prior to collecting or
processing their personal data, new laws or regulations governing personal
privacy may change the ways in which we and our customers and affiliates may
gather this personal information. There may be significant costs and delays
involved with adapting our products to any change in regulations.
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Our business, and in particular our Strategy.com network, depends upon our
receiving detailed personal information about subscribers in order to provide
them with the services they select. Privacy concerns may cause some potential
subscribers to forego subscribing to our service. If new laws or regulations
prohibit us from using information in the ways that we currently do, or if users
opt out of making their personal preferences and information available to us and
our affiliates, the utility of our products will decrease, which could have a
material adverse effect on our business, operating results and financial
condition. If personal information is misused by us, our customers or our
network affiliates, our legal liability may be increased and our growth may be
limited.
The Federal Trade Commission has recently launched investigations of the data
collection practices of various Internet companies. In addition, numerous
individuals and privacy groups have filed lawsuits or administrative complaints
against other companies asserting that they were harmed by the misuse of their
personal information. If comparable legal proceedings were commenced against us,
regardless of the merits of the claim, we could be required to spend significant
amounts on legal defense and our senior management's time and attention could be
diverted from our business. In addition, demand for our products could be
reduced if companies are not permitted to use clickstream data derived from
their web sites. This could materially and adversely affect our business,
operating results and financial condition.
In addition, in Europe, the European Union Directive on Data Protection, a
comprehensive administrative and regulatory program, currently limits the
ability of companies to collect, store and exchange personal data with other
entities. Because the U.S. 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.
Our business may suffer if either the Internet infrastructure or the wireless
communication infrastructure is unable to effectively support the growth in
demand placed upon it
Our Strategy.com network and our other products depend increasingly upon the
Internet infrastructure and wireless communications infrastructures to collect
information and deliver information to customers. We cannot assure you that
either of these infrastructures will continue to effectively support the
capacity, speed and security demands placed upon them as they continue to
experience increased numbers of users, frequency of use and increased
requirements for data transmission by users. Even if the necessary
infrastructure or technologies are developed, we may incur considerable costs to
adapt our solutions accordingly. Furthermore, the Internet has experienced a
variety of outages and other delays due to damage to portions of its
infrastructure or attacks by hackers. These outages and delays could impact the
web sites using our products or hosting our Strategy.com network and could
materially affect our business, operating results and financial condition.
If the market for business intelligence software fails to grow as we expect, or
if businesses fail to adopt our products, our business, operating results and
financial condition would be materially adversely affected
Nearly all of our revenues to date have come from sales of business
intelligence software and related technical support, consulting and education
services. We expect these sales to account for a large portion of our revenues
for the foreseeable future. Although demand for business intelligence software
has grown in recent years, the market for business intelligence software
applications is still emerging. Resistance from consumer and privacy groups to
increased commercial collection and use of data on spending patterns and other
personal behavior may impair the further growth of this market, as may other
developments. We cannot be sure that this market will continue to grow or, even
if it does grow, that businesses will adopt our solutions. We have spent, and
intend to keep spending, considerable resources to educate potential customers
about business intelligence software in general and our solutions in particular.
However, we cannot be sure that these expenditures will help our products
achieve any additional market acceptance. If the market fails to grow or grows
more slowly than we currently expect, our business, operating results and
financial condition would be materially adversely affected.
Because of the rights of our two classes of common stock, and because we are
controlled by our existing stockholders, these stockholders could transfer
control of MicroStrategy to a third party without anyone else's approval or
prevent a third party from acquiring MicroStrategy
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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 May 1, 2000, holders of our Class B common stock owned or
controlled 55,179,115 shares of Class B common stock, or 95.8% of the total
voting power. Michael J. Saylor, our chairman, president and chief executive
officer, controlled 43,549,324 shares of Class B common stock, or 75.6% of the
total voting power, as of May 1, 2000. Accordingly, Mr. Saylor is able to
control MicroStrategy through his ability to determine the outcome of elections
of our directors, amend our certificate of incorporation and bylaws and take
other actions requiring the vote or consent of stockholders, including mergers,
going private transactions and other extraordinary transactions and their terms.
Our certificate of incorporation allows holders of Class B common stock,
almost all of whom are 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, operating results and financial condition. Mr.
Saylor will also be able to prevent a change of control of MicroStrategy,
regardless of whether holders of Class A common stock might otherwise receive a
premium for their shares over the then-current market price.
We rely on our strategic channel partners and if we are unable to develop or
maintain successful relationships with them, our business, operating results and
financial condition will suffer
In addition to our direct sales force, we rely on strategic channel partners,
such as 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 three months ended March 31, 2000 and
the years ended December 31, 1999, 1998 and 1997, channel partners accounted
for, directly or indirectly, approximately 40.4%, 39.2%, 33.6% and 27.0% 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 through our strategic channel partners. However, there
can be no assurance that our efforts to continue to expand indirect sales in
this manner 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
developing and maintaining successful relationships with those strategic
partners. If we are unable to develop or maintain our relationships with these
strategic partners, our business, operating results and financial condition will
suffer.
We rely on our network affiliates to market our Strategy.com network to their
customers and if we are unable to enter into arrangements with a sufficient
number of affiliates, or if our affiliates are unable to interest their
customers in our services, our business will suffer
We rely on our network affiliates to market our Strategy.com network to their
customers. We cannot be sure that we will attract affiliates who will market our
services effectively. Our ability to achieve revenue growth in the future will
depend in part on our success in recruiting and maintaining successful
relationships with affiliates. If we are unable to recruit affiliates or
maintain our relationships with them, our business, operating results and
financial condition will suffer.
Third party providers of information and services for our Strategy.com network
may fail to provide us such information and services or may also provide such
information and services to our competitors
We rely on third parties to provide information and services for our
Strategy.com network. For example, we rely on Ameritrade to provide users of our
Strategy.com network with stock quote information and expect to rely upon a
third party to execute trades in securities when this capability is added to our
network. If one or more of these providers were to stop working with us, we
would have to rely on other parties to provide the information and services we
need. We cannot predict whether other parties would be willing to do so on
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reasonable terms. Furthermore, we do not have long-term agreements with our
providers of information and services and we cannot restrict them from providing
similar information and services to our competitors. As a result, our
competitors may be able to duplicate some of the information and services that
we provide and may, therefore, find it easier to enter the market for personal
intelligence and compete with us.
We rely upon our network affiliates to deliver services we offer through our
Strategy.com network and if they have difficulty in doing so, we could be
exposed to liability and our reputation could suffer
We depend upon our affiliates to deliver services to subscribers of our
Strategy.com network. If our affiliates fail to deliver reliable services, we
could face liability claims from our subscribers and our reputation could be
damaged. In addition, we will be dependent on the performance of the systems
deployed and maintained by these parties, whom we will not control. We expect to
include contractual provisions limiting our liability to the subscriber for
failures and delays, but we cannot be sure that these limits will be enforceable
or will be sufficient to shield us from liability. We will seek to obtain
liability insurance to cover problems of this sort, but we cannot guarantee that
insurance will be available or that the amounts of our coverage will be
sufficient to cover all potential claims.
Our network affiliates will rely on us to maintain the infrastructure of the
Strategy.com network and any problems with that infrastructure could expose us
to liability from our affiliates and their customers
Our network affiliates depend on us to maintain the software and hardware
infrastructure of our Strategy.com network. If this infrastructure fails or our
affiliates or their customers otherwise experience difficulties or delays in
accessing the network, we could face liability claims from them. We expect to
include contractual provisions limiting our liability to our affiliates for
system failures and delays, but we cannot be sure that these limits will be
enforceable or will be sufficient to shield us from liability. We will seek to
obtain liability insurance to cover problems of this sort, but we cannot
guarantee that insurance will be available or that the amounts of our coverage
will be sufficient to cover all potential claims.
We are vulnerable to system failures which could cause interruptions or
disruptions in our service
The hardware infrastructure on which the Strategy.com system operates is
located at the Exodus Communications data center in Northern Virginia. We cannot
assure you that we will be able to manage this relationship successfully to
mitigate any risks associated with having our hardware infrastructure maintained
by Exodus. Unexpected events such as natural disasters, power losses and
vandalism could damage our systems. Telecommunications failures, computer
viruses, electronic break-ins or other similar disruptive problems could
adversely affect the operation of our systems. Our insurance policies may not
adequately compensate us for any losses that may occur due to any damages or
interruptions in our systems. Accordingly, we could be required to make capital
expenditures in the event of damage. We do not currently have a formal disaster
recovery plan. Periodically, we experience unscheduled system downtime that
results in our web site being inaccessible to subscribers. Although we have not
suffered material losses during these downtimes to date, if these problems
persist in the future, users, network affiliates and advertisers could lose
confidence in our services.
System capacity constraints may diminish our ability to generate revenues from
Strategy.com
A substantial increase in the use of the products and services offered by
Strategy.com could strain the capacity of our systems, which could lead to
slower response time or system failures. System failures or slowdowns could
adversely affect the speed and responsiveness of our Strategy.com network. These
would diminish the experience for our subscribers and affect our reputation. The
ability of our systems to manage a significantly increased volume of
transactions in a production environment is unknown. As a result, we face risks
related to our ability to scale up to our expected transaction levels while
maintaining satisfactory performance. If our transaction volume increases
significantly, we may need to purchase additional servers and networking
equipment to maintain adequate data transmission speeds. The availability of
these products and related services may be limited or their cost may be
significant.
We have only limited protection for our proprietary rights in our software,
which makes it difficult to prevent third parties from infringing upon our
rights
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We regard our software products as proprietary and we rely on a combination of
federal and international copyright, state and federal trademark and service
mark and state and common law 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, and no registered trademarks other
than MicroStrategy(R), DSS Agent(R) and QuickStrike(R). Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain and use our products or technology. Policing such unauthorized
use is difficult, and we cannot be certain that we can prevent it, particularly
in countries where the laws may not protect our proprietary rights as fully as
in the United States.
Our products may be susceptible to claims by other companies that our products
infringe upon their proprietary rights, which could adversely affect our
business, operating results and financial condition
As the number of software products in our target markets increases and the
functionality of these products further overlaps, we may become increasingly
subject to claims by a third party that our technology infringes such party's
proprietary rights. Regardless of their merit, any such claims could be time
consuming and expensive to defend, may divert management's attention and
resources, could cause product shipment delays and could require us to enter
into costly royalty or licensing agreements. If successful, a claim of
infringement against us and our inability to license the infringed or similar
technology could have a material adverse affect on our business, operating
results and financial condition.
Expanding our international operations will be difficult and our failure to do
so successfully or in a cost-effective manner would have a material adverse
effect on our business, operating results and financial condition
International sales accounted for 22.6%, 24.0%, 26.1% and 27.1% of our total
revenues for the three months ended March 31, 2000 and the years ended December
31, 1999, 1998 and 1997, 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 and financial condition. In
order to expand international sales successfully, 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.
There are certain risks inherent in our international business activities
including:
. changes in foreign currency exchange rates;
. unexpected changes in regulatory requirements;
. tariffs and other trade barriers;
. costs of localizing products for foreign countries;
. lack of acceptance of localized products in foreign countries;
. longer accounts receivable payment cycles;
. difficulties in managing international operations;
. tax issues, including restrictions on repatriating earnings;
. weaker intellectual property protection in other countries; and
. the burden of complying with a wide variety of foreign laws.
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These factors may have a material adverse effect on our future international
sales and, consequently, our business, operating results and financial
condition.
The nature of our products makes them particularly vulnerable to undetected
errors, or bugs, which could cause problems with how the products perform and
which could in turn reduce demand for our products, reduce our revenue and lead
to product liability claims against us
Software products as complex as ours may contain errors or defects, especially
when first or subsequent versions are released. Although we test our products
extensively, we have in the past discovered software errors in new products
after their introduction. We 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 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.
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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. 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 March
31, 2000, 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 March 31, 2000, 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, operating results, 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.
28
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Actions Arising under Federal Securities Laws. In March 2000, numerous
separate complaints purporting to be class actions were filed in federal courts
in various jurisdictions alleging that we and certain of our officers and
directors violated section 10(b) of the Securities Exchange Act of 1934, as
amended, Rule 10b-5 promulgated by the Securities and Exchange Commission
("SEC") thereunder, and section 20(a) of the Securities Exchange Act of 1934, as
amended.
The complaints contain varying allegations, including that we made materially
false and misleading statements with respect to our 1999 and 1998 financial
results in our filings with the SEC, analysts' reports, press releases and media
reports. The complaints do not specify the amount of damages sought.
We have not filed any answers, motions to dismiss or other responsive
pleadings in this litigation. We intend to defend this matter vigorously.
SEC Investigation. In March 2000, we were notified that the SEC had issued a
formal order of private investigation in connection with matters relating to our
restatement of our financial results. The SEC has requested that we provide
them with certain documents concerning the revision of our financial results and
financial reporting documents. The SEC indicated that its inquiry should not be
construed as an indication by the SEC or its staff that any violation of law has
occurred, nor as an adverse reflection upon any person, entity or security. We
are cooperating with the SEC in connection with this investigation and its
outcome cannot yet be determined.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
3.1 Amended and Restated Certificate of Incorporation of the Company
(Filed as Exhibit 3.1 to the Company's Registration Statement on
Form S-1 (Registration No. 333-49899) and incorporated by reference
herein.)
3.2 Restated Bylaws of the Company (Filed as Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (Registration No. 333-
49899) and incorporated by reference herein.)
4.1 Form of Certificate of Class A Common Stock of the Company (Filed as
Exhibit 4.1 to the Company's Registration Statement on Form S-1
(Registration No. 333-49899) and incorporated by reference herein.)
10.1 1997 Director Option Plan (as amended) of the Company (Filed as
Exhibit 10.3 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999 (File No. 000-24435) and
incorporated by reference herein.)
10.2 Deed of Lease, dated January 7, 2000, between Tysons Corner Property
LLC and the Company (Filed as Exhibit 10.18 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999
(File No. 000-24435) and incorporated by reference herein.)
10.3 First Modification Agreement, dated May 15, 2000, among Bank of
America, N.A., MicroStrategy Incorporated, Michael J. Saylor and
Alcantara LLC
10.4 Pledge and Security Agreement, dated May 15, 2000, by Alcantara LLC
in favor of Bank of America, N.A.
10.5 Guaranty of Payment, dated May 15, 2000, made by Alcantara LLC to
Bank of America, N.A.
10.6 Guaranty of Payment, dated May 15, 2000, made by Michael J. Saylor
to Bank of America, N.A.
27.1 Financial Data Schedule
- ----------------
29
<PAGE>
B. Reports on Form 8-K
On January 7, 2000, the Company filed a Current Report on Form 8-K, dated
December 23, 1999, announcing that the Company had completed its acquisition of
the intellectual property and other intangible assets relating to NCR's TeraCube
business.
On March 23, 2000, the Company filed a Current Report on Form 8-K, dated
March 20, 2000, to report that it had (a) issued a press release announcing that
it is revising its 1999 and 1998 revenues and operating results, (b) issued a
clarification on March 21, 2000 of its March 20, 2000 public statements,
indicating that the principal reason for its decision to revise its 1999 and
1998 reported revenues and operating results was the need to do so under
existing accounting principles articulated in Statement of Position 97-2, (c)
announced on March 21, 2000 that a number of lawsuits purporting to be class
actions had been filed naming the Company and certain of its officers and
directors as defendants alleging violations of various securities laws in
connection with the Company's previously announced revision of its 1999 and 1998
revenues and operating results and (d) filed on March 21, 2000, an Application
for Withdrawal of Registration Statement relating to the Company's Registration
Statement on Form S-3 (File No. 333-31042) with the SEC.
All other items are omitted because they are not applicable or the answers
are none.
30
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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: May 15, 2000
31
<PAGE>
INDEX TO EXHIBITS
3.1 Amended and Restated Certificate of Incorporation of the Company (Filed as
Exhibit 3.1 to the Company's Registration Statement on Form S-1
(Registration No. 333-49899) and incorporated by reference herein.)
3.2 Restated Bylaws of the Company (Filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (Registration No. 333-49899) and
incorporated by reference herein.)
4.1 Form of Certificate of Class A Common Stock of the Company (Filed as
Exhibit 4.1 to the Company's Registration Statement on Form S-1
(Registration No. 333-49899) and incorporated by reference herein.)
10.1 1997 Director Option Plan (as amended) of the Company (Filed as Exhibit
10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 (File No. 000-24435) and incorporated by reference
herein.)
10.2 Deed of Lease, dated January 7, 2000, between Tysons Corner Property LLC
and the Company (Filed as Exhibit 10.18 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999 (File No. 000-24435)
and incorporated by reference herein.)
10.3 First Modification Agreement, dated May 15, 2000, among Bank of America,
N.A., MicroStrategy Incorporated, Michael J. Saylor and Alcantara LLC
10.4 Pledge and Security Agreement, dated May 15, 2000, by Alcantara LLC in
favor of Bank of America, N.A.
10.5 Guaranty of Payment, dated May 15, 2000, made by Alcantara LLC to Bank of
America, N.A.
10.6 Guaranty of Payment, dated May 15, 2000, made by Michael J. Saylor to Bank
of America, N.A.
27.1 Financial Data Schedule
<PAGE>
Exhibit 10.3
FIRST MODIFICATION AGREEMENT
THIS FIRST MODIFICATION AGREEMENT (this "Agreement"), dated as of the
15th day of May 2000, is by and among BANK OF AMERICA, N.A., a national banking
association and successor to NationsBank, N.A. (the "Bank"); MICROSTRATEGY
INCORPORATED, a Delaware corporation (the "Borrower"); and MICHAEL J. SAYLOR and
ALCANTARA LLC, a Delaware limited liability company (the "Guarantors").
WITNESSETH THAT:
WHEREAS, the Bank is the owner and holder of that certain Revolving
Commercial Note dated March 26, 1999, made by the Borrower and payable to the
order of the Bank, in the original principal amount of Twenty-five Million and
no/100 Dollars ($25,000,000.00) and bearing interest and being payable in
accordance with the terms and conditions therein set forth (the "Note"); and
WHEREAS, the Note was issued pursuant to a certain Credit Agreement dated
March 26, 1999, between the Borrower and the Bank (the "Credit Agreement"); and
WHEREAS, as of the date hereof, the principal balance of the Note is Zero
Dollars ($0.00), the outstanding amount of issued Letters of Credit (as defined
in the Credit Agreement) is $3,859,464.01 and the parties hereto desire to
modify the terms of the Note and the Credit Agreement.
NOW, THEREFORE, for Ten Dollars ($10.00) and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. The Credit Agreement is hereby modified, effective March 30, 2000,
as follows:
(a) In Section 1.1,
(i) by replacing "NationsBank, N.A." with "Bank of America,
N.A., a national banking association and successor to NationsBank, N.A." in the
definition of "Bank".
(ii) by inserting ", contingent or otherwise," after
"obligations" in clause (c) of the definition of "Debt"; and
(iii) by adding the following new definitions:
"Guarantor" means Michael J. Saylor and his successors, or Alcantara LLC,
a Delaware limited liability company and its successors; and "Guarantors"
means both of said Persons.
<PAGE>
"Royal Caribbean Letter of Credit" means the Letter of Credit in the
amount of US$3,600,000.00, to be requested by the Borrower and issued by
the Bank for the benefit of Royal Caribbean Cruises LTD, together with all
renewals, modifications and increases thereof, and replacements thereto.
(b) In Section 2.1,
(i) by inserting "(subject to subsection (c) of this Section
2.1)" after "$25,000,000.00" in subsection (a) and after "$5,000,000.00" in
subsection (b); and
(ii) by adding a new subsection (c), as follows:
(c) The Royal Caribbean Letter of Credit. Upon the issuance by the Bank
------------------------------------
of the Royal Caribbean Letter of Credit, the Commitment shall be increased
automatically to $28,600,000.00 and the Letter of Credit Commitment shall
be increased automatically to the lesser of $8,600,000.00 (or the
equivalent in foreign currency, as determined by the Bank in its sole
discretion) and the unused Commitment. As the undrawn amount of the Royal
Caribbean Letter of Credit decreases (by cancellation, expiration, draws,
or otherwise), each of the Commitment and the Letter of Credit Commitment
shall be reduced by the amount of said decrease. Once decreased as
aforesaid, neither the Commitment nor the Letter of Credit Commitment may
thereafter be increased.
(c) In Article IV,
(i) by inserting "except as set forth on Schedule IV hereto, as
supplemented by information supplied by the Borrower to the Bank," after "Since
December 31, 1998" in Section 4.4(c);
(ii) by inserting "and except as set forth on Schedule IV
hereto, as supplemented by information supplied by the Borrower to the Bank,"
after "To the knowledge of the Borrower" in Section 4.5; and
(iii) by inserting "and except as set forth on Schedule IV
hereto, as supplemented by information supplied by the Borrower to the Bank,"
after "To the best of the Borrower's knowledge" in the last sentence of Section
4.13.
(d) Article V thereof is deleted in its entirety and replaced with
the following:
ARTICLE V
[intentionally deleted]
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<PAGE>
(e) In Section 7.1,
(i) by deleting "in Article V or" from clause (ii);
(ii) by deleting clause (iv) in its entirety and replacing it
with the following:
(iv) any representation, warranty, certification or statement made by or
on behalf of the Borrower or either of the Guarantors in this Agreement,
any Application, or in any other instrument or agreement which now or
hereafter evidences, secures or guarantees any Loan, or by or on behalf of
the Borrower or either of the Guarantors in any certificate, financial
statement or other document delivered after May 15, 2000 pursuant hereto or
thereto shall prove to have been incorrect in any material respect when
made;
(iii) by inserting ", either of the Guarantors," between "the
Borrower" and "or any Subsidiary of the Borrower" in clauses (v), (vi), (vii),
(viii) and (x);
(iv) by replacing "in excess of $500,000 over the limit of
applicable insurance coverage" in clause (x) with "which would cause the total
of all such judgments and orders to exceed $15,000,000.00 in the aggregate"; and
(v) by adding new clause (xi) as follows:
(xi) any indorsement or guaranty of the payment of the Note or any
Loan shall cease for any reason to be in full force and effect, or any
indorser or guarantor (including, without limitation, either Guarantor) shall
contest the validity or enforceability of the indorsement or guaranty or deny
that it has any further liability or obligation under the indorsement or
guaranty, or the breach of any representation, warranty or agreement
contained in said indorsement or guaranty; or any agreement or other document
granting the Bank security for the payment of any Loan or any such
indorsement or guaranty shall cease for any reason to be in full force and
effect as such security with the priority stated to be created thereby, or
the grantor of such security shall contest the validity or enforceability of
the security or deny that it has any further liability or obligation under
such agreement or other document, or the breach of any representation,
warranty, or agreement contained in said agreement or other document;
2. The "INTEREST RATE" section of the Note is hereby deleted in its
entirety and replaced with the following:
INTEREST RATE. This Note shall bear interest on the outstanding
principal balance from time to time at a variable rate per annum equal at
all times to 1.75% over the LIBOR Rate. The "LIBOR Rate" means that
variable rate of
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<PAGE>
interest (rounded upwards, if necessary, to the nearest 1/100 of 1%)
appearing on Telerate Page 3750 (or any successor page) as the one-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 one-month
rate of interest (rounded upwards, if necessary, to the nearest 1/100 of
1%) appearing on Reuters Screen LIBO Page as the one-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. Changes
in the interest rate on this Note shall take place, without notice, in
accordance with changes in the LIBOR Rate, as and when such changes occur.
Interest shall be computed on the basis of a 360 day year, counting 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.
3. The Bank's modification fee of $50,000.00, plus the reasonable fees
and expenses of the Bank's legal counsel in connection with this modification
and related transactions, shall be paid by the Borrower on the date hereof.
4. Contemporaneously with the execution and delivery of this Agreement,
the Borrower shall execute and deliver, or cause to be executed and delivered,
to the Bank (i) the guaranties of Michael J. Saylor and Alcantara LLC; (ii) the
pledge and security agreement of Alcantara LLC providing collateral security for
such guaranty of Alcantara LLC and for the obligations of the Borrower under the
Credit Agreement and the Note and Applications (as defined in the Credit
Agreement); (iii) the opinion of Hale and Dorr LLP, as to such matters as the
Bank shall require, including, without limitation, the validity of the agreement
referenced in clause (ii) hereof, the validity of the security interest created
thereby, and the perfection of said security interest; and (iv) all documents,
schedules, exhibits and agreements required by any of the foregoing to be
delivered in connection therewith (all of the foregoing being referred to herein
as the "Closing Documents"). All Closing Documents shall be on the Bank's
forms therefor and appropriately completed, or otherwise satisfactory to the
Bank and its counsel. Upon the delivery of the Closing Documents as set forth
above, the "Events of Default" described in that certain letter from the Bank to
the Borrower dated May 10, 2000, shall be deemed to have been cured; and, upon
the delivery to the Bank of the opinion
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<PAGE>
of Hunton & Williams, special counsel to the Borrower and Alcantara LLC, that
the aforesaid security interest is of the first priority, the Commitment and the
Letter of Credit Commitment, as defined in, and subject to, the Credit Agreement
as modified hereby, shall be reinstated.
5. The Borrower and the Guarantor hereby acknowledge and agree that, as
of the date hereof, the unpaid principal balance of the Note is Zero Dollars
($0.00), the outstanding amount of issued Letters of Credit is $3,859,464.01 and
that there are no set-offs or defenses against the Note, the Credit Agreement,
or any Application (as defined in the Credit Agreement).
6. The Guarantors join in this Agreement for the purpose of signifying
their consent hereto and agree to execute and deliver the documents described in
Paragraph 4 hereof to be executed and delivered by them.
7. The parties to this Agreement do not intend that this Agreement be
construed as a novation of the Note, the Credit Agreement or any Application.
8. Except as hereby expressly modified, the Credit Agreement and the
Note shall otherwise be unchanged, shall remain in full force and effect, and
are hereby expressly approved, ratified and confirmed. A legend shall be placed
on the Note indicating that its terms have been modified hereby, and the
original of this Agreement shall be affixed to the original of the Note.
9. This Agreement shall be governed in all respects by the laws of the
Commonwealth of Virginia and shall be binding upon and shall inure to the
benefit of the parties hereto and their respective heirs, executors,
administrators, personal representatives, successors and assigns.
WITNESS the following signatures and seals.
MICROSTRATEGY INCORPORATED [SEAL]
By___________________________________
Name:
Title:
______________________________ [SEAL]
MICHAEL J. SAYLOR
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<PAGE>
ALCANTARA LLC [SEAL]
By: /s/ Michael J. Saylor
---------------------------------
Michael J. Saylor, President
and Sole Member
BANK OF AMERICA, N.A. [SEAL]
By: /s/
---------------------------------
Name:
Title:
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<PAGE>
Exhibit 10.4
PLEDGE AND SECURITY AGREEMENT
This PLEDGE AND SECURITY AGREEMENT (as amended, supplemented or
modified from time to time, this "Pledge Agreement") is dated as of May 15,
2000, and is by ALCANTARA LLC, a Delaware limited liability company without
managers (the "Pledgor") in favor of BANK OF AMERICA, N.A., a national banking
association (the "Pledgee").
MicroStrategy Incorporated, a Delaware corporation, (the "Borrower")
and the Bank have entered into a certain Credit Agreement dated March 26, 1999
(as modified by a certain First Modification Agreement dated as of May 15, 2000,
and as from time to time otherwise amended, supplemented and replaced, the
"Credit Agreement"). Terms used herein and defined in the Credit Agreement and
not otherwise defined herein, shall have their meanings herein as therein
defined. The Pledgor has delivered to the Pledgee its Guaranty of Payment dated
May 15, 2000 (as from time to time amended and replaced, the "LLC Guaranty"),
and Michael J. Saylor (the "Guarantor"), the sole member and sole officer of the
Pledgor, has delivered to the Pledgee his Guaranty of Payment dated May 15, 2000
(as from time to time amended and replaced, the "Personal Guaranty"), to
guaranty in full the payment of all "Obligations" (as defined in the LLC
Guaranty and the Personal Guaranty) (hereinafter, "Loan Obligations"). To
provide collateral security for all of the obligations of the Pledgor under the
LLC Guaranty (the "Guaranty Obligations") and the Loan Obligations, the Pledgor
has requested that the Pledgee accept this Pledge Agreement. The Pledgee has
agreed to do so, but only upon the terms and conditions set forth herein.
Accordingly, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1. Specifically Defined Terms. As used in this Pledge
--------------------------
Agreement, the following terms shall have the following meanings:
(a) "Account" means securities account number 859973 maintained by the
Pledgor with the Intermediary, all subacccounts and additional accounts in
connection therewith which are now existing or hereafter arising, and all
replacement accounts for any of the foregoing.
(b) "Book-entry Treasury Security" has the meaning given to the term
"Book-entry Security" in 31 CFR 357.2(a) or any successor provision.
(c) "Control of the Borrower" means (i) direct ownership, control, and
power to vote 54% or more of all classes of voting securities of the Borrower
(considered as one class); (ii) direct control over the election or appointment
of a majority of the directors (or individuals exercising similar functions) of
the Borrower; and (iii) the direct power to exercise a controlling influence
over the management and policies of the Borrower.
(d) "Control of the Pledgor" means (i) direct ownership, control, and
power to vote 100% of the ownership interests in the Pledgor; (ii) direct
control over the election or appointment of all members and officers (or
individuals exercising similar functions) of the Pledgor; and (iii) and the
direct power to exercise a controlling influence over the management and
policies of the Pledgor.
<PAGE>
(e) "Debt" has the meaning given that term in the Credit Agreement.
(f) "Intermediary" means Bank of America, N.A., a national banking
association, and its successors, in its capacity as such with regard to the
Account and the other Pledged Collateral.
(g) Each term specifically defined in any other section of this Pledge
Agreement shall have the meaning given to said term therein.
Section 1.2. UCC Terms. Unless otherwise specifically defined
---------
herein, or unless the context otherwise requires, all terms used herein which
are defined in the Virginia Uniform Commercial Code shall have the meanings
therein stated. As used herein, "UCC" means at any time the Virginia Uniform
Commercial Code; provided that, if, by reason of mandatory provisions of law,
--------
the validity or perfection of any security interest granted herein is governed
by the Uniform Commercial Code as in effect in a jurisdiction other than the
Commonwealth of Virginia, then, as to the validity or perfection of such
security interest, "UCC" shall mean the Uniform Commercial Code in effect in
such other jurisdiction. In the event "UCC" is construed to mean the Uniform
Commercial Code in effect in a jurisdiction other than Virginia, then specific
Uniform Commercial Code references herein shall be construed to mean the
corresponding Uniform Commercial Code provision in such other jurisdiction.
ARTICLE II
THE SECURITY INTERESTS
Section 2.1. The Security Interests. The Pledgor hereby pledges to
----------------------
the Pledgee, and grants to the Pledgee a security interest in, the following
(the "Pledged Collateral"):
(i) the Account;
(ii) all cash, investment property, financial assets, security
entitlements, securities, commodity contracts and instruments which are now or
may hereafter be held, contained or deposited in, arising under, or subject to,
the Account, including, without limitation, those listed on Schedule 1 hereto,
and all additions thereto and substitutions and replacements therefor (the
"Listed Assets"); and all dividends, distributions, cash, instruments and other
property and proceeds from time to time received, receivable or otherwise made
upon or distributed in respect of or in exchange for any or all of the Listed
Assets;
(iii) all additional investment property and financial assets from
time to time acquired by the Pledgor in any manner and held or subject to the
Account and all dividends, distributions, cash, instruments and other property
from time to time received, receivable or otherwise made upon or distributed in
respect of or in exchange for any or all of such securities;
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<PAGE>
(iv) all rights of the Pledgor against the Intermediary or any other
third party arising out of the Account, or any instrument or agreement in
connection therewith in which the Pledgor has rights;
(v) all general intangibles now existing or hereafter arising
with respect to any of the foregoing;
(vi) all instruments, security certificates and other
certificates representing any of the foregoing; and
(vii) to the extent not otherwise included in the foregoing, all
cash and non-cash proceeds thereof.
Section 2.2. Security for Obligations. This Pledge Agreement secures
------------------------
the payment of all Guaranty Obligations and Loan Obligations. The security
interests granted by this Pledge Agreement are granted as security only and
shall not subject the Pledgee to, or transfer or in any way affect or modify,
any obligation or liability of the Pledgor with respect to the Account, any of
the Pledged Collateral, or any transaction in connection therewith.
Section 2.3. Control of Pledged Collateral. All Pledged Collateral
-----------------------------
shall be pledged or transferred to the Pledgee so as to create a perfected first
priority security interest therein in favor of the Pledgee through control of
the Pledged Collateral by the Pledgee in accordance with applicable provisions
of the UCC. Without limiting in any way the foregoing:
(a) All security certificates, other certificates, and instruments
representing or evidencing the Pledged Collateral shall be delivered to and held
by the Pledgee, or by the Intermediary on behalf of the Pledgee, pursuant hereto
and to Section 8.8A-301(a) or 8.9-304, as applicable, of the UCC, and shall be
in suitable form for transfer by delivery, or shall be accompanied by duly
executed instruments of transfer or assignment in blank, or specially indorsed
to the Pledgee, with signatures appropriately guaranteed, and accompanied in
each case by any required documentary or transfer tax stamps, and any other
documents necessary or, in the sole discretion of the Pledgee, desirable, to
cause the Pledgee to have control of (within the meaning of Sections 8.9-115(e)
and 8.8A-106 of the UCC) and a security interest in the Pledged Collateral, all
in form and substance satisfactory to the Pledgee. The Pledgee shall have the
right, at any time in its discretion and without notice to the Pledgor, to cause
any or all of such Pledged Collateral to be transferred of record into the name
of the Pledgee or its nominee. All such certificates or instruments held by the
Intermediary shall be segregated from all other securities or other assets of
the Pledgor or the Pledgee or any other person held by the Intermediary in any
capacity other than as Intermediary hereunder.
(b) With respect to all Pledged Collateral consisting of
uncertificated securities, the Pledgor shall cause, as appropriate, (i) each
issuer of said Pledged Collateral to agree in writing that it will comply with
instructions originated by the Pledgee without further consent by the Pledgor or
other registered owner; or (ii) said Pledged Collateral to be delivered to and
held by the Pledgee
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<PAGE>
pursuant hereto and to Section 8.8A-301(b) of the UCC. The Pledgee shall have
the right, at any time in its discretion and without notice to the Pledgor, to
cause any or all of such Pledged Collateral to be transferred of record into the
name of the Pledgee or its nominee.
(c) With respect to all Pledged Collateral consisting of security
entitlements, the Pledgor shall (i) issue its entitlement order to the
Intermediary instructing that the Pledgee be forthwith identified in the
Intermediary's records as the entitlement holder of said Pledged Collateral, or
(ii) cause the Intermediary to agree in writing that it will comply with
entitlement orders originated by the Pledgee without further consent by the
Pledgor or other entitlement holder.
(d) With respect to all Pledged Collateral consisting of commodity
contracts, the Pledgor shall cause the Intermediary to agree, in a writing
executed by the Intermediary, the Pledgor and the Pledgee, that the Intermediary
will apply any value distributed on account of said commodity contracts as
directed by the Pledgee without further consent by the Pledgor or other
commodity customer.
(e) With respect to all Pledged Collateral consisting of Book-entry
Treasury Securities, the Pledgor shall (i) (A) issue its entitlement order to
the Intermediary instructing that the Pledgee be forthwith identified in the
Intermediary's records as the entitlement holder of said Pledged Collateral, or
(B) cause the Intermediary to agree in writing that it will comply with
entitlement orders originated by the Pledgee without further consent by the
Pledgor or other entitlement holder, and (ii) use its best efforts to have, or
cause the Intermediary to use its best efforts to have, the appropriate Federal
Reserve Bank (or Banks) mark its books and records to record the security
interest of the Pledgee in such Pledged Collateral.
(f) The Pledgor shall otherwise cause the Pledgee to obtain control
over the Account in accordance with Section 8.9-115(e) of the UCC.
(g) The Pledgor shall cause the Intermediary, and any secured party
other than the Pledgee having control of any of the Pledged Collateral, to
subordinate in writing its security interest in the Pledged Collateral (whether
arising by contract or under the UCC or other applicable law) to that of the
Pledgee granted herein.
(h) The Pledgor shall execute and deliver to the Pledgee UCC
financing statements and continuation statements to be filed by the Pledgor in
all applicable jurisdictions as required to perfect the security interests
granted to the Pledgee hereunder, to the extent that applicable law permits
perfection of a security interest by filing under the UCC.
Section 2.4. Termination of Security Interests; Release of Pledged
-----------------------------------------------------
Collateral. Upon the full, final and irrevocable payment and performance of all
- ----------
the Guaranty Obligations and Loan Obligations, the security interests in the
Pledged Collateral shall terminate and all rights to the Pledged Collateral
shall revert to the Pledgor. In addition, at any time and from time to time
prior to such termination of the security interests, the Pledgee may release any
of the Pledged Collateral. Upon any
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<PAGE>
such termination of the security interests or any release of the Pledged
Collateral, the Pledgee will, at the Pledgor's expense, execute and deliver to
the Pledgor such documents as the Pledgor shall reasonably request to evidence
the termination of the security interests or the release of the Pledged
Collateral. Any such documents shall be without recourse to or warranty by the
Pledgee.
Section 2.5. Security Interests Absolute. Subject to the provisions
---------------------------
of Section 2.4, all rights of the Pledgee and security interests hereunder, and
all obligations of the Pledgor hereunder, shall be absolute and unconditional
and, without limiting the generality of the foregoing, shall not be released,
discharged or otherwise affected by:
(i) any extension, renewal, settlement, compromise, waiver or
release in respect of any Loan Obligation or Guaranty Obligation, or any other
document evidencing or securing such Loan Obligation or Guaranty Obligation, by
operation of law or otherwise;
(ii) any modification or amendment or supplement to the Credit
Agreement, the LLC Guaranty, the Personal Guaranty, or any instrument or
document evidencing or securing any Loan Obligation or Guaranty Obligation;
(iii) any release, non-perfection or invalidity of any direct or
indirect security for any Loan Obligation or Guaranty Obligation;
(iv) the death or incompetence of the Guarantor, or any change in
the existence, structure or ownership of the Borrower, or any insolvency,
bankruptcy, reorganization or other similar proceeding affecting the Borrower or
the Guarantor, or their respective assets or any resulting disallowance, release
or discharge of all or any portion of the Loan Obligations or the Guaranty
Obligations;
(v) the existence of any claim, set-off or other right which the
Pledgor may have at any time against the Borrower, the Pledgee, or the
Guarantor, or any other corporation or person, whether in connection herewith or
any unrelated transactions; provided, that nothing herein shall prevent the
--------
assertion of any such claim by separate suit or compulsory counterclaim;
(vi) any invalidity or unenforceability relating to or against the
Borrower or the Guarantor for any reason of any Loan Obligation or Guaranty
Obligation, respectively, or any provision of applicable law or regulation
purporting to prohibit the payment by the Borrower of the Loan Obligations or
the Pledgor of the Guaranty Obligations;
(vii) any failure by the Pledgee (A) to file or enforce a claim
against the Borrower or the Guarantor or their respective estates (in a
bankruptcy or other proceeding), (B) to give notice of the existence, creation
or incurring by the Borrower of any new or additional indebtedness or obligation
under or with respect to the Loan Obligations or Guaranty Obligations, (C) to
commence any action against the Borrower or the Guarantor, (D) to disclose to
the Pledgor any facts which the Pledgee may now or hereafter know with regard to
the Borrower or the Guarantor, or (E) to proceed
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<PAGE>
with due diligence in the collection, protection or realization upon any
collateral securing the Loan Obligations or the Guaranty Obligations; or
(viii) any other act or omission to act or delay of any kind by the
Borrower or the Guarantor or the Pledgee or any other corporation or person or
any other circumstance whatsoever which might, but for the provisions of this
clause, constitute a legal or equitable discharge of the Pledgor's obligations
hereunder.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
The Pledgor represents and warrants as follows:
Section 3.1. Binding Effect. This Pledge Agreement constitutes a
--------------
valid and binding agreement of the Pledgor, enforceable against the Pledgor in
accordance with its terms, except as the enforceability hereof may be limited by
bankruptcy, insolvency or similar laws affecting creditors' rights generally and
by equitable principles of general applicability (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
Section 3.2. Title to Pledged Collateral. The Pledgor lawfully owns
---------------------------
the Pledged Collateral and has good and marketable title thereto, to the extent
of its interest therein, free and clear of any liens (including, without
limitation, state and federal tax liens and issuer's liens) other than the
security interests granted hereby and Liens in favor of the Intermediary. The
Account is not a margin account.
Section 3.3. Validity, Perfection and Priority of Security
---------------------------------------------
Interests. Upon (i) delivery of all certificates or instruments representing or
evidencing the Listed Assets registered in the Pledgee's name to the Pledgee,
(ii) the receipt by the Pledgee of an agreement in the form set forth as Exhibit
A hereto, appropriately completed and fully executed, and (iii) the proper
filing of UCC financing statements covering the Pledged Collateral in the
jurisdictions listed on Exhibit B hereto, the Pledgee will have a valid and
perfected security interest in the Pledged Collateral subject to no prior Lien,
other than the security interest of the United States with respect to Book-entry
Treasury Securities as set forth in 31 CFR 357.12(b) or Liens in favor of the
Intermediary. Except for the filing of financing statements, no registration,
recordation or filing with any governmental authority is required in connection
with the execution or delivery of this Pledge Agreement, or necessary for the
validity or enforceability hereof or for the perfection of the security
interests of the Pledgee granted hereby. The Pledgor has not performed any acts
which might prevent the Pledgee from enforcing any of the terms and conditions
of this Pledge Agreement or which would limit the Pledgee in any such
enforcement.
Section 3.4. Governmental and Other Authorization; Contravention .
---------------------------------------------------
The execution, delivery and performance by the Pledgor of this Pledge Agreement
and the other instruments and agreements executed and delivered, or to be
executed and delivered, by it are within its
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<PAGE>
organizational power, have been duly authorized by all necessary action of its
members, require no action by or in respect of, or filing with, any governmental
body, agency or official (other than the filing of financing statements) 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 any
operating agreement or other organizational documents of the Pledgor or of any
agreement, judgment, injunction, order, decree or other instrument binding upon
or affecting the Pledgor or result in the creation or imposition of any lien on
any of its assets.
Section 3.5. Book-Entry Treasury Securities. All Pledged Collateral
------------------------------
consisting of Book-entry Treasury Securities is maintained in "TRADES" and not
in "TREASURY DIRECT" (as those terms are defined in 31 CFR 357.2(a) or any
successor provision).
Section 3.7. Existence and Power. The Pledgor is a limited
-------------------
liability company duly organized, validly existing and in good standing under
the laws of the State of Delaware, and has all organizational powers and all
material governmental licenses, authorizations, consents and approvals required
to carry on its business as now conducted. The Pledgor is duly qualified as a
foreign entity, 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 Pledgor.
Section 3.8. Debt. The Pledgor has no Debt other than Debt to the
----
Bank.
Section 3.9. Control. The Pledgor has Control of the Borrower and
-------
the Guarantor has Control of the Debtor.
ARTICLE IV
COVENANTS
The Pledgor agrees that so long as any Guaranty Obligation or Loan
Obligation remains unpaid:
Section 4.1. Filing; Further Assurances. The Pledgor will, at its
--------------------------
expense and in such manner and form as the Pledgee may reasonably require,
execute, deliver, file and record any financing statement, specific assignment
or other appropriate paper and take any other action that may be reasonably
necessary or desirable, or that the Pledgee may reasonably request, in order to
create, preserve, perfect or validate the security interests granted hereby or
to enable the Pledgee to exercise and enforce its rights hereunder with respect
to any of the Pledged Collateral. To the extent permitted by applicable law,
the Pledgor hereby authorizes the Pledgee to execute and file, in the name of
the Pledgor or otherwise, UCC financing statements which the Pledgee reasonably
may deem necessary or appropriate to further perfect the security interests.
Section 4.2. Liens on Pledged Collateral. The Pledgor will not sell
---------------------------
or otherwise
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<PAGE>
dispose of, or authorize the sale or disposition of, or grant any option with
respect to, any of the Pledged Collateral or create or suffer to exist any Lien
(other than security interests in favor of the Pledgee, the Lien of the
Intermediary and the security interest of the United States with respect to
Book-entry Treasury Securities as set forth in 31 CFR 357.12(b)) on any Pledged
Collateral. The Account shall not become a margin account. The Pledgor agrees
that it will cause the Intermediary to obtain, and hold in the Account subject
to the security interest granted in the Pledge Agreement, all Listed Assets and
all investment property in addition to or in substitution for the Listed Assets.
Section 4.3. Debt. The Pledgor shall not incur or suffer to exist
----
any Debt other than Debt to the Bank.
Section 4.4. Control. The Pledgor shall at all times maintain
-------
Control of the Borrower and the Guarantor shall at all times maintain Control of
the Debtor.
ARTICLE V
DISTRIBUTIONS ON COLLATERAL; VOTING
Section 5.1. Right to Receive Distributions on Pledged Collateral;
-----------------------------------------------------
Voting and Other Rights.
- -----------------------
(a) So long as no Event of Default has occurred and is continuing,
and subject to the provisions of Section 2.3:
(i) The Pledgor shall be entitled to exercise any and all
voting and other rights pertaining to the Pledged Collateral or any part thereof
(including, without limitation, rights of or with respect to conversions,
exchanges, subscriptions, calls, maturities, tenders and options, the right to
make substitutions for uncertificated securities and security entitlements, and
the right to originate instructions and entitlement orders to the issuer or the
Intermediary) for any purpose not inconsistent with the terms of the LLC
Guaranty, the Credit Agreement, or this Pledge Agreement.
(ii) The Pledgor shall be entitled to receive and retain any
and all dividends, interest and other payments and distributions made upon or
with respect to the Pledged Collateral, provided, however, that any and all
-------- -------
(A) dividends and interest paid or payable other than in
cash in respect of, and certificates, instruments and other property
received, receivable or otherwise distributed in respect of, or in
exchange for, any Pledged Collateral (including, without limitation,
any certificate or instrument representing a stock dividend or a
distribution in connection with any reclassification, increase or
reduction of capital, or reorganization),
-8-
<PAGE>
(B) dividends and other distributions paid or payable in
cash in respect of any Pledged Collateral in connection with a partial
or total liquidation or dissolution or in connection with a reduction
of capital, capital surplus or paid-in-surplus, and
(C) cash paid, payable or otherwise distributed in respect
of principal of, in redemption of, or in exchange for, any Pledged
Collateral,
shall be, and shall be forthwith delivered to the Pledgee or the Intermediary to
hold as, Pledged Collateral and shall, if received by the Pledgor, be received
in trust for the benefit of the Pledgee, be segregated from the other property
or funds of the Pledgor and be forthwith delivered to the Pledgee or the
Intermediary as Pledged Collateral in the same form as so received (with any
necessary indorsement and, if appropriate, undated stock powers duly executed in
blank).
(iii) The Pledgee shall execute and deliver (or cause to be
executed and delivered) to the Pledgor all such proxies, powers of attorney,
consents, instructions, entitlement orders, ratifications and waivers and other
instruments as the Pledgor may reasonably request for the purpose of enabling
the Pledgor to exercise the voting and other rights which it is entitled to
exercise pursuant to paragraph (i) above and to receive the dividends or
interest payments which it is authorized to receive and retain pursuant to
paragraph (ii) above.
(b) Upon the occurrence and during the continuance of an Event of
Default:
(i) All rights of the Pledgor to receive the dividends and
interest payments which it would otherwise be authorized to receive and retain
pursuant to Section 5.1(a)(ii) shall cease, and all such rights shall thereupon
become vested in the Pledgee which shall thereupon have the sole right to
receive and hold as Pledged Collateral such dividends and interest payments.
(ii) All dividends and interest payments which are received by
the Pledgor contrary to the provisions of paragraph (i) of this Section 5.1(b)
shall be received in trust for the benefit of the Pledgee, shall be segregated
from other funds of the Pledgor and shall be forthwith paid over to the Pledgee
as Pledged Collateral in the same form as so received (with any necessary
indorsement).
(c) Upon the occurrence and during the continuance of an Event of
Default and upon notice by the Pledgee to the Pledgor, all rights of the Pledgor
to exercise the voting and other rights which it would otherwise be entitled to
exercise pursuant to Section 5.1(a)(i) shall cease, and all such rights shall
thereupon become vested in the Pledgee who shall thereupon have the sole right
(but in no event any obligation) to exercise such voting and other rights.
ARTICLE VI
GENERAL AUTHORITY; REMEDIES
Section 6.1. General Authority. The Pledgor hereby irrevocably
-----------------
appoints the
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<PAGE>
Pledgee and any officer or agent thereof, with full power of substitution, as
its true and lawful attorney-in-fact, in the name of the Pledgor or its own
name, for the sole use and benefit of the Pledgee, but at the Pledgor's expense,
at any time and from time to time after the occurrence and during the
continuance of an Event of Default, to take any and all appropriate action and
to execute any and all documents and instruments which may be necessary or
desirable to carry out the terms of this Pledge Agreement and, without limiting
the foregoing, the Pledgor hereby gives the Pledgee the power and right on its
behalf, without notice to or further assent by the Pledgor to do the following:
(i) to receive, take, indorse, assign and deliver any and all
checks, notes, drafts, acceptances, documents and other negotiable and non-
negotiable instruments taken or received by the Pledgor as, or in connection
with, the Pledged Collateral;
(ii) to demand, sue for, collect, receive and give acquittance
for any and all monies due or to become due upon or in connection with the
Pledged Collateral;
(iii) to commence, settle, compromise, compound, prosecute,
defend or adjust any claim, suit, action or proceeding with respect to, or in
connection with, the Pledged Collateral;
(iv) to sell, transfer, assign or otherwise deal in or with the
Pledged Collateral or any part thereof, as fully and effectually as if the
Pledgee were the absolute owner thereof; and
(v) to do, at its option, but at the expense of the Pledgor,
at any time or from time to time, all acts and things which the Pledgee deems
necessary to protect or preserve the Pledged Collateral and to realize upon the
Pledged Collateral.
The Pledgor shall fully cooperate, to the extent requested by the Pledgee, in
the completion of any notice, form, schedule, or other document filed by the
Pledgee on its own behalf or on behalf of the Pledgor pursuant to the Pledgor's
power of attorney, including, without limitation, any required notice or
statement of beneficial ownership or of the acquisition of beneficial ownership
of equity securities constituting part of the Pledged Collateral and any notice
of proposed sale of any such securities pursuant to Rule 144 of the Securities
Exchange Commission.
Section 6.2. UCC Rights. If an Event of Default shall have
----------
occurred, the Pledgee may in addition to all other rights and remedies granted
to it in this Pledge Agreement and in any other agreement securing, evidencing
or relating to the Obligations, exercise (i) all rights and remedies of a
secured party under the UCC (whether or not in effect in the jurisdiction where
such rights are exercised) and (ii) all other rights available to the Pledgee at
law or equity.
Section 6.3. Application of Cash; Sale of Pledged Collateral.
-----------------------------------------------
(a) The Pledgor expressly agrees that if an Event of Default shall
occur and be
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<PAGE>
continuing, the Pledgee, without demand of performance or other demand or notice
of any kind (except the notice specified below of the time and place of any
public or private sale) to or upon the Pledgor or any other person (all of which
demands and notices are hereby waived by the Pledgor), may forthwith (i) apply
the cash, if any, then held by it as Pledged Collateral as specified in Section
6.7 and (ii) if there shall be no such cash or if such cash shall be
insufficient to pay the Obligations in full, to collect, receive, appropriate
and realize upon the Pledged Collateral, and sell, assign, give an option or
options to purchase or otherwise dispose of and deliver the Pledged Collateral
(or contract to do so) or any part thereof in one or more parcels (which need
not be in round lots) at public or private sale, at any office of the Pledgee or
elsewhere in such manner is commercially reasonable and, as the Pledgee may deem
best, for cash or on credit or for future delivery without assumption of any
credit risk. The Pledgee shall have the right upon any such public sale, and, if
the Pledged Collateral is of a type customarily sold in a recognized market or
is of a type which is the subject of widely distributed standard price
quotations, upon any such private sale or sales, to purchase the whole or any
part of the Pledged Collateral so sold, and thereafter to hold the same,
absolutely and free from any right or claim of any kind, provided that any such
sale is conducted in a commercially reasonable manner. To the extent permitted
by applicable law, the Pledgor waives all claims, damages and demands against
the Pledgee arising out of the foreclosure, repossession, retention or sale of
the Pledged Collateral.
(b) Unless the Pledged Collateral threatens to decline speedily in
value or is of a type customarily sold on a recognized market, the Pledgee shall
give the Pledgor 10 days' written notice of its intention to make any such
public or private sale or sale at a broker's board or on a securities exchange.
Such notice shall (i) in the case of a public sale, state the time and place
fixed for such sale, (ii) in the case of sale at a broker's board or on a
securities exchange, state the board or exchange at which such sale is to be
made and the day on which the Pledged Collateral, or the portion thereof being
sold, will first be offered for sale and (iii) in the case of a private sale,
state the day after which such sale may be consummated. The Pledgee shall not
be obligated to make any such sale pursuant to any such notice. The Pledgee may
adjourn any public or private sale or cause the same to be adjourned from time
to time by announcement at the time and place fixed for the sale, and such sale
may be made at any time or place to which the same may be so adjourned. In the
case of any sale of all or any part of the Pledged Collateral on credit or for
future delivery, the Pledged Collateral so sold may be retained by the Pledgee
until the selling price is paid by the purchaser thereof, but the Pledgee shall
not incur any liability in case of the failure of such purchaser to take up and
pay for the Pledged Collateral so sold and, in the case of such failure, such
Pledged Collateral may again be sold upon like notice.
Section 6.4. Rights of Purchasers. Upon any sale of the Pledged
--------------------
Collateral (whether public or private) pursuant to this Article VI, the Pledgee
shall have the right to deliver, assign and transfer to the purchaser thereof
the Pledged Collateral so sold. Each purchaser (including the Pledgee) at any
such sale shall hold the Pledged Collateral so sold absolutely, free from any
claim or right whatsoever, including any equity or right of redemption of the
Pledgor who, to the extent permitted by law, hereby specifically waives all
rights of redemption, including, without limitation, any right to redeem the
Pledged Collateral under Section 8.9-506 of the UCC, and any right to a judicial
or other stay or approval which it has or may have under any law now existing or
hereafter adopted.
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<PAGE>
Section 6.5. Other Rights of the Pledgee. So long as an Event of
---------------------------
Default has occurred and is continuing:
(a) The Pledgee (i) shall have the right and power (but in no event
the obligation) to institute and maintain such suits and proceedings as it may
deem appropriate to protect and enforce the rights vested in it by this Pledge
Agreement and (ii) may proceed by suit or suits at law or in equity to enforce
such rights and to foreclose upon the Pledged Collateral and to sell all, or
from time to time, any of the Pledged Collateral under the judgment or decree of
a court of competent jurisdiction.
(b) The Pledgee shall, to the extent permitted by applicable law,
without notice to the Pledgor or any party claiming through it, without regard
to the solvency or insolvency at such time of any person then liable for the
payment of any of the Guaranty Obligations or the Loan Obligations, without
regard to the then value of the Pledged Collateral and without requiring any
bond from any complainant in such proceedings, be entitled as a matter of right
to the appointment of a receiver or receivers (who may be the Pledgee) of the
Pledged Collateral or any part thereof, and of the profits, revenues and other
income thereof, pending such proceedings, with such powers as the court making
such appointment shall confer, and to the entry of an order directing that the
profits, revenues and other income of the property constituting the whole or any
part of the Pledged Collateral be segregated, sequestered and impounded for the
benefit of the Pledgee, and the Pledgor irrevocably consents to the appointment
of such receiver or receivers and to the entry of such order.
(c) In no event shall the Pledgee have any duty (other than the
exercise of reasonable care) to exercise any rights or take any steps (either in
a timely manner or at all) to preserve the rights of the Pledgor in the Pledged
Collateral, nor shall the Pledgee be liable to the Pledgor or any other person
for any loss caused by the Pledgee's failure to meet any obligation imposed by
Section 8.9-207 of the UCC or any successor provision. Without limiting the
foregoing, the Pledgee shall be deemed to have exercised reasonable care in the
custody and preservation of any of the Pledged Collateral in its actual
possession if the Pledged Collateral is accorded treatment substantially equal
to that which the Pledgee accords its own property, it being understood that the
Pledgee shall not have any duty or responsibility for (i) ascertaining or taking
action with respect to calls, conversions, exchanges, maturities, tenders or
other matters (including, without limitation, the rights described in Section
5.1(a)(i)) relative to any Pledged Collateral, whether or not the Pledgee has or
is deemed to have knowledge of such matters or (ii) taking any necessary steps
to preserve rights against any parties with respect to any Pledged Collateral.
No refusal, failure, omission or delay by the Pledgee in complying with any
request by or on behalf of the Pledgor to do any of the foregoing shall be
deemed to be a failure to exercise reasonable care.
Section 6.6. Waiver and Estoppel.
-------------------
(a) The Pledgor agrees, to the extent it may lawfully do so, that it
will not at any time in any manner whatsoever claim or take the benefit or
advantage of, any appraisal, valuation, stay, extension, moratorium, turnover or
redemption law, or any law permitting it to direct the order in
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which the Pledged Collateral shall be sold, now or at any time hereafter in
force which may delay, prevent or otherwise affect the performance or
enforcement of this Pledge Agreement, and hereby waives all benefit or advantage
of all such laws. The Pledgor covenants that it will not hinder, delay or impede
the execution of any power granted to the Pledgee in this Pledge Agreement or
any of the other instrument or agreement evidencing or securing a Loan.
(b) The Pledgor, to the extent it may lawfully do so, on behalf of
itself and all who claim through or under it, including without limitation any
and all subsequent creditors, vendees, assignees and lienors, waives and
releases all rights to demand or to have any marshalling of the Pledged
Collateral upon any sale, whether made under any power of sale granted herein or
pursuant to judicial proceedings or under any foreclosure or any enforcement of
this Pledge Agreement, and consents and agrees that all of the Pledged
Collateral may at any such sale be offered and sold as an entirety.
(c) The Pledgor waives, to the extent permitted by law, presentment,
demand, protest and any notice of any kind (except the notices expressly
required hereunder) in connection with this Pledge Agreement and any action
taken by the Pledgee with respect to the Pledged Collateral. The Pledgor waives
and agrees not to assert any privileges which it may acquire under Section 8.9-
112 of the UCC.
Section 6.7. Application of Moneys. The proceeds of any sale of, or
----------------------
other realization upon, all or any part of the Pledged Collateral shall be
applied by the Pledgee in the following order of priority (the Pledgor remaining
liable for any deficiency remaining unpaid after such application):
first, to payment of the expenses of such sale or other realization,
-----
including reasonable compensation to the Pledgee and its agents and counsel, and
all reasonable expenses, liabilities and advances incurred or made by the
Pledgee, its agents and counsel in connection therewith or in connection with
the care, safekeeping or otherwise of any or all of the Pledged Collateral, and
any other unreimbursed expenses for which the Pledgee is to be reimbursed
pursuant to Section 7.3;
second, to payment of the Loan Obligations and the Guaranty
------
Obligations; and
finally, any surplus then remaining shall be paid to the Pledgor, or
-------
its successors or assigns, or to whomsoever may be lawfully entitled to receive
the same or as a court of competent jurisdiction may direct.
ARTICLE VII
MISCELLANEOUS
Section 7.1. Notices. All notices, requests and other
-------
communications to any party hereunder shall be in writing and shall be given to
such party at its address set forth on the signature
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<PAGE>
page hereof or to 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 (i) 5 days after such communication is deposited in the mails
with first class postage prepaid, addressed as aforesaid or (ii) if given by any
other means, when delivered at the address specified in this Section. Rejection
or refusal to accept, or the inability to deliver because of a changed address
of which no notice was given shall not affect the validity of notice given in
accordance with this Section.
Section 7.2. Waivers, Non-Exclusive Remedies. No failure on the
-------------------------------
part of the Pledgee to exercise, and no delay in exercising, no course of
dealing with respect to, any right under this Pledge Agreement shall operate as
a waiver thereof; nor shall any single or partial exercise by the Pledgee of any
right under this Pledge Agreement preclude any other or further exercise thereof
or the exercise of any other right. The rights of the Pledgee under this Pledge
Agreement are cumulative and are not exclusive of any other remedies provided by
law.
Section 7.3. Expenses; Documentary Taxes. The Pledgor shall
---------------------------
forthwith on demand pay all out-of-pocket expenses incurred by the Pledgee,
including fees and disbursements of its counsel and agents, in connection with
the preparation and administration of this Pledge Agreement or the
administration, sale or other disposition of the Pledged Collateral or the
preservation, protection or defense of the rights of the Pledgee in and to the
Pledged Collateral. The Pledgor shall forthwith pay on demand the amount of any
taxes which the Pledgee may have been required to pay by reason of the security
interests granted in the Pledged Collateral (including any applicable transfer
taxes) or to free any of the Pledged Collateral from the lien thereof.
Section 7.4. Successors and Assigns. This Pledge Agreement is for
----------------------
the benefit of the Pledgee and its successors and assigns, and in the event of
an assignment of all or any of the Obligations, the rights hereunder, to the
extent applicable to the indebtedness so assigned, may be transferred with such
indebtedness. This Pledge Agreement shall be binding upon the Pledgor and its
successors and assigns.
Section 7.5. Amendments and Waivers. Any provision of this Pledge
----------------------
Agreement may be amended or waived, if, but only if, such amendment or waiver is
in writing and is signed by the Pledgor and the Pledgee.
Section 7.6. Delivery and Virginia Law. This Pledge Agreement has
-------------------------
been delivered in the Commonwealth of Virginia and shall be governed by and
construed in accordance with the laws of the Commonwealth of Virginia, except as
otherwise required by mandatory provisions of law and except to the extent that
remedies provided by the laws of any jurisdiction other than Virginia are
governed by the laws of such jurisdiction.
Section 7.7. Limitation by Law; Severability.
-------------------------------
(a) All rights, remedies and powers provided in this Pledge
Agreement may be exercised only to the extent that the exercise thereof does not
violate any applicable provision of law,
-14-
<PAGE>
and all the provisions of this Pledge Agreement are intended to be subject to
all applicable mandatory provisions of law which may be controlling and be
limited to the extent necessary so that they will not render this Pledge
Agreement invalid, unenforceable in whole or in part, or not entitled to be
recorded, registered or filed under the provisions of any applicable law.
(b) If any provision hereof is invalid and unenforceable in any
jurisdiction, then, to the fullest extent permitted by law, (i) the other
provisions hereof shall remain in full force and effect in such jurisdiction and
shall be liberally construed in favor of the Pledgee in order to carry out the
intentions of the parties hereto as nearly as may be possible; and (ii) the
invalidity or unenforceability of any provision hereof in any jurisdiction shall
not affect the validity or enforceability of such provision in any other
jurisdiction.
Section 7.8. Counterparts; Effectiveness. This Pledge 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 Pledge Agreement shall become effective when the Pledgee shall
have received counterparts hereof signed by itself and the Pledgor.
IN WITNESS WHEREOF, the parties hereto have caused this Pledge
Agreement to be duly executed by their respective authorized officers as of the
day and year first above written.
Address: ________________________ ALCANTARA LLC [SEAL]
________________________
/s/ Michael J. Saylor
By: ________________________________
Tax I.D. #: _____________________ Michael J. Saylor, President and
Sole Member
BANK OF AMERICA, N.A. [SEAL]
Address: 8300 Greensboro Drive, Suite 550
McLean, Virginia 22102
/s/
By: ________________________________
Name:
Title:
-15-
<PAGE>
Schedule 1
----------
The Listed Assets
-16-
<PAGE>
EXHIBIT A
---------
Form of Control Agreement
May 15, 2000
Bank of America, N.A.
730 15th Street, N.W., 6th Floor
Washington, D.C. 20005
Attn: Bradley A. Hughes, Investment Officer
Re: Notice of Security Interest in various Securities owned by
Alcantara LLC and held by Bank of America, N.A., as Manager
Ladies and Gentlemen:
We are writing on behalf of Bank of America, N.A. as lender (the "Bank")
with regard to the various investment securities held in Account No. 859973
(collectively, the "Account") owned by Alcantara LLC, a Delaware limited
liability company (the "Customer") and held by Bank of America, N.A., Manager
and attorney-in-fact for the Customer (the "Agent").
The Customer agreed to give to the Bank a security interest in the Account
to induce the Bank to extend and continue credit (the "Credit") to the Customer
and to MicroStrategy Incorporated, a Delaware corporation. As consideration to
induce the Bank to continue to extend such and continue Credit and in order to
secure the payment and performance in full of the Customer's obligations (the
"Obligations") under the documents evidencing and/or securing a portion of the
Credit dated March 26, 1999 and modified May 15, 2000, the Customer has
collaterally assigned and pledged to the Bank, and granted to the Bank a
continuing security interest in all of the Customer's right, title and interest
in and to the Account and all proceeds (cash and non-cash) of the foregoing
(such property being herein referred to as the "Collateral") pursuant to the
terms of and subject to the limitations set forth in a Pledge and Security
Agreement dated May 15, 2000 (the "Pledge Agreement").
If your firm, as the Agent, is willing to agree to the terms hereof in
order to allow the Customer to use the Collateral for the purposes contemplated
and, therefore, retain the Collateral, please sign the original of this letter
and return it to the undersigned.
The Agent, by signing this letter, agrees and confirms the following:
1. Ownership of the Account shall remain with the Customer. The
Collateral is held in the Account by the Agent as agent for the Bank alone and,
for the purposes of providing the Bank with a perfected security interest in the
Collateral, possession of the Collateral by the Agent shall be deemed possession
and control thereof by the Bank and not by the Customer. The books and records
of the Agent shall be appropriately marked or amended to reflect the foregoing.
The Agent may, in
<PAGE>
accordance with the Pledge Agreement, register the Collateral at a recognized
securities depository (such as Depository Trust Company), in which event the
Collateral may be registered in the name of the nominee of such depository.
2. The Agent agrees that it will comply with entitlement orders and
instructions originated by the Bank with respect to the Account and the
Collateral without the further consent of the Customer.
3. Subject to the Agent's authority in Paragraph 1 to register the
Collateral in the name of a nominee or in the name of a depository, the
Collateral shall be held in negotiable and deliverable form.
4. All of the Collateral shall remain in the Account at all times during
the term of the Credit. The Bank acknowledges and consents to the receipt by the
Customer of ordinary dividends, distributions or other payments made on account
of the Collateral until the Agent receives written notice from the Bank
specifying that an event of default has occurred under the documents evidencing
and securing the Obligations.
5. The Agent will promptly notify the Bank in the event any person
attempts to redeem, cancel, withdraw or grant to any party other than the Bank
any interest in the Collateral or in the event any person or entity obtains or
claims a lien, levy, attachment or other encumbrance against all or any part of
the Collateral.
6. The Agent will, upon receipt of a written demand by the Bank, liquidate
such of the Collateral as is specified in such demand, and promptly remit to the
Bank, in immediately available funds payable to the order of the Bank, the
proceeds received therefrom and the Bank and the Customer agree that the Agent
shall be entitled to rely exclusively on the direction of the Bank.
7. The Agent will provide to the Bank a copy of each monthly statement
issued by the Agent in connection with the Account.
The Customer, by its signature below, consents to the Agent acting in
accordance with the agreements set forth herein. The Customer agrees to
indemnify and hold Agent harmless from any and all expenses (including, without
limitation, reasonable attorney's fees) arising from any claims of or
liabilities to the Customer or the Bank or in any way relating to the matters
contemplated hereby. The Bank by its signature below acknowledges that once the
Credit has been paid in full, this letter agreement shall be null and void and
of no further force and effect.
Very truly yours,
BANK OF AMERICA, N.A.
By:__________________________
Name:
Title:
-2-
<PAGE>
Acknowledged and Agreed to:
AGENT:
BANK OF AMERICA, N.A.
By:__________________________________
Name:
Title:
CUSTOMER:
ALCANTARA LLC
By: _________________________________
Michael J. Saylor, President
and Sole Member
-3-
<PAGE>
EXHIBIT B
---------
Filing Jurisdictions
Virginia State Corporation Commission
Circuit Court of Fairfax County, Virginia
District of Columbia Recorder of Deeds
-4-
<PAGE>
Exhibit 10.5
GUARANTY OF PAYMENT
To induce BANK OF AMERICA, N.A., McLean, Virginia (the "Bank") to
extend or continue credit and other financial accommodations to MicroStrategy
-------------
Incorporated, a Delaware corporation (the "Debtor"), and to forbear in the
- ------------
exercise of its rights against the Debtor, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
undersigned (the "Guarantor"), hereby unconditionally guarantees to the Bank the
full and prompt payment at maturity, including accelerated or extended maturity,
of all Obligations, as hereinafter defined, of the Debtor to the Bank. The term
"Obligations" means all indebtedness, obligations and liabilities of the Debtor
to the Bank now existing or hereafter created or arising, whether direct or
indirect, absolute or contingent, joint or several, secured or unsecured,
liquidated or unliquidated, and regardless of how evidenced.
The Bank may at any time and from time to time, without the consent of
or notice to the Guarantor, without incurring liability to the Guarantor, and
without affecting, impairing or releasing the obligations of the Guarantor
hereunder, renew, extend, change the manner, time, place, and terms of payment,
grant indulgences in connection with, settle, compromise, sell, exchange,
substitute, release, surrender, subordinate, or exercise or refrain from
exercising any rights with respect to, any of the Obligations, any security
therefor, the obligation of the Guarantor hereunder or any other party primarily
or secondarily liable for any of the Obligations.
The liability of the Guarantor shall not be affected, impaired or
released by (i) any failure, neglect or omission by the Bank to realize upon or
collect any of the Obligations, any obligation hereunder, or any security for or
guaranty of the Obligations or any obligation hereunder, or to exercise any
remedies of setoff or otherwise that it may have with respect to property of the
Debtor possessed by the Bank, (ii) any defense the Debtor or any other party
primarily or secondarily liable for any of the Obligations might have to the
payment of the Obligations, (iii) any determination that any lien taken, or
attempted to be taken, by the Bank to secure the Obligations is invalid or
unperfected, (iv) any determination that any party executing any evidence of any
of the Obligations on behalf of the Debtor was without power or authority to do
so or that for any other reason the Obligations, any security therefor, or any
other guaranty thereof, are invalid or unenforceable, or (v) any defenses the
Debtor may have or assert to the Obligations. It is understood that nothing
shall discharge or satisfy the Guarantor's liability hereunder except the full
performance and payment of all Obligations with interest and expenses, or the
Bank's written release of the Guarantor's liability.
The Guarantor's liability hereunder shall not be affected, impaired or
released by the filing of a petition by or against the Debtor under the
provisions of any bankruptcy, reorganization, arrangement, insolvency,
liquidation or similar law for relief of debtors, and upon the filing of such
petition, for the purpose of this Guaranty, all Obligations, at the option of
the Bank, shall be immediately due and payable.
The Guarantor represents and covenants that it is and shall remain
independently informed of the financial condition of the Debtor and all other
circumstances which bear on the risk of non-payment of the Obligations. The
Guarantor waives any right to require the Bank to disclose to it any information
the Bank has or may have in the future concerning such condition or
circumstances.
<PAGE>
The Guarantor subordinates all obligations of the Debtor owing to it,
whether now existing or hereafter arising, to all Obligations of the Debtor to
the Bank.
For so long as any Obligation remains outstanding, (i) the Guarantor
unconditionally waives any right it may have to be subrogated to the rights of
the Bank against the Debtor with respect to any payment by the Guarantor
hereunder, and (ii) unconditionally waives any right it may have of
reimbursement or indemnification from the Debtor with respect to any such
payment.
If at any time any payment by the Debtor of any Obligation is
rescinded or must otherwise be restored or returned upon the insolvency,
bankruptcy, dissolution, liquidation or reorganization of the Debtor or upon or
as a result of the appointment of a receiver, intervener or conservator of, or
trustee or similar officer for, the Debtor or any substantial part of its
property or otherwise, the Guarantor's obligations hereunder with respect to
such payment shall be reinstated as though such payment had been due but not
made at such time.
The Guarantor waives (i) notice of acceptance of this Guaranty,
(ii) notice of the existence or creation of the Obligations, (iii) presentment
and demand for payment of any of the Obligations, and (iv) protest and notice of
dishonor and protest and any other notice to the Guarantor or to any other party
with respect to the Obligations.
This is a guaranty of payment and not of collection. The Guarantor
waives any right, including without limitation any right arising from Section
49-25 or 49-26 of the Code of Virginia, to require that the Bank bring action
against the Debtor or any other party or to require that the Bank resort to any
security or to any balance of any deposit account or credit on the books of the
Bank in favor of Debtor or any other party.
All payments, whether voluntary or involuntary, received by the Bank
from the Debtor, Guarantor, or any other source, including amounts realized from
security and deposit account balances, may be applied by the Bank to any of the
Obligations, or any other obligations of the Guarantor or any other obligor, in
whatever order the Bank elects.
The Bank may, without notice to or consent of the Guarantor, but in
any event subject to the limitations set forth in Section 8.6 of that certain
Credit Agreement between the Debtor and the Bank dated March 26, 1999, as
amended, assign or transfer all or any part of the Obligations, and this
Guaranty will inure to the benefit of the Bank's assignee or transferee to the
extent of such assignment or transfer; provided, however, that the Bank shall
continue to have an unimpaired right, superior to that of any such assignee or
transferee, to enforce this Guaranty as to that part of the Obligations the Bank
has not assigned or transferred.
The Bank will have the right, in addition to any remedies permitted by
law (including, without limitation, other rights of set-off), to set off the
amount now or hereafter due under this Guaranty against any and all accounts,
credits, money, securities, or other property now or hereafter on deposit with,
held by, or in possession of the Bank to the credit of or for the account of the
Guarantor, without notice to or consent by the Guarantor. In addition to the
right of set-off, to secure the payment of his obligations under this Guaranty,
the Guarantor hereby assigns and grants to the Bank a security interest in all
accounts, credit, money, securities, or other property now or hereafter on
deposit with, held by, or in the possession of the Bank to the credit of or for
the account of the Guarantor.
-2-
<PAGE>
The Guarantor shall pay to the Bank on demand all costs incurred by
the Bank, and reasonable attorneys' fees, in the collection or enforcement of
this Guaranty, whether or not suit is brought. The Guarantor stipulates that,
to the extent evidence of the reasonableness of the Bank's attorneys' fees may
be required, an affidavit of the Bank setting forth the Bank's attorneys' fees
shall be conclusive evidence of such reasonableness, and the Guarantor waives
the right to a hearing or other proceeding to establish such reasonableness.
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 OF THE OTHER LOAN 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.
(a) SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE COUNTY
-------------
OF THE GUARANTOR'S DOMICILE AT THE TIME OF THE EXECUTION OF THIS AGREEMENT 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.
(b) 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 BANK
HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF,
OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO
OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED
TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER. THE
BANK MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN
SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF
ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS AGREEMENT. NEITHER THIS
EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION
FOR
-3-
<PAGE>
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 Guarantor agrees to furnish the Bank, in form acceptable to the
Bank, (i) a current balance sheet, income statement, and copy of its federal
income tax return (including all schedules and attachments), within 150 days
after the end of each calendar year (unless the tax return is the subject of a
duly filed extension, in which case such materials shall be submitted within 15
days after such tax return is filed), and (ii) such other financial information
and data as the Bank may from time to time reasonably request.
THE GUARANTOR IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT IT MAY
HAVE TO TRIAL BY JURY IN ANY SUIT, ACTION, PROCEEDING, OR COUNTERCLAIM ARISING
OUT OF OR RELATING TO THIS GUARANTY, WHETHER SUCH SUIT, ACTION, PROCEEDING, OR
COUNTERCLAIM IS INSTITUTED BY THE BANK, THE GUARANTOR OR ANY OTHER PARTY.
The Guarantor irrevocably (i) submits to the jurisdiction of any
Virginia state court or federal court sitting in the state of Virginia with
respect to any suit, action, or proceeding relating to this Guaranty, (ii)
waives any objection which the Guarantor may now or hereafter have to the laying
of venue of any such suit, action, or proceeding brought in any such court and
any claim that any such suit, action or proceeding brought in any such court has
been brought in an inconvenient forum, (iii) waive the right to object that any
such court does not have jurisdiction over the Guarantor, and (iv) consent to
the service of process in any such suit, action, or proceeding by the mailing of
copies of such process to the Guarantor by certified mail at the Guarantor's
address indicated in this Guaranty or at such other address of which the Bank
shall have received notice. Nothing in this paragraph shall affect the Bank's
right to serve process in any other manner permitted by law or to bring
proceedings against the Guarantor in any other court having jurisdiction.
The rights and remedies of the Bank under this Guaranty and applicable
law shall be cumulative and concurrent and the exercise of any one or more of
them shall not preclude the simultaneous or later exercise by the Bank of any or
all such other rights or remedies. In the event any provision of this Guaranty
is held to be invalid, illegal, or unenforceable for any reason, then such
provision only shall be deemed null and void and shall not affect any other
provisions of this Guaranty, which shall remain effective. No modification or
waiver of any provision of this Guaranty shall be effective unless it is in
writing and signed by the Bank, and any such waiver shall be effective only in
the specific instance and for the specific purpose for which it is given. The
failure of the Bank to exercise any option, right or remedy, in any one or more
instances, or the acceptance by the Bank of partial payments or partial
performance, shall not constitute a waiver of the right to exercise any option,
right or remedy at any time. The nouns, pronouns and verbs used in this
Guaranty shall be construed as being of such number and gender as the context
may require.
This Guaranty shall be governed by and construed in accordance with
the laws of Virginia.
-4-
<PAGE>
Witness the following signatures and seals this 15th day of May 2000.
ALCANTARA LLC [SEAL]
Address: ______________________
______________________
By: /s/ Michael J. Saylor
------------------------------
Michael J. Saylor, President
and Sole Member
Tax ID #: ________________________
-5-
<PAGE>
Exhibit 10.6
GUARANTY OF PAYMENT
To induce BANK OF AMERICA, N.A., McLean, Virginia (the "Bank") to
extend or continue credit and other financial accommodations to MicroStrategy
-------------
Incorporated, a Delaware corporation (the "Debtor"), and to forbear in the
- ------------
exercise of its rights against the Debtor, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
undersigned (the "Guarantor"), hereby unconditionally guarantees to the Bank the
full and prompt payment at maturity, including accelerated or extended maturity,
of all Obligations, as hereinafter defined, of the Debtor to the Bank. The term
"Obligations" means all indebtedness, obligations and liabilities of the Debtor
to the Bank now existing or hereafter created or arising, whether direct or
indirect, absolute or contingent, joint or several, secured or unsecured,
liquidated or unliquidated, and regardless of how evidenced.
The Bank may at any time and from time to time, without the consent of
or notice to the Guarantor, without incurring liability to the Guarantor, and
without affecting, impairing or releasing the obligations of the Guarantor
hereunder, renew, extend, change the manner, time, place, and terms of payment,
grant indulgences in connection with, settle, compromise, sell, exchange,
substitute, release, surrender, subordinate, or exercise or refrain from
exercising any rights with respect to, any of the Obligations, any security
therefor, the obligation of the Guarantor hereunder or any other party primarily
or secondarily liable for any of the Obligations.
The liability of the Guarantor shall not be affected, impaired or
released by (i) any failure, neglect or omission by the Bank to realize upon or
collect any of the Obligations, any obligation hereunder, or any security for or
guaranty of the Obligations or any obligation hereunder, or to exercise any
remedies of setoff or otherwise that it may have with respect to property of the
Debtor possessed by the Bank, (ii) any defense the Debtor or any other party
primarily or secondarily liable for any of the Obligations might have to the
payment of the Obligations, (iii) any determination that any lien taken, or
attempted to be taken, by the Bank to secure the Obligations is invalid or
unperfected, (iv) any determination that any party executing any evidence of any
of the Obligations on behalf of the Debtor was without power or authority to do
so or that for any other reason the Obligations, any security therefor, or any
other guaranty thereof, are invalid or unenforceable, or (v) any defenses the
Debtor may have or assert to the Obligations. It is understood that nothing
shall discharge or satisfy the Guarantor's liability hereunder except the full
performance and payment of all Obligations with interest and expenses, or the
Bank's written release of the Guarantor's liability.
The Guarantor's liability hereunder shall not be affected, impaired or
released by the filing of a petition by or against the Debtor under the
provisions of any bankruptcy, reorganization, arrangement, insolvency,
liquidation or similar law for relief of debtors, and upon the filing of such
petition, for the purpose of this Guaranty, all Obligations, at the option of
the Bank, shall be immediately due and payable.
The Guarantor represents and covenants that he is and shall remain
independently informed of the financial condition of the Debtor and all other
circumstances which bear on the risk of non-payment of the Obligations. The
Guarantor waives any right to require the Bank to disclose to him any
information the Bank has or may have in the future concerning such condition or
circumstances.
<PAGE>
The Guarantor subordinates all extensions of credit to the Debtor
owing to him, whether now existing or hereafter arising, to all Obligations of
the Debtor to the Bank.
For so long as any Obligation remains outstanding, (i) the Guarantor
unconditionally waives any right he may have to be subrogated to the rights of
the Bank against the Debtor with respect to any payment by the Guarantor
hereunder, and (ii) unconditionally waives any right he may have of
reimbursement or indemnification from the Debtor with respect to any such
payment.
If at any time any payment by the Debtor of any Obligation is
rescinded or must otherwise be restored or returned upon the insolvency,
bankruptcy, dissolution, liquidation or reorganization of the Debtor or upon or
as a result of the appointment of a receiver, intervener or conservator of, or
trustee or similar officer for, the Debtor or any substantial part of its
property or otherwise, the Guarantor's obligations hereunder with respect to
such payment shall be reinstated as though such payment had been due but not
made at such time.
The Guarantor waives (i) notice of acceptance of this Guaranty, (ii)
notice of the existence or creation of the Obligations, (iii) presentment and
demand for payment of any of the Obligations, (iv) protest and notice of
dishonor and protest and any other notice to the Guarantor or to any other party
with respect to the Obligations, and (v) the benefit of his homestead exemption
and any other exemptions with respect to the Obligations.
This is a guaranty of payment and not of collection. The Guarantor
waives any right, including without limitation any right arising from Section
49-25 or 49-26 of the Code of Virginia, to require that the Bank bring action
against the Debtor or any other party or to require that the Bank resort to any
security or to any balance of any deposit account or credit on the books of the
Bank in favor of Debtor or any other party.
All payments, whether voluntary or involuntary, received by the Bank
from the Debtor, Guarantor, or any other source, including amounts realized from
security and deposit account balances, may be applied by the Bank to any of the
Obligations, or any other obligations of the Guarantor or any other obligor, in
whatever order the Bank elects.
The Bank may, without notice to or consent of the Guarantor, but in
any event subject to the limitations set forth in Section 8.6 of that certain
Credit Agreement between the Debtor and the Bank dated March 26, 1999, as
amended, assign or transfer all or any part of the Obligations, and this
Guaranty will inure to the benefit of the Bank's assignee or transferee to the
extent of such assignment or transfer; provided, however, that the Bank shall
continue to have an unimpaired right, superior to that of any such assignee or
transferee, to enforce this Guaranty as to that part of the Obligations the Bank
has not assigned or transferred.
The Bank will have the right, in addition to any remedies permitted by
law (including, without limitation, other rights of set-off), to set off the
amount now or hereafter due under this Guaranty against any and all accounts,
credits, money, securities, or other property now or hereafter on deposit with,
held by, or in possession of the Bank to the credit of or for the account of the
Guarantor, without notice to or consent by the Guarantor. In addition to the
right of set-off, to secure the payment of his obligations under this Guaranty,
the Guarantor hereby assigns and grants to the Bank a security interest
-2-
<PAGE>
in all accounts, credit, money, securities, or other property now or hereafter
on deposit with, held by, or in the possession of the Bank to the credit of or
for the account of the Guarantor.
The Guarantor shall pay to the Bank on demand all costs incurred by
the Bank, and reasonable attorneys' fees, in the collection or enforcement of
this Guaranty, whether or not suit is brought. The Guarantor stipulates that,
to the extent evidence of the reasonableness of the Bank's attorneys' fees may
be required, an affidavit of the Bank setting forth the Bank's attorneys' fees
shall be conclusive evidence of such reasonableness, and the Guarantor waives
the right to a hearing or other proceeding to establish such reasonableness.
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 OF THE OTHER LOAN 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.
(a) SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE COUNTY
-------------
OF THE GUARANTOR'S DOMICILE AT THE TIME OF THE EXECUTION OF THIS AGREEMENT 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.
(b) 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 BANK
HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF,
OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO
OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED
TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER. THE
BANK MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN
SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF
ANY ARBITRATION
-3-
<PAGE>
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.
The Guarantor agrees to furnish the Bank, in form acceptable to the
Bank, (i) a current annual personal financial statement and copy of his
individual federal income tax return (including all schedules and attachments),
within 150 days after the end of each calendar year (unless the tax return is
the subject of a duly filed extension, in which case such materials shall be
submitted within 15 days after such tax return is filed), and (ii) such other
financial information and data as the Bank may from time to time reasonably
request.
THE GUARANTOR IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT HE MAY
HAVE TO TRIAL BY JURY IN ANY SUIT, ACTION, PROCEEDING, OR COUNTERCLAIM ARISING
OUT OF OR RELATING TO THIS GUARANTY, WHETHER SUCH SUIT, ACTION, PROCEEDING, OR
COUNTERCLAIM IS INSTITUTED BY THE BANK, THE GUARANTOR OR ANY OTHER PARTY.
The Guarantor irrevocably (i) submits to the jurisdiction of any
Virginia state court or federal court sitting in the state of Virginia with
respect to any suit, action, or proceeding relating to this Guaranty, (ii)
waives any objection which the Guarantor may now or hereafter have to the laying
of venue of any such suit, action, or proceeding brought in any such court and
any claim that any such suit, action or proceeding brought in any such court has
been brought in an inconvenient forum, (iii) waive the right to object that any
such court does not have jurisdiction over the Guarantor, and (iv) consent to
the service of process in any such suit, action, or proceeding by the mailing of
copies of such process to the Guarantor by certified mail at the Guarantor's
address indicated in this Guaranty or at such other address of which the Bank
shall have received notice. Nothing in this paragraph shall affect the Bank's
right to serve process in any other manner permitted by law or to bring
proceedings against the Guarantor in any other court having jurisdiction.
The rights and remedies of the Bank under this Guaranty and applicable
law shall be cumulative and concurrent and the exercise of any one or more of
them shall not preclude the simultaneous or later exercise by the Bank of any or
all such other rights or remedies. In the event any provision of this Guaranty
is held to be invalid, illegal, or unenforceable for any reason, then such
provision only shall be deemed null and void and shall not affect any other
provisions of this Guaranty, which shall remain effective. No modification or
waiver of any provision of this Guaranty shall be effective unless it is in
writing and signed by the Bank, and any such waiver shall be effective only in
the specific instance and for the specific purpose for which it is given. The
failure of the Bank to exercise any option, right or remedy, in any one or more
instances, or the acceptance by the Bank of partial payments or partial
performance, shall not constitute a waiver of the right to exercise any option,
right or remedy at any time. The nouns, pronouns and verbs used in this
Guaranty shall be construed as being of such number and gender as the context
may require.
This Guaranty shall be governed by and construed in accordance with
the laws of Virginia.
-4-
<PAGE>
Witness the following signatures and seals this 15th day of May 2000.
/s/ Michael J. Saylor
_______________________ [SEAL]
MICHAEL J. SAYLOR
Address: _____________________
_____________________ Soc. Sec. #: __________________
-5-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 17,534,000
<SECURITIES> 37,226,000
<RECEIVABLES> 39,184,000
<ALLOWANCES> 3,836,000
<INVENTORY> 0
<CURRENT-ASSETS> 102,409,000
<PP&E> 52,936,000
<DEPRECIATION> 13,112,000
<TOTAL-ASSETS> 193,222,000
<CURRENT-LIABILITIES> 76,103,000
<BONDS> 0
0
0
<COMMON> 79,000
<OTHER-SE> 82,526,000
<TOTAL-LIABILITY-AND-EQUITY> 193,222,000
<SALES> 26,011,000
<TOTAL-REVENUES> 50,615,000
<CGS> 605,000
<TOTAL-COSTS> 16,366,000
<OTHER-EXPENSES> 73,736,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,000
<INCOME-PRETAX> (32,600,000)
<INCOME-TAX> 250,000
<INCOME-CONTINUING> (32,850,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (32,850,000)
<EPS-BASIC> (0.42)
<EPS-DILUTED> (0.42)
</TABLE>
