-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KDzkZKWibnircSDo8SglDIm39WNRBJXrDM/UrApppfbmk01qOiTmEUmz/FuyVE5O dZpQy+h3X+eYJ0Hn/V0q1g== 0000916641-01-500027.txt : 20010409 0000916641-01-500027.hdr.sgml : 20010409 ACCESSION NUMBER: 0000916641-01-500027 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICROSTRATEGY INC CENTRAL INDEX KEY: 0001050446 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 510323571 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24435 FILM NUMBER: 1588830 BUSINESS ADDRESS: STREET 1: 8000 TOWERS CRESCENT DR CITY: VIENNA STATE: VA ZIP: 22182 BUSINESS PHONE: 7038488600 MAIL ADDRESS: STREET 1: 8000 TOWERS CRESCENT DR CITY: VIENNA STATE: VA ZIP: 22182 10-K 1 d10k.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 000-24435 MICROSTRATEGY INCORPORATED (Exact name of registrant as specified in its charter) Delaware (State of incorporation) 8000 Towers Crescent Drive, Vienna, VA 22182 (Address of Principal Executive Offices) (Zip Code) 51-0323571 (I.R.S. Employer Identification Number) Registrant's telephone number, including area code: (703) 848-8600 Securities registered pursuant to Section 12(b) of the Act: Not applicable Securities registered pursuant to Section 12(g) of the Act: Class A common stock, par value $0.001 per share (Title of class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant (based on the last reported sale price of the Registrant's Class A common stock on March 1, 2001 on the Nasdaq National Market) was approximately $267.2 million. The number of shares of the registrant's Class A common stock and Class B common stock outstanding on March 1, 2001 was 30,325,030 and 51,165,624, respectively. MICROSTRATEGY INCORPORATED TABLE OF CONTENTS
Page PART I ---- Item 1. Business.................................................................................... 1 Item 2. Properties.................................................................................. 17 Item 3. Legal Proceedings........................................................................... 17 Item 4. Submission of Matters to a Vote of Security Holders......................................... 18 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters........................ 18 Item 6. Selected Financial Data..................................................................... 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 20 Item 7a. Quantitative and Qualitative Disclosures about Market Risk.................................. 49 Item 8. Financial Statements and Supplementary Data................................................. 49 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........ 49 PART III Item 10. Directors and Executive Officers of the Registrant.......................................... 49 Item 11. Executive Compensation...................................................................... 52 Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 56 Item 13. Certain Relationships and Related Transactions.............................................. 59 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................. 59
i CERTAIN DEFINITIONS All references in this Annual Report on Form 10-K to "MicroStrategy", "we", "us", and "our" refer to MicroStrategy Incorporated and its consolidated subsidiaries (unless the context otherwise requires). FORWARD-LOOKING INFORMATION This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. For this purpose, any statements contained herein that are not statements of historical fact, including without limitation, certain statements under "Item 1. Business" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and located elsewhere herein regarding industry prospects and our results of operations or financial position, may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. The important factors discussed below under the caption "Business--Risk Factors," among others, could cause actual results to differ materially from those indicated by forward-looking statements made herein and presented elsewhere by management from time to time. Such forward-looking statements represent management's current expectations and are inherently uncertain. Investors are warned that actual results may differ from management's expectations. ii PART I ITEM 1. BUSINESS Overview We are a leading worldwide provider of business intelligence software and related services that enable the transaction of one-to-one electronic business through web, wireless and voice communication channels. Our product line enables both proactive and interactive delivery of information from large-scale databases. Our objective is to provide businesses 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, telephone and wireless communication devices. Our platform is designed for developing business intelligence solutions that are personalized and proactive and that reach millions of users. We offer a comprehensive set of consulting, education and technical support services for our customers and partners. Our principal corporate offices are located in Vienna, Virginia. We also maintain domestic sales offices throughout the United States and international sales offices throughout Europe, South America, and the Asia-Pacific region. International sales accounted for 24.9%, 24.0% and 26.1% of our total revenues in 2000, 1999 and 1998, respectively. In July 1999, we launched a new business unit called Strategy.com. Third party content providers use Strategy.com's hosted One-to-One Messaging platform to offer their customers highly personalized, timely information services. These services are delivered on a scheduled or event-driven basis through a wide variety of delivery methods, including e-mail, telephone and wireless devices. With an infrastructure built upon a scalable and flexible database architecture, MicroStrategy platform technology and an XML interface, Strategy.com delivers over 500,000 messages per day on average. Each message is individually tailored by matching end user profiles and preferences with proprietary content or third- party syndicated content in the areas of finance, weather, traffic, sports and news. Strategy.com's hosted messaging applications can be used by companies to facilitate transactions, increase mind share and augment customer profile data warehouses with information that the user has provided and given permission to use. Strategy.com also provides application maintenance, development, customer billing, hosting and support services, enabling customers to focus on their core businesses. As of March 1, 2001, syndicated programming hosted by Strategy.com includes Finance, News, Weather, Sports and Traffic "channels." Strategy.com syndicates its channels through companies it refers to as Strategy.com affiliates, such as Earthlink and Ameritrade. Strategy.com has established dozens of affiliate agreements with leading Internet companies, communications carriers, media companies and financial institutions. Strategy.com also powers messaging services utilizing proprietary content for content brands such as Thomson Financial, Wall Street Journal Interactive, and Belo Interactive. Strategy.com currently provides over 500,000 subscribers with information services. In October 2000, MicroStrategy completed the reorganization of Strategy.com into a separate subsidiary. In connection with this reorganization, Strategy.com commenced a round of financing through the sale of Series A redeemable convertible preferred stock which was completed in January 2001. Aggregate proceeds from this round of financing totaled approximately $49.8 million, net of offering costs of approximately $3.0 million. Microstrategy owns approximately 84% of the economic interest in the outstanding equity of Strategy.com on an as converted, diluted basis. Industry Background The emergence and widespread acceptance of the Internet (or "web") as a medium of communication and commerce has dramatically changed the way businesses interact with each other and with their customers. The Internet provides opportunities for businesses to establish new revenue streams, create new distribution channels and reduce costs. For example, companies are using Internet-based systems to facilitate business operations, including sales automation, supply-chain management, marketing, customer service and human resource management. Consumers are also becoming increasingly sophisticated in their use of the Internet, relying on the Internet not only 1 to make online purchases, but to perform price comparisons, analyze recommendations from like-minded individuals and educate themselves about relevant products and offerings. The integration of the Internet into business processes and increased consumer sophistication create opportunities for companies to use business intelligence applications as part of a more dynamic business model. Factors increasing demand for these systems include: Increased Electronic Capture of Transaction and Customer Information. The rapid growth in the electronic capture of business transactions and the increased availability of related profile data on the parties or products involved in each transaction are providing businesses with a rich data foundation for one-to-one customer interactions. Powerful data analysis tools are required to sift through massive amounts of data to uncover information regarding customer interactions, in turn enabling organizations to provide superior service and products to customers. Need to Create a Personalized, One-to-One Customer Experience While Maintaining Privacy. Many companies are initiating one-to-one marketing strategies that establish personalized relationships with each customer based on their individual needs and preferences and earn customer loyalty by providing superior service, security and convenience. In order to successfully acquire, retain and upgrade customers, organizations need to understand their profiles, their transaction history, their past responses to marketing campaigns, and their interactions with customer service. Retrieving information from widely dispersed and complex data sources and providing a holistic view of the customer can be challenging. At the same time, while businesses have the opportunity to collect a variety of information that could improve targeting, customers are increasingly concerned about the potential for loss or abuse of their privacy. Need to Integrate Online and Traditional Operations. While there are substantial benefits to conducting business electronically, companies need to ensure that their online operations work in combination with their traditional bricks and mortar operations. Companies are seeking to ensure that an order placed online can be reliably fulfilled according to the expectations of the customer and to develop and maintain consistent interactions with customers across different channels. Maintaining the integrity of, and enhancing, the customer experience is crucial to fostering customer loyalty. Emergence of Wireless Internet and Voice Technologies. Information can be more valuable if there is untethered, ubiquitous access to the information. The recent development of the wireless application protocol and improvements in text-to-speech and voice-recognition technologies have created a uniform technology platform for delivering Internet-based information and services to digital mobile phones and other wireless devices. This development is expected to generate new business opportunities for companies by providing an additional channel for existing services and creating opportunities to provide new services that can be delivered any place and at any time to anyone that has access to a wireless device. For instance, customers of an online brokerage company will have the capability not only to get stock portfolio updates and alerts over their phones, but will also be able to immediately act on that information and buy or sell securities through a wireless device. Web Browsers are Becoming the Standard Interface for Business Intelligence Applications. Until recently, business intelligence tools were primarily deployed in a company's headquarter offices. With web-based business intelligence applications, store clerks, customer service representatives and technicians can have the tools to make data-driven decisions in the field. The web facilitates an unprecedented degree of collaboration between geographically distributed people. Headquarters-based users and distributed users now have access to the same data through the same tool. Hopes for the web have revolved around its ability to serve as a point-of-transaction for customers and trading partners. With a web-based business intelligence system, the web can also become the "point-of-decision" that provides users, customers and partners with the information they need to make insightful decisions. Increased Openness of Business Intelligence Applications to Customers, Suppliers and Partners. Business intelligence systems are no longer confined to the corporation. Today, companies are extending their business intelligence insight to suppliers, channel partners and customers. Business partners can have up-to-the-minute access to sales histories, inventory status and billing information through their web browsers. Three key drivers for opening up the business intelligence system to vendors, partners and customers are: 2 o Supplier transactions become more efficient with direct access to inventory and other related data. For true vendor-managed inventory and collaborative commerce systems, vendors need to have access to key information about how their products are performing against business metrics. For example, vendors should be able to see how their products are selling in each geography so as not to over-ship products that are slow-moving or under-ship products that are selling quickly. By opening vendor performance information to the vendors themselves, they become partners in the quest to optimize sales, margin and inventory. o Business partners collaborate more effectively with access to shared data. By giving access to information such as the manufacturing pipeline and build schedule, partners can be more effective at satisfying end customers and setting expectations. Opening invoice and purchase order information to partners will enable them to reduce the overhead associated with channel management, resulting in cost savings and time efficiencies. For example, notifying channel sales partners of changes in the manufacturing schedule allows them to reset end customer expectations or to increase selling activity. o Customers derive increasing value from the information content of products and services. In a market crowded with mass-market advertising, customers increasingly value meaningful interactions with companies. Customers want companies to know their interests and preferences. Customers also want to be able to login to their providers' systems to check their billing and order status. These are the features that a business intelligence system can deliver to help differentiate each company in a crowded marketplace. The MicroStrategy Solution MicroStrategy offers a comprehensive suite of software products and services that enable businesses to develop and deploy business intelligence systems. MicroStrategy's solution enables organizations seeking a strong, personalized relationship with their customers to better understand customer interactions and actively deliver personalized information to customers through the Internet, e-mail, telephones or wireless devices. Optimized Support for Large Data Volumes and All Major Relational Database/Hardware Combinations. The MicroStrategy platform supports systems with very large data volumes and is specifically designed to support all major relational database platforms commonly used for business intelligence systems. Important features of our solution in this area include: o structured query language optimization drivers that improve performance of each major database; o the ability to support very large user populations; o maximized up-time, even in high volume applications; and o the ability to work with many languages for international applications. Extremely Powerful Analytics to Customer- and Transaction-Levels of Detail. We believe that the MicroStrategy platform incorporates the most sophisticated analysis engine available today, capable of answering highly detailed business questions. The MicroStrategy platform offers support for information beyond the summary level to include information at the customer transaction and interaction level. This capability is critical to a wide range of applications, including highly targeted direct marketing, e-commerce site personalization, customer and product affinity analysis, call detail analysis, fraud detection, credit analysis forecasting and trend metrics and campaign management. The MicroStrategy platform allows the creation of highly sophisticated systems that take maximum advantage of the detail available in a company's databases. Powerful Personalization Engine. The MicroStrategy platform includes a customer transaction-level personalization engine. The underlying architecture is designed to generate personalization parameters based on data gathered by an organization from a variety of sources, including past customers' transactions, customer clickstream information, stated user preferences and demographic information. In addition, the MicroStrategy personalization engine is able to determine when and under what circumstances a person is automatically provided with a set of 3 information. Interactive Broadcast Engine for Delivery and Response Using Internet, E-mail, Wireless or Voice Media. Our technology offers a high performance personalized broadcast engine for delivering periodic and alert-based information to people via Internet, e-mail, wireless devices and traditional telephone via text-to-speech conversion. The broadcast engine includes drivers for all major device types used in both domestic and international markets enabling the delivery of information to users when and where it is needed. In addition, users can respond to a message delivered by the MicroStrategy broadcast engine. For example, a store manager can be alerted via a personal digital assistant that an item is out of stock and order additional inventory using this device. Strategy Our objective is to provide businesses with a software platform to develop solutions that deliver insight and intelligence to their enterprises, customers and supply-chain partners. The key elements of our strategy include. Marketing Strategy. Our marketing strategy focuses on expanding our market share and brand awareness by focusing in three key areas: Business Intelligence Platform. Our business intelligence platform marketing strategy is designed to extend our footprint in the business intelligence market, by increasing awareness of the MicroStrategy 7 platform. In the business intelligence market, our marketing programs will target three principal audiences: o Our historical base of corporate technology buyers and departmental technology buyers in Global 2000 enterprises; o Corporate and departmental technology buyers in mid-sized enterprises, with revenue between $500 million and $2.5 billion; and o Independent software vendors who want to embed analytical tools in their solutions. Analytical Customer Relationship Management Applications. In January 2001, MicroStrategy announced the general availability of our analytical Customer Relationship Management (CRM) applications. We believe that corporate marketing departments are the target market for these applications. Because the applications are built on the MicroStrategy 7 platform, we will seek to create maximum synergy between our MicroStrategy 7 platform and analytical CRM applications by continuing to upgrade the CRM applications to run on newer versions of the MicroStrategy 7 platform and by incorporating functionality developed by the CRM applications as base functionality for the Microstrategy 7 platform. Our advertising and other promotions will be designed to mutually support both product lines. Hosted Messaging Platform. The target market for Strategy.com includes marketing executives and general managers at companies that have strong electronic relationships with their customers. During 2001, our marketing objectives are to engage financial institutions and media companies and communicate the benefits of Strategy.com's One-to-One Messaging service. The companies most interested in Strategy.com services seek to enhance their customer relationships, drive transactions and/or monetize their content. Strategy.com will focus on creating awareness among our target customer base with a combination of vertically-targeted public relations campaigns, direct marketing programs, vertically-targeted print advertising and trade show participation. Strategy.com will also selectively promote new product releases and initiatives to build its subscriber base. Technology Strategy--Provide a Scalable, Sophisticated and Maintainable Business Intelligence Platform. We have designed our platform to be highly-scalable, sophisticated, reliable and easy to maintain. Our technology strategy is focused on expanding our support for large customer-oriented information stores, enhancing our analysis and segmentation capabilities, strengthening our personalization technology, enhancing our information delivery functionality to the broadest set of consumer devices and providing a platform that can be easily integrated with e- 4 commerce transaction engines. As part of this strategy, we are developing technology that further differentiates our product offerings by increasing functionality along the following key dimensions: o Deployability--the ease with which applications can be deployed, modified, upgraded and tuned; o Capacity--the volume of information that can be efficiently analyzed and utilized; o Database flexibility--the range of data sources, data warehouses and online transaction processing databases which the software is capable of efficiently querying without modification; o Performance--the response time of the system; o Openness--the ease with which applications can be developed on our standard-based platform and comprehensive application programming interfaces; o Interactivity--the ability for users to take action upon information and update the data warehouse or transactional systems; o Personalization--the quality and sophistication of a one-to-one user experience; o Concurrency--the number of users, which can be supported simultaneously; o Sophistication--the range of analytical methods available to the application designer; and o Robustness--the reliability and availability of the software in mission critical environments. Sales Strategy--Our sales strategy is executed through a field-based direct sales force, a newly launched web store and inside sales force, and relationships with indirect channel partners. Our goal is to increase market share both domestically and abroad, by targeting corporate and departmental technology buyers in Global 2000 enterprises, in mid-sized companies and independent software vendors. We also seek to increase sales to our installed base of customers by offering a wide range of software and services utilizing our MicroStrategy 7 platform. Products We offer a comprehensive business intelligence platform, known as MicroStrategy 7, which is designed to enable businesses to turn information into strategic insight, transform customer interactions into relationships and make more effective business decisions. Revenues from sales of product licenses accounted for approximately 46% of total revenues during 2000. The following are the components of the MicroStrategy 7 platform: MicroStrategy Intelligence Server. MicroStrategy Intelligence Server is the foundation for our business intelligence platform. We believe that MicroStrategy Intelligence Server is the most sophisticated analysis engine available. MicroStrategy Intelligence Server is capable of answering highly detailed business questions. Its robust relational analysis technology enables organizations to conduct large-scale product affinity and product profitability analyses, research customer preferences through sales, contribution and pricing analysis, and compare present and historical customer retention data with forecasting and trend metrics. MicroStrategy Intelligence Server generates highly optimized queries through its very large database drivers, enabling high throughput and fast response times. The MicroStrategy Intelligence Server has been built with the scalability and fault tolerance required for sophisticated analysis of multi-terabyte databases and can be deployed to thousands of users through complete user, object and data security and management. It contains thousands of specific optimizations for all major relational databases and includes the load distribution, prioritization and system tuning capabilities demanded by large-scale implementations. MicroStrategy Intelligence Server contains an analytical engine with over 150 different sophisticated mathematical and statistical functions with the flexibility for further function extensions. MicroStrategy Intelligence 5 Server combines the power of its analytical engine with the scalability of a relational database to perform complex data analysis with maximum efficiency. All the other products in the MicroStrategy 7 platform integrate with the MicroStrategy Intelligence Server and benefit from its broad functionality. MicroStrategy Intelligence Server is designed to be fault-tolerant to ensure system availability and high performance. Through an enterprise management console, MicroStrategy Intelligence Server provides a sophisticated array of enterprise management tools, such as caching and query prioritization to streamline performance and batch job scheduling, which helps to maintain disparate and diverse user communities. Administrators can automate the dynamic adjustments of system and user governing settings, such as user thresholds and database thread priorities, in order to smooth the database workload and ensure the high performance that large user communities require. MicroStrategy Web. MicroStrategy Web provides easy-to-use, interactive, sophisticated analysis, which extends the information access and analysis capabilities of MicroStrategy Intelligence Server to any user with a web browser. MicroStrategy Web can be accessed through a web browser on any operating system, eliminating deployment issues associated with customer-side Java and Active X controls. Using the MicroStrategy Web infrastructure, customers can rapidly implement systems that allow local and remote users to develop and access sophisticated reports containing information from their relational databases. MicroStrategy Web provides a graphical user interface designed to boost end user efficiency. Users gain access to an array of options for data exploration and analysis, such as spreadsheet grids and a wide variety of graphs. A flexible architecture enables businesses to implement a standardized structure for analysis and ensure consistent work practices. Through MicroStrategy Web's reporting capabilities, users receive key elements of a report in easily understood messages. MicroStrategy Web also allows users to dynamically analyze data with higher levels of detail to view the underlying information or to create and save new analyses. In addition, MicroStrategy Web's security plug-ins enable businesses to limit access to sensitive information. In order to accommodate the various business requirements of end users, MicroStrategy Web is available in a full-featured version, a simplified version and an enterprise reporting version. MicroStrategy Narrowcast Server. MicroStrategy Narrowcast Server is a powerful content generation and information broadcast server designed to proactively deliver personalized information to millions of recipients via the Internet, e-mail, telephone and wireless devices. MicroStrategy Narrowcast Server delivers targeted information to individuals on an event-triggered or scheduled basis through the consumer communication device that is most convenient. It provides an engine to implement targeted messaging to acquire and retain customers, and a platform for distributing information to the corporate enterprise, customers, suppliers and other constituencies. MicroStrategy Narrowcast Server has a web-based interface that can be used with existing web applications. Users subscribe to information services by providing personal information and preferences, ensuring they receive personalized product offerings and information. In addition to proactively delivering information from the MicroStrategy 7 platform, MicroStrategy Narrowcast Server's open information source modules enable it to deliver information from a multitude of information sources to the business user. The multiple information sources can be combined to provide users with requested information in one personalized e-mail, message or document. MicroStrategy OLAP Provider. With MicroStrategy OLAP Provider, other vendors' front-end business intelligence products can now access the analytical power and scalability of the MicroStrategy 7 platform. Cognos PowerPlay and Microsoft Excel 2000 communicate with MicroStrategy OLAP Provider using the standard OLE database for OLAP application programming interface. MicroStrategy OLAP Provider accepts multi-dimensional expressions, or MDX, queries from Cognos PowerPlay, Microsoft Excel 2000 or custom applications, and works with MicroStrategy Intelligence Server to translate these queries into database-optimized structured query language. MicroStrategy OLAP Provider allows organizations to standardize on a reporting and analysis platform, while still enabling users to access the platform from a variety of user interfaces. This leverages investments in databases, software and training and removes some of the traditional burdens of cube-based architectures. By doing this, MicroStrategy OLAP Provider allows other vendors' interfaces to access transaction-level detail 6 in a relational database, with the analytical power and flexibility of the MicroStrategy 7 platform. This helps organizations realize value by reducing maintenance and development costs, increasing user access to the data, minimizing re-training costs and promoting a standard, enterprise-wide view of the data. MicroStrategy Transactor. To integrate business intelligence and online transaction processing systems, MicroStrategy Transactor employs intelligent transaction agents that interpret and integrate web information with various enterprise information systems, such as database, commerce, business intelligence, and enterprise resource planning systems through an open driver application programming interface, allowing customers to transact with businesses via XML-compliant devices such as web-enabled phones, personal digital assistants and web browsers. Through its transaction and extraction capabilities, MicroStrategy Transactor enables e-commerce applications through a variety of devices and communications media. MicroStrategy Architect. MicroStrategy Architect is the MicroStrategy 7 component in which applications are modeled through an intuitive graphical user interface. MicroStrategy Architect provides a unified environment for creating and maintaining all aspects of web reporting and business intelligence applications. MicroStrategy Architect is highly automated and is based on an open, flexible architecture, which greatly reduces the cost and time required to implement and maintain systems. MicroStrategy Administrator. MicroStrategy Administrator enables administrators to efficiently maintain large-scale data warehouse applications supporting millions of users. Project migration utilities help administrators develop, test and deploy systems. Performance analysis enables administrators to monitor and tune systems for maximum performance and availability. MicroStrategy Administrator has been designed to ensure easy management of application objects and users across multiple development, testing, and production environments. MicroStrategy Administrator eases the burden of maintaining users and security by using textual commands that can be saved as scripts. These commands and scripts can be executed from either a graphical interface or from the command line giving system administrators the flexibility and ease-of-use necessary for efficient systems management. MicroStrategy Agent. MicroStrategy Agent provides an advanced environment for rapid application development and sophisticated analysis. It provides an object-oriented view of business data--converting a company's business data into a virtual library of valuable information, enabling users to develop sophisticated business metrics, filtering criteria and pre-defined report templates. Applications developed within MicroStrategy Agent are easily deployed throughout the MicroStrategy architecture bringing integrated query and reporting capabilities, powerful analytics and decision support workflow to analysts, quantitative users and end users throughout the enterprise and beyond. These applications provide better understanding of a business or customer base through analyses such as customer profiling, clickstream analysis and sales and inventory analyses. Once applications have been created through MicroStrategy Architect, they can be deployed through a number of different interfaces. For power analysts and application developers desiring to use a client-server Microsoft Windows interface, MicroStrategy Agent is an advanced environment providing a full range of analytical functionality, a rich mathematical function library, built-in workflow and data mining integration. MicroStrategy SDK. MicroStrategy SDK completes the MicroStrategy 7 platform by enabling developers to integrate, extend and fully harness the power of MicroStrategy 7. Through a set of rich XML, Java and COM-based application programming interfaces that fully expose all platform functionality, businesses can leverage this powerful development environment to quickly deploy custom applications and embed intelligence into any website. MicroStrategy CRM Applications. MicroStrategy CRM Applications enable customers to develop and grow personal and profitable customer relationships. MicroStrategy CRM Applications is an easy-to-use, web-based customer relationship management application built on the MicroStrategy 7 platform that delivers customer analysis and segmentation across all customer touch points. MicroStrategy CRM Applications customers can use best-of-breed marketing automation to continually build, execute and manage permission-based, personalized and event-driven marketing campaigns. 7 Consulting, Education and Technical Support Our services and customer support capabilities are as follows: MicroStrategy Consulting. MicroStrategy Consulting facilitates the development of high-end applications for our customers. Our consultants design and implement scalable, high performance applications that run against multi-terabyte databases for companies throughout the world. MicroStrategy Consulting's mission is to provide services that ensure customer success and return on investment through full use of our advanced technology. Revenues from consulting services accounted for approximately 31% of total revenues during 2000. MicroStrategy Education. MicroStrategy Education provides our customers with a thorough understanding of our products and the implementation of business intelligence systems through quality instruction and hands-on experience. With nearly ten years of experience training a diverse customer base, we have developed a comprehensive set of education programs designed to help customers quickly become familiar with business intelligence technologies. Revenues from education services accounted for approximately 5% of total revenues during 2000. MicroStrategy Technical Support. MicroStrategy technical support provides support services designed to help customers extract the highest return on investment from our products. MicroStrategy technical support offers a variety of support options geared to resolve technical issues quickly and efficiently whenever they arise. All support options are supplemented with access to online support services, including the comprehensive, web-based MicroStrategy Knowledge Base, as well as the ability to check, modify or log new cases via the web. Revenues from technical support services accounted for approximately 18% of total revenues during 2000. Customer Case Studies The following case studies illustrate the application and implementation of our products and related services by several of our customers. Best Buy. Best Buy, one of the nation's leading electronics retailers, continues to drive business growth with MicroStrategy's business intelligence platform. For more than four years, Best Buy has used MicroStrategy technology to provide merchandise buyers, financial analysts, store managers and executive officers detailed reports on store performance, product sales, marketing results and consumer trends. MicroStrategy Web anchors the business performance management application that gives end users an array of options for powerful information analysis and exploration. For example, merchandise buyers and other user groups can run predefined reports, create their own queries and download information into Excel spreadsheets for easy off-line analysis right from their desktops. Identified trends indicate potential problems or opportunities. Users can drill down into the data to get more detailed information, including sales by region, city or even individual store. In addition, a MicroStrategy-based customer relationship management application helps Best Buy employees foster stronger relationships with their valued customers. GE Capital Fleet Services. GE Capital Fleet Services, one of the world's largest vehicle fleet management companies, chose MicroStrategy as its corporate standard for business intelligence. To support, track and analyze transactions associated with thousands of corporate fleet vehicles leased to customers, GE Capital required a platform that could be deployed via the Internet and scale to support a rapidly growing user community. Approximately 1,600 GE Capital Fleet Services' end users access a simple-to-use web-based system via MicroStrategy Web and perform critical analyses, such as invoice management, trend analysis and forecasting, improving bottom line results. GE Capital Fleet Services also uses MicroStrategy to send personalized proactive maintenance alerts directly to vehicle drivers through multiple communications channels, including web, wireless and voice. Customers The Company has over 1,100 customers across such diverse industries as retail, telecommunications, banking and finance, pharmaceuticals and healthcare, technology and consumer packaged goods. A list of some of the firms that purchased over $250,000 of our products and services since January 1, 1997 is as follows: 8 Banking & Finance The SABRE Group La Poste American Express* Starwood Hotels & Resorts Ohio Department of Ameritrade* Universal Studios* Education* Bank of America US Air Force CIBC Telecommunications US Postal Service* Deutsche Borse Ameritech Fannie Mae AT&T Wireless Services Consumer Packaged Goods First Data Corporation Bell Atlantic* Beverage Data Network First Union Corporation* Bell South* Brown & Williamson First USA Bank Cable & Wireless Hallmark FleetBoston Financial France Telecom* Ralston Purina Corporation* Pacific Bell* S.C. Johnson & Son* Freddie Mac* Sprint* GE Capital* Technology Nationwide Insurance* Pharmaceutical & Earthlink* Royal Bank of Canada Healthcare Gateway USAA * Cardinal Health IBM Corporation* Visa International * Glaxo Wellcome* J.D. Edwards & Company* Ingenix* Lexis Nexis Retail MedPartners Network Solutions Asda Stores Merck/Medco* Nielsen Media Research B & Q Premier NCR* Best Buy* Smithkline Beecham* Perot Systems Comet Warner Lambert* Snap.com Elder Beerman Western Digital* Fox Entertainment Group Grocery & Pharmacy Xchange, Inc.* Kmart* American Stores* Kohl's Department Stores Associated Food Stores Manufacturing & Liz Claiborne* CVS Pharmacy Industrial Marks & Spencer* Eckerd Corporation* Allied Signal ShopKo* Food Lion DuPont* The Limited Harris Teeter General Motors* Victoria's Secret Marsh Supermarkets Lexmark* Woolworth's Michelin* Government/Public Monsanto Travel & Entertainment Services Samsung* Blockbuster Entertainment* Housing and Urban Shaw Industries Continental Airlines Development* Unisys 9 * Indicates customers that purchased more than $1.0 million of our products and services since January 1, 1997. Sales and Marketing Direct Sales Organization. We market our software and services primarily through our direct sales force. As of December 31, 2000, we had domestic sales offices in a number of cities, including Atlanta, Bedminster, Boston, Charlotte, Chicago, Cincinnati, Dallas, Denver, Detroit, Houston, Kansas City, Los Angeles, Minneapolis, New York, Phoenix, Pittsburgh, San Francisco, Seattle, Tampa and Washington, D.C., and international sales offices located in Barcelona, Buenos Aires, Calgary, Cologne, London, Madrid, Mexico City, Milan, Montreal, Paris, Sao Paolo, Seoul, Sydney, Toronto, Utrecht, Vancouver, Vienna and Zurich. We are represented by distributors in several countries where we do not have sales offices, including Chile, Colombia, the Czech Republic, Denmark, Finland, Greece, Hungary, Ireland, Japan, Malaysia, the Middle East, New Zealand, Norway, Peru, Poland, Singapore, South Africa and Sweden. Indirect Sales Channels. We have entered into relationships with more than 225 system integration, application development, platform and OEM partners whose products and services are used in conjunction with our own. Agreements with these partners generally provide them with non-exclusive rights to market our products and services and allow access to our marketing materials, product training and direct sales force for field level assistance. In addition, we offer our partners product discounts. Favorable product recommendations from the leading system integration, application development and platform partners to potential customers facilitate the sale of our products. We believe that such indirect sales channels allow us to leverage sales and service resources as well as marketing and industry specific expertise to expand our user base and increase our market coverage. In addition, we have entered into agreements with resellers who resell our software on a stand-alone basis. System Integrators. We have also entered into agreements to provide training, support, marketing and sales assistance to a number of system integrators, including: American Management Systems AnswerThink Consulting Group Arthur Andersen AutoMate Incorporated Braun Technology Group Computer Sciences Corporation Cap Gemini Ernst & Young Deloitte & Touche Etensity Greenbrier & Russel KPMG Peat Marwick Nexgenix Perot Systems Corporation Questra Corporation Tessera Enterprise Systems Xpedior Value-Added Resellers. Value-added resellers who resell MicroStrategy software bundled with their own software applications and/or syndicated data products include: Accrue Software Beverage Data Network Fair Isaac and Company HNC Software IDX Systems Corporation M&I Data Services Net Perceptions PlumTree Software Prime Response Radiant Systems Retek Information Systems Xchange, Inc. Platform Partners. Our platform partners consist of firms which co-sell and co-market complementary technology to the same target customer base. These platform partners include Compaq, NCR, Informatica and Informix. OEM Partners. Our OEM partners integrate our business intelligence platform, narrowcast server or customer relationship management modules into their applications. These OEM Partners include J.D. Edwards and Company, Interworld and SageTree. Resellers. Companies that resell MicroStrategy software on a stand-alone basis include Broadcast 1 10 on 1.com Incorporated, Olympus Group, Fugen, Inc., Application Consulting Group, eJiva and Veridian Information Solutions, Inc. Research and Product Development We have made substantial investments in research and product development. We believe that our future performance will depend in large part on our ability to maintain and enhance our current product line, develop new products that achieve market acceptance, maintain technological competitiveness and meet an expanding range of customer requirements. As of December 31, 2000, our research and product development staff consisted of 474 employees. Our total expenses for research and development for the years 2000, 1999 and 1998 were $61.4 million, $28.0 million and $12.1 million, respectively. Strategy.com In July 1999, we launched a new business unit called Strategy.com. Companies such as Thomson Financial, EarthLink, The Wall Street Journal, and Ameritrade use Strategy.com's hosted one-to-one messaging platform to offer their customers highly personalized, timely information services. These services are delivered on a scheduled or event-driven basis through a wide variety of delivery methods, including e-mail, telephone and wireless devices. With an infrastructure built upon a scalable and flexible database architecture, MicroStrategy platform technology and an XML interface, Strategy.com delivers over 500,000 messages per day on average. Each message is individually tailored by matching end user profiles and preferences with proprietary content or third-party syndicated content in the areas of finance, weather, traffic, sports and news. Strategy.com's hosted messaging applications can be used by companies to facilitate transactions, increase mind share and augment customer profile data warehouses with information that the user has provided and given permission to use. Strategy.com also provides application maintenance, development, customer billing, hosting and support services, enabling customers to focus on their core businesses. As of March 1, 2001, syndicated programming hosted by Strategy.com includes Finance, News, Weather, Sports and Traffic "channels." Strategy.com syndicates its channels through companies it refers to as Strategy.com affiliates, such as Earthlink and Ameritrade. Strategy.com has established dozens of affiliate agreements with leading Internet companies, communications carriers, media companies and financial institutions. Strategy.com also powers messaging services utilizing proprietary content for premier content brands such as Thomson Financial, Wall Street Journal Interactive, and Belo Interactive. Strategy.com currently provides over 500,000 subscribers with information services. In October 2000, MicroStrategy completed the reorganization of Strategy.com into a separate subsidiary. In connection with this reorganization, Strategy.com commenced a round of financing through the sale of Series A redeemable convertible preferred stock which was completed in January 2001. Aggregate proceeds from this round of financing totaled $49.8 million, net of offering costs. MicroStrategy owns approximately 84% of the economic interest in the outstanding equity of Strategy.com on an as converted, diluted basis. Strategy.com seeks to differentiate its offerings from competitors through its greater level of personalization, its support of virtually any information delivery device and its scalable and extensible messaging platform. Strategy.com's XML application programming interface enables the Strategy.com platform to be embedded into the offerings of financial institutions, device manufacturers, Internet companies, communication carriers, media companies and wireless companies. Our vision for Strategy.com is for it to be the leading platform for one-to-one messaging. Strategy.com revenues accounted for approximately 4% of our license and service revenues during 2000. Strategy.com derives its revenue from three principal sources: o set-up and hosting fees; o usage fees; and 11 o subscription fees. Set-up and hosting fees. Strategy.com affiliates and customers pay set-up fees for integration and customization, such as linking Strategy.com financial monitoring services to a customer's backend portfolio system. In addition, customers also pay hosting fees for continual monitoring and support. Usage fees. Strategy.com's affiliates and customers pay usage fees which are typically measured on either a per message basis or on a monthly month basis per subscriber. Subscription fees. Strategy.com affiliates and customers pay subscription fees for expanded or premium service. For those services in which the Strategy.com affiliate or customer does not fully subsidize the cost of providing the service, the end subscriber is charged a subscription fee. Strategy.com's business is centered around its technology platform. The key attributes of the Strategy.com platform are as follows: o One-to-One Messaging Engine. Strategy.com's one-to-one message engine, based on MicroStrategy platform technology, constantly monitors incoming data, matches that data to subscriber profile data, and creates and delivers individually personalized messages to the subscribers delivery device of choice. This enables an end user to configure a personal intelligence agent to act on behalf of the user to deliver tailored, pertinent, and timely information. o Strategy.com XML Application Programming Interface. Strategy.com's XML application programming interface allows customers to seamlessly integrate Strategy.com platform functionality and services into their existing website or offering on a private-labeled basis. This application programming interface also facilitates rapid development of new applications upon the Strategy.com platform. o Resource Center. Strategy.com provides its customers a web-based Resource Center, where they can access information and sample code on the XML application programming interface, configure settings, view activity reports on their services and set up custom messages to be sent to their subscribers. o Hosting and Operations. Customers can obtain the benefits of Strategy.com's one-to-one messaging platform without incurring the infrastructure set-up and on-going costs of in-house implementations. Strategy.com's flexible platform is packaged into a set of product offerings, tailored for different customer bases. These products are described below. Syndicated Information Services. Strategy.com's syndicated information services is organized around different categories of content: o Strategy.com Finance. As the first channel of the Strategy.com network, Strategy.com Finance provides consumers with personalized portfolio and market reports via the delivery device of their choice. Strategy.com Finance provides users with a variety of information, from intra-day stock movement alerts to a personalized portfolio analysis sent via Excel spreadsheets. o Strategy.com Weather. Strategy.com Weather delivers personalized weather reports, forecasts and alerts for over 55,000 locations worldwide. Strategy.com Weather offers subscribers features such as severe weather alerts, beach and boating reports and weekly forecasts, along with the convenience of receiving personalized weather information. o Strategy.com News. Strategy.com News delivers breaking news, news alerts and local and global 12 updates. Strategy.com News utilizes data from numerous content providers and covers over 20,000 stories a day. Subscribers have the ability to easily personalize Strategy.com News so they only receive stories about the issues and locations that are of importance to them. o Strategy.com Sports. Strategy.com Sports gives fans across the country and around the world the ability to track results and news in a wide variety of leagues and sports. Strategy.com Sports provides subscribers with daily sports highlights, score alerts and sports news alerts. o Strategy.com Traffic. Strategy.com Traffic offers personalized traffic conditions, reports and alerts to people in 65 cities across the country. Subscribers can define regularly traveled routes so they know when an incident occurs that would specifically impact their commute. Subscribers can also check live traffic information and receive personalized traffic alerts. Custom Content Services. Strategy.com can take proprietary content or data from a customer, monitor and filter the data and create individually personalized messages that are delivered to the end user, based on the preferences and permissions established by the end user. In addition, Strategy.com's customers can leverage other Strategy.com syndicated content solutions to mix-and-match content into a custom offering. This solution is designed for companies, such as media companies, online commerce companies, retailers, direct marketers and financial institutions, with content or information that would be more useful to an end user if delivered on a personalized and timely basis. Competition The markets for business intelligence software, customer relationship management applications and narrowcast messaging technologies are intensely competitive and subject to rapidly changing technology. In addition, many of our competitors in these markets are offering, or may soon offer, products and services that may compete with MicroStrategy products and those of Strategy.com. MicroStrategy's most direct competitors provide: o business intelligence software; o OLAP tools; o query and reporting tools; o web-based static reporting tools; o information delivery and proactive reporting; o analytical customer relationship management products; o web traffic analysis applications; and o marketing automation. Each of these markets are discussed more fully below. Business Intelligence Software. Makers of business intelligence software provide business intelligence capabilities designed for integration, customization and application development. Leading analyst firms classify companies such as Microsoft, Oracle, Hyperion, SAP and SAS to be leading providers of business intelligence software. OLAP Tools. Companies that build software to perform online analytical processing (OLAP) provide offerings competitive with the core MicroStrategy 7 platform. Whether web-based or client-server, these 13 tools give end users the ability to query underlying data sources without having to hand code structured query language queries. Most OLAP tools allow users to build their own calculations and specify report layouts and other options. Additionally, OLAP tools provide users the ability to navigate throughout the underlying data in an easy, graphical mode, often referred to as drilling. Providers of OLAP tools include Cognos, Hyperion, Brio, IBM, Seagate and Microsoft. Query and Reporting Tools. Query and reporting tools allow large numbers of end users to gain access to pre-defined reports for simple analysis. Often the end users are able to specify some sort of run-time criteria that customizes the result set for that particular person. Some limited drilling is also provided. Companies who produce query and reporting tools include Business Objects, Cognos, Oracle, Seagate and Brio. Web-based Static Reporting Tools. Companies that offer software to deliver pre-built reports for end user viewing and consumption can also compete with MicroStrategy. These applications often lack the sophistication, robustness and scalability of MicroStrategy, but can be attractive for small, departmental applications. Vendors in this category include Actuate, Business Objects, Seagate, Microsoft, Computer Associates and SAS. Information Delivery and Proactive Reporting. Companies that focus on the proactive delivery of information, via e-mail, website, or other medium can compete with MicroStrategy's offerings. Typically these tools serve to push out compiled reports on a scheduled basis to sets of users based on job type. MicroStrategy software has this technology integrated into its core platforms. Vendors of such technology include Actuate, nQuire, Information Builders and Business Objects. Analytical Customer Relationship Management Products. Companies that deliver customer relationship management products alone or in conjunction with e-commerce applications, such as Broadbase, BroadVision, E.piphany and Vignette, compete with our analytical customer relationship management applications. In contrast with providers of operational customer relationship management vendors, such as Vantive and Oracle, analytical customer relationship management deals more with customer segmentation, analysis and interaction as opposed to infrastructure and call centers. Web Traffic Analysis Applications. Reporting and analysis tools can be specialized to deal specifically with the analysis of visitors to a company's website. Typically this involves extracting data from a web-log file and importing it into a usable format, often in a relational database. A set of analyses, sometimes customer-centric in nature, is performed, and limited ad-hoc reporting is permitted. Advanced applications in this space merge data from the web-logs with other customer centric attributes to help provide a complete view of the customer base. Vendors in this space include Accrue, Net.Genesis and WebTrends. Marketing Automation. Applications focused on the automation and execution of marketing tasks, such as campaign management and delivery, compete with our customer relationship management applications and our Narrowcast Server platform. Leading vendors in this space include E.piphany, Xchange, Chordiant and Broadbase. Strategy.com's most direct competitors are: o Web portal and information networks; o E-mail marketers and publishers; o Wireless content vendors; o Alert vendors; o Financial solution vendors; and o Vertical internet portals and information networks. 14 Each of these markets are discussed more fully below. 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. E-mail marketers and publishers. E-mail marketers and publishers, such as DoubleClick, Responsys, and ClickAction, offer companies the ability to deliver non-personalized content via e-mail to end users. These companies could expand their offering to more closely compete with Strategy.com. Wireless content vendors. Wireless content vendors, such as Infospace and i3Mobile, have similar offerings as Strategy.com's syndicated information services for wireless devices. These companies could expand their offerings to support e-mail and voice, as well as to deliver proprietary content. Alert vendors. Alert vendors, such as Alerts Inc., Pumatech, and Xigo, have similar offerings as Strategy.com's proactive alert services. These companies could expand their offering to more closely compete with Strategy.com. Financial solution vendors. Financial solution vendors, such as 724 Solutions and W-Technologies, offer a broad array of consumer finance technology solutions, but generally do not have a proactive messaging system like Strategy.com. Any of these companies could augment their existing offering with proactive messaging comparable to Strategy.com. 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. Many of our competitors have longer operating histories, significantly greater financial, technical, marketing or other resources, and greater name recognition than we do. In addition, many of our competitors have strong relationships with current and potential customers and extensive knowledge of the business intelligence industry. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sale of their products than we can. Increased competition may lead to price cuts, reduced gross margins and loss of market share. We cannot be sure that we will be able to compete successfully against current and future competitors or that the competitive pressures we face will not have a material adverse effect on our business, operating results and financial condition. Current and future competitors may also make strategic acquisitions or establish cooperative relationships among themselves or with others. By doing so, they may increase their ability to meet the needs of our potential customers. Our current or prospective indirect channel partners may establish cooperative relationships with our current or future competitors. These relationships may limit our ability to sell our products through specific distribution channels. Accordingly, 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. Intellectual Property and Licenses We rely primarily on a combination of copyright, patent, trademark and trade secret laws, 15 non-disclosure agreements and contractual provisions to protect our proprietary technology. For example, we require software licensees to enter into license agreements that impose certain restrictions on their use of the software. In addition, we have made efforts to avoid disclosure of our trade secrets, including requiring those persons with access to our proprietary technology and information to enter into confidentiality agreements with us and restricting access to our source code. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult, and while we are unable to determine the extent to which piracy of our software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States. There can be no assurance that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology. Generally, our products are licensed through software licenses that restrict its use to a specific number of named users or a specific hardware configuration. A user is an individual to whom a licensee has assigned an identification number for purposes of tracking use of a product and who is under an obligation to the licensee to protect any of our confidential information. Under our standard software license agreement, we have the ability to request certified statements of records regarding identification numbers in particular, and use of the products in general, once per year, and have the right to audit use of the products at least once per year. Copying of products and documentation is limited to the number of users for whom license fees have been paid and for archival purposes. There can be no assurance that third parties will not claim infringement by us with respect to current or future products. We expect that software product developers will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which could have a material adverse effect upon our business, operating results and financial condition. Employees As of December 31, 2000, we had a total of 1,899 employees, of whom 1,498 were based in the United States and 401 were based internationally. Of the total, 661 were engaged in sales and marketing, 474 in product development, 516 in professional services and 248 in finance, administration and corporate operations. None of our employees are represented by a labor union. We have not experienced any work stoppages and consider our relations with our employees to be good. We believe that effective recruiting, education and nurturing of human resources are critical to our success and have traditionally made investments in these areas in order to differentiate ourselves from our competition, increase employee loyalty and create a culture conducive to creativity, cooperation and continuous improvement. All newly hired professionals complete a professional orientation course that ranges from 2 days to 6 weeks long, presented by "MicroStrategy University," our in-house education function. The curriculum consists of lectures, problem sets and independent and group projects, covering data, our products, competitors and customers. Certain lectures also deal with general business practices, ethics and teamwork. At the end of this training, students must pass a number of oral and written examinations in order to begin their assignments. Following this introductory course, veteran employees normally complete at least one week of continuing professional development each year. Course content for MicroStrategy University is created by experienced members of our professional staff, who generally have an annual obligation to create expert content based upon the best practices they have most recently observed in the field. This expert content is then used to upgrade and revitalize our education, consulting, support, technology and marketing operations. 16 ITEM 2. PROPERTIES Our principal offices currently occupy over 350,000 square feet in Northern Virginia pursuant to multiple leases, the majority of which expire between June 2003 and June 2010. In addition, we also lease sales offices domestically and internationally in a variety of locations, including Atlanta, Bedminster, Boston, Charlotte, Chicago, Cincinnati, Dallas, Denver, Detroit, Houston, Los Angeles, Minneapolis, New York, Phoenix, Pittsburgh, San Francisco, Seattle, Tampa, Washington, D.C., Barcelona, Buenos Aires, Calgary, Cologne, London, Madrid, Mexico City, Milan, Montreal, Paris, Sao Paolo, Seoul, Sydney, Toronto, Utrecht, Vancouver, Vienna and Zurich. We do not expect to add additional office space in the foreseeable future. ITEM 3. LEGAL PROCEEDINGS Actions Arising under Federal Securities Laws From March through May 2000, twenty-five class action complaints were filed in federal courts in various jurisdictions alleging that we and certain of our officers and directors violated section 10(b) of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), Rule 10b-5 promulgated thereunder, and section 20(a) and section 20A of the Exchange Act. Our outside auditor, PricewaterhouseCoopers LLP, was also named in two of the suits. The complaints contained varying allegations, including that we made materially false and misleading statements with respect to our 1999, 1998 and 1997 financial results in our filings with the SEC, analysts' reports, press releases and media reports. In June 2000, these putative class action lawsuits were consolidated in the United States District Court for the Eastern District of Virginia. On July 7, 2000, the lead plaintiffs filed an amended class action complaint naming us, certain of our officers and directors, and PricewaterhouseCoopers LLP as defendants. The amended class action complaint alleges claims under section 10(b), section 20(a) and section 20A of the Exchange Act. The amended class action complaint does not specify the amount of damages sought. On October 23, 2000, the Company, its officers and directors named as defendants, and plaintiffs' counsel entered into a settlement agreement in the consolidated class action. Under the settlement agreement, class members will receive: (1) five-year unsecured promissory notes issued by MicroStrategy having an aggregate principal amount of $80.5 million and bearing interest at 7.5% per year; (2) 550,000 shares of our Class A common stock, with the number of shares to be increased if the market value of the shares, based on the dollar weighted average trading price during a specified trading period prior to the district court settlement hearing, is less than $30 per share, so that the minimum value of the shares is $16.5 million; and (3) warrants to purchase 1.9 million shares of Class A common stock at an exercise price of between $40 and $50 per share, based on the dollar weighted average trading price during a specified trading period prior to the district court settlement hearing, with the warrants expiring five years from the date they are issued. The settlement was made subject to confirmatory discovery, final documentation, district court approval, and other conditions. On January 19, 2001, the district court authorized notice of the proposed settlement to be sent to all putative class members. The notice informs class members of their rights including their rights to object to the proposed settlement and to opt out of the proposed settlement and pursue their claims separately. A hearing has been scheduled for April 2, 2001 for the district court to consider and, if appropriate, approve the settlement. Delaware Derivative Investigation On June 30, 2000, a shareholder derivative action was filed in the Delaware Court of Chancery seeking recovery for various alleged breaches of fiduciary duties by certain of our directors and officers relating to our restatement of financial results. On September 11, 2000, we filed a motion to dismiss the derivative complaint for failure to make a demand. That motion remains pending. On October 23, 2000, the Company, the directors and officers named as defendants and the derivative plaintiff reached an agreement in principle settling the derivative action. Under the derivative settlement agreement, we will add a new, independent director with finance experience to the audit committee of our 17 Board of Directors and will ensure continued adherence with applicable legal and regulatory requirements regarding the independence of audit committee members and trading by insiders. In addition, certain of our officers will contribute a portion of the Class A common stock held by them that is to be issued to class members in settlement of the class action lawsuit. Specifically, Michael J. Saylor, Sanju K. Bansal and Mark S. Lynch will contribute to the class action settlement shares of Class A common stock with a total value of $10 million. The settlement was made subject to confirmatory discovery, final documentation, Chancery Court approval, and other conditions. No hearing has been scheduled for the Chancery Court to review and, if appropriate, approve the settlement. 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 the restatement of our financial results. On December 14, 2000, we consented, without admitting or denying the SEC's findings, to the entry of an administrative cease and desist order finding that we had violated certain provisions of the federal securities laws. As part of the cease and desist order, we made a number of undertakings pursuant to which we will implement various corporate governance enhancements, hire additional staff and adopt policies and controls relating to our contract administration and financial reporting functions. The cease and desist order imposed no monetary fines or penalties on us. Other Proceedings We are also involved in other legal proceedings through the normal course of business. Management believes that any unfavorable outcome related to these other proceedings will not have a material effect on our financial position, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 2000. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Our Class A common stock, $0.001 par value, is traded on the Nasdaq National Market under the symbol, MSTR. The following table sets forth for the periods indicated the high and low closing prices, adjusted to reflect the two-for-one stock split which occurred in January 2000, for our Class A common stock as reported by Nasdaq in each quarter: For the quarter ended High Low ----------------------------- ------ ------ March 31, 1999.......... 17.25 9.00 June 30, 1999........... 18.94 7.75 September 30, 1999...... 28.03 13.22 December 31, 1999....... 115.66 28.81 March 31, 2000.......... 313.00 74.78 June 30, 2000........... 77.12 17.31 September 30, 2000...... 35.75 20.25 December 31, 2000....... 28.00 9.25 As of March 1, 2001, there were approximately 510 stockholders of record of our Class A common stock and 13 stockholders of record of our Class B common stock, $0.001 par value. We have never paid any cash dividends on our Class A common stock and do not expect to pay any such dividends in the foreseeable future. Our stock price has fluctuated substantially since our initial public offering in June 1998. The trading price of our Class A common stock is subject to significant fluctuations 18 in response to variations in quarterly operating results, the gain or loss of significant orders, changes in earnings estimates by analysts, announcements of technological innovations or new products by us or our competitors, general conditions in the software and computer industries and other events or factors. In addition, the equity markets in general have experienced extreme price and volume fluctuations which have affected the market price for many companies in industries similar or related to that of ours and which have been unrelated to the operating performance of these companies. These market fluctuations have affected and may continue to affect the market price of our Class A common stock. ITEM 6. SELECTED FINANCIAL DATA
Years ended December 31, -------------------------------------------- 2000 1999 1998 1997 1996 --------- -------- ------- ------- ------- (in thousands, except per share data) Statements of Operations Data Revenues: Product licenses.................................. $ 102,050 $ 85,797 $61,635 $35,478 $15,873 Product support and other services................ 121,880 65,461 33,854 17,073 6,730 --------- -------- ------- ------- ------- Total revenues.................................. 223,930 151,258 95,489 52,551 22,603 --------- -------- ------- ------- ------- Cost of revenues: Product licenses.................................. 2,722 2,597 2,246 1,641 1,020 Product support and other services................ 85,249 34,436 17,535 9,475 4,237 --------- -------- ------- ------- ------- Total cost of revenues.......................... 87,971 37,033 19,781 11,116 5,257 --------- -------- ------- ------- ------- Gross profit......................................... 135,959 114,225 75,708 41,435 17,346 Operating expenses: Sales and marketing............................... 151,095 93,090 53,327 30,468 13,054 Research and development.......................... 61,433 27,998 12,106 5,049 2,840 General and administrative........................ 58,762 24,448 12,743 6,552 3,742 Amortization of intangible assets................. 17,667 422 81 -- -- In-process research and development............... -- 2,800 -- -- -- Restructuring and related charges................. 10,835 -- -- -- -- --------- -------- ------- ------- ------- Total operating expenses........................ 299,792 148,758 78,257 42,069 19,636 --------- -------- ------- ------- ------- Loss from operations................................. (163,833) (34,533) (2,549) (634) (2,290) Financing and other income (expenses): Interest income................................... 3,675 2,174 1,028 94 22 Interest expense.................................. (37) (144) (720) (333) (127) Loss on investments............................... (9,365) -- -- -- -- Provision for litigation settlement............... (89,729) -- -- -- -- Minority interest................................. (713) -- -- -- -- Other income (expense), net....................... 96 6 (14) (12) 20 --------- -------- ------- ------- ------- Total financing and other income (expenses)..... (96,073) 2,036 294 (251) (85) --------- -------- ------- ------- ------- Loss before income taxes............................. (259,906) (32,497) (2,255) (885) (2,375) Provision for income taxes........................... 1,400 1,246 -- -- -- --------- -------- ------- ------- ------- Net loss............................................. (261,306) (33,743) (2,255) (885) (2,375) --------- -------- ------- ------- ------- Preferred stock dividends............................ (4,687) -- -- -- -- Beneficial conversion feature........................ (19,375) -- -- -- -- --------- -------- ------- ------- ------- Net loss attributable to common stockholders......... $(285,368) $(33,743) $(2,255) $ (885) $(2,375) ========= ======== ======= ======= ======= Basic and diluted net loss per share (1)............. $ (3.58) $ (0.44) $ (0.03) $ (0.02) $ (0.04) ========= ======== ======= ======= ======= Weighted average shares used in computing basic and diluted net loss per share (1)................ 79,779 77,028 66,986 58,988 58,988 ========= ======== ======= ======= =======
19
As of December 31, -------------------------------------------- 2000 1999 1998 1997 1996 --------- -------- -------- ------- ------- (in thousands) Balance Sheet Data Cash and cash equivalents............................ $ 67,685 $ 25,941 $ 27,491 $ 3,506 $ 1,686 Restricted cash...................................... 25,884 -- -- -- -- Working capital (deficit)............................ 42,616 53,109 23,919 (7,048) (2,237) Total assets......................................... 259,087 203,368 76,571 27,052 13,004 Long-term liabilities, excluding deferred revenue and advance payments.................................. 100,993 -- 1,928 2,428 460 Series A redeemable convertible preferred stock...... 119,585 -- -- -- -- Mandatorily redeemable convertible preferred stock of consolidated subsidiary........................ 40,530 -- -- -- -- Total stockholders' equity (deficit)................. (145,538) 101,816 37,775 (1,433) (793)
- ---------- (1) Share and per share amounts for all periods presented have been restated to reflect the two-for-one stock split which occurred in January 2000. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We are a leading worldwide provider of business intelligence software 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 businesses 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, telephone and wireless communications devices. Our platform is designed for developing business intelligence solutions that are personalized and proactive and that reach millions of users. We 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. Third party content providers use Strategy.com's hosted one-to-one messaging platform to offer their customers highly personalized, timely information services. These services are delivered on a scheduled or event-driven basis through a wide variety of delivery methods, including e-mail, telephone and wireless devices. With an infrastructure built upon a scalable and flexible database architecture, MicroStrategy platform technology and an XML interface, Strategy.com delivers over 500,000 messages per day on average. Each message is individually tailored by matching end user profiles and preferences with proprietary content or third-party syndicated content in the areas of finance, weather, traffic, sports and news. Strategy.com's hosted messaging applications can be used by companies to facilitate transactions, increase mind share and augment customer profile data warehouses with information that the user has provided and given permission to use. Strategy.com also provides application maintenance, development, customer billing, hosting and support services, enabling customers to focus on their core businesses. As of March 1, 2001, syndicated programming hosted by Strategy.com includes Finance, News, Weather, Sports and Traffic "channels." Strategy.com syndicates its channels through companies it refers to as Strategy.com affiliates, such as Earthlink and Ameritrade. Strategy.com has established dozens of affiliate agreements with leading Internet companies, communications carriers, media companies and financial institutions. Strategy.com also powers messaging services utilizing proprietary content for content brands such as Thomson Financial, Wall Street Journal Interactive, and Belo Interactive. Strategy.com currently provides over 500,000 subscribers with information services. In October 2000, MicroStrategy completed the reorganization of Strategy.com into a separate subsidiary. In connection with this reorganization, Strategy.com commenced a round of financing through the sale of Series A redeemable convertible preferred stock which was completed in January 2001. Aggregate proceeds from this round of financing totaled approximately $49.8 million, net of offering costs of approximately $3.0 million. MicroStrategy owns approximately 84% of the economic interest in the outstanding equity of Strategy.com on an as converted, diluted basis. Aether Capital, the investment arm of Aether Systems, Inc., a provider of wireless data products and services, participated as an investor in this round of financing. Aether Capital's investment was 20 approximately $25.0 million of total gross proceeds. Concurrent with this financing round, we also announced a strategic alliance with Aether Systems which includes initiatives in the following areas: o the companies will develop a new product, MicroStrategy 7M, that will be designed to combine Aether Systems' wireless technology with the functionality and performance of the MicroStrategy 7 platform to deliver personalized, intelligent information services to a full range of wireless devices; o Aether Systems' chairman and chief executive officer, David Oros, was named to the Board of Directors of Strategy.com; and o Aether Systems will offer Strategy.com services to its customers. Since 1997, 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 2000, 1999 and 1998 primarily as a result of increases in staff levels, expansion of operations outside of the United States, and our increased investment in Strategy.com. Our net losses increased substantially during 2000, as our growth in revenues, and particularly higher margin product license revenues, decreased, while our expenses have significantly increased due primarily to aggressive hiring of additional personnel and advertising expenditures in the first half of 2000, increased investment in our Strategy.com subsidiary, and increased legal and professional fees relating to class action lawsuits and an SEC investigation in connection with matters relating to the restatement of our 1999, 1998 and 1997 financial statements. Our net loss increased significantly during 2000 to $261.3 million primarily as a result of the following factors: (1) operating expenses (excluding in-process research and development and restructuring related charges) increased by $143.0 million while gross profit increased by only $21.7 million; (2) amortization of intangible assets increased by $17.2 million; (3) we recorded an $89.7 million expense associated with an agreement to settle outstanding class action and derivative shareholder lawsuit litigation (of which approximately $4.0 million is a cash charge for legal fees and administration costs and approximately $85.7 million is a non-cash charge); (4) we recorded a $10.8 million charge related to restructuring activities; and (5) we recorded a $9.4 million loss on investments, net of realized gain of $2.7 million. Our revenues historically have been derived from two principal sources, fees for product licenses and fees for product support and other services, including maintenance, education and consulting services. We recognize revenue in accordance with accounting principles generally accepted in the United States and particularly 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, SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions, SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, and SEC Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, as applicable. Product license revenues are generally recognized upon persuasive evidence of an arrangement (as provided by agreements or contracts executed by both parties), delivery of the software and determination that collection of a fixed or determinable license fee is reasonably assured. When fees for software upgrades and enhancements, maintenance, consulting or education are bundled with the license fee, they are unbundled using objective evidence of the fair value of the multiple elements represented by our customary pricing for each element in separate transactions. If such evidence of fair value exists on undelivered elements and there is no such evidence of fair value established for delivered elements, revenue is first allocated to the elements where such evidence of fair value has been established and the residual amount is allocated to the delivered elements. If evidence of fair value for each undelivered element of the arrangement does not exist, all revenue from the arrangement is deferred until such time that evidence of fair value does exist for undelivered elements or until all elements of the arrangement are delivered, subject to certain limited exceptions set forth in SOP 97-2. 21 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 recorded as deferred revenue and recognized ratably over the term of the 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. These agreements may extend over several years. Fees for our education and consulting services are typically recognized at the time the services are performed. Revenue from arrangements where we provide hosting services is recognized over the hosting period. Any fees paid or costs incurred prior to the hosting period, such as license fees, consulting, customization or development services, are deferred and recognized ratably over the subsequent hosting period, which is typically two to three years. Customers at times require consulting and implementation services, which may 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 us 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. We recognize revenue from these arrangements using contract accounting (typically, the percentage of completion method based on cost inputs) and, therefore, both product license and product support and other services revenue are recognized as work progresses. Expected losses on contracts in progress are expensed in the current period. As of December 31, 2000, we have not incurred any losses on contracts in progress. If the arrangement includes acceptance criteria, revenue is not recognized until we can demonstrate that the software or services can meet the acceptance criteria. If the software license arrangement obligates us to deliver unspecified future products, then revenue is recognized on the subscription basis, ratably over the term of the contract. Beginning in the fourth quarter of 1998, we began to sell our products and services to customers for large-scale applications and have continued to enter into similar transactions. In contrast to earlier periods in which our typical customer transaction involved a stand-alone software license and simple maintenance and support services, these transactions typically involve multiple software products and services for use by very large numbers of end users across network, intranet, web, wireless and voice communication channels, and sometimes incorporate elements from our Strategy.com network. In addition, these multiple element transactions often include significant implementation and other consulting work and may also include the provision of 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 revenue recognition from multiple elements, 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 maintenance and 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 may not be recognized upon full execution and delivery of the software product as in the past, but instead is initially recorded as deferred revenue, with product revenue recognized using the percentage of completion method based on cost inputs or ratably over the entire term of the contract. If the arrangement includes acceptance criteria, revenue is not recognized until we can demonstrate that the software or services can meet the acceptance criteria. 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 22 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 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 license transactions generated by our direct sales force and increasingly through or in conjunction with "channel partners," including value-added resellers, system integrators and original equipment manufacturers. Channel partners accounted for, directly or indirectly, approximately 44.4%, 39.2% and 33.6% of our revenues for the years ended December 31, 2000, 1999 and 1998, 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, our efforts to continue to expand indirect sales may not 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. We recently implemented a new multi-channel distribution strategy and product-pricing plan designed to expand our customer base, improve operating efficiency and decrease the length of sales cycles. The strategy includes the use of the web as a channel for distributing products where new and existing customers can test our software on a demonstration basis and configure, upgrade and order software directly online via a standard pricing model. In addition, we will now provide complimentary evaluation software for all potential customers and qualified partners. Recognizing the need to bring operating expenses in line with our revenue expectations, during the third quarter of 2000, we developed and implemented a restructuring plan that called for the elimination of 231 employees or approximately 10% of our workforce. We also rescinded approximately 230 offers of employment, reduced various company-sponsored events for employees, limited the use of external contractors and consultants and developed a plan to consolidate facilities. To implement these actions we made severance payments to employees, incurred costs for rescinded job offers, recognized expenses associated with stock grants from a principal shareholder and the acceleration of vesting provisions of stock options and recorded a liability for commitments related to company-sponsored events. These costs totaled $10.8 million and are reflected as restructuring and related charges in the accompanying consolidated statements of operations for the year ended December 31, 2000. We expect that annualized savings from these actions will approximate $25.0 million and will contribute to slowing the growth of our sales and marketing expenses and our general and administrative expenses. Substantially all restructuring costs and related charges had been paid as of December 31, 2000. The unpaid amount of $48,000 is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets. Our operations and prospects have been and will be significantly affected by the developments relating to the revision of our 1999, 1998 and 1997 financial statements. We and certain of our officers and directors are defendants in a class action lawsuit alleging violations of various securities laws and certain of our officers and directors are defendants in a shareholder derivative lawsuit alleging that they breached their fiduciary duties related to our restated financial statements. In October 2000, we entered into agreements to settle the class action and shareholder derivative lawsuits. Both settlements are subject to confirmatory discovery, final documentation, court approval and certain other conditions. 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: 23 Years ended December 31, ------------------------ 2000 1999 1998 ----- ----- ----- Statements of Operations Data Revenues: Product licenses .............................. 45.6% 56.7% 64.5% Product support and other services ............ 54.4 43.3 35.5 ----- ----- ----- Total revenues .............................. 100.0 100.0 100.0 Cost of revenues: Product licenses .............................. 1.2 1.7 2.4 Product support and other services ............ 38.1 22.8 18.4 ----- ----- ----- Total cost of revenues ...................... 39.3 24.5 20.8 ----- ----- ----- Gross profit ..................................... 60.7 75.5 79.2 Operating expenses: Sales and marketing ........................... 67.5 61.5 55.8 Research and development ...................... 27.4 18.5 12.7 General and administrative .................... 26.2 16.1 13.3 Amortization of intangible assets ............. 7.9 0.3 0.1 In-process research and development ........... -- 1.9 -- Restructuring and related charges ............. 4.8 -- -- ----- ----- ----- Total operating expenses .................... 133.8 98.3 81.9 ----- ----- ----- Loss from operations ............................. (73.1) (22.8) (2.7) Financing and other income (expenses): Interest income ............................... 1.6 1.4 1.1 Interest expense .............................. -- (0.1) (0.8) Loss on investments ........................... (4.2) -- -- Provision for litigation settlement ........... (40.1) -- -- Minority interest ............................. (0.3) -- -- Other income (expense), net ................... -- -- -- ----- ----- ----- Total financing and other income (expenses) .................................. (43.0) 1.3 0.3 ----- ----- ----- Loss before income taxes ......................... (116.1) (21.5) (2.4) Provision for income taxes ....................... 0.6 0.8 -- ----- ----- ----- Net loss ......................................... (116.7)% (22.3)% (2.4)% ===== ===== ===== Preferred stock dividends ........................ (2.1) -- -- Beneficial conversion feature .................... (8.6) -- -- ----- ----- ----- Net loss attributable to common stockholders ..... (127.4)% (22.3)% (2.4)% ====== ===== ===== Comparison of 2000, 1999 and 1998 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 $95.5 million in 1998 to $151.3 million in 1999, and to $223.9 million in 2000, resulting in annual revenue growth rates of 81.7% in 1998, 58.4% in 1999 and 48.0% in 2000. Total revenues may not 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 large, multiple element arrangements is recorded as deferred revenue, with both product license revenues and product support and other services revenues recognized using the percentage of completion method based on cost inputs as the work progresses. If the arrangement includes acceptance criteria, revenue is not recognized until we can demonstrate that the software or service can meet the acceptance criteria. If the software license arrangement obligates us to the delivery of unspecified future products, then revenue is recognized on the subscription basis, ratably over the term of the contract. In 1999, we launched the Strategy.com Finance channel. In 2000, we launched the Strategy.com News and Weather channels, and in March 2001, we launched the Strategy.com Sports and Traffic channels. We did not recognize revenues related to Strategy.com until 2000, in which we recognized $8.7 million in network affiliate and subscription fees and other services. During 2000, approximately $5.0 million of Strategy.com revenues related to a customer 24 from whom we do not expect to generate significant recurring revenue in the future. We expect to continue to generate revenues from OEM fees, network affiliation fees, subscription fees, hosting, transaction and other fees from Strategy.com services in the future. During 2000, we agreed to restructure our relationship with a significant customer, terminating the Strategy.com affiliation and joint research and development agreement and replacing it with a standard enterprise software license and maintenance agreement. While we had been providing services to the customer throughout the year, no revenue had been recognized in accordance with our revenue recognition accounting policies. In view of changes in the customer's internal information technology plans, we entered into an agreement with the customer in which we agreed to discontinue our development efforts and deliver all existing work product. Since we have no future obligations to this customer, all payments were made prior to the end of the year, and all other revenue recognition criteria were met, we recorded revenues of $9.8 million, with $4.4 million and $5.4 million recorded as product license and services revenue, respectively, and deferred an additional $1.2 million related to ongoing technical support obligations. Of the total $5.4 million recorded as services revenue, $5.0 million related to Strategy.com. We do not expect to generate significant recurring revenue from this customer in future periods. Product License Revenues. Product license revenues increased from $61.6 million in 1998 to $85.8 million in 1999, and to $102.1 million in 2000, resulting in annual growth rates of 73.7% in 1998, 39.2% in 1999 and 18.9% in 2000. The increase in product license revenues was due to increased customer acceptance of our recently released products and the growth of the business intelligence software market in general. Product license revenues were also positively affected by the restructuring of the customer relationship described above which resulted in $4.4 million of product license revenue. Although product revenues have increased each year, the rate of increase has declined. We believe this may be caused, in part, by concerns of potential new customers over our restatement of financial results and the related litigation during 2000. We believe the resolution of these matters may relieve these concerns. We expect product license revenues as a percentage of total revenues to fluctuate on a period-to-period basis and vary significantly from the percentage of total revenues achieved in prior years. Additionally, historic growth rates my not be sustainable or may decline due to the current economic climate in the first quarter of 2001 with respect to decreased corporate spending in information technology. Product Support and Other Services Revenues. Product support and other services revenues increased from $33.9 million in 1998 to $65.5 million in 1999, and to $121.9 million in 2000, resulting in a growth rate of 98.3% in 1998, 93.4% in 1999 and 86.2% in 2000. The increase in product support and other services revenues was primarily due to a continuing increase in large scale business intelligence applications which require significant implementation and other consulting work. As a result of expected fluctuations in product license revenues discussed above, 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 are included in the amounts discussed above and are discussed separately in this paragraph. International revenues increased from $24.9 million in 1998 to $36.4 million in 1999, and to $55.8 million in 2000, resulting in a growth rate of 74.9% in 1998, 45.9% in 1999 and 53.5% in 2000. Growth in international product license revenues accounted for 45% of the total product license growth during 2000. 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. International revenues also increased as a result of the recognition of $4.4 million of product license revenues from the non-recurring transaction with the significant customer that restructured its relationship with us. In addition, we opened new sales offices in Argentina, Switzerland, Mexico, Korea and Australia in 2000, in Brazil in 1999, in Canada and Italy in 1998 and in Austria, France, the Netherlands, Germany, United Kingdom and Spain prior to 1998. As a percentage of total revenues, international revenues were 26.1% in 1998, 24.0% in 1999 and 24.9% in 2000. 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. 25 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 $2.2 million in 1998 to $2.6 million in 1999, and to $2.7 million in 2000. As a percentage of product license revenues, however, cost of product license revenues decreased from 3.6% in 1998, to 3.0% in 1999 and to 2.7% in 2000. 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 and shipping 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 may increase as product license revenues increase. In the event that we enter into additional royalty arrangements 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. Cost of product support and other services consists of the costs of providing consulting services to customers and partners, technical support and education. Cost of product support and other services revenues increased from $17.5 million in 1998 to $34.4 million in 1999, and to $85.2 million in 2000. As a percentage of product support and other services revenues, cost of product support and other services revenues was 51.8% in 1998, 52.6% in 1999 and 69.9% in 2000. 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 new product licenses sold associated with a continuing increase in large-scale business intelligence applications and complex Strategy.com deployments. The total cost of product support and other services revenues as a percentage of product support and other services revenues increased slightly in 1999 compared to 1998 due to the increased use of third parties to perform consulting services. The significant increase in total cost of product support and other services revenues as a percentage of product support and other services revenues ("services margin") in 2000 compared to 1999 was primarily attributable to the following a substantial increase in the use of third parties to perform consulting services, an increase in consulting services revenues as a percentage of total product support and other services revenues, which are at lower margins than other product support revenues, the agreement to restructure a large customer relationship which resulted in recognizing a significant amount of services revenue at no margin, excess capacity in consulting personnel, and excess capacity in the Strategy.com service infrastructure. We have increased our consulting, education and technical support staffing levels based on anticipated increases in revenues. To the extent our product support and other services revenues do not increase at anticipated rates, our services margin may not improve without lowering costs of product support and other services. To the extent that Strategy.com can maximize economies of scale and leverage off its relationship with MicroStrategy and existing infrastructure, we expect Strategy.com's cost of product support and other services as a percentage of its total product support and other services revenues will decrease. The cost, however, of providing hosting services and operating the Strategy.com network may become more significant as Strategy.com's customer base expands, further increasing the cost of product support and other services 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 $53.3 million in 1998 to $93.1 million in 1999, and to $151.1 million in 2000. As a percentage of total revenues, sales and marketing expenses were 55.8% in 1998, 61.5% in 1999 and 67.5% in 2000. The increase in sales and marketing expenses was primarily the result of increased staffing levels in the sales force prior to our restructuring in 2000, increased commissions earned, increased promotional activities and advertising, increased marketing efforts for Strategy.com and general marketing efforts. Prior to the restructuring, weighted average staffing levels for sales and marketing personnel had increased by approximately 59% in 2000 over 1999. Additionally, during the first quarter of 2000, we invested heavily in advertising, including a national television and print advertising campaign and other marketing efforts in order to create better market awareness of the value-added potential of our product suite and Strategy.com and to seek to acquire 26 market share. We intend to continue to market our MicroStrategy 7 software and other technology in our suite of products; however, we expect to reduce our overall advertising and marketing efforts going forward in order to better align our costs with anticipated revenues. Research and Development Expenses. Research and development expenses consist primarily of salaries and benefits of software engineering personnel, depreciation of equipment and other costs. Research and development expenses increased from $12.1 million in 1998 to $28.0 million in 1999, and to $61.4 million in 2000. As a percentage of total revenues, research and development expenses increased from 12.7% in 1998 to 18.5% in 1999, and to 27.4% in 2000. 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 business intelligence technology. Weighted average staffing levels of research and development personnel increased by approximately 59% in 2000 over 1999. During 2000, Strategy.com research and development costs represented 29% of total research and development costs. Research and development expenses may increase as we continue to invest in developing new products, applications and product enhancements for our existing platform business. 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 consulting, legal and other professional fees. General and administrative expenses increased from $12.7 million in 1998 to $24.4 million in 1999, and to $58.8 million in 2000. As a percentage of total revenues, general and administrative expenses were 13.3% in 1998, 16.1% in 1999, and 26.2% in 2000. The increase in general and administrative expenses was the result of increased staff levels, increased office occupancy costs, costs associated with the growth of our business and an increase in outside professional fees, specifically legal and other consultancy fees related to the recent litigation associated with our restatement of our financial statements and the related SEC investigation. We expect that general and administrative expenses may level-off or decrease in future periods in view of the settlement of the SEC inquiry, facilities consolidation, staff reductions and reductions in the use of external consultants. Amortization of Intangible Assets. We have recorded $81,000, $422,000 and $17.7 million in amortization expense for the years ended December 31, 1998, 1999 and 2000, respectively. We expect our rate of amortization expense to be substantially the same over the next two years, to the extent no additional intangible assets are acquired. The primary components of amortization of intangible assets are discussed below. In June 2000, we entered into an agreement with the controlling stockholder of a software integrator. The primary purpose of the agreement was to grant us the right to hire certain employees of the software integrator. In exchange, we issued 57,143 shares of Class A common stock to the controlling stockholder. We will issue up to $3.4 million in additional shares of Class A common stock over the next two years based on an agreed upon formula including revenue and attrition objectives. We have recorded $1.6 million related to the first installment as an intangible asset in the accompanying balance sheet. The first installment is being amortized over the estimated period of benefit of two years. Beginning in December 1999 and throughout 2000, we acquired the right to use certain Internet domain names for $3.2 million. We are amortizing these assets over their expected useful life of 3 years. 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 $46.6 million of the $49.6 million purchase price to intangible assets. The intangible assets are being amortized over their useful lives, ranging from one to three years. As of December 31, 2000, $16.7 million of such amount had been amortized and $15.1 million and $14.8 million are expected to be amortized in 2001 and 2002, respectively. 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 in certain foreign 27 subsidiaries. The intangible assets consist primarily of distribution channels, trade names and customer lists and are being amortized on a straight-line basis over their weighted average useful lives of approximately 14 years. In-process Research and Development. In December 1999, in connection with the purchase of intellectual property and other tangible and intangible assets relating to NCR's Teracube project, we allocated $2.8 million of the $49.6 million purchase price to in-process research and development. In estimating the fair value of the in-process research and development projects acquired, we considered, among other factors, the stage of development of the Teracube research and development projects at the time of the acquisition, projected estimated cash flows from those projects when completed and the percentage of the final products' cash flows that is attributed to our core technology and that was already developed by NCR. Associated risks include the inherent difficulties and uncertainties in completing Teracube and, thereby, achieving technological feasibility and risk related to the impact of potential changes in future technology. At the end of 1999, we estimated we would incur additional expenses of approximately $900,000 to complete development; however, due to expansion of project scope, we incurred expenses of $1.6 million during 2000 and intend to incur additional expenses in 2001 of approximately $700,000 in order to complete development. Remaining development efforts are focused on completing the development of certain sub-products of Teracube that will maximize efficiencies in the operation of our business intelligence and business intelligence products. Completion of these projects will be necessary before revenues are produced. Approximately 30% of the final products' estimated cash in-flows are attributable to the acquired Teracube technology. We used a discount rate of 35% when estimating the net present value of the projected incremental cash flows. We expect to begin deriving revenues in 2001 when certain MicroStrategy products that include the Teracube sub-products are expected to be generally available. Restructuring and related charges. In the third quarter of 2000, we announced a restructuring plan designed to better align costs with expected revenues and strengthen the financial performance of the business. The restructuring plan included a reduction of our workforce by 231 or approximately 10% of the worldwide headcount and the cancellation of 230 new jobs for which candidates had not yet started with us. All of these actions were completed prior to September 30, 2000. As a result of the reduction in headcount, we plan to consolidate facilities located in the vicinity of our Northern Virginia headquarters. In addition, we are eliminating or reducing certain quarterly corporate events, including cancellation of our annual cruise. Finally, we are reducing expenditures on external consultants and contractors across all functional areas. We anticipate realizing annual savings of approximately $25.0 million as a result of these actions. In connection with this restructuring plan, we incurred severance costs for terminated employees and costs for rescinded offers of employment, accelerated the vesting provisions of certain stock option grants, wrote-off certain assets that are no longer of service, and accrued related professional fees. In addition, Michael J. Saylor, our chairman of the board and chief executive officer, made grants of the Company's Class A common stock to terminated employees from his personal stock holdings. Since he is a principal shareholder of Microstrategy, his actions are deemed to be an action undertaken on behalf of Microstrategy for accounting purposes. Accordingly, we recognized an expense and a capital contribution by Mr. Saylor for approximately $3.0 million, which represents the fair value of the stock on the date of grant. We also recognized a liability related to our commitments associated with the 2000 annual cruise for employees that was canceled. The following table sets forth a summary of these restructuring costs and related charges (in thousands): 28 Severance and rescinded employment offers.................. $2,854 Stock grant and applicable payroll taxes................... 3,192 Compensation expense on accelerated stock options.......... 1,483 Elimination of corporate events............................ 2,838 Write-off of impaired assets............................... 360 Accrual for professional fees.............................. 108 ------- Total restructuring costs and related charges.............. $10,835 ======= Included in the $10.8 million restructuring charge are approximately $6.2 million of cash costs and $4.6 million in non-cash related costs. No events or circumstances occurred subsequent to the announcement of the restructuring plan requiring significant changes to management's original estimates. Substantially all restructuring costs and related charges had been paid as of December 31, 2000. If we are unable to reduce our costs more in line with revenues and strengthen the financial performance of our business, we may need to further adjust our cost structure through the execution of additional restructuring plans. Loss on investments. In December 1999, we received 824,742 shares of Xchange, Inc., formerly Exchange Applications, Inc., stock valued at $21.5 million, in consideration for the sale of MicroStrategy software, technical support and consulting services. We sold all of our economic interest in these shares for a net realized gain of $1.5 million during the first two quarters of 2000. During 2000, we received an additional 805,800 shares of Xchange's stock, valued at $13.1 million, in consideration for the sale of MicroStrategy software, technical support and consulting services. Due to a significant decrease in the market value of their stock, the timing and amount of future recovery, if any, in the value of this asset is uncertain and we do not consider the decline in value to be temporary. Accordingly, we have written down the investment to its fair value at December 31, 2000, and recognized a loss of $12.1 million during 2000. This loss was partially offset by a hedging transaction that resulted in a gain of $1.4 million in the third quarter of 2000. Provision for litigation settlement. We and certain of our officers and directors are defendants in a private securities class action lawsuit alleging that we have violated Section 10(b) of the Exchange Act, Rule 10b-5 promulgated thereunder, and Section 20(a) and Section 20A of the Exchange Act in connection with various statements that we had made with respect to our 1999, 1998 and 1997 financial results. In June 2000, purported holders of our common stock filed a shareholder derivative lawsuit in the Delaware Court of Chancery seeking recovery for various alleged breaches of fiduciary duties by certain of our directors and officers relating to our restatement of financial results for 1999, 1998 and 1997. In October 2000, we entered into agreements to settle these lawsuits. Both settlements are subject to confirmatory discovery, final documentation, court approval and certain other conditions. Under the class action settlement agreement, class members will receive: 1) five-year unsecured promissory notes issued by the Company having an aggregate principal amount of $80.5 million and bearing interest at 7.5% per year; 2) 550,000 shares of our Class A common stock, with the number of shares to be increased if the market value of the shares, based on the dollar weighted average trading price during a specified trading period prior to the district court settlement hearing, is less than $30 per share so that the minimum value of the shares is $16.5 million; and 3) warrants issued by the Company to purchase 1.9 million shares of our Class A common stock at an exercise price between $40 and $50 per share, based on the dollar weighted average trading price during a specified trading period prior to the district court settlement hearing, with the warrants expiring five years from the date they are issued. We will have the right, at any time, to prepay the promissory notes, or to mandatorily convert the promissory notes into shares of our Class A common stock at a conversion price equal to 80% of the dollar weighted average trading price per share for all round lot transactions in the stock on the Nasdaq National Market for the ten trading days ending two days prior to the date that written notice of conversion has been given. The warrants may be exercised for cash or by tendering promissory notes valued for the purpose of warrant exercise at 133% of their principal amount plus accrued interest. Based on the terms of the settlement agreements, we determined that a liability related to these actions was probable and that the value was reasonably estimable. Accordingly, we separately evaluated the individual components of the settlement agreements in consideration of existing market conditions and recorded an estimated charge of $89.7 million for the cost of the litigation settlement, net of insurance proceeds of approximately $13.0 million. 29 The final value of the settlements may differ significantly from the estimates currently recorded depending on a variety of factors including the market value of the stock when issued and potential changes in market conditions affecting the valuation of the other securities. Additionally, the settlements are contingent on confirmatory discovery, final documentation, court approval and certain other conditions. Accordingly, we will revalue the estimate of the settlements on a quarterly basis and at the time the securities are issued. Minority Interest. During the year ended December 31, 2000, we accreted dividends of $713,000 on the preferred stock of Strategy.com. Deferred Compensation Expense. During 1998, we granted options to purchase 3,753,380 shares of Class A common stock, of which options to purchase 1,071,670 shares of Class A common stock were granted at exercise prices below fair market value. We are amortizing $1.4 million of compensation expense related to these options ratably over the five-year vesting period. In 2000, 1999 and 1998, compensation expense was $271,000, $269,000 and $186,000, respectively. We will record additional compensation expense of $270,000 in each year beginning 2001 through 2002, and $84,000 in 2003, if all of the related options vest. Provision for Income Taxes. In 2000, 1999 and 1998, we recorded income tax expense of $1.4 million, $1.2 million and $0, respectively, primarily related to foreign jurisdictions where we are profitable. Prior to our initial public offering, we had elected to be treated as a Subchapter S corporation for federal and state income tax purposes. Under Subchapter S, our income was allocated to our individual stockholders rather than to us. Accordingly, no federal or state income taxes have been provided for in the financial statements, prior to June 1998 when we converted to a C corporation. The provision for income taxes may increase as we become more profitable in certain foreign jurisdictions. Preferred Stock Dividends. During 2000, we recorded preferred stock dividends of $4.7 million on our Series A redeemable convertible preferred stock. For the year ended December 31, 2000, we paid dividends of $4.1 million through the issuance of 359,125 shares of Class A common stock in lieu of cash and had accrued dividends of $599,000 as of December 31, 2000 which are included in accounts payable and accrued expenses in the accompanying consolidated balance sheet. All accrued dividends were paid subsequent to December 31, 2000 through the issuance of 63,146 shares of Class A common stock in lieu of cash. Beneficial Conversion Feature. During the second quarter of 2000, we recorded a $19.4 million charge attributable to the beneficial conversion feature of the Series A redeemable convertible preferred stock based on the difference between the fair market value of the Class A common stock on the closing date of the private placement and the conversion rate. The conversion rate was computed based on the volume weighted average price of the stock for the 17 trading days subsequent to the closing date in accordance with the Certificate of Designations, Preferences and Rights of the Series A Redeemable Convertible Preferred Stock. If the conversion price is adjusted based upon certain contingent events as specified in the Certificate of Designations, Preferences and Rights of the Series A Redeemable Convertible Preferred Stock, an additional charge per share of outstanding preferred stock may be recorded in the future. Deferred Revenue Deferred revenue represents product support and other services fees that are collected in advance for 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. Deferred revenue also includes product license and product support and other services fees relating to arrangements which required implementation-related services that are significant to the functionality of features of the software product, including arrangements with subsequent hosting services. Aggregate deferred revenue was $81.6 million as of December 31, 2000 compared to $71.3 million as of December 31, 1999. The increase in deferred revenue is primarily attributable to a few large contracts with customers that involved multiple elements, including software products, product support and other services, hosting services and 30 Strategy.com services and for which our revenue recognition policy requires that the revenues be recognized on a percentage of completion basis or recognized over the entire term of the contract or the hosting period, as applicable. We expect to recognize approximately $50.3 million of this deferred revenue in 2001; 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. Liquidity and Capital Resources On December 31, 2000 and 1999, we had $94.7 million and $68.4 million, of cash, cash equivalents, and short-term investments, respectively, of which $25.9 million is restricted cash as of December 31, 2000. The restrictions on this cash were removed in February 2001. Cash used in operations was $87.8 million for 2000 and cash provided by operations was $89,000 for 1999. The increase in cash used in operations from 1999 to 2000 was primarily attributable to a substantial increase in sales and marketing, and other operating expenses, which increased at a significantly greater rate than revenues. However, during the latter part of the year, we took several actions to curtail our operating expenses including a reduction in headcount and discontinuation of various company sponsored events. We have also implemented actions to reduce the use of outside consultants and contractors and other sales and marketing expenses. These actions were taken to achieve our goal of making our business other than Strategy.com breakeven on an operating basis by the end of 2001, excluding amortization, preferred dividends and other non-operating expenses. Cash used in investing activities was $37.7 million and $43.2 million for 2000 and 1999, respectively. In December 1999, we received 824,742 shares of Xchange stock, valued at $21.5 million, in consideration for the sale of MicroStrategy software, technical support and application development. We sold all of our economic interest in the shares we received in December 1999 for a total net realized gain of $1.5 million. The decrease in cash used in investing activities from 1999 to 2000 reflected the sale of these shares and other short-term investments primarily offset by the increase in restricted cash, 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 the third quarter of 2000, we invested $5.0 million in exchange for an approximate 5% interest in a voice portal technology company. Our financing activities provided cash of $167.8 million and $42.2 million for 2000 and 1999, respectively. In June 2000, we issued 12,500 shares of our Series A redeemable convertible preferred stock in a private placement to institutional investors for cash proceeds of $119.6 million, net of offering costs. Dividends are payable quarterly at a rate of 7% per annum, in cash or in shares of Class A common stock. The preferred stock is currently convertible into 3,744,152 shares of Class A common stock based on the current conversion price of $33.39 per share. The conversion price may be adjusted at certain future dates, including the first and each subsequent anniversary of the initial issuance date, depending upon the trading price of the Class A common stock and an agreed upon formula. The preferred stock is also redeemable upon certain triggering events such as suspension from trading or failure of our Class A common stock to be listed on the Nasdaq National Market for a period of five consecutive trading days and other events as defined in the Certificate of Designations, Preferences and Rights of the Series A Redeemable Convertible Preferred Stock. As of December 31, 2000, none of these triggering events have occurred. We also recorded a $19.4 million charge attributable to the beneficial conversion feature of the Series A redeemable convertible preferred stock equal to the difference between the fair market value of the Class A common stock on the closing date of the private placement and the conversion rate. The conversion rate was computed based on the volume weighted average price of the stock for the 17 trading days subsequent to the closing date in accordance with the Certificate of Designations, Preferences and Rights of the Series A Redeemable Convertible Preferred Stock. If the conversion price is adjusted based upon certain contingent events as specified in the Certificate of Designations, Preferences and Rights of the Series A Redeemable Convertible Preferred Stock, such as the failure to maintain the effectiveness of the related 31 registration statement and issuance of certain equity securities, an additional charge per share of outstanding preferred stock may be recorded in the future. Additionally, in accordance with the terms of the agreements relating to the issuance of Series A redeemable convertible preferred stock, under certain circumstances, we may be required to pay substantial penalties to a holder of the preferred stock. Such penalties are generally paid in the form of interest payments, subject to any restrictions imposed by applicable law. In the third quarter of 2000, we incurred $578,000 in penalties as a result of a 14-day delay in the filing of a registration statement registering the shares of Class A common stock issuable upon conversion of and in lieu of dividends on the Series A redeemable convertible preferred stock. During the year ended December 31, 2000, we paid dividends of $4.1 million through the issuance of 359,125 shares of Class A common stock in lieu of cash. As of December 31, 2000, we had recorded unpaid accrued dividends of $599,000. All accrued dividends were paid subsequent to December 31, 2000 through the issuance of 63,146 shares of Class A common stock in lieu of cash. In October 2000, we issued 13,401,253 shares of convertible preferred stock of Strategy.com to a group of institutional and accredited investors for cash proceeds of $39.8 million, net of offering costs, in an initial closing. In January 2001, we issued an additional 3,134,796 million shares for $10.0 million, in a second and final closing. The preferred stock is convertible into Class A common stock of Strategy.com on a one-for-one basis based upon the occurrence of certain specified events. The total proceeds of $49.8 million, net of offering costs, will be used to fund ongoing operations of our Strategy.com subsidiary. Microstrategy owns approximately 84% of the economic interest in the outstanding equity of Strategy.com on an as converted, diluted basis. As part of the class action litigation settlement agreement, in addition to issuing Class A common stock, we expect to issue five-year unsecured promissory notes having an aggregate principal amount of $80.5 million and bearing interest at 7.5% per year and warrants to purchase 1.9 million shares of Class A common stock at an exercise price between $40 and $50 per share, with the warrants expiring five years from the date they are issued. In connection with this arrangement, we expect to pay approximately $6.0 million per year in interest charges commencing upon the settlement hearing date which has been scheduled for April 2, 2000. As of December 31, 2000, we had $12.1 million in future minimum lease commitments for computer software and equipment. 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 December 31, 2000. The lease bears interest at a rate equal to interest on three-year U.S. treasury notes plus 1.5% to 2.0%. Future drawdowns and interest rates under the lease agreement are subject to our credit worthiness. Currently, we are unable to draw down additional amounts under the lease agreement. 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. In March 1999, we entered into a line of credit agreement with a commercial bank, which provided for a $25.0 million unsecured revolving line of credit for general working capital purposes. In May 2000, we entered into a modification of the line of credit agreement, which, among other things, increased the aggregate credit available to include an additional letter of credit, removed any financial covenants and cured any financial covenant defaults. The modified line of credit accrued interest at LIBOR plus 1.75%, included a 0.2% unused line of credit fee, and required monthly payments of interest. As of December 31, 2000, after consideration of outstanding letters of credit, we had $18.7 million of borrowing capacity under this credit line. As of December 31, 2000, the line of credit was secured by $25.9 million of cash and cash equivalents, which is classified as restricted cash in the accompanying consolidated balance sheets. The cash was restricted through February 2001, at which time the agreement was terminated upon the closing of the credit facility agreement described below. On February 9, 2001, we entered into a loan and security agreement which provides for aggregate borrowing capacity of up to $30.0 million to be used for general working capital purposes (the "Credit 32 Facility"). The Credit Facility consists of a $10.0 million term loan and a revolving line of credit for up to $20.0 million, subject to certain borrowing base limitations, as defined in the agreement. The Credit Facility, which matures in February 2004, is collateralized by substantially all of our assets and replaces the previous line of credit agreement. On February 9, 2001, we borrowed $10.0 million under the term loan. Currently, we have $1 million of borrowing capacity under the $20 million revolving line of credit. The remaining $19 million under the revolving line of credit is expected to be available for future drawdowns upon completion of specified reporting requirements and other events defined in the agreement and subject to borrowing base limitations. At our option, borrowings under the revolving line of credit will bear interest at a variable rate equal to LIBOR plus 3.25% or 3.75% or at a variable rate equal to the prime rate plus 1.50% or 2.00%, depending on the outstanding balance. The Credit Facility also includes a 1.50% unused letter of credit fee and requires monthly payments of interest and other fees beginning on the first day of the month following the execution of the agreement. Borrowings under the term loan are based upon certain levels of maintenance revenue and bear interest at a variable rate equal to the prime rate plus 3.00%. In addition to the interest and other fees on borrowings under the Credit Facility, the lender has been granted warrants to purchase 50,000 shares of our Class A common stock at an exercise price of $14.825 per share, subject to adjustment as set forth therein. Under the terms of the Credit Facility, we are required to maintain certain financial covenants, the most restrictive of which are achieving certain minimum earnings amounts, as defined in the agreement, limitations on capital expenditures ($11.2 million in 2001, $14.4 million in 2002 and $21.0 million in 2003), minimizing the ability to invest further in subsidiaries, and limitations on incurring additional indebtedness. We have grown significantly in 2000 and prior years in anticipation of high revenue growth. We have recently taken actions to realign our cost structure to better match our expected revenue growth by reducing our workforce, limiting discretionary operating expenses and reducing capital expenditures. If revenues do not grow at anticipated rates, and we are not able to promptly adjust our cost structure, we will need to take further measures to reduce costs or will require additional external financing through credit facilities, sale of additional equity in MicroStrategy or in our Strategy.com subsidiary, or by obtaining other financing facilities to support our current cost structure. Financing facilities may not be available on acceptable terms. We believe that our existing cash, cash generated internally by operations and the new credit facility agreement entered into in February 2001 will meet our working capital requirements and anticipated capital expenditures for the next 12 months. Recent Accounting Standards In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 137, which delays the effective date of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which will be effective for our fiscal year 2001. This statement establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. We have not entered into any material derivative contracts and do not have near term plans to enter into such contracts. Accordingly, the adoption of SFAS No. 133 and SFAS No. 137 is not expected to have a material effect 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 Annual Report on Form 10-K 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 33 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. 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: o the size, timing and execution of significant orders and shipments; o 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; o the timing of new product announcements; o changes in our pricing policies or those of our competitors; o market acceptance of business intelligence software generally and of new and enhanced versions of our products in particular; o the length of our sales cycles; o changes in our operating expenses; o personnel changes; o our success in adding to our indirect distribution channels; o utilization of our consulting personnel, which can be affected by delays or deferrals of customer implementation of our software products and consulting, education and support services; o changes in foreign currency exchange rates; and o seasonal factors, such as our traditionally lower pace of new sales in the summer. Limited Ability to Adjust Expenses. We base our operating expense budgets on expected revenue trends. Many of our expenses, particularly personnel costs and rent, are relatively fixed. We may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall. Accordingly, any shortfall in revenue may cause significant variation in operating results in any quarter. Based on the above factors, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. It is possible that in one or more future quarters, our operating results may be below the expectations of public market analysts and investors. In that event, the trading price of our Class A common stock may fall. We may lose sales, or sales may be delayed, due to the long sales and implementation cycles for our products, which would reduce our revenues 34 To date, our customers have typically invested substantial time, money and other resources and involved many people in the decision to license our software products and purchase our consulting and other services. As a result, we may wait nine months or more after the first contact with a customer for that customer to place an order while they seek internal approval for the purchase of our products and/or services. During this long sales cycle, events may occur that affect the size or timing of the order or even cause it to be canceled. For example, our competitors may introduce new products, or the customer's own budget and purchasing priorities may change. Even after an order is placed, the time it takes to deploy our products and complete consulting engagements varies widely from one customer to the next. Implementing our product can sometimes last several months, depending on the customer's needs and may begin only with a pilot program. It may be difficult to deploy our products if the customer has complicated deployment requirements, which typically involve integrating databases, hardware and software from different vendors. If a customer hires a third party to deploy our products, we cannot be sure that our products will be deployed successfully. Our 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 and we believe that this publicity has caused some of our potential customers to defer purchases of our software or to do business with other vendors. 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 Our deferred revenue was $81.6 million as of December 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 may need additional financing which could be difficult to obtain We may require additional external financing through credit facilities, sale of additional equity in MicroStrategy or in our Strategy.com subsidiary or by obtaining other financing facilities to support our operations, as we expect to incur operating losses through at least the third quarter of 2001 and possibly longer. Obtaining additional financing will be subject to a number of factors, including: o market conditions; o our operating performance; and o investor sentiment. These factors may make the timing, amount, terms and conditions of additional financing unattractive to us. If we are unable to raise capital to fund our operations, our business, operating results and financial condition may be materially and adversely affected. We face litigation that could have a material adverse effect on our business, financial condition and 35 results of operations We and certain of our directors and executive officers are named as defendants in a private securities class action lawsuit and a shareholder derivative lawsuit relating to the restatement of our 1999, 1998 and 1997 financial results. Although we have entered into agreements to settle such lawsuits, the settlements are subject to court approval and certain other conditions. If the agreed upon settlements are not consummated, it is possible that we may be required to pay substantial damages or settlement costs which could have a material adverse effect on our financial condition or results of operation. Regardless of the outcome of these matters, it is likely that we will incur substantial defense costs and that such actions may cause a diversion of management time and attention. The issuance of Class A common stock as part of the proposed settlement of class action litigation and the exercise of warrants or conversion of notes issued as part of the litigation settlement could result in a substantial number of additional shares of Class A common stock being issued The agreements we entered into to settle the private securities class action lawsuit and the derivative suit relating to the restatement of our 1999, 1998 and 1997 financial results require us to issue shares of common stock with a market value of $16.5 million, but not less than 550,000 shares. Based on the closing price of our Class A common stock on March 1, 2001, we and certain of our executive officers would be obligated to issue approximately 1,872,340 shares of Class A common stock to the class members as part of the settlement. In addition, the settlement agreements require the issuance of warrants to purchase 1,900,000 shares of common stock and promissory notes having an aggregate principal amount of $80.5 million. We would have the option at any time to convert the notes into a number of shares of Class A common stock equal to the principal amount of the notes being converted divided by 80% of the weighted average trading price of the Class A common stock over a 10 day period preceding our delivery of a notice of conversion, which could result in a substantial number of shares of Class A common stock being issued. For example, if the conversion of notes were based on the weighted average trading price of the Class A common stock during the 10 days ending March 1, 2001, we would be obligated to issue 10,363,690 shares of Class A common stock if we elected to convert the notes. The issuance of a substantial number of shares of Class A common stock as part of the litigation settlement and future exercises or conversions of securities issued in the litigation settlement may result in substantial dilution to the interests of holders of Class A common stock and may result in downward pressure on the price of our Class A common stock. Shares in our public offerings may have been offered and sold in violation of the Securities Act and purchasers in one or more of these offerings may have claims that could result in a substantial amount of damages The Company and selling shareholders sold an aggregate 9,200,000 shares of our Class A common stock in our initial public offering on June 16, 1998 at a price (adjusted for a 2 for 1 stock split in January 2000) per share of $6.00 for an aggregate purchase price of $55.2 million and 4,000,000 shares of our Class A common stock at a price (adjusted for a 2 for 1 stock split in January 2000) per share of $13.50 in an additional public offering on February 10, 1999 for an aggregate purchase price of $54.0 million. The shares were sold pursuant to prospectuses that contained financial statements that we subsequently revised. The inclusion of these financial statements that required revision in the registration statements and prospectuses used in the offering and sale of these shares may constitute a violation of the Securities Act. If the inclusion of these financial statements that required revision in the registration statements and prospectuses used in the offerings did constitute a violation of the Securities Act, the purchasers in these offerings would have the right for a period of one year from the date that they discovered, or should have discovered with reasonable diligence, that such financial statements required revision in the applicable registration statement and prospectus, but in no event later than three years from the date of the sale of shares to them, to obtain recovery of the consideration paid in connection with their purchase of Class A common stock or, if they have already sold the stock, to sue us for damages based upon the difference between the price they paid for Class A common stock and the proceeds they obtained from the sale of the stock. The amount of these damages could be substantial. 36 We are currently unable to borrow additional amounts under our master equipment lease 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 December 31, 2000. Future drawdowns 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. We face intense competition, which may lead to lower prices for our products, reduced gross margins, loss of market share and reduced revenue The markets for business intelligence software, customer relationship management applications, portals and narrowcast messaging technologies are intensely competitive and subject to rapidly changing technology. In addition, many of our competitors in these markets are offering, or may soon offer, products and services that may compete with MicroStrategy products and those of Strategy.com. MicroStrategy's most direct competitors provide: o business intelligence software; o OLAP tools; o query and reporting tools; o web-based static reporting tools; o information delivery and proactive reporting; o analytical customer relationship management products; o web traffic analysis applications; and o marketing automation. Each of these markets are discussed more fully below. Business Intelligence Software. Makers of business intelligence software provides business intelligence capabilities designed for integration, customization and application development. Leading analyst firms classify companies such as Microsoft, Oracle, Hyperion, SAP and SAS to be leading providers of business intelligence software. OLAP Tools. Companies that build software to perform OLAP provide offerings competitive with the core MicroStrategy 7 platform. Whether web-based or client-server, these tools give end users the ability to query underlying data sources without having to hand code structured query language queries. Most OLAP tools allow users to build their own calculations and specify report layouts and other options. Additionally, OLAP tools provide users the ability to navigate throughout the underlying data in an easy, graphical mode, often referred to as drilling. Providers of OLAP tools include Cognos, Microsoft, Hyperion, Brio, IBM, Seagate and Microsoft. Query and Reporting Tools. Query and reporting tools allow large numbers of end users to gain access to pre-defined reports for simple analysis. Often the end users are able to specify some sort of run-time criteria that customizes the result set for that particular person. Some limited `drilling' is also provided. Companies who produce query and reporting tools include Business Objects, Cognos, Oracle, Seagate, and Brio. Web-based Static Reporting Tools. Companies that offer software to deliver pre-built reports for end- 37 user viewing and consumption can also compete with MicroStrategy. These applications often lack the sophistication, robustness and scalability of MicroStrategy, but can be attractive for small, departmental applications. Vendors in this category include Actuate, Business Objects, Seagate, Microsoft, Computer Associates and SAS. Information Delivery and Proactive Reporting. Companies that focus on the proactive delivery of information, via e-mail, website, or other medium can compete with MicroStrategy's offerings. Typically these tools serve to push out compiled reports on a scheduled basis to sets of users based on job type. MicroStrategy software has this technology integrated into its core platforms. Vendors of such technology include Actuate, nQuire, Information Builders and Business Objects. Analytical Customer Relationship Management Products. Companies that deliver customer relationship management products alone or in conjunction with e-commerce applications, such as Broadbase, BroadVision, E.piphany, Vignette, compete with our analytical customer relationship management applications. In contrast with providers of operational customer relationship management vendors, such as Vantive and Oracle, analytical customer relationship management deals more with customer segmentation, analysis and interaction as opposed to infrastructure and call centers. Web Traffic Analysis Applications. Reporting and analysis tools can be specialized to deal specifically with the analysis of visitors to a company's website. Typically this involves extracting data from a web-log file and importing it into a usable format, often in a relational database. A set of analysis, sometimes customer-centric in nature, is performed, and limited ad-hoc reporting is permitted. Advanced applications in this space merge data from the web-logs with other customer centric attributes to help provide a complete view of the customer base. Vendors in this space include Accrue, Net.Genesis and WebTrends. Marketing Automation. Applications focused on the automation and execution of marketing tasks, such as campaign management and delivery, compete with our customer relationship management applications and our Narrowcast Server platform. Leading vendors in this space include E.piphany, Xchange, Chordiant and Broadbase. Strategy.com's most direct competitors provide: o web portal and information networks; o vertical internet portals and information networks; and, o wireless communications and wireless access protocol enabled products. Each of these market segments are discussed more fully below. 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. 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, 3COM and Palm offer a variety of mobile phones and wireless devices over which Strategy.com delivers information. These companies may develop in-house information services or partner with other companies to deliver information that is competitive to 38 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 business intelligence industry. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sale of their products than we can. Increased competition may lead to price cuts, reduced gross margins and loss of market share. We cannot be sure that we will be able to compete successfully against current and future competitors or that the competitive pressures we face will not have a material adverse 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, 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. We have expanded our business rapidly and our failure to manage this expansion effectively, as well as the strain it places on our resources, could have a material adverse effect on our business, operating results and financial condition We have expanded rapidly. Our total number of employees has grown from 907 on December 31, 1998 to 1,899 on December 31, 2000. This expansion has placed significant demands on our administrative, operational, financial and personnel resources and is expected to continue doing so. In particular, our expansion into international markets has led to increased financial and administrative demands. For example, managing relationships with new foreign partners require additional administrative burdens and managing foreign currency risks requires 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. In addition, the development of the Strategy.com network could divert the time and attention of our senior management from our other business. Michael J. Saylor, our chairman and chief executive officer, currently is responsible for the strategic planning and direction of both our MicroStrategy software business and the Strategy.com business. If Mr. Saylor does not effectively manage his time and attention between these 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 and chief executive officer, and Sanju K. Bansal, our vice chairman, executive vice president and chief operating officer. If we lose the services of one or both of these individuals or other key personnel, or if we are unable to attract, train, assimilate and retain the highly skilled personnel we need, our business, operating results and financial condition could be materially adversely affected. Our inability to develop and release product enhancements and new products to respond to rapid technological change in a timely and cost-effective manner would have a material adverse effect on 39 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: o our ability to continue to support a number of popular operating systems and databases; o our ability to maintain and improve our current product line; and o 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 NT operating system. Therefore, our ability to increase sales currently depends on the continued acceptance of the Windows NT operating system. We cannot market many of 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 our products and us. 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. 40 Our business, and in particular the 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 plan to do, or if users opt out of making their personal preferences and information available to us and Strategy.com affiliates, the utility of our products will decrease, which could have a material adverse effect on our business, operating results and financial condition. If our customers, our network or Strategy.com affiliates misuse personal information, 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 websites. This could materially and adversely affect our business, operating results and financial condition. In Europe, the European Union Directive on Data Protection requires member countries to implement legislation that prohibits any European entity from sharing personal data collected from EU persons with entities in any country that is not deemed to have adequate data protection laws. Currently, the United States' data protection laws are not deemed to be adequate, and some data transfers from European entities to us may be prohibited unless explicit consent is obtained from EU data subjects, we agree to specified contractual privacy safeguards that are approved by EU authorities, or we comply with the requirements of the so-called Safe Harbor program between the United States and the EU. It may not be feasible for us to obtain the required consent or to make the necessary contractual commitments. Currently, we have not sought to be certified under the Safe Harbor program, and our data collection and handling practices may not qualify under this program. Although enforcement of EU data protection laws against U.S. companies is currently subject to a standstill, this standstill will expire in June 2001, and some countries, including France, are currently attempting to enforce data protection laws with respect to data exports to the United States, notwithstanding the existence of the standstill. 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 The 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. These infrastructures may not 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 websites using our products or hosting the 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 41 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. Our relationship with Strategy.com could create the potential for conflicts of interest We hold an approximately 84% economic interest in the equity of Strategy.com. Conflicts may arise between us and other investors in Strategy.com, including: the allocation of business opportunities, the sharing of rights, technologies, facilities, personnel and other resources, and the fiduciary duties owed by officers, directors and other personnel who provide services to both us and Strategy.com. Strategy.com has only recently introduced its network and it is uncertain whether it will achieve widespread acceptance Strategy.com has implemented the finance, news, weather, sports and traffic channels of its network. Strategy.com may introduce additional channels as part of our suite of information and we could be subject to 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 Strategy.com affiliates who bundle the Strategy.com network with their own product and service offerings. If this service, or the products and services offered through it, fails to achieve widespread customer acceptance, our business, operating results and financial condition would be materially adversely affected. In addition, revenue from Strategy.com would be adversely affected if Strategy.com affiliates do not perceive that the integration of the 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. Strategy.com is expected to incur significant losses for the foreseeable future and will require additional external financing Strategy.com is expected to incur significant losses for the foreseeable future and will require additional external financing to support its operations and it may be difficult to obtain addition financing on acceptable terms. If Strategy.com is unable to raise capital to fund its operations, our business and spending results could be materially and adversely affected. Strategy.com relies on Strategy.com affiliates to market and deliver Strategy.com services to their customers and if Strategy.com is unable to enter into arrangements with a sufficient number of Strategy.com affiliates, or if Strategy.com affiliates are unable to interest their customers in Strategy.com services or have difficulty in delivering those service to their customers, our business and reputation will suffer Strategy.com relies on Strategy.com affiliates to market and deliverStrategy.com services to their customers. Strategy.com may not attract Strategy.com affiliates who will market its services effectively and deliver services reliably to customers. If Strategy.com affiliates fail to deliver services reliably, Strategy.com could face liability claims from its subscribers and our reputation could be damaged. Strategy.com includes contractual provisions limiting its liability to the subscriber for failures and delays, but these limits may not be enforceable and may not be sufficient to shield Strategy.com from liability. Strategy.com will seek to obtain liability insurance to cover problems of this sort, but insurance may not be available and the amounts of its coverage may not be sufficient to cover all potential claims Our ability to achieve revenue growth in the future will depend in part on Strategy.com's success in recruiting and maintaining successful relationships with Strategy.com affiliates and the performance of the systems deployed and maintained by Strategy.com affiliates which Strategy.com does not control. If 42 Strategy.com is unable to recruit Strategy.com affiliates or maintain its relationships with Strategy.com affiliates, or if Strategy.com affiliates perform poorly in the delivery of Strategy.com services to customers, our business, operating results and financial condition will suffer. 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 We have two classes of common stock: Class A common stock and Class B common stock. Holders of our Class A common stock generally have the same rights as holders of our Class B common stock, except that holders of Class A common stock have one vote per share while holders of Class B common stock have ten votes per share. As of March 1, 2001, holders of our Class B common stock owned or controlled 51,165,624 shares of Class B common stock, or 94.4% of the total voting power. Michael J. Saylor, our chairman and chief executive officer, controlled 3,550,155 shares of Class A common stock and 39,657,110 shares of Class B common stock, or 73.8% of total voting power, as of March 1, 2001. 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 who 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. The conversion of the Series A redeemable convertible preferred shares could result in substantial numbers of additional shares of Class A common stock being issued if our market price declines during periods in which the conversion price of the Series A redeemable convertible preferred shares may adjust As of December 31, 2000, the Series A redeemable convertible preferred shares are convertible into Class A common stock at a conversion price equal to $33.3854 per share. This conversion price may be adjusted based on the market price of our Class A common stock if the preferred stock remains outstanding on June 19, 2001 and on each subsequent anniversary of such date, if such adjustment would result in a lower conversion price. The conversion price may also be adjusted upon the occurrence of various events, including the failure to maintain the effectiveness of the registration statement to which these shares relate and the issuance of certain equity securities. As a result, the lower the price of our Class A common stock at these intervals, the greater the number of shares the holder will receive upon conversion after any such adjustment. For example, the number of shares of Class A common stock that we would be required to issue upon conversion of all 12,500 Series A redeemable convertible preferred shares, excluding shares issued as accrued dividends, would increase from approximately 3,744,152 shares, based on the applicable conversion price of $33.3854 per share as of December 31, 2000, to approximately: o 4,992,212 shares if the applicable conversion price decreased 25%; o 7,488,303 shares if the applicable conversion price decreased 50%; o 14,976,516 shares if the applicable conversion price decreased 75%; or o 37,441,516 shares if the applicable conversion price decreased by 90%. For example, if the Series A redeemable convertible preferred stock conversion price were adjusted to a 43 conversion price of $8.8125 per share (the closing price of our Class A common stock on March 1, 2001) we would be required to issue 14,184,397 shares of Class A common stock upon conversion of all 12,500 Series A preferred shares. To the extent the Series A redeemable convertible preferred shares are converted or dividends on the Series A preferred shares are paid in shares of Class A common stock rather than cash, a significant number of shares of Class A common stock may be sold into the market, which could decrease the price of our Class A common stock and encourage short sales. Short sales could place further downward pressure on the price of our Class A common stock. In that case, we could be required to issue an increasingly greater number of shares of our Class A common stock upon future conversions of the Series A redeemable convertible preferred shares as a result of the annual and other adjustments described above, sales of which could further depress the price of our Class A common stock. The conversion of and the payment of dividends in shares of Class A common stock in lieu of cash on the Series A redeemable convertible preferred shares may result in substantial dilution to the interests of other holders of our Class A common stock. No selling stockholder may convert its Series A redeemable convertible preferred shares if upon such conversion the selling stockholder together with its affiliates would have acquired a number of shares of Class A common stock during the 60-day period ending on the date of conversion which, when added to the number of shares of Class A common stock held at the beginning of such 60-day period, would exceed 9.99% of our then outstanding Class A common stock, excluding for purposes of such determination shares of Class A common stock issuable upon conversion of Series A preferred shares which have not been converted. Nevertheless, a selling stockholder may still sell a substantial number of shares in the market. By periodically selling shares into the market, an individual selling stockholder could eventually sell more than 9.99% of our outstanding Class A common stock while never holding more than 9.99% at any specific time. We may be required to pay substantial penalties to the holders of the Series A redeemable convertible preferred shares if specific events occur In accordance with the terms of the agreements relating to the issuance of the Series A redeemable convertible preferred shares, we are required to pay substantial penalties to a holder of the Series A preferred shares under specified circumstances, including, among others: o nonpayment of dividends on the Series A redeemable convertible preferred shares in a timely manner; o failure to deliver shares of our Class A common stock upon conversion of the Series A redeemable convertible preferred shares after a proper request; o nonpayment of the redemption price at maturity of the Series A redeemable convertible preferred shares; o failure to hold a meeting of our stockholders on or before July 31, 2001 to approve the issuance of the shares of Class A common stock issuable upon conversion of and in lieu of cash dividends on the Series A redeemable convertible preferred shares; or o the unavailability of the registration statement relating to the shares of Class A common stock issuable upon conversion of and in lieu of cash dividends on the Series A redeemable convertible preferred shares to cover the resale of such shares for more than brief intervals. Such penalties are generally paid in the form of interest payments, subject to any restrictions imposed by applicable law. In the third quarter of 2000, we incurred $578,000 in penalties as a result of a 14 day delay in the filing of a registration statement registering the shares of Class A common stock issuable upon conversion of and in lieu of dividends on the Series A redeemable convertible preferred shares. We rely on our strategic channel partners and if we are unable to develop or maintain successful 44 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, the years ended December 31, 2000, 1999 and 1998, channel partners accounted for, directly or indirectly, approximately 44.4%, 39.2% and 33.6% of our total product license revenues, respectively. Our channel partners generally offer customers the products of several different companies, including some products that compete with ours. Although we believe that direct sales will continue to account for a majority of product license revenues, we intend to increase the level of indirect sales activities through our strategic channel partners. However, we may not be successful in our efforts to continue to expand indirect sales in this manner. We may not be able to attract strategic partners who will market our products effectively and who will be qualified to provide timely and cost-effective customer support and service. Our ability to achieve revenue growth in the future will depend in part on our success in developing and maintaining successful relationships with those strategic partners. If we are unable to develop or maintain our relationships with these strategic partners, our business, operating results and financial condition will suffer. Third party providers of information and services for Strategy.com services may fail to provide us such information and services or may also provide such information and services to our competitors Strategy.com relies on third parties to provide information and services for the Strategy.com network. For example, Strategy.com relies on Thomson Financial to provide users of Strategy.com financial information services with stock quote information. If one or more of these providers were to stop working with Strategy.com, Strategy.com would have to rely on other parties to provide the information and services it needs. Other parties may not be willing to do so on reasonable terms. Furthermore, Strategy.com does not have long-term agreements with its providers of information and services and cannot restrict them from providing similar information and services to its competitors. As a result, Strategy.com's competitors may be able to duplicate some of the information and services that it provides and may, therefore, find it easier to enter the market for personal intelligence and compete with Strategy.com. Strategy.com affiliates will rely on Strategy.com to maintain the infrastructure of the network and any problems with that infrastructure could expose Strategy.com to liability from its Strategy.com affiliates and their customers Strategy.com affiliates depend on Strategy.com to maintain the software and hardware infrastructure of the Strategy.com network. If this infrastructure fails or Strategy.com affiliates or their customers otherwise experience difficulties or delays in accessing the network, Strategy.com could face liability claims from them. Strategy.com expects to include contractual provisions limiting its liability to its Strategy.com affiliates for system failures and delays, but these limits may not be enforceable and may not be sufficient to shield Strategy.com from liability. Strategy.com will seek to obtain liability insurance to cover problems of this sort, but insurance may not be available and the amounts of its coverage may not be sufficient to cover all potential claims. Strategy.com is vulnerable to system failures, which could cause interruptions or disruptions in its service The hardware infrastructure on which the Strategy.com system operates is located at the Exodus Communications data center in Northern Virginia. Strategy.com may not be able to manage this relationship successfully to mitigate any risks associated with having its hardware infrastructure maintained by Exodus. Unexpected events such as natural disasters, power losses and vandalism could damage its systems. Telecommunications failures, computer viruses, electronic break-ins or other similar disruptive problems could adversely affect the operation of its systems. Insurance policies may not provide adequate compensation for any losses that may occur due to any damages or interruptions in its systems. Accordingly, we may need to make capital expenditures in the event of damage. Strategy.com does not currently have a formal disaster recovery plan. Periodically, Strategy.com experiences unscheduled system 45 downtime that results in its website being inaccessible to subscribers. Although Strategy.com has not suffered material losses during these downtimes to date, if these problems persist in the future, users, Strategy.com affiliates and advertisers could lose confidence in Strategy.com 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 its systems, which could lead to slower response time or system failures. System failures or slowdowns could adversely affect the speed and responsiveness of the Strategy.com network. These would diminish the experience for Stategy.com subscribers and affect our reputation. The ability of Stategy.com systems to manage a significantly increased volume of transactions in a production environment is unknown. As a result, Stategy.com faces risks related to its ability to scale up to expected transaction levels while maintaining satisfactory performance. If Strategy.com transaction volume increases significantly, it 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 We rely primarily on a combination of copyright, patent, trademark and trade secret laws, customer licensing agreements, employee and third-party nondisclosure agreements and other methods to protect our proprietary rights. However, these laws and contractual provisions provide only limited protection. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Policing such unauthorized use is difficult, and we cannot be certain that we can prevent it, particularly in countries where the laws may not protect our proprietary rights as fully as in the United States. Our products may be susceptible to claims by other companies that our products infringe upon their proprietary rights, which could adversely affect our business, operating results and financial condition As the number of software products in our target markets increases and the functionality of these products further overlaps, we may become increasingly subject to claims by a third party that our technology infringes such party's proprietary rights. Regardless of their merit, any such claims could be time consuming and expensive to defend, may divert management's attention and resources, could cause product shipment delays and could require us to enter into costly royalty or licensing agreements. If successful, a claim of infringement against us and our inability to license the infringed or similar technology could have a material adverse effect on our business, operating results and financial condition. In late March 2001, NCR Corporation asked us to consider licensing certain technology which NCR alleges is covered under patents that they hold. NCR has implied that if we are unwilling to license this technology they may seek to enforce their patents against us. We have not yet had an opportunity to fully review these matters. In the event NCR seeks to enforce any of these patents and if such patents are found to be valid and enforceable against MicroStrategy, our business, operating results and financial condition may be materially adversely affected. We are not currently able to estimate the potential range of loss and the outcome of the uncertainty is unknown. Accordingly, no provision for this matter has been made in the accompanying consolidated financial statements. Managing our international operations is complex and our failure to do so successfully or in a cost-effective manner would have a material adverse effect on our business, operating results and financial condition International sales accounted for 24.9%, 24.0% and 26.1% of our total revenues for the years ended December 31, 2000, 1999 and 1998, respectively. Our international operations require significant management attention and financial resources. There are certain risks inherent in our international business activities including: o changes in foreign currency exchange rates; o unexpected changes in regulatory requirements; 46 o tariffs and other trade barriers; o costs of localizing products for foreign countries; o lack of acceptance of localized products in foreign countries; o longer accounts receivable payment cycles; o difficulties in managing international operations; o tax issues, including restrictions on repatriating earnings; o weaker intellectual property protection in other countries; and o the burden of complying with a wide variety of foreign laws. These factors may have a material adverse effect on our future international sales and, consequently, our 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. Despite testing by us and by our current and potential customers, errors may be found in new products or releases after commercial shipments begin. This could result in lost revenue or delays in market acceptance, which could have a material adverse effect upon our business, operating results and financial condition. Our license agreements with customers typically contain provisions designed to limit our exposure to product liability claims. It is possible, however, that these provisions may not be effective under the laws of certain domestic or international jurisdictions. Although there have been no product liability claims against us to date, our license and support of products may involve the risk of these claims. A successful product liability claim against us could have a material adverse effect on our business, operating results and financial condition. The price of our stock may be extremely volatile The market price for our Class A common stock has historically been volatile and could fluctuate 47 significantly for any of the following reasons: o quarter-to-quarter variations in our operating results; o developments or disputes concerning proprietary rights; o technological innovations or new products; o governmental regulatory action; o general conditions in the software industry; o increased price competition; o changes in earnings estimates by analysts; o any change in the actual or expected amount of dilution attributable to issuances of additional shares of Class A common stock upon conversion of the Series A redeemable convertible preferred stock or as a result of the litigation settlement; or o other events or factors. Many of the above factors are beyond our control. The stock market has recently experienced extreme price and volume fluctuations. These fluctuations have particularly affected the market price of many software companies, often without regard to their operating performance. 48 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following discussion about our market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We are exposed to the impact of interest rate changes and foreign currency fluctuations. Interest Rate Risk Our exposure to market risk for changes in interest rates relates primarily to our cash equivalents and short-term investments. We do not have material 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 December 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. The functional currency of each of our foreign subsidiaries is the local currency. Our international business is subject to risks typical of an international business, including, but not limited to differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Based on our overall currency rate exposure at December 31, 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, results of operations, financial condition and cash flows will not be materially adversely affected by exchange rate fluctuations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our consolidated financial statements, together with the related notes and the report of independent accountants, are set forth on the pages indicated in Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISRTANT Our executive officers and directors and their ages and positions as of March 1, 2001 are as follows: 49 Name Age Title ------------------------- --- ------------------------------------------- Michael J. Saylor............ 36 Chairman and Chief Executive Officer Sanju K. Bansal.............. 35 Vice Chairman, Executive Vice President & Chief Operating Officer Eric F. Brown................ 35 President and Chief Financial Officer Jonathan F. Klein............ 34 Vice President, Law and General Counsel Stephen S. Trundle........... 32 Vice President, Technology and Chief Technology Officer Frank A. Ingari (1)(2)....... 51 Director Jonathan J. Ledecky.......... 43 Director John W. Sidgmore............. 49 Director Ralph S. Terkowitz (1)(2).... 50 Director - ---------- (1) Member of the Audit Committee (2) Member of the Compensation Committee Set forth below is certain information regarding the professional experience of each of the above-named persons. Michael J. Saylor has served as chief executive officer and chairman of the board of directors since founding MicroStrategy in November 1989, and as president from November 1989 to November 2000. Prior to that, Mr. Saylor was employed by E.I. du Pont de Nemours & Company as a Venture Manager from 1988 to 1989 and by Federal Group, Inc. as a consultant from 1987 to 1988. Mr. Saylor received an S.B. in Aeronautics and Astronautics and an S.B. in Science, Technology and Society from the Massachusetts Institute of Technology. Sanju K. Bansal has served as executive vice president and chief operating officer since 1993 and was previously vice president, consulting since joining MicroStrategy in 1990. He has been a member of the board of directors of MicroStrategy since September 1997 and has served as vice chairman since November 2000. Prior to joining MicroStrategy, Mr. Bansal was a consultant at Booz Allen & Hamilton, a worldwide technical and management-consulting firm, from 1987 to 1990. Mr. Bansal received an S.B. in Electrical Engineering from the Massachusetts Institute of Technology and an M.S. in Computer Science from The Johns Hopkins University. Eric F. Brown has served as president and chief financial officer since November 2000. Mr. Brown originally joined the Company as chief financial officer of the Strategy.com subsidiary in February 2000. Prior to that, Mr. Brown served as division chief financial officer and then chief operating officer of Electronic Arts from October 1998 until February 2000. Prior to that, Mr. Brown was co-founder and chief financial officer of DataSage, Inc. from 1995 until October 1998. Mr. Brown also held several senior financial positions with Grand Metropolitan from 1990 until 1995. Mr. Brown received his M.B.A. from the Sloan School of Management of Massachusetts Institute of Technology and a B.S. in Chemistry from the Massachusetts Institute of Technology. Jonathan F. Klein has served as vice president, law and general counsel since November 1998 and as corporate counsel from June 1997 to November 1998. From September 1993 to June 1997, Mr. Klein was an appellate litigator with the United States Department of Justice. Mr. Klein received a B.A. in Economics from Amherst College and a J.D. from Harvard Law School. Stephen S. Trundle has served as vice president, technology and chief technology officer since July 1997 and as director, technology from 1994 to 1997. From 1992 to 1994, Mr. Trundle served as a consultant and then a senior consultant with MicroStrategy. Prior to that, Mr. Trundle worked for Bath Iron Works on the Aegis Destroyer program from 1991 to 1992. Mr. Trundle received an A.B. in Engineering and an A.B. in Government from Dartmouth College. Frank A. Ingari has been a member of the board of directors of MicroStrategy since October 1997. Mr. Ingari founded Wheelhouse Corporation, a marketing infrastructure services provider, in April 1999 and served as its chief executive officer from April 1999 until May 2000 and as its chairman of the board from April 1999 until the present. Prior to Wheelhouse, Mr. Ingari founded Growth Ally, LLC, a start-up consultancy dedicated to helping pre-public technology companies accelerate their development, and served as its president from November 1997 until April 1999. Mr. Ingari was chairman and chief executive officer of Shiva Corporation from 1993 to 1997. Prior to joining Shiva Corporation, Mr. Ingari was vice president of worldwide marketing at Lotus Development Corporation. Mr. Ingari received a B.A. in Creative Writing and U.S. Foreign Relations from Cornell University. 50 Jonathan J. Ledecky has been a member of the board of directors of MicroStrategy since June 1998. Mr. Ledecky is currently vice chairman of Lincoln Holdings LLC, which owns the Washington Capitals, the Washington Wizards and the Washington Mystics sports teams, and has served in this position since July 1999. Mr. Ledecky founded U.S. Office Products Company in October 1994 and served as its chairman of the board and chief executive officer from inception through November 1997 and thereafter as a director until May 1998. In February 1997, Mr. Ledecky founded Building One Services Corp., now Encompass Services Corporation, and served as its chairman until February 2000 and chief executive officer until June 1999. Mr. Ledecky is also a director of publicly traded School Specialty, Inc. John W. Sidgmore has been a member of the board of directors of MicroStrategy since February 2000. Mr. Sidgmore is currently the chief operating officer and vice chairman of WorldCom, Inc., a provider of long distance, Internet and telecommunications services, where he has served in such positions since December 1996. Mr. Sidgmore was the president and chief executive officer of UUNET Technologies, Inc., a provider of worldwide Internet services, from June 1994 until December 1996. Prior to joining UUNET, Mr. Sidgmore was president and chief executive officer of Intelicom Solutions, now CSC Intelicom, a telecommunications software company. Mr. Sidgmore is also a member of the board of directors of WorldCom. Ralph S. Terkowitz has been a member of the board of directors of MicroStrategy since September 1997. Mr. Terkowitz is vice president, technology for the Washington Post Company, a position he has held since 1992. Until February 1996, Mr. Terkowitz was chief executive officer, president and publisher of Digital Ink, an Internet publishing venture that launched, among other ventures, WashingtonPost.com and PoliticsNow. In 1998, he was co-chief executive officer of HireSystems and instrumental in the formation of BrassRing.com. Mr. Terkowitz is a director of BigStep.com and OutTask. Mr. Terkowitz received an A.B. in Chemistry from Cornell University and an M.S. in Chemical Physics from the University of California, Berkeley. We have agreed as part of a settlement with the Securities and Exchange Commission ("SEC") to add an additional independent director with finance experience to the audit committee of the our board of directors who is not objectionable to the SEC. We expect to appoint this additional director to the audit committee in the second quarter of 2001. Involvement in Certain Legal Proceedings On December 14, 2000, Mr. Saylor and Mr. Bansal each entered into a settlement with the SEC in connection with the Company's restatement of its financial results for 1999, 1998 and 1997. In the settlement, each of Mr. Saylor and Mr. Bansal consented, without admitting or denying the allegations in the SEC's complaint, to the entry of a judgment enjoining him from violating the antifraud and recordkeeping provisions of the federal securities laws and ordering him to pay disgorgement and a civil penalty. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors, executive officers and holders of more than 10% of the Company's Class A Common Stock to file with the SEC initial reports of ownership of the Company's Class A Common Stock and other equity securities on a Form 3 and reports of changes in such ownership on a Form 4 or Form 5. Officers, directors and holders of 10% of the Company's Class A Common Stock are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on a review of the Company's records, all Section 16(a) filing requirements were satisfied with respect to the fiscal year ended 2000 except that (i) one Form 4 that was timely filed by Michael J. Saylor to report a series of gift transactions included four share conversions by Michael J. Saylor that were reportable in two prior months in connection with those gift transactions, and (ii) one Form 4 filed by Stephen S. Trundle included a sale of shares by his spouse that was inadvertently omitted from a prior reporting period. 51 ITEM 11. EXECUTIVE COMPENSATION The compensation information set forth in this Item 11 relates to compensation paid by the Company to its Chief Executive Officer, the Company's four other most highly compensated executive officers who were serving as executive officers of the Company as of December 31, 2000, and the two most highly compensated executive officers who served as executive officers during the fiscal year ended December 31, 2000 ("Fiscal Year 2000"), but who were not serving as executive officers at the end of Fiscal Year 2000 (collectively, the "Named Executive Officers"). Option awards relating to the Class A Common Stock of Strategy.com Incorporated, a majority-owned subsidiary of the Company, are designated in the tables set forth below in this Item 11 by the term "SDC." Unless so designated, all option information set forth in this Item 11 refers to option awards relating to the Class A Common Stock of the Company. The following table sets forth certain information concerning the compensation of the Named Executive Officers for each of the last three fiscal years: SUMMARY COMPENSATION TABLE
Long-Term Annual Compensation Compensation Awards -------------------------------------- ------------ Number of Shares Name and Fiscal Underlying Principal Position Year Salary Bonus Other Annual Options - ------------------ ---- ------ ----- Compensation ------- Michael J. Saylor. 2000 150,000 -- -- -- Chairman of the Board and Chief 1999 150,000 50,000 -- -- Executive Officer 1998 127,500 -- -- -- Sanju K. Bansal 2000 115,000 -- -- -- Vice Chairman of the Board, 1999 115,000 40,000 -- -- Executive Vice President, Chief 1998 115,000 -- -- -- Operating Officer and Director Eric F. Brown (1) 2000 131,250 10,000 96,962(2) 500,000 President and Chief Financial 100,000 (SDC) Officer 1999 -- -- -- -- 1998 -- -- -- -- Jonathan F. Klein 2000 135,417 60,000 -- 75,000 Vice President, Law and General 75,000 (SDC) Counsel 1999 115,000 30,000 -- 30,000 1998 91,500 15,000 -- 80,500 Stephen S. Trundle 2000 125,000 -- -- 125,000 Vice President, Technology and Chief 150,000 (SDC) Technology Officer 1999 125,000 -- -- 100,000 1998 115,000 20,000 -- -- Eric D. Driscoll (3) 2000 153,750 72,365 -- 125,661 Vice President, Corporate Development 50,000 (SDC) 1999 -- -- -- 10,000 1998 -- -- -- -- Joseph P. Payne (4) 2000 175,000 75,000 -- 75,000 Vice President, Marketing and 50,000 (SDC) Chief Marketing Officer 1999 121,307 15,000 -- 250,000 1998 -- -- -- --
52 - ---------- (1) Mr. Brown joined the Company in February 2000 as Chief Financial Officer of Strategy.com, a business unit of the Company at the time, and became Chief Financial Officer and President of the Company on August 1, 2000 and November 14, 2000, respectively. Accordingly, the 2000 information for Mr. Brown is for the period from February 2000 to December 31, 2000, and there is no information for 1999 and 1998. (2) This amount represents relocation expenses paid by the Company. (3) Mr. Driscoll became the Company's Vice President, Corporate Development in June 2000. From March 1999 until June 2000, Mr. Driscoll was Vice President, Americas Consulting and from October 1998 until March 1999 was Director, North American Consulting. The information in the table for Mr. Driscoll reflects the aggregate compensation received during 2000 as an employee of MicroStrategy Services Corporation and as an employee of the Company. Mr. Driscoll did not serve as an executive officer of the Company during 1999 or 1998. (4) Mr. Payne joined the Company in April 1999 as Vice President, Marketing and Chief Marketing Officer. Accordingly, the 1999 information for Mr. Payne is for the period from April 22, 1999 to December 31, 1999, and there is no information for 1998. Mr. Payne resigned from the Company on February 28, 2001. Option Grants Table The following table contains information concerning grants of stock options made to each of the Named Executive Officers during Fiscal Year 2000: 53 Option Grants in Last Fiscal Year Individual Grants
Potential Realizable Number of Shares Value at Assumed of Class A Annual rates of Stock Common Stock % of Total Price Appreciation for Underlying Options Granted Exercise Option Term(3) Options to Employees in Price Per Expiration -------------- Name Granted(1) 2000 Share(2) Date 5% 10% ---- ---------- ---- -------- ---- -- --- Michael J. Saylor -- -- -- -- $ -- $ -- Sanju K. Bansal -- -- -- -- -- -- Eric F. Brown 500,000 6.504 21.000 8/21/2010 6,603,394 16,734,296 100,000 (SDC) 2.124 2.7500 12/20/2010 172,946 438,279 Jonathan F. Klein 50,000 0.650 23.625 9/27/2010 742,882 1,882,608 25,000 0.325 21.500 10/17/2010 338,031 856,637 75,000 (SDC) 1.593 2.7500 12/20/2010 129,710 328,709 Stephen S. Trundle 50,000 0.650 44.125 6/09/2010 1,387,499 3,516,194 75,000 0.976 21.500 10/17/2010 1,014,093 2,569,910 150,000 (SDC) 3.186 2.7500 12/20/2010 259,419 657,419 Eric D. Driscoll 661 0.009 17.938 5/30/2010 7,457 18,897 75,000 0.976 39.313 6/16/2010 1,854,280 4,699,110 50,000 0.650 21.500 10/17/2010 676,062 1,713,273 50,000 (SDC) 1.062 2.7500 12/20/2010 86,473 219,140 50,000 0.650 23.625 9/27/2010 742,882 1,882,608 Joseph P. Payne 25,000 0.325 21.500 10/17/2010 338,031 856,637 50,000 (SDC) 1.062 2.7500 12/20/2010 86,473 219,140
- ---------- (1) These options generally vest over a five-year period and expire on the tenth anniversary of the date of grant. SDC options, irrespective of vesting, are not exercisable until the earlier of an underwritten initial public offering of SDC or the closing of an acquisition transaction resulting in a change of control of SDC. (2) The exercise price of options of the Company or SDC may be paid in cash or in shares of Class A Common Stock of the Company or SDC, as the case may be, valued at fair market value on the exercise date. All stock options were granted with an exercise price equal to the fair market value of such stock as determined by the Board of Directors of the Company or SDC, as applicable, on the grant date. 54 (3) The potential realizable value is calculated based on the term of the option at its time of grant (ten years). It is calculated assuming that the fair market value of the Class A Common Stock of the Company or of SDC, as the case may be, on the date of grant appreciates at the indicated annual rate compounded annually for the entire term of the option and that the option is exercised and sold on the last day of its term for the appreciated stock price. Option Exercises and Holdings The following table sets forth information concerning each exercise of a stock option during Fiscal Year 2000 by each of the Named Executive Officers and the number and value of unexercised options held by each of the Named Executive Officers on December 31, 2000. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
Number of Shares of Class Number of A Common Stock Value of Unexercised In- Shares Underlying Unexercised the-Money Options at Fiscal Acquired Options at Fiscal Year-End Year-End(2) on Value Name Exercise Realized(1) Exercisable/Unexercisable Exercisable/Unexercisable ---- -------- ----------- ------------------------- ------------------------- Michael J. Saylor -- $ -- -- / -- $ -- / $ -- Sanju K. Bansal -- -- -- / -- -- / -- Eric F. Brown -- -- 0 / 500,000 -- / -- 0 / 100,000 (SDC) -- / -- Jonathan F. Klein 20,000 2,049,000 10,200 / 155,300 35,270 / 429,905 0 / 75,000 (SDC) -- / -- Stephen S. Trundle 100,000 16,025,000 81,600 / 245,400 569,800 / 373,700 0 / 150,000 (SDC) -- / -- Eric D. Driscoll 10,000 318,750 2,000 / 153,661 0 / 170,000 0 / 50,000 (SDC) -- / -- Joseph P. Payne 20,000 380,000 30,000 / 275,000 18,750 / 125,000 0 / 50,000 (SDC) -- / --
- ---------- (1) Represents the difference between the exercise price and the fair market value of the Class A Common Stock of the Company on the date of exercise. (2) Value of unexercised options is determined by subtracting the exercise price per share from the fair market value per share for the underlying shares as of December 31, 2000, multiplied by the number of shares underlying the options. The fair market value of the Company's Class A Common Stock is based upon the last reported sale price as reported on the Nasdaq National Market on December 31, 2000 ($9.50 per share). No public market for the shares underlying the SDC options existed as of December 31, 2000, and accordingly no value in excess of the exercise price has been attributed to these options. 55 Directors' Compensation Directors do not receive any fees or other cash compensation for serving on the Company's Board of Directors or any committee thereof. Directors of the Company who are not employees of the Company or any subsidiary ("Outside Directors") are entitled to receive options to purchase shares of the Company's Class A Common Stock. In 2000, options for 30,000 shares of Class A Common Stock were granted to Outside Directors under the 1997 Director Option Plan. Subsequent to 2000, the Company grants options to Outside Directors under the 1999 Stock Option Plan. Pursuant to this plan, Outside Directors are granted options on the following terms: (i) each Outside Director of the Company is granted an option to purchase 100,000 shares of Class A Common Stock upon his or her initial election or appointment to the Board of Directors ("First Options") and (ii) each Outside Director is granted an option to purchase 30,000 shares of Class A Common Stock of the Company on the day immediately following each annual meeting of stockholders ("Subsequent Options"). Each option granted to an Outside Director under the 1999 Stock Option Plan has an exercise price equal to the last reported sale price of the Company's Class A Common Stock as reported on the Nasdaq National Market for the most recent trading day prior to the date of grant. First Options granted under the 1999 Stock Option Plan become exercisable in equal annual installments over a five-year period and Subsequent Options are exercisable in full upon grant. In the event of a merger of the Company with or into another corporation or another qualifying acquisition event, each option will be assumed or an equivalent option will be substituted by the successor corporation. If the successor corporation does not assume outstanding options or such options are not otherwise exchanged, the exercisability of all outstanding options will accelerate. Employment Agreements Employees of the Company are generally required to enter into confidentiality agreements prohibiting the employees from disclosing any confidential or proprietary information of the Company. In addition, the agreements generally provide that upon termination, an employee will not work for a competitor and will not solicit Company customers and employees for a period of one year. At the time of commencement of employment, the Company's employees also generally sign offer letters specifying certain basic terms and conditions of employment. Otherwise, employees of the Company are not subject to written employment agreements. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the beneficial ownership of the Common Stock of the Company, as of February 28, 2001 unless otherwise indicated, by (i) each person who is known by the Company to beneficially own more than 5% of any class of the Company's Common Stock, (ii) each director or nominee for director, (iii) each of the Named Executive Officers, and (iv) all directors and executive officers as a group as of February 28, 2001: Number of Shares Percentage of Beneficially Class Beneficial Owner(1) Owned(2)(3) Outstanding(3)(4) - ------------------- ----------- ----------------- Michael J. Saylor (5) 43,534,865 53.4 Sanju K. Bansal (6) 8,698,958 10.7 Eric F. Brown (7) 100,000 * Jonathan F. Klein (8) 68,946 * Stephen S. Trundle (9) 452,878 * Eric D. Driscoll (10) 17,274 * Joseph P. Payne (11) 30,396 * Frank A. Ingari (12) 45,000 * Jonathan J. Ledecky (13) 38,000 * Ralph S. Terkowitz (14) 38,000 * John W. Sidgmore (15) 18,000 * Thomas P. Spahr (16) 1,582,242 2.0 Capital Group International, Inc. (17) 1,626,900 2.0 Citadel Investment Group, L.L.C. (18) 2,664,845 3.3 John Hancock Financial Services, Inc. (19) 1,549,000 1.9 Nevis Capital (20) 2,474,850 3.1 All executive officers and directors as a 52,994,647 64.8 group (9 persons) (2) 56 - ---------- * Less than 1% (1) Each person named above (except as otherwise indicated in the footnotes below) has an address in care of MicroStrategy Incorporated, 8000 Towers Crescent Drive, Vienna, Virginia 22182. (2) The shares of the Company listed in this table are shares of Class B Common Stock, unless otherwise indicated or set forth in the footnotes to this table. Shares held by the directors and executive officers as a group include options to purchase 363,300 shares of Class A Common Stock of the Company that are exercisable within 60 days after February 28, 2001. (3) The inclusion of any shares of Common Stock deemed beneficially owned does not constitute an admission of beneficial ownership of those shares. In accordance with the rules of the SEC, each stockholder is deemed to beneficially own any shares subject to stock options that are currently exercisable or exercisable within 60 days after February 28, 2001, and any reference below to shares subject to outstanding stock options held by the person in question refers only to such stock options. (4) Number of shares deemed outstanding as of February 28, 2001 includes (i) 30,313,030 shares of the Company's Class A Common Stock and (ii) 51,165,624.28 shares of the Company's Class B Common Stock, plus any shares of the Company's Common Stock subject to outstanding stock options exercisable by the person in question within 60 days after February 28, 2001. (5) Mr. Saylor's holdings of the Company's Common Stock consist of 39,257,110 shares of the Class B Common Stock held beneficially by Mr. Saylor as a result of his beneficial ownership in Alcantara LLC, 400,000 shares of Class B Common Stock held in trust (approximately 77.5% of the Class B Common Stock outstanding), 3,030,000 shares of the Company's Class A Common Stock held beneficially by Mr. Saylor as a result of his beneficial ownership in Alcantara LLC, 535,155 shares of the Company's Class A Common Stock held in his own name and 312,600 shares of the Company's Class A Common Stock held beneficially by Mr. Saylor in a foundation. (6) Mr. Bansal's holdings of Common Stock consist of 8,059,681 shares of Class B Common Stock held beneficially by Mr. Bansal as a result of his beneficial ownership in Shangri-La LLC, 439,046 shares of Class B Common Stock held in trust, 16,954 shares of Class B Common Stock held in his own name (approximately 16.6% of the Class B Common Stock outstanding), 19,000 shares of the Company's Class A Common Stock held beneficially by Mr. Bansal as a result of his beneficial ownership in Shangri-La LLC, 106,277 shares of the Company's Class A Common Stock held in his own name and 58,000 shares of Class A Common Stock held beneficially by Mr. Bansal in a foundation. (7) Mr. Brown's holdings of the Common Stock consist of options exercisable within 60 days after February 28, 2001 for 100,000 shares of the Company's Class A Common Stock. (8) Mr. Klein's holdings of Common Stock consist of 42,646 shares of the Company's Class A Common Stock and options exercisable within 60 days after February 28, 2001 for 26,300 shares of the Company's Class A Common Stock. 57 (9) Mr. Trundle's holdings of Common Stock consist of 230,878 shares of the Company's Class A Common Stock, 100,000 Shares of Class B Common Stock (approximately 0.002% of the Class B common stock outstanding), and options exercisable within 60 days after February 28, 2001 for 122,000 shares of the Company's Class A Common Stock. (10) Mr. Driscoll's holdings of Common Stock consist of 15,274 shares of the Company's Class A Common Stock and options exercisable within 60 days after February 28, 2001 for 2,000 shares of the Company's Class A Common Stock. (11) Mr. Payne's holdings of Common Stock consist of 936 shares of the Company's Class A Common Stock and options exercisable within 60 days after February 28, 2001 for 30,000 shares of the Company's Class A Common Stock. (12) Mr. Ingari's holdings of Common Stock consist of 20,000 shares of the Company's Class A Common Stock and options exercisable within 60 days after February 28, 2001 for 25,000 shares of the Company's Class A Common Stock. (13) Mr. Ledecky's holdings of Common Stock consist of 2,000 shares of the Company's Class A Common Stock and options exercisable within 60 days after February 28, 2001 for 36,000 shares of the Company's Class A Common Stock. (14) Mr. Terkowitz's holdings of Common Stock consist of 2,000 shares of the Company's Class A Common Stock held beneficially by Mr. Terkowitz in trust and options exercisable within 60 days after February 28, 2001 for 36,000 shares of the Company's Class A Common Stock. (15) Mr. Sidgmore was elected as a director on February 16, 2000. Mr. Sidgmore's holdings of Common Stock consist of options exercisable within 60 days after February 28, 2001 for 18,000 shares of the Company's Class A Common Stock. (16) Mr. Spahr's holdings of Common Stock consist of 1,364,000 shares of Class B Common Stock (approximately 2.7% of the Class B Common Stock outstanding), 139,000 shares of the Company's Class A Common Stock in his own name, 50,000 shares of the Company's Class A Common Stock held beneficially by Mr. Spahr in trust, 19,000 shares of the Company's Class A Common Stock held beneficially by Mr. Spahr in a foundation and options exercisable within 60 days after February 28, 2001 for 10,242 shares of the Company's Class A Common Stock. (17) Information regarding the number of shares of Common Stock beneficially owned by Capital Group International, Inc. includes shares beneficially owned by a wholly-owned subsidiary, Capital Guardian Trust Company, and is based on the most recent Schedule 13-G of such entities received by the Company, which reported such ownership as of December 29, 2000. All shares beneficially held by Capital Group International consist of the Company's Class A Common Stock (approximately 5.7% of the Class A Common Stock outstanding as of December 29, 2000). The address of Capital Group International, Inc. is 11100 Santa Monica Boulevard, Los Angeles, California 90025. (18) Information regarding the number of shares of Common Stock beneficially owned by Citadel Investment Group, L.L.C. includes shares beneficially owned by affiliates Citadel Limited Partnership, GLB Partners, 58 L.P., Wellington Partners Limited Partnership, Kensington Global Strategies Fund, Ltd., Wingate Capital Ltd., Fisher Capital Ltd. and Kenneth Griffin, and is based on the most recent Schedule 13-G of such entities and individual received by the Company, which reported such ownership as of December 31, 2000. All shares beneficially held by such entities and individual consist of the Company's Class A Common Stock (approximately 8.8% of the Class A Common Stock outstanding as of December 31, 2000). The address of Citadel Investment Group, L.L.C. is 225 W. Washington, 9th Floor, Chicago, Illinois 60606. (19) Information regarding the number of shares of Common Stock beneficially owned by John Hancock Financial Services, Inc. includes shares beneficially owned by affiliates John Hancock Life Insurance Company, John Hancock Subsidiaries, Inc., The Berkeley Financial Group, Inc. and John Hancock Advisers, Inc., and is based on the most recent Schedule 13-G of such entities received by the Company, which reported such ownership as of December 31, 2000. All shares beneficially held by such entities and individual consist of the Company's Class A Common Stock (approximately 5.4% of the Class A Common Stock outstanding as of December 31, 2000). The address of John Hancock Financial Services, Inc. is John Hancock Place, P.O. Box 111, Boston, Massachusetts 02117. (20) Information regarding the number of shares of Common Stock beneficially owned by Nevis Capital includes shares beneficially owned by Jon C. Baker and David R. Wilmerding, III, and is based on the most recent Schedule 13- G of such entities received by the Company, which reported such ownership as of December 31, 2000. All shares beneficially held by such entities consist of the Company's Class A Common Stock (approximately 8.6% of the Class A Common Stock outstanding as of December 31, 2000). The address of Nevis Capital is 1119 St. Paul Street, Baltimore, Maryland 21202. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS As discussed under Item 3 "Legal Proceedings" above, Michael J. Saylor and Sanju K. Bansal were named as defendants in a class action lawsuit and shareholder derivative action and were subjects of an SEC investigation relating to the restatement of our financial results for 1999, 1998 and 1997. Mr. Saylor and Mr. Bansal each retained separate legal counsel to defend their individual interests in these legal proceedings. Using a portion of the proceeds that we received from insurance in connection with those proceedings, we paid the legal fees of such separate counsel in the amounts of $1,009,360 and $334,553 on behalf of Mr. Saylor and Mr. Bansal, respectively, during 2000. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Report: 1. Consolidated Financial Statements Page ---- Report of Independent Accountants................................... 64 Consolidated Financial Statements: Balance Sheets................................................ 65 Statements of Operations...................................... 66 Statements of Stockholders' Equity (Deficit).................. 67 Statements of Cash Flows...................................... 70 Notes to Consolidated Financial Statements.......................... 71 2. Consolidated Financial Statement Schedule Page ---- Schedule II--Valuation and Qualifying Accounts...................... 93 59 3. Exhibits Exhibit Number Description ------ ----------- 3.1 Amended and Restated Certificate of Incorporation of the registrant, as amended (Filed as Exhibit 3.1 to the registrant's Registration Statement on Form S-1 (Registration No. 333-49899) and incorporated by reference herein). 3.2 Certificate of Designations, Preferences and Rights of the Series A Convertible Preferred Stock (Filed as Exhibit 3.1 to the registrant's Current Report on Form 8-K (File No. 000-24435) filed on June 19, 2000 and incorporated by reference herein). 3.3 Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the registrant (Filed as Exhibit 3.2 to the registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000 (File No. 000-24435) and incorporated by reference herein). 3.4 Bylaws of the registrant (Filed as Exhibit 3.2 to the registrant's Registration Statement on Form S-1 (Registration No. 333-49899) and incorporated by reference herein). 4.1 Form of Certificate of Class A Common Stock of the registrant (Filed as Exhibit 4.1 to the registrant's Registration Statement on Form S-1 (Registration No. 333-49899) and incorporated by reference herein). 10.1 1996 Stock Plan (as amended) of the registrant (Filed as Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (File No. 000-24435) and incorporated by reference herein). 10.2 1997 Stock Option Plan for French Employees of the registrant (Filed as Exhibit 10.6 to the registrant's Registration Statement on Form S-1 (Registration No. 333-49899) and incorporated by reference herein). 10.3 1997 Director Option Plan (as amended) of the registrant (Filed as Exhibit 10.3 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 000-24435) and incorporated by reference herein). 10.4 1998 Employee Stock Purchase Plan of the registrant (Filed as Exhibit 10.4 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (File No. 000-24435) and incorporated by reference herein). 10.5 1999 Stock Option Plan of the registrant (Filed as Exhibit 10.3 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (File No. 000-24435) and incorporated by reference herein). 10.6 Amendment No. 1 to the 1999 Stock Option Plan of the registrant (Filed as Exhibit 10.3 to the registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000 (File No. 000-24435) and incorporated by reference herein). 10.7 Master Lease Agreement No. VAC180, dated November 1, 1999, between MLC Group, Inc. and the registrant (Filed as Exhibit 10.8 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 000-24435) and incorporated by reference herein). 10.8 Letter Agreement, dated December 1, 1999, between ePlus, Inc. (f/k/a MLC Group, Inc.) and the registrant (Filed as Exhibit 10.9 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 000-24435) and incorporated by reference herein). 10.9 Software Development and OEM Agreement, dated December 28, 1999, between the registrant and Exchange Applications, Inc. (Filed as Exhibit 10.10 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 000-24435) and incorporated by reference herein). 60 Exhibit Number Description ------ ----------- 10.10 Software License Agreement, dated December 28, 1999, between the registrant and Exchange Applications, Inc. (Filed as Exhibit 10.11 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 000-24435) and incorporated by reference herein). 10.11 Value-Added Reseller Agreement, dated December 28, 1999, between the registrant and Exchange Applications, Inc. (Filed as Exhibit 10.12 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 000-24435) and incorporated by reference herein). 10.12 Payment and Registration Rights Agreement, dated December 28, 1999, between the registrant and Exchange Applications, Inc. (Filed as Exhibit 10.13 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 000-24435) and incorporated by reference herein). 10.13 DSS Partner MicroStrategy Incorporated OEM Agreement, between the registrant and NCR Corporation (Filed as Exhibit 10.14 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 000-24435) and incorporated by reference herein). 10.14 Memorandum of Understanding (Purchase), dated as of September 30, 1999, between, the registrant and NCR Corporation (Filed as Exhibit 10.15 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 000-24435) and incorporated by reference herein). 10.15 Memorandum of Understanding (Joint Marketing), dated as of September 30, 1999, between the registrant and NCR Corporation (Filed as Exhibit 10.16 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 000-24435) and incorporated by reference herein). 10.16 Asset Purchase Agreement, dated December 23, 1999, between the registrant and NCR Corporation (Filed as Exhibit 10.17 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 000-24435) and incorporated by reference herein). 10.17 Deed of Lease, dated January 7, 2000, between Tysons Corner Property LLC and the registrant (Filed as Exhibit 10.18 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 000-24435) and incorporated by reference herein). 10.18 Registration Rights Agreement, dated as of June 17, 2000, by and among MicroStrategy Incorporated and each of the signatories thereto (Filed as Exhibit 10.1 to the registrant's Current Report on Form 8-K (File No. 000-24435) filed on June 19, 2000 and incorporated by reference herein). 10.19 Series A Preferred Stock Purchase Agreement by and among Strategy.com Incorporated, Aether Capital LLC and the other parties thereto, dated as of October 18, 2000 (Filed as Exhibit 10.1 to the registrant's Current Report of Form 8-K (File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein). 10.20 Amended and Restated Certificate of Incorporation of Strategy.com Incorporated, dated as of October 17, 2000 (Filed as Exhibit 10.2 to the registrant's Current Report of Form 8-K (File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein). 10.21 Investor Rights Agreement by and among Strategy.com Incorporated, the registrant, Aether Capital LLC and the other parties thereto, dated as of October 18, 2000 (Filed as Exhibit 10.3 to the registrant's Current Report of Form 8-K (File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein). 10.22 Stockholders' Voting Agreement by and among Strategy.com Incorporated, the registrant, Aether Capital LLC and the other parties thereto, dated as of October 18, 2000 (Filed as Exhibit 10.4 to the registrant's Current Report of Form 8-K (File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein). 61 Exhibit Number Description ------ ----------- 10.23 Memorandum of Understanding by and among the registrant, Strategy.com Incorporated and certain other affiliates of the registrant, dated as of October 17, 2000 (Filed as Exhibit 10.5 to the registrant's Current Report of Form 8-K (File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein). 10.24 United States Intellectual Property Assignment and License Back Agreement by and between the registrant and Strategy.com Incorporated, dated as of October 17, 2000 (Filed as Exhibit 10.6 to the registrant's Current Report of Form 8-K (File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein). 10.25 U.S. Intellectual Property License Agreement by and between the registrant and Strategy.com Incorporated, dated as of October 17, 2000 (Filed as Exhibit 10.7 to the registrant's Current Report of Form 8-K (File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein). 10.26 U.S. Software License Agreement by and between the registrant and Strategy.com Incorporated, dated as of October 17, 2000 (Filed as Exhibit 10.8 to the registrant's Current Report of Form 8-K (File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein). 10.27 International Software License Agreement by and between MicroStrategy International II Limited and Strategy.com International Limited, dated as of October 17, 2000 (Filed as Exhibit 10.9 to the registrant's Current Report of Form 8-K (File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein). 10.28 International Intellectual Property License Agreement by and between MicroStrategy International II Limited and Strategy.com International Limited, dated as of October 17, 2000 (Filed as Exhibit 10.10 to the registrant's Current Report of Form 8-K (File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein). 10.29 Stipulation of Settlement regarding the settlement of the class action lawsuit, dated as of January 11, 2001. 10.30 Loan and Security Agreement by and among Foothill Capital Corporation, the registrant and MicroStrategy Services Corporation, dated as of February 9, 2001 (Filed as Exhibit 10.1 to the registrant's Current Report of Form 8-K (File No. 000-24435) filed on February 15, 2001 and incorporated by reference herein). 10.31 General Continuing Guaranty by and among the registrant, Aventine Incorporated, MicroStrategy Capital Corporation and MicroStrategy Management Corporation, dated as of February 9, 2001 (Filed as Exhibit 10.2 to the registrant's Current Report of Form 8-K (File No. 000-24435) filed on February 15, 2001 and incorporated by reference herein). 10.32 Security Agreement by and among the registrant, Aventine Incorporated, MicroStrategy Capital Corporation, MicroStrategy Management Corporation and Foothill Capital Corporation, dated as of February 9, 2001 (Filed as Exhibit 10.3 to the registrant's Current Report of Form 8-K (File No. 000-24435) filed on February 15, 2001 and incorporated by reference herein). 10.33 Warrant to Purchase Class A Common Stock of the registrant, dated February 9, 2001, issued to Foothill 10.33 Wapital Corporation (Filed as Exhibit 10.4 to the registrant's Current Report of Form 8-K (File No. C00-24435) filed on February 15, 2001 and incorporated by reference herein). 10.34 Registration Rights Agreement by and between the registrant and Foothill Capital Corporation, dated as of February 9, 2001 (Filed as Exhibit 10.5 to the registrant's Current Report of Form 8-K (File No. 000-24435) filed on February 15, 2001 and incorporated by reference herein). 62 Exhibit Number Description ------ ----------- 21.1 Subsidiaries of the registrant. 23.1 Consent of PricewaterhouseCoopers LLP. (b) Reports on Form 8-K On November 6, 2000, we filed a Current Report on Form 8-K announcing the initial closing of a private placement of Series A redeemable convertible preferred stock by Strategy.com Incorporated. (c) Exhibits We hereby file as part of this Form 10-K the exhibits listed in the Index to Exhibits. (d) Financial Statement Schedule The following financial statement schedule is filed herewith: Schedule II--Valuation and Qualifying Accounts 63 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders MicroStrategy Incorporated In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) and Item 14(a)(2) on page 59 present fairly, in all material respects, the financial position of MicroStrategy Incorporated and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /S/ PRICEWATERHOUSECOOPERS LLP PRICEWATERHOUSECOOPERS LLP McLean, Virginia February 2, 2001, except as to Note 19 which is as of March 20, 2001 64 MICROSTRATEGY INCORPORATED CONSOLIDATED BALANCE SHEETS (in thousands, except per share data)
December 31, ------------------ 2000 1999 ---- ---- Assets Current assets: Cash and cash equivalents..................................................... $ 67,685 $ 25,941 Restricted cash............................................................... 25,884 -- Short-term investments........................................................ 1,085 42,418 Accounts receivable, net...................................................... 49,061 37,586 Prepaid expenses and other current assets..................................... 11,158 15,461 -------- -------- Total current assets..................................................... 154,873 121,406 -------- -------- Property and equipment, net..................................................... 61,409 30,594 Long-term investments........................................................... 5,271 -- Goodwill and other intangible assets, net of accumulated amortization of $18,170 and $503, respectively.......................................... 34,300 47,154 Deposits and other assets....................................................... 3,234 2,439 Deferred tax assets, net........................................................ -- 1,775 -------- -------- Total assets............................................................. $259,087 $203,368 ======== ======== Liabilities and Stockholders' (Deficit) Equity Current liabilities: Accounts payable and accrued expenses......................................... $ 35,025 $ 13,582 Accrued compensation and employee benefits.................................... 26,929 14,912 Deferred revenue and advance payments......................................... 50,303 38,028 Deferred tax liabilities, net................................................. -- 1,775 -------- -------- Total current liabilities................................................ 112,257 68,297 Deferred revenue and advance payments........................................... 31,260 33,255 Accrued litigation settlement................................................... 99,484 -- Other long-term liabilities..................................................... 1,509 -- -------- -------- Total liabilities. ...................................................... 244,510 101,552 -------- -------- Commitments and contingencies (Notes 8, 11 and 12) Series A redeemable convertible preferred stock, par value $0.001 per share, 18 shares authorized, 13 shares issued and outstanding in 2000............. 119,585 -- Mandatorily redeemable convertible preferred stock of consolidated subsidiary, par value $0.001 per share, 47,884 shares authorized, 13,401 shares issued and outstanding in 2000.................................................... 40,530 -- Stockholders' equity (deficit): Preferred stock undesignated, par value $0.001 per share, 4,982 shares authorized, no shares issued or outstanding.............................. -- -- Class A common stock, par value $0.001 per share, 330,000 shares authorized, 28,736 and 22,384 shares issued and outstanding, respectively. 29 22 Class B common stock, par value $0.001 per share, 165,000 shares authorized, 52,033 and 55,867 shares issued and outstanding, respectively. 52 56 Additional paid-in capital.................................................... 152,821 138,943 Deferred compensation......................................................... (624) (895) Accumulated other comprehensive income........................................ 1,443 1,643 Accumulated deficit........................................................... (299,259) (37,953) -------- -------- Total stockholders' (deficit) equity..................................... (145,538) 101,816 -------- -------- Total liabilities and stockholders' (deficit) equity..................... $259,087 $203,368 ======== ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 65 MICROSTRATEGY INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
Years ended December 31, ------------------------------ 2000 1999 1998 ---- ---- ---- Revenues: Product licenses...................................................... $ 102,050 $ 85,797 $ 61,635 Product support and other services.................................... 121,880 65,461 33,854 --------- -------- -------- Total revenues...................................................... 223,930 151,258 95,489 --------- -------- -------- Cost of revenues: Product licenses...................................................... 2,722 2,597 2,246 Product support and other services.................................... 85,249 34,436 17,535 --------- -------- -------- Total cost of revenues.............................................. 87,971 37,033 19,781 --------- -------- -------- Gross profit............................................................. 135,959 114,225 75,708 Operating expenses: Sales and marketing................................................... 151,095 93,090 53,327 Research and development.............................................. 61,433 27,998 12,106 General and administrative............................................ 58,762 24,448 12,743 Amortization of intangibles assets.................................... 17,667 422 81 In-process research and development................................... -- 2,800 -- Restructuring and related charges..................................... 10,835 -- -- --------- -------- -------- Total operating expenses............................................ 299,792 148,758 78,257 --------- -------- -------- Loss from operations..................................................... (163,833) (34,533) (2,549) Financing and other income (expenses): Interest income....................................................... 3,675 2,174 1,028 Interest expense...................................................... (37) (144) (720) Loss on investments................................................... (9,365) -- -- Provision for litigation settlement................................... (89,729) -- -- Minority interest..................................................... (713) -- -- Other income (expense), net........................................... 96 6 (14) --------- -------- -------- Total financing and other income (expenses)......................... (96,073) 2,036 294 --------- -------- -------- Loss before income taxes................................................. (259,906) (32,497) (2,255) Provision for income taxes............................................... 1,400 1,246 -- --------- -------- -------- Net loss................................................................. (261,306) (33,743) (2,255) --------- -------- -------- Preferred stock dividends................................................ (4,687) -- -- Beneficial conversion feature............................................ (19,375) -- -- --------- -------- -------- Net loss attributable to common stockholders............................. $(285,368) $(33,743) $ (2,255) ========= ======== ======== Basic and diluted net loss per share..................................... $ (3.58) $ (0.44) $ (0.03) ========= ======== ======== Weighted average shares used in computing basic and diluted net loss per share............................................................. 79,779 77,028 66,986 ========= ======== ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 66 MICROSTRATEGY INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (in thousands)
Additional Class A Class B Paid-in Common Stock Common Stock Common Stock Capital --------------- --------------- --------------- -------- Shares Amount Shares Amount Shares Amount ------ ------ ------ ------ ------ ------ Balance at December 31, 1997 ............................... 58,988 $ 59 -- $-- -- $ -- $ (10) ------- ---- ------ --- ------ ---- -------- Net loss ................................................... -- -- -- -- -- -- -- Foreign currency translation adjustment .................... -- -- -- -- -- -- -- Comprehensive loss ......................................... -- -- -- -- -- -- -- Issuance of common stock in exchange for minority interest of Company's foreign subsidiaries ............... 2,803 3 -- -- -- -- 1,065 Issuance of stock options below fair value ................. -- -- -- -- -- -- 1,350 Declaration of dividend .................................... -- -- -- -- -- -- (10,000) Conversion of common stock to Class B common stock. (61,791) (62) -- -- 61,791 62 -- S-Corporation to C-Corporation conversion .................. -- -- -- -- -- -- 315 Issuance of Class A common stock in connection with initial public offering, net of offering costs ........... -- -- 8,880 9 -- -- 48,180 Issuance of Class A common stock under stock option plan ..................................................... -- -- 699 1 -- -- 349 Conversion of Class B to Class A common stock .............. -- -- 525 1 (525) (1) -- Issuance of Class A common stock warrants .................. -- -- -- -- -- -- 934 Amortization of deferred stock compensation ................ -- -- -- -- -- -- -- ------- ---- ------ --- ------ ---- -------- Balance at December 31, 1998 ............................... -- $ -- 10,104 $11 61,266 $ 61 $ 42,183 ------- ---- ------ --- ------ ---- -------- Net loss ................................................... -- -- -- -- -- -- -- Change in unrealized gain (loss) on investments, net of applicable taxes ......................................... -- -- -- -- -- -- -- Foreign currency translation adjustment .................... -- -- -- -- -- -- -- Comprehensive loss ......................................... -- -- -- -- -- -- -- Issuance of Class A common stock in connection with offering, net of offering costs .......................... -- -- 3,170 3 -- -- 40,046 Conversion of Class B to Class A common stock .............. -- -- 5,399 5 (5,399) (5) -- Issuance of Class A common stock under stock option and purchase plans ........................................... -- -- 3,145 3 -- -- 7,018 Issuance of Class A common stock related to purchase of NCR's Teracube assets .................................... -- -- 566 -- -- -- 49,557 Issuance of Class A common stock warrants .................. -- -- -- -- -- -- 139 Amortization of deferred stock compensation ................ -- -- -- -- -- -- -- ------- ---- ------ --- ------ ---- -------- Balance at December 31, 1999 ............................... -- $ -- 22,384 $22 55,867 $ 56 $138,943 ------- ---- ------ --- ------ ---- -------- Net loss ................................................... -- -- -- -- -- -- -- Change in unrealized gain (loss) on investments, net of applicable taxes ......................................... -- -- -- -- -- -- -- Foreign currency translation adjustment .................... -- -- -- -- -- -- -- Comprehensive loss ......................................... -- -- -- -- -- -- -- Conversion of Class B to Class A common stock .............. -- -- 3,834 4 (3,834) (4) -- Issuance of Class A common stock under stock option and purchase plans ........................................... -- -- 2,102 2 -- -- 8,392 Issuance of Class A common stock in connection with agreement with software integrator ....................... -- -- 57 -- -- -- 1,600 Capital contribution related to stockholder stock grant .... -- -- -- -- -- -- 3,003 Acceleration of vesting provisions on stock options ........ -- -- -- -- -- -- 1,483 Preferred stock dividends .................................. -- -- -- -- -- -- (4,687) Payment of preferred stock dividends ....................... -- -- 359 1 -- -- 4,087 Amortization of deferred stock compensation ................ -- -- -- -- -- -- -- ------- ---- ------ --- ------ ---- -------- Balance at December 31, 2000 ............................... -- $ -- 28,736 $29 52,033 $ 52 $152,821 ------- ---- ------ --- ------ ---- --------
The accompanying notes are an integral part of these Consolidated Financial Statements. 67 MICROSTRATEGY INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (in thousands)
Accumulated Other Accumu- Deferred Comprehensive lated Comp- Income (Loss) Deficit ensation Total ------------------------ ------- -------- ----- Unrealized Foreign Gain (Loss) on Currency Short-term Translation Investments Adjustment ----------- ---------- Balance at December 31, 1997.............. $ -- $ 158 $ (1,640) $ -- $ (1,433) ------- ------- --------- -------- --------- Net loss.................................. -- -- (2,255) -- (2,255) Foreign currency translation adjustment............................. -- 736 -- -- 736 --------- Comprehensive loss........................ -- -- -- -- (1,519) Issuance of common stock in exchange for minority interest of Company's foreign subsidiaries......... -- -- -- -- 1,068 Issuance of stock options below fair value.................................. -- -- -- (1,350) -- Declaration of dividend................... -- -- -- -- (10,000) Conversion of common stock to Class B common stock................... -- -- -- -- -- S-Corporation to C-Corporation conversion............................. -- -- (315) -- -- Issuance of Class A common stock in connection with initial public offering, net of offering costs........ -- -- -- -- 48,189 Issuance of Class A common Stock under stock option plan................ -- -- -- -- 350 Conversion of Class B to Class A common stock........................... -- -- -- -- -- Issuance of warrants...................... -- -- -- -- 934 Amortization of deferred stock compensation........................... -- -- -- 186 186 ------- ------- --------- -------- --------- Balance at December 31, 1998.............. $ -- $ 894 $ (4,210) $ (1,164) $ 37,775 ------- ------- --------- -------- --------- Net loss.................................. -- -- (33,743) -- (33,743) Change in unrealized gain (loss) on investments, net of applicable taxes.................................. 1,367 -- -- -- 1,367 Foreign currency translation adjustment............................. -- (618) -- -- (618) --------- Comprehensive loss........................ -- -- -- -- (32,994) Issuance of Class A common stock in connection with offering, net of offering costs................. -- -- -- -- 40,049 Conversion of Class B to Class A common stock........................... -- -- -- -- -- Issuance of Class A common stock under stock option and purchase plans.................................. -- -- -- -- 7,021 Issuance of Class A common stock related to purchase of NCR's Teracube assets........................ -- -- -- -- 49,557 Issuance of warrants...................... -- -- -- -- 139 Amortization of deferred stock compensation........................... -- -- -- 269 269 ------- ------- --------- -------- --------- Balance at December 31, 1999.............. $ 1,367 $ 276 $ (37,953) $ (895) $ 101,816 ------- ------- --------- -------- --------- Net loss.................................. -- -- (261,306) -- (261,306) Change in unrealized gain (loss) on investments, net of applicable taxes.................................. (1,400) -- -- -- (1,400) Foreign currency translation adjustment............................. -- 1,200 -- -- 1,200 --------- Comprehensive loss........................ -- -- -- -- (261,506) Conversion of Class B to Class A common stock........................... -- -- -- -- -- Issuance of Class A common stock under stock option and purchase plans... -- -- -- -- 8,394 Issuance of Class A common stock in connection with agreement with software integrator................... -- -- -- -- 1,600 Capital contribution related to stockholder stock grant............... -- -- -- -- 3,003 Acceleration of vesting provisions on stock options......................... -- -- -- -- 1,483 Preferred stock dividends................. -- -- -- -- (4,687) Payment of preferred stock dividends...... -- -- -- -- 4,088 Amortization of deferred stock compensation.......................... -- -- -- 271 271 ------- ------- --------- -------- --------- Balance at December 31, 2000.............. $ (33) $ 1,476 $(299,259) $ (624) $(145,538) ------- ------- --------- -------- ---------
The accompanying notes are an integral part of these Consolidated Financial Statements. 69 MICROSTRATEGY INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Years ended December 31, ------------------------------- 2000 1999 1998 ---- ---- ---- Operating activities: Net loss................................................................................ $(261,306) $(33,743) $ (2,255) Adjustments to reconcile net loss to net cash from operating activities: Depreciation and amortization........................................................... 34,890 7,839 3,250 Allowance for doubtful accounts......................................................... 10,129 1,877 815 Acquired in-process research and development............................................ -- 2,800 -- Amortization of deferred stock option compensation...................................... 271 269 186 Loss on other than temporary decline in investments..................................... 12,095 -- -- Gain on hedging transaction and short-term investments.................................. (2,730) -- -- Restructuring expense related to stockholder stock grant and accelerated options........ 4,486 -- -- Noncash accrual for litigation settlement............................................... 99,484 -- -- Minority interest....................................................................... 713 -- -- Issuance of warrants to a customer...................................................... -- -- 934 Changes in operating assets and liabilities: Accounts receivable..................................................................... (20,395) (14,598) (12,884) Prepaid expenses and other current assets............................................... 4,528 (10,318) (3,758) Deposits and other assets............................................................... (1,908) (1,054) (188) Accounts payable and accrued expenses, compensation and employee benefits............... 33,064 10,297 5,508 Deferred revenue and advance payments................................................... (2,636) 36,720 5,844 Other long-term liabilities............................................................. 1,509 -- -- --------- -------- -------- Net cash (used in) provided by operating activities................................... (87,806) 89 (2,548) --------- -------- -------- Investing activities: Purchases of property and equipment..................................................... (47,420) (23,733) (9,295) Purchases of short-term investments..................................................... (1,496) (24,491) -- Purchases of long-term investments...................................................... (5,021) -- -- Maturities of short-term investments.................................................... 5,500 5,000 -- Proceeds from sale of short-term investments and realized gain on hedging transaction... 39,763 -- -- Increase in restricted cash............................................................. (25,884) -- -- Purchase of intangible assets........................................................... (3,168) -- -- --------- -------- -------- Net cash used in investing activities................................................. (37,726) (43,224) (9,295) --------- -------- -------- Financing activities: Proceeds from sale of Class A common stock and exercise of stock options, net of offering costs..................................................................... 8,394 47,197 48,539 Proceeds from sale of Series A redeemable convertible preferred stock, net of offering costs................................................................................. 119,585 -- -- Proceeds from sale of redeemable convertible preferred stock of consolidated subsidiary, net of offering costs................................................................. 39,817 -- -- Repayments on short-term line of credit, net............................................ -- -- (4,508) Payments of dividend notes payable...................................................... -- (5,000) (5,000) Proceeds from issuance of notes payable................................................. -- -- 862 Principal payments on notes payable..................................................... -- -- (4,190) --------- -------- -------- Net cash provided by financing activities............................................. 167,796 42,197 35,703 --------- -------- -------- Effect of foreign exchange rate changes on cash....................................... (520) (612) 125 --------- -------- -------- Net increase (decrease) in cash and cash equivalents....................................... 41,744 (1,550) 23,985 Cash and cash equivalents, beginning of year............................................... 25,941 27,491 3,506 --------- -------- -------- Cash and cash equivalents, end of year..................................................... $ 67,685 $ 25,941 $ 27,491 ========= ======== ========= Supplemental disclosure of noncash investing and financing activities: Issuance of common stock in exchange for minority interest of Company's foreign subsidiaries.......................................................................... $ -- $ -- $ 1,065 ========= ======== ========= Issuance of Class A common stock related to purchase of Teracube assets................. $ -- $ 49,557 $ -- ========= ======== ========= Stock received in exchange for product and services..................................... $ 13,058 $ 21,546 $ -- ========= ======== ========= Issuance of Class A common stock warrants............................................... $ -- $ 139 $ 934 ========= ======== ========= Issuance of Class A common stock in connection with agreement with software integrator. $ 1,600 $ -- $ -- ========= ======== ========= Payment of preferred stock dividends through the issuance of Class A common stock....... $ (4,088) $ -- $ -- ========= ======== ========= Supplemental disclosure of cash flow information: Cash paid during the year for interest.................................................. $ 33 $ 87 $ 714 ========= ======== ========= Cash paid during the year for income taxes.............................................. $ 515 $ 2,113 $ 2,996 ========= ======== =========
The accompanying notes are an integral part of these Consolidated Financial Statements. 70 MICROSTRATEGY INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Organization MicroStrategy Incorporated (the "Company" or "MicroStrategy") provides business intelligence software and related services that enable the transaction of one-to-one electronic business through web, wireless and voice communication channels. MicroStrategy's product line enables both proactive and interactive delivery of information from large-scale databases and provides businesses with a software platform to develop solutions that deliver insight and intelligence to their enterprises, customers and supply-chain partners. In July 1999, MicroStrategy launched a business unit called Strategy.com, which leverages MicroStrategy's software platform to deliver personalized, requested information to consumers. In October 2000, the Company completed a reorganization of its business, which resulted in the establishment of Strategy.com as a stand-alone subsidiary. As part of this reorganization, the Company assigned rights to MicroStrategy software, certain contracts, employees and intellectual property to Strategy.com in exchange for approximately 84.0 million shares of Class B common stock, which at the time represented all of the outstanding common stock of Strategy.com. The Company also agreed to enter into various intercompany agreements covering consulting services, sales and marketing activities and administrative services to be provided by MicroStrategy on behalf of Strategy.com. The Company owns approximately 84% of the economic interest in the outstanding equity of Strategy.com on an as converted, diluted basis. All losses of Strategy.com are included in the consolidated financial statements of the Company. The Company has incurred substantial losses for each of the three years in the period ended December 31, 2000. For the year ended December 31, 2000, the Company incurred a loss from operations of $163.8 million and negative cash flows from operations of $87.8 million. As of December 31, 2000, the Company had an accumulated deficit of $299.3 million. If revenues do not grow at anticipated rates, and the Company is not able to promptly adjust its cost structure, it will need to take further measures to reduce costs or will require additional external financing through credit facilities, sale of additional equity in MicroStrategy or in Strategy.com, or by obtaining other financing facilities to support the Company's current cost structure. Financing facilities may not be available on acceptable terms. Management believes that existing cash, cash generated internally by operations and the new credit facility agreement entered into in February 2001 (see Note 19) will meet working capital requirements and anticipated capital expenditures for the next 12 months. (2) Summary of Significant Accounting Policies (a) Basis of Presentation The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. (b) Use of Estimates The preparation of the consolidated financial statements, in conformity with accounting principles generally accepted in the United States, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (c) Reclassification Certain amounts in prior years' consolidated financial statements have been reclassified to conform to the current year presentation. (d) Cash and Cash Equivalents Cash equivalents include money market instruments and commercial paper. The Company considers all highly liquid investments with an original maturity of three months or less, when purchased, to be cash equivalents. 71 (e) Investments Investments are comprised of readily marketable equity securities, non-publicly traded equity securities, and debt securities with original maturities of more than three months when purchased. Where the original maturity of marketable debt securities is more than one year, the marketable debt securities are classified as short-term investments if the Company's intention is to convert them to cash within one year. Marketable debt securities are classified in one of three categories: trading, available-for-sale, or held-to-maturity. Marketable equity securities are classified as either trading or available-for-sale. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those debt securities, which the Company has the ability and intent to hold until maturity. All other marketable securities not included in trading and held-to-maturity are classified as available-for-sale. Management determines the appropriate classification of marketable securities at the time of purchase and re-evaluates such designation as of each balance sheet date. A majority of the Company's marketable securities are available-for-sale as of December 31, 2000. Available-for-sale marketable securities are reported at fair value. Unrealized holding gains and losses, net of applicable taxes, on available-for-sale marketable securities are reported in accumulated other comprehensive income in stockholders' equity until realized. On a quarterly basis, management evaluates individual securities to determine whether a decline in fair value is other than temporary. If the decline in fair value is considered to be other than temporary, the cost basis of the individual security is written down to fair value as a new cost basis and the amount of the write-down is included in operations. Interest income is recognized when earned. Realized gains and losses for marketable securities are derived using the specific identification method for determining the cost of the securities sold. (f) Property and Equipment Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, as follows: three years for computer equipment and software and five to ten years for furniture and equipment. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the improvements or the term of the lease, whichever is shorter. Expenditures for maintenance and repairs are charged to expense as incurred. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized and depreciated over the remaining useful lives of the asset. When assets are retired or sold, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the results of operations. Included in property and equipment is the cost of internally developed software. In accordance with Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," eligible internally developed software costs incurred are capitalized subsequent to the completion of the preliminary project stage. Such costs include external direct material and service costs, employee payroll and payroll-related costs. After all substantial testing and deployment is completed and the software is ready for its intended use, internally developed software costs are amortized using the straight-line method over the estimated useful life of the software, generally up to three years. (g) Goodwill and Other Intangible Assets Goodwill and other intangible assets were acquired principally in connection with the purchase of NCR Corporation's ("NCR") Teracube assets and related intangible assets and the purchase of the minority interest in the Company's foreign subsidiaries. Other intangible assets consist of trade names, customer lists, assembled work force, domain names and agreement with software integrator. Goodwill and other intangible assets are amortized on the straight-line basis over their weighted average useful lives of approximately three years. (h) Impairment of Long-Lived Assets The Company reviews long-lived assets, including goodwill and other intangible assets, for impairment 72 whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Each impairment test is based on a comparison of the undiscounted cash flows to the recorded value of the asset. If impairment is indicated, the asset is written down by the amount in which the carrying value of the asset exceeds the related fair value of the asset. No provisions for impairment have been recorded to date. (i) Software Development Costs In accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed," software development costs are expensed as incurred until technological feasibility has been established, at which time such costs are capitalized until the product is available for general release to customers. Software development costs capitalized include direct labor costs and fringe labor overhead costs attributed to programmers, software engineers, quality control and field certifiers working on products after they reach technological feasibility but before they are generally available to customers for sale. Capitalized costs are amortized over the estimated product life of two to three years using the greater of the straight-line method or the ratio of current product revenues to total projected future revenues. Capitalized software development costs, net of accumulated amortization, are $1,296,000 and $647,000 at December 31, 2000 and 1999, respectively, and are included in deposits and other assets in the accompanying consolidated balance sheets. Amortization expense related to software development costs was $771,000, $600,000 and $584,000 for the years ended December 31, 2000, 1999 and 1998, respectively, and is included in cost of product license revenues. During 2000, the Company capitalized software development costs of $1.4 million. No costs were capitalized during 1999 as the establishment of technological feasibility and general release of such software had substantially coincided. (j) Legal Costs The Company accrues legal costs in the period in which expenses are incurred, except in the event of a loss contingency that is believed to be probable and can be reasonably estimated, whereby the Company accrues the legal costs estimated to be incurred until the expected settlement of the contingent matter. As events evolve during the administration and litigation process and additional information becomes known, the Company reassesses its estimates related to accrued legal costs. (k) Deferred Costs Deferred costs represent costs incurred that are directly associated with customer contracts for which the Company has not yet started recognizing revenue. These costs, which consist mainly of salary and commissions costs, are deferred until revenues on the related project are recognized in order to properly match revenues and associated expenses. Deferred costs are amortized over the same period as the related revenue. As of December 31, 2000 and 1999, the Company had deferred costs of $2.9 million and $630,000, respectively. The current and non-current portions of deferred costs are included in prepaid expenses and other current assets and deposits and other assets, respectively, in the accompanying consolidated balance sheets. (l) Deferred Revenue and Advance Payments Deferred revenue and advance payments related to product licenses result primarily from multiple element arrangements that include development and other customized services, which may also include subsequent hosting services, or other arrangements with future deliverables. Certain of these services significantly alter features or functionality of the software. Deferred revenue and advance payments related to product support and other services result from payments received prior to the performance of services for software development, consulting, education and maintenance. Deferred revenue has been classified as either deferred product revenue or deferred product support and other services revenue based on the estimated fair value of the multiple elements of the arrangement. Non-current deferred revenue and advance payments are expected to be recognized into revenue in one to three years. The Company offsets its accounts receivable and deferred revenue for any unbilled and unpaid items included in deferred revenue and advance payments. 73 (m) Revenue Recognition Product license revenue is derived from sales of software licenses. Product support and other services revenue consists of revenue derived from software production and/or modification, maintenance services, customer and partner education, consulting, hosting and other services. The Company's revenue recognition policies are in accordance with SOP 97-2, "Software Revenue Recognition," as amended, which is the authoritative guidance for recognizing revenue on software transactions. In the case of software arrangements which require significant production, modification, or customization of software, the Company follows the guidance in SOP 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts." SOP 97-2 requires that revenue recognized from software arrangements be allocated to each element of the arrangement based on the relative fair values of the elements, such as software products, maintenance services, installation, training or other elements. Under SOP 97-2, the determination of fair value is based on objective evidence that is specific to the vendor. If such evidence of fair value for each undelivered element of the arrangement does not exist, all revenue from the arrangement is deferred until such time that evidence of fair value does exist or until all elements of the arrangement are delivered, subject to certain limited exceptions set forth in SOP 97-2. SOP 97-2 was amended in February 1998 by SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2" and was amended again in December 1998 by SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions." Those amendments deferred and then clarified, respectively, the specification of what was considered vendor specific objective evidence of fair value for the various elements in a multiple element arrangement. In December 1999, the Securities and Exchange Commission ("SEC") released SAB No. 101, "Revenue Recognition in Financial Statements," which provides guidance on the recognition, presentation, and disclosure of revenue in the financial statements filed with the SEC. The Company adopted the provisions of SOP 97-2 and SOP 98-4 as of January 1, 1998. SOP 98-9 is effective for all transactions entered into by the Company in fiscal year 2000. The adoption of this statement did not have a material impact on the Company's operating results, financial position or cash flows. SAB No. 101 was effective in fiscal year 2000. The implementation of SAB No. 101 did not have a material impact on the Company's financial position or results of operations. The Company's revenue recognition policy is as follows: Product license revenue: The Company recognizes revenue from sales of software licenses to end users or resellers upon persuasive evidence of an arrangement (as provided by agreements or contracts executed by both parties), delivery of the software and determination that collection of a fixed or determinable license fee is reasonably assured. When the fees for software upgrades and enhancements, maintenance, consulting and education are bundled with the license fee, they are unbundled using the Company's objective evidence of the fair value of the multiple elements represented by the Company's customary pricing for each element in separate transactions. If such evidence of fair value exists on undelivered elements and there is no such evidence of fair value established for delivered elements, revenue is first allocated to the elements where evidence of fair value has been established and the residual amount is allocated to the delivered elements. If evidence of fair value for each undelivered element of the arrangement does not exist, all revenue from the arrangement is deferred until such time that evidence of fair value exists for undelivered elements or until all elements of the arrangement are delivered, subject to certain limited exceptions set forth in SOP 97-2. When the software license arrangement requires the Company to provide consulting services for significant production, customization or modification of the software or when the customer considers these services essential to the functionality of the software product, both the product license revenue and consulting services revenue are recognized in accordance with the provisions of SOP 81-1. The Company recognizes revenue from these arrangements using the percentage of completion method based on cost inputs and, therefore, both product license and consulting services revenue are recognized as work progresses. Expected losses on contracts in progress are expensed in the current period. As of December 31, 2000, the Company has not incurred any losses on contracts in progress. If the arrangement includes acceptance criteria, revenue is not recognized until the Company can demonstrate that the software or service can meet the acceptance criteria. If the software license arrangement obligates the Company to deliver unspecified future products, then revenue is recognized on the subscription basis, ratably over the term of the contract. Product support and other services: Maintenance includes technical support and software updates and upgrades 74 to customers. Maintenance service revenue is recognized ratably over the term, which in most cases is one year. Revenue from consulting and education services is recognized as the services are performed. Revenue from arrangements where the Company provides hosting services is recognized over the hosting period. Any fees paid or costs incurred prior to the hosting period, such as license fees, consulting, customization or development services, are deferred and recognized ratably over the subsequent hosting period, which is typically two to three years. Amounts collected prior to satisfying the above revenue recognition criteria are reflected in deferred revenue and advance payments. The Company offsets its accounts receivable and deferred revenue for any unbilled and unpaid items included in deferred revenue and advance payments. Cost of product licenses consists of the costs to distribute the product, including the costs of the media on which it is delivered, shipping and handling costs and royalty payments to third party vendors, as well as amortization of software development costs. Cost of product support and other services consists primarily of consulting and support personnel salaries and related costs. Research and development costs are excluded from the cost of revenue. The Company occasionally enters into barter arrangements involving the exchange of both products and services. Such transactions are recorded at the estimated fair value of the products or services received or given where significant objective evidence of this value exists. In the absence of sufficient objective evidence of fair value, the acquired assets are recorded at the book value of the surrendered assets. (n) Advertising Costs Advertising production costs are expensed the first time the advertisement takes place. Media placement costs are expensed in the month the advertising appears. Advertising costs were $9.0 million, $1.6 million and $134,000 for the years ended December 31, 2000, 1999 and 1998, respectively. As of December 31, 2000, the Company had no prepaid advertising costs. As of December 31, 1999, the Company had prepaid advertising costs of $3.5 million. (o) Income Taxes Prior to the initial public offering, the Company was a Subchapter S corporation for federal and state income tax purposes. Under Subchapter S, the stockholders reported the taxable income or loss and, accordingly, no federal or state income taxes have been recorded in the financial statements prior to the Initial Public Offering. In connection with the initial public offering, the Company converted to a Subchapter C corporation and, accordingly, is no longer treated as a Subchapter S corporation for tax purposes. Since that conversion, the Company is subject to federal and state income taxes and recognizes deferred taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." This statement provides for a liability approach under which deferred income taxes are provided based upon enacted tax laws and rates applicable to the periods in which the taxes become payable. The Company provides a valuation allowance to reduce deferred tax assets to their estimated realizable value. (p) Basic and Diluted Net Loss Per Share 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. Net loss used in the calculation is increased by dividends and beneficial conversion features in each period related to preferred stock outstanding. 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 consist of common stock issuable upon exercise of outstanding common stock options, warrants and the conversion of preferred stock. The Company's net loss per share calculation for basic and diluted is based on the weighted average number of common shares outstanding. There are no reconciling items in the numerator and denominator of the Company's net loss per share calculation. Employee stock options, warrants and the conversion of preferred stock have been excluded from the net loss per share calculation because their effect would be anti-dilutive. Refer to Notes 13 and 15 below for stock options, warrants and the conversion of preferred stock excluded in each year. 75 (q) Foreign Currency Translation The functional currency of the Company's international operations is the local currency. Accordingly, all assets and liabilities of these subsidiaries are translated using exchange rates in effect at the end of the period and revenue and costs are translated using weighted average exchange rates for the period. The related translation adjustments are reported in accumulated other comprehensive income (loss) in stockholders' equity (deficit). Transaction gains and losses arising from transactions denominated in a currency other than the functional currency of the entity involved are included in the consolidated statement of operations. For the year ended December 31, 2000, the Company recorded foreign currency transaction losses of $505,000. Gains and losses resulting from foreign currency transactions were immaterial for 1999 and 1998. (r) Concentrations of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents, short-term investments and accounts receivable. The Company places its cash equivalents and short-term investments with high credit-quality financial institutions and invests its excess cash primarily in money market instruments. The Company has established guidelines relative to credit ratings and maturities that seek to maintain safety and liquidity. The Company sells products and services to various companies across several industries throughout the world in the ordinary course of business. The Company routinely assesses the financial strength of its customers and maintains allowances for anticipated losses. For the year ended December 31, 2000, one customer accounted for 10.8% of net accounts receivable. For the year ended 1999, no individual customer accounted for 10% or more of net accounts receivable. (s) Fair Value of Financial Instruments The carrying amounts for the Company's cash, cash equivalents, accounts receivable, and accounts payable approximate fair value. The fair market value for short-term and long-term marketable securities is based on quoted market prices where available. The carrying value of Series A redeemable convertible preferred stock approximates fair value. The carrying value of long-term debt and warrants to be issued in connection with the settlement of the class action litigation is based upon the fair value of the instruments to be issued. See factors for determining the fair value of these instruments discussed in Note 12. (t) Stock-based Compensation The Company accounts for stock-based compensation under SFAS No. 123, "Accounting for Stock-Based Compensation." As permitted by SFAS No. 123, the Company has elected to continue following the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and to adopt only the disclosure provisions of SFAS No. 123. (u) Comprehensive Income (Loss) Other comprehensive income (loss) recorded by the Company is comprised of accumulated currency translation adjustments and unrealized gains and losses on available-for-sale marketable securities, net of related tax effects. (v) Recent Accounting Standards In June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS No. 137, which delays the effective date of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," until 2001. This statement establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. The Company has not entered into any material derivative contracts and does not have near term plans to enter into such contracts. Accordingly, the adoption of SFAS No. 133 and SFAS No. 137 is not expected to have a material effect on the financial position or results of operations of the Company. 76 (3) Public Offerings On February 10, 1999, the Company sold to the public 3,170,000 shares of Class A common stock for approximately $40.1 million, net of offering costs of $2.7 million. In addition, certain holders of Class B common stock converted 830,000 shares of Class B common stock to Class A common stock in connection with their sale of such shares in the public offering. Class B common stock shares are convertible to Class A common stock shares on a one-to-one basis at the election of the stockholder. On June 16, 1998, the Company issued 8,880,000 shares of Class A common stock in an initial public offering, raising $48.2 million, net of offering costs of $5.1 million. In addition, certain stockholders of Class B common stock converted 320,000 shares of Class B common stock to Class A common stock in connection with their sale of such shares in the initial public offering. The holders of Class A common stock generally have rights identical to those of holders of Class B common stock, except that holders of Class A common stock are entitled to one vote per share while holders of Class B common stock are entitled to ten votes per share on all matters submitted to a vote of stockholders. (4) Acquisitions In December 1999, the Company purchased the intellectual property and other tangible and intangible assets, including the assembled workforce relating to NCR's Teracube project in exchange for 566,372 shares of Class A common stock, valued at $49.6 million, based on the price of the Company's stock at the closing. The Company is developing the Teracube assets in concert with its existing proprietary technology to create a business intelligence platform for data warehouses using NCR's Teradata database. The Company's allocation of the $49.6 million purchase price was $2.8 million for in-process research and development and $46.8 million for tangible and intangible assets including core technology, computer equipment, and assembled workforce. The Company is amortizing the intangible assets over their estimated useful lives, ranging from one to three years. In estimating the fair value of the in-process research and development projects acquired, the Company considered, among other factors, the stage of development of the Teracube research and development projects at the time of the acquisition and projected estimated cash flows from those projects when completed and the percentage of the final products cash flows that is attributed to core technology of the Company and that was already developed by NCR. Associated risks include the inherent difficulties and uncertainties in completing Teracube and, thereby, achieving technological feasibility and risk related to the impact of potential changes in future technology. At the end of 1999, the Company estimated additional expenditures of approximately $900,000 to complete development; however, due to expansion of project scope, the Company incurred expenses of $1.6 million during 2000 and intends to incur additional expenses in 2001 of approximately $700,000 in order to complete development. Remaining development efforts are focused on completing the development of certain sub-products of Teracube that will maximize efficiencies in operation of the Company's business intelligence products. Completion of these projects will be necessary before revenues are produced. Approximately 30% of the final products' estimated cash in-flows are attributable to the acquired Teracube technology. The Company used a discount rate of 35% when estimating the net present value of the projected incremental cash flows. The Company expects to begin deriving revenues in 2001 when certain MicroStrategy products that include the Teracube sub-products are expected to be generally available. If these projects are not successfully developed, the Company may not realize the value assigned to the intangible assets. During the years ended December 31, 2000 and 1999, the Company recorded amortization expense of $16.4 million and $341,000, respectively, relating to these intangible assets. (5) Investments The following summarizes by major security type the fair market value and cost of the Company's investments as of December 31, (in thousands): 77 2000 1999 -------------- --------------- Fair Fair Value Cost Value Cost ----- ---- ----- ---- Corporate notes......................... $ - $ - $ 5,455 $ 5,505 U.S. agency notes....................... - - 13,922 14,000 Marketable equity securities............ 1,085 1,118 23,041 21,546 Non-publicly traded equity securities... 5,271 5,271 - - ------ ------ ------- ------- $6,356 $6,389 $42,418 $41,051 ====== ====== ======= ======= In December 1999, the Company received 824,742 shares of Xchange, Inc. ("Xchange"), formerly Exchange Applications, Inc., stock valued at $21.5 million, in consideration for the sale of MicroStrategy software, technical support and consulting services. The Company sold all of its economic interest in these shares for a net realized gain of $1.5 million during the first two quarters of 2000. During 2000, the Company received an additional 805,800 shares of Xchange's stock, valued at $13.1 million, in consideration for the sale of MicroStrategy software, technical support and consulting services. Due to a significant decrease in the market value of their stock, the timing and amount of future recovery, if any, of this asset is uncertain and the Company does not consider the decline in value to be temporary. Accordingly, the Company has written down the investment to its fair value at December 31, 2000, and recognized a loss of $12.1 million during 2000. This loss was partially offset by a hedging transaction that resulted in a gain of $1.4 million in the third quarter of 2000. At December 31, 2000, the Company had net unrealized losses of $33,000 and at December 31, 1999, the Company had net unrealized gains of $1.4 million included in accumulated other comprehensive income (loss) in the accompanying consolidated statements of stockholders' equity (deficit). (6) Accounts Receivable Accounts receivable, net of allowances, consist of the following, as of December 31, (in thousands): 2000 1999 ------- ------- Billed and billable........................... $84,833 $66,181 Less: billed and unpaid deferred revenue...... (26,128) (25,266) ------- ------- 58,705 40,915 Less: allowance for doubtful accounts......... (9,644) (3,329) ------- ------- $49,061 $37,586 ======= ======= The Company offsets its accounts receivable and deferred revenue for any billed and unpaid items included in deferred revenue and advance payments. (7) Property and Equipment Property and equipment consist of the following, as of December 31, (in thousands): 2000 1999 ------- ------- Computer equipment and software..................... $43,677 $22,940 Furniture and equipment............................. 18,772 9,595 Leasehold improvements.............................. 13,508 3,647 Internally developed software....................... 12,409 5,511 ------- ------- 88,366 41,693 Less: accumulated depreciation and amortization..... (26,957) (11,099) ------- ------- $61,409 $30,594 ======= ======= 78 Depreciation and amortization expense related to property and equipment was $16.4 million, $6.6 million, $2.6 million for the years ended December 31, 2000, 1999 and 1998, respectively. (8) Bank Borrowings In March 1999, the Company entered into a line of credit agreement with a commercial bank which provided for a $25.0 million unsecured revolving line of credit for general working capital purposes. In May 2000, the Company entered into a modification of the line of credit agreement, which, among other things, increased the aggregate credit available to include an additional letter of credit, removed any financial covenants and cured any financial covenant defaults. As of December 31, 2000, the line of credit was secured by $25.9 million of cash and cash equivalents, which is classified as restricted cash in the accompanying consolidated balance sheet. The cash was restricted through February 2001, at which time the agreement was terminated upon the closing of the credit facility agreement discussed in Note 19 below. The modified line of credit accrued interest at LIBOR plus 1.75%, includes a 0.2% unused line of credit fee, and requires monthly payments of interest. As of December 31, 2000, after consideration of outstanding letters of credit, the Company had $18.7 million of borrowing capacity under this credit line. As of December 31, 2000 and 1999, there were no outstanding amounts under the line of credit. (9) Deferred Revenue and Advance Payments Deferred revenue and advance payments from customers consist of the following, as of December 31, (in thousands):
2000 1999 ---- ---- Current: Deferred product revenue................................ $21,399 $38,164 Deferred product support and other services revenue..... 48,278 24,267 ------- ------- 69,677 62,431 Less: billed and unpaid deferred revenue................ (19,374) (24,403) ------- ------- $50,303 $38,028 ======= ======= Non-current: Deferred product revenue................................ $13,267 $9,461 Deferred product support and other services revenue..... 24,747 24,657 ------- ------- 38,014 34,118 Less: billed and unpaid deferred revenue................ (6,754) (863) ------- ------- $31,260 $33,255 ======= =======
The Company offsets it accounts receivable and deferred revenue for any billed and unpaid items included in deferred revenue and advance payments. (10) Income Taxes Prior to the initial public offering, the Company was an S Corporation, and accordingly, the Company was not liable for corporate income taxes. Effective June 12, 1998, the Company elected to become a tax-paying entity. In connection with such conversion, the Company recorded a net deferred tax liability of $576,000 reflecting the effect of its conversion from the cash to the accrual basis for tax reporting. U.S. and international components of income (loss) before income taxes were, for the years ended December 31, (in thousands): 2000 1999 1998 ---- ---- ---- U.S..................... $(235,703) $(28,245) $ 206 Foreign................. (24,203) (4,252) (2,461) --------- -------- ------- Total................... $(259,906) $(32,497) $(2,255) ========= ======== ======= 79 The provision for income taxes consists of the following, for the years ended December 31, (in thousands): 2000 1999 1998 ---- ---- ---- Current: Federal.............. $ 175 $ -- $ -- State................ -- -- -- Foreign.............. 1,225 1,246 -- ------ ------ -------- $1,400 $1,246 $ -- ====== ====== ======== The provision for income taxes differs from the amount computed by applying the federal statutory income tax rate to the Company's income (loss) before income taxes as follows, for the years ended December 31, (in thousands): 2000 1999 1998 ---- ---- ---- Income tax benefit at federal statutory rate...................... $(88,369) $(11,374) $ (766) Goodwill amortization and other non-deductibles..................... 2,234 351 (72) Restructuring and related charges..... 1,528 -- -- Impact of international operations.... (10,860) (200) (787) Adjustment for tax method change...... -- 1,016 -- S Corporation income.................. -- (180) (637) Research and development tax credit... -- (40) (73) Change in valuation allowance......... 96,867 11,673 2,335 -------- -------- ------ $ 1,400 $ 1,246 $ -- ======== ======== ====== Significant components of the Company's deferred tax assets and liabilities are as follows, as of December 31, (in thousands): 2000 1999 ---- ---- Deferred tax assets, net: Allowances and reserves........................... $ 3,723 $ 1,826 Reserve for litigation settlement................. 37,804 -- Accrued compensation and expenses................. 1,827 1,214 Net operating loss carryforwards.................. 59,044 17,434 Deferred revenue adjustment....................... 14,577 12,660 Investment valuation differences.................. 4,596 -- Rent abatement.................................... 545 -- Amortization...................................... 6,809 329 Acquired in-process research and development...... 1,055 1,064 Alternative minimum tax and contribution Carryforwards..................................... 152 -- Federal and state tax credit carryforwards........ 4,335 1,649 Net unrealized gain/loss on marketable securities. 12 -- --------- -------- 134,479 36,176 Valuation allowance............................... (124,159) (25,169) --------- -------- Deferred tax assets, net of valuation allowance... 10,320 11,007 ------ ------ Deferred tax liabilities: Prepaid assets.................................... 187 3,257 Depreciation...................................... 2,464 2,311 Capitalized software.............................. 540 208 Capitalized internal software..................... 4,272 1,651 Deferred costs................................. 1,459 -- Amortization...................................... -- 7 Unbilled receivables.............................. 650 1,558 Cash to accrual conversion........................ 748 1,496 Net unrealized gain on marketable securities...... -- 519 --------- -------- Total deferred tax liabilities.................... 10,320 11,007 --------- -------- Total net deferred taxes.......................... $ -- $ -- ========= ======== 80 The Company recorded a net $99.0 million increase in the valuation allowance for the year ended December 31, 2000 related to deferred tax assets. As of December 31, 2000 management has concluded that a full valuation allowance is required on the deferred tax assets based on its assessment that the realization of deferred tax assets does not meet the "more likely than not" criteria under SFAS No. 109. The Company has foreign net operating loss carryforwards of $20.9 million of which $185,000, $744,000, $2.0 million and $959,000 will expire in 2002, 2003, 2005 and 2007, respectively. The remaining foreign net operating losses of $17.0 million can be carried forward indefinitely. The Company has domestic net operating loss carryforwards of $137.9 million, of which $10.3 million and $127.6 million will expire in 2019 and 2020, respectively. The Company has research and development tax credit carryforwards of $3.7 million expiring in 2018, 2019 and 2020. For the years ended December 31, 2000, 1999 and 1998, the Company recorded a total tax provision of $1.4 million, $1.2 million and $0, respectively. (11) Commitments and Contingencies The Company leases office space and computer and other equipment under operating lease agreements expiring at various dates through 2010. In addition to base rent, the Company is responsible for certain taxes, utilities, and maintenance costs and several leases include options for renewal or purchase The Company has also entered into marketing agreements and agreements with content providers expiring at various dates through 2003. Future minimum payments under noncancellable operating leases and agreements with initial terms of greater than one year consist of the following (in thousands): 2001.............................. $ 27,754 2002.............................. 26,931 2003.............................. 16,718 2004.............................. 11,832 2005.............................. 11,285 Thereafter........................ 32,195 -------- $126,715 ======== Total rental expense for the years ended December 31, 2000, 1999 and 1998 was approximately $29.4 million, $12.8 million and $4.0 million, respectively. As of December 31, 2000, future minimum lease commitments included $12.1 million in commitments for computer software and equipment, $5.2 million in commitments for marketing agreements and $2.8 million in commitments with content providers. The Company subleases office space under an operating lease agreement expiring in 2005. As of December 31, 2000, the total future minimum rentals to be received under this noncancellable sublease agreement are $1.6 million in 2001, $1.7 million in 2002, $1.8 million in 2003, $1.8 million in 2004 and $1.6 million in 2005. Shares of Class A common stock sold in connection with the Company's public offerings on June 16, 1998 and February 10, 1999, respectively, were sold pursuant to prospectuses that contained financial statements that were subsequently revised. The inclusion of these financial statements that required revision in the registration statements and prospectuses used in the offering and sale of these shares may constitute a violation of the Securities Act. If the inclusion of these financial statements that required revision in the registration statements and prospectuses used in the offerings did constitute a violation of the Securities Act, the purchasers in these offerings would have the right for a period of one year from the date that they discovered, or should have discovered with reasonable diligence, that such financial statements required revision in the applicable registration statement and prospectus, but in no event later than three years from the date of the sale of shares to them, to obtain recovery of the consideration paid in connection with their purchase of Class A common stock or, if they have already sold the 81 stock, to sue the Company for damages based upon the difference between the price they paid for Class A common stock and the proceeds they obtained from the sale of the stock. The amount of these damages could be substantial. No provision has been recorded in the Company's consolidated financial statements as management believes that the occurrence of these events is remote. (12) Litigation The Company and certain of its officers and directors are defendants in a private securities class action lawsuit alleging that they have violated Section 10(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), Rule 10b-5 promulgated thereunder, and Section 20(a) and Section 20A of the Exchange Act in connection with various statements that were made with respect to the 1999, 1998 and 1997 financial results. The action has been consolidated in the United States District Court for the Eastern District of Virginia. The class action complaint does not specify the amount of damages sought. In June 2000, purported holders of the Company's common stock filed a shareholder derivative lawsuit in the Delaware Court of Chancery seeking recovery for various alleged breaches of fiduciary duties by certain directors and officers of the Company relating to the restatement of financial results for 1999, 1998 and 1997. In October 2000, the Company entered into agreements to settle these lawsuits. Both settlements are subject to confirmatory discovery, final documentation, court approval and certain other conditions. Under the class action settlement agreements, class members will receive: 1) five-year unsecured promissory notes issued by the Company having an aggregate principal amount of $80.5 million and bearing interest at 7.5% per year; 2) 550,000 shares of the Company's Class A common stock, with the number of shares to be increased if the market value of the shares, based on the dollar weighted average trading price during a specified trading period prior to the district court settlement hearing, is less than $30 per share so that the minimum value of the shares is $16.5 million; and 3) warrants issued by the Company to purchase 1.9 million shares of the Company's Class A common stock at an exercise price between $40 and $50 per share, based on the dollar weighted average trading price during a specific trading period prior to the district court settlement hearing, with the warrants expiring five years from the date they are issued. The Company will have the right, at any time, to prepay the promissory notes, or to mandatorily convert the promissory notes into shares of the Company's Class A common stock at a conversion price equal to 80% of the dollar weighted average trading price per share for all round lot transactions in the Company's stock on the Nasdaq National Market for the ten trading days ending two days prior to the date that written notice of conversion has been given. The warrants may be exercised for cash or by tendering promissory notes valued for the purpose of warrant exercise at 133% of their principal amount plus accrued interest. Under the derivative settlement agreement, the Company will add a new, independent director with finance experience to the audit committee of its Board of Directors and will ensure continued adherence with applicable legal and regulatory requirements regarding the independence of audit committee members and trading by insiders. In addition, certain officers of the Company will contribute a portion of the 550,000 shares of the Company's Class A common stock that is to be issued to class members in settlement of the class action lawsuit. Specifically, Michael J. Saylor, Sanju K. Bansal and Mark S. Lynch will contribute to the class action settlement shares of Class A common stock held by them with a total value of $10 million. Based on the terms of the settlement agreements, the Company determined that a liability related to these actions was probable and that the value was reasonably estimable. Accordingly, the Company separately evaluated the individual components of the settlement agreements in consideration of existing market conditions and established an estimate for the cost of the litigation settlement. The details of this estimate are as follows (in thousands): Issuance of debt securities.................... $ 69,200 Issuance of Class A common stock............... 16,500 Issuance of warrants........................... 13,034 Legal fees..................................... 3,245 Administration costs........................... 750 -------- Total.......................................... 102,729 Less insurance recoveries...................... (13,000) -------- Net estimated litigation settlement............ $ 89,729 ======== 82 The fair value of the debt securities was based on the present value of future cash flows discounted at borrowing rates currently available for debt with similar terms and maturities. Utilizing a market borrowing rate of 12%, a discount of $11.3 million was computed on the debt securities to be issued. Upon the issuance of the debt securities, the discount will be amortized to interest expense over the term of the debt securities. The fair value of each warrant was computed utilizing the Black-Scholes pricing model with the following assumptions used for the calculation: volatility factor of 119%, risk free interest rate of 6%, expected life of 5 years, and no dividend yield. The Company has recorded the unpaid amounts of $99.5 million in the accompanying consolidated balance sheet as a long-term liability pending approval by the courts and satisfaction of certain other conditions and $2.0 million in accounts payable and accrued expenses related to amounts due currently. Upon issuance of the securities, the Company will record such amounts as liabilities or stockholders' equity based on the nature of the individual securities. As of December 31, 2000, the Company had paid approximately $1.2 million in legal fees and had received all amounts recoverable from the insurance company. The final value of the settlements may differ significantly from the estimates currently recorded depending on a variety of factors including the market value of the Company's stock when issued and potential changes in market conditions affecting the valuation of the other securities. Additionally, the settlements are contingent on confirmatory discovery, final documentation, court approval and certain other conditions. Accordingly, the Company will revalue the estimate of the settlement on a quarterly basis and at the time the securities are issued. On January 19, 2001, the United States District Court authorized notice of the proposed class action settlement to be sent to all putative class members. The notice informs class members of their rights including their rights to object to the proposed settlement and to pursue their claims separately. A hearing has been scheduled for April 2, 2001 for the United States District Court to consider and, if appropriate, approve the class action settlement. No hearing has been scheduled for the Delaware Court of Chancery to review and, if appropriate, approve the derivative settlement. 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 Company cooperated with the SEC in its investigation. On December 14, 2000, the Company consented, without admitting or denying the SEC's findings, to the entry of an administrative cease and desist order finding that the Company had violated certain provisions of the federal securities laws. As a part of the cease and desist order, the Company made a number of undertakings pursuant to which the Company will implement various corporate governance enhancements, hire additional compliance staff and adopt policies and controls relating to our contract administration and financial reporting functions. The cease and desist order imposed no monetary fines or penalties on the Company. In connection with the class action lawsuit and shareholder derivative action and the SEC investigation relating to the restatement of financial results for 1999, 1998 and 1997, Mr. Saylor and Mr. Bansal each retained separate legal counsel to defend their individual interests in these legal proceedings. Using a portion of the proceeds received from the insurance company in connection with those proceedings, the Company paid the legal fees of such separate counsel in the amounts of $1.0 million and $335,000 on behalf of Mr. Saylor and Mr. Bansal, respectively, during 2000. 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. (13) Series A Redeemable Convertible Preferred Stock In June 2000, the Board of Directors of the Company authorized the issuance of 17,500 shares of Series A redeemable convertible preferred stock with a par value of $0.001 per share. Upon adoption of this resolution, the Company issued 12,500 shares of its Series A redeemable convertible preferred stock in a private placement to institutional investors for $119.6 million, net of estimated offering costs of $5.4 million. Dividends are cumulative and payable quarterly at a rate of 7% per annum, in cash or in shares of Class A common stock. The preferred stock is currently convertible, at the option of the holders of the preferred stock, into 3,744,152 shares of Class A common stock based on the current conversion price of $33.39 per share. The conversion price may be adjusted at certain 83 future dates, including the first and each subsequent anniversary of the initial issuance date, dependent upon the trading price of the Company's Class A common stock and an agreed upon formula. The preferred stock is also redeemable upon certain triggering events such as suspension from trading or failure of the Company's Class A common stock to be listed on the Nasdaq National Market for a period of five consecutive trading days and other events as defined in the Certificate of Designations, Preferences and Rights of the Series A Redeemable Convertible Preferred Stock. In the event of redemption upon a triggering event, the preferred stock is redeemable at the greater of 125% of the conversion amount or an agreed upon formula. As of December 31, 2000, none of these triggering events have occurred. During the second quarter of 2000, the Company recorded a $19.4 million charge attributable to the beneficial conversion feature of the Series A redeemable convertible preferred stock based on the difference between the fair market value of the Class A common stock on the closing date of the private placement and the conversion rate. The conversion rate was computed based on the volume weighted average price of the stock for the 17 trading days subsequent to the closing date in accordance with the Certificate of Designations, Preferences and Rights of the Series A Redeemable Convertible Preferred Stock. If the conversion price is adjusted based upon certain contingent events as specified in the Certificate of Designations, Preferences and Rights of the Series A Redeemable Convertible Preferred Stock, such as the failure to maintain the effectiveness of the related registration statement and issuance of certain equity securities, an additional charge per share of outstanding preferred stock may be recorded in the future. Holders of the Series A redeemable convertible preferred stock have no voting rights, except as required by law and as provided in the Certificate of Designations, Preferences and Rights of the Series A Redeemable Convertible Preferred Stock. The preferred stock ranks senior to common stock with respect to distribution and payments upon the liquidation or dissolution of the Company and to resolutions made by the Board of Directors of the Company. Additionally, the Series A redeemable convertible preferred stock has a liquidation preference of $10,000 per share plus an additional amount per share based upon an agreed upon formula. In accordance with the terms of the agreements relating to the issuance of Series A redeemable convertible preferred stock, under certain circumstances, the Company may be required to pay substantial penalties to a holder of the preferred stock. Such penalties are generally paid in the form of interest payments, subject to any restrictions imposed by applicable law. In the third quarter of 2000, the Company incurred $578,000 in penalties as a result of a 14-day delay in the filing of a registration statement registering the shares of Class A common stock issuable upon conversion of and in lieu of dividends on the Series A redeemable convertible preferred stock. For the year ended December 31, 2000, the Company paid dividends on such preferred stock of $4.1 million through the issuance of 359,125 shares of Class A common stock in lieu of cash. As of December 31, 2000, the Company has accrued dividends of $599,000 which are included in accounts payable and accrued expenses in the accompanying consolidated balance sheet. All accrued dividends were paid subsequent to December 31, 2000 through the issuance of 63,146 shares of Class A common stock in lieu of cash. (14) Mandatorily Redeemable Convertible Preferred Stock of Consolidated Subsidiary In October 2000, the Board of Directors of Strategy.com authorized the issuance of 47,884,011 shares of $0.001 par value Series A redeemable convertible preferred stock. Dividends are accreted at a rate of $0.2552 per annum. The preferred stock is automatically convertible into Class A common stock of Strategy.com, at the then effective conversion rate, at the time of an initial public offering resulting in at least $30.0 million of net proceeds to Strategy.com. The preferred shares are mandatorily redeemable for $3.19 per share plus any dividends accrued or declared but unpaid thereon at mandatory redemption dates of October 17, 2005, 2006 and 2007, with the maximum redemption portions at each date being 33%, 50% and 100%, respectively. Each holder of outstanding shares of Series A redeemable convertible preferred stock of Strategy.com shall be entitled to the number of votes equal to the number of whole shares of Strategy.com common stock into which the shares of Series A redeemable convertible preferred stock held by such holder are convertible as of the record date for determining stockholders entitled to vote on such matters. Additionally, the preferred stock has a liquidation preference of $3.19 per share plus any dividends accrued or declared but unpaid thereon. In October 2000, Strategy.com issued 13,401,253 shares of Series A redeemable convertible preferred stock to a 84 group of institutional and accredited investors in exchange for $39.8 million, net of offering costs of approximately $3.0 million, in an initial closing. In January 2001, Strategy.com completed this round of financing in a second closing and issued an additional 3,134,796 shares for proceeds of $10.0 million. The investors own approximately 16% of the economic interest in the outstanding equity of Strategy.com on an as converted, diluted basis. The remaining 84% economic interest continues to be owned by the Company and the Company maintains approximately 98% of the voting interest in Strategy.com. During the year ended December 31, 2000, the Company has accreted dividends of $713,000 on the preferred stock of its consolidated subsidiary, Strategy.com. The dividends on Strategy.com's preferred stock are classified as minority interest in the accompanying consolidated statements of operations. No other minority interest has been recorded as all losses of Strategy.com are included in the consolidated financial statements of the Company. (15) Stockholders' Equity (a) Stock Split In January 2000, the Company's Board of Directors approved a two-for-one split of the Company's common stock effected in the form of a stock dividend. The stock dividend was distributed on January 26, 2000 to stockholders of record as of January 20, 2000. Stockholders' equity has been restated to give retroactive recognition to the split for all periods presented by reclassifying the par value of the additional shares arising from the split from paid-in capital to common stock. All references to share and per share amounts for all periods presented have been restated to reflect this stock split. (b) Stock Plans In February 1996, Microstrategy adopted the 1996 Stock Plan in order to provide an incentive to eligible employees and officers of Microstrategy. A total of 12,282,664 shares of Class A common stock are reserved under the 1996 Stock Plan, as amended. As of December 31, 2000, options to purchase 15,337,838 shares have been granted, of which 4,289,640 have been canceled. As of December 31, 2000, 1,234,466 shares are available for grant under the 1996 Stock Plan. The Company is no longer issuing options under this plan. In March 1997, Microstrategy adopted the 1997 Stock Option Plan for French Employees, which provides for the granting of options on the Company's Class A common stock to employees of MicroStrategy France SARL, the Company's French subsidiary. A total of 600,000 shares of Class A common stock are reserved under the 1997 Stock Option Plan for French Employees. As of December 31, 2000, options to purchase 377,618 shares have been granted. As of December 31, 2000, 268,161 shares are available for grant under the 1997 Stock Option Plan for French Employees. In September 1997, Microstrategy adopted the 1997 Director Option Plan, which provides for grants of nonqualified stock options to non-employee directors of Microstrategy. A total of 600,000 shares of Class A common stock are reserved under the 1997 Director Option Plan, as amended. As of December 31, 2000, options to purchase 440,000 shares have been granted. As of December 31, 2000, 160,000 shares are available for grant under the 1997 Director Option Plan. In April 1999, Microstrategy adopted the 1999 Stock Option Plan, which provides for grants of stock options to eligible employees and officers of Microstrategy. A total of 11,000,000 shares of Class A common stock are reserved under the 1999 Stock Option Plan, as amended. As of December 31, 2000, options to purchase 12,992,404 shares have been granted, of which 2,390,039 have been canceled. As of December 31, 2000, 397,635 shares are available for grant under the 1999 Stock Option Plan. Shares of Class A common stock will be issued upon exercise of any of the stock options granted under the stock plans. Stock options granted to date generally vest ratably over five years from the date of grant and expire ten years after grant. The stock option exercise price of incentive options under Microstrategy's stock option plans may not be less than the determined fair market value at the date of grant. 85 A summary of the status of the Microstrategy's stock option plans is presented (in thousands, except per share data):
Price per Share Options Exercisable --------------- ------------------- Weighted Weighted Number of Average Shares Range Average Shares Exercise Price ------ ----- ------- ------ -------------- Balance, December 31, 1996............ 4,919 $ 0.25-- 0.63 $ 0.42 Granted............................ 5,321 0.75-- 2.00 1.22 Exercised.......................... -- -- -- Canceled........................... (416) 0.25-- 1.25 0.55 ------ ------------- ------ Balance, December 31, 1997............ 9,824 0.25-- 2.00 0.85 913 $0.41 Granted............................ 3,753 2.00--21.25 7.14 Exercised.......................... (700) 0.25-- 2.00 0.53 Canceled........................... (726) 0.25--19.13 1.98 ------ ------------- ------ Balance, December 31, 1998............ 12,151 0.25--21.25 2.73 2,292 $1.04 Granted............................ 5,245 7.75--115.66 28.42 Exercised.......................... (2,513) 0.25--20.00 1.26 Canceled........................... (2,065) 0.25--48.31 4.38 ------ ------------- ------ Balance, December 31, 1999............ 12,818 0.25--115.66 13.07 2,128 $4.11 Granted............................ 9,929 10.50--313.00 40.48 Exercised.......................... (1,968) 0.25--22.09 2.41 Canceled........................... (3,537) 0.25--313.00 36.24 ------ ------------- ------ Balance, December 31, 2000............ 17,242 $0.25-313.00 $25.70 2,976 $12.60 Options Outstanding at Options Exercisable at December 31, 2000 December 31, 2000 ----------------- ----------------- Weighted Average Remaining Range of Number of Contractual Life Weighted Average Number of Weighted Average Exercise Prices Shares (Years) Exercise Price Shares Exercise Price --------------- ------ ------- -------------- ------ -------------- $ 0.25 -- 0.75 1,191 5.1 $ 0.49 596 $ 0.49 1.00 -- 1.50 1,792 6.1 1.23 748 1.24 1.51 -- 4.00 949 6.5 2.38 213 2.38 4.01 -- 8.00 543 6.2 5.81 225 5.90 8.01 -- 14.00 1,994 6.8 11.10 459 11.16 14.01 -- 22.00 5,738 8.9 20.54 351 18.18 22.01 -- 35.00 1,133 7.8 27.18 88 27.71 35.01 -- 70.00 2,708 8.7 43.03 166 44.59 70.01 --140.00 871 8.3 101.69 115 88.82 140.01 --313.00 323 8.7 177.45 15 167.09 ------ --- ------ ----- ------ 17,242 7.7 $25.70 2,976 $12.60
In October 2000, Strategy.com adopted the 2000 Strategy.com Stock Option Plan, which provides for grants of stock options to eligible employees, officers, and non-employees of Strategy.com. A total of 17,200,000 shares of Strategy.com Class A common stock are reserved under the 2000 Strategy.com Stock Option Plan. As of December 31, 2000, options to purchase 3,651,430 and 2,479,900 shares have been granted to employees of Strategy.com and MicroStrategy, respectively. As of December 31, 2000, 11,082,670 shares are available for grant under the 2000 Strategy.com Stock Option Plan. Shares of Strategy.com Class A common stock will be issued upon exercise of any stock options granted under the stock plan. Stock options granted to date vest over approximately five years from the date of grant and expire ten years after grant. The stock option exercise price of incentive options under Strategy.com's stock option plan may not be less than the determined fair value at the date of grant. 86 A summary of the status of the 2000 Strategy.com Stock Option Plan is presented (in thousands, except per share data): Weighted Average Exercise Price Shares Per Share ------ --------- Balance, December 31, 1999....... -- -- Granted....................... 6,131 $2.75 Exercised..................... -- -- Canceled...................... (14) 2.75 ----- ----- Balance, December 31, 2000....... 6,117 $2.75 All options under the 2000 Strategy.com Stock Option Plan were granted at the then determined per share fair market value at the date of grant of $2.75. These options will expire if not exercised by December 2010 and the weighted average remaining contractual life of the options outstanding at December 31, 2000 is approximately 9.9 years. At December 31, 2000, there were 11,750 options vested but not exercisable under the 2000 Strategy.com Stock Option Plan, all of which related to international employees. During 1998, Microstrategy adopted the 1998 Employee Stock Purchase Plan and reserved 800,000 shares, subject to annual increases. As of December 31, 2000, a total of 1,000,000 shares of common stock were reserved. The Purchase Plan became effective upon the completion of the Microstrategy's initial public offering. The Purchase Plan permits eligible employees to purchase common stock, through payroll deductions of up to 10%, not to exceed $15,000 per year, of the employee's compensation, at a price equal to 85% of the fair market value of the common stock at either the beginning or the end of each offering period, whichever is lower. As of December 31 2000, 758,465 shares have been issued under the plan. If compensation expense had been recorded based on the fair value at the grant dates for awards under the stock option and purchase plans as set forth in SFAS 123, "Accounting for Stock-based Compensation," the Company's net loss would have been adjusted to the pro forma amounts presented below, for the years ended December 31, (thousands, except per share data):
2000 1999 1998 ---- ---- ---- Net loss: As reported...................................... $(285,368) $(33,743) $(2,255) Pro forma........................................ $(349,414) $(42,358) $(5,229) Basic and diluted net loss per share, as reported... $ (3.58) $ (0.44) $ (0.03) Pro forma basic and diluted net loss per share...... $ (4.38) $ (0.55) $ (0.08)
The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for option grants under Microstrategy's stock option plans issued during 2000, 1999 and 1998, respectively: volatility factors of 119%, 95% and 80%, risk-free interest rates of 6%, 6% and 5%, weighted-average expected life of 5 years, and no dividend yields. The following assumptions were used for shares issued during 2000, 1999 and 1998, respectively, under the Employee Stock Purchase Plan: volatility factors of 119%, 96% and 80%, risk free interest rates of 6%, 5% and 5%, weighted-average expected life of 6 months, and no dividend yields. The pro forma amounts for options granted prior to the Microstrategy's initial public offering are based on the minimum value method proscribed by SFAS 123. The following assumptions were used for shares issued during 2000 to employees of MicroStrategy under the 2000 Strategy.com Stock Option Plan: volatility factor of 131%, risk free interest rate of 5%, weighted-average expected life of 10 years, and no dividend yield. The following assumptions were used for shares issued during 2000 to employees and directors of Strategy.com under the 2000 Strategy.com Stock Option Plan: volatility factor of 131%, risk free interest rate of 5%, weighted-average expected life of 6 years, and no dividend yield. 87 The grant date fair value of grants made under Microstrategy's stock option plans during 2000, 1999 and 1998 are $32.58, $21.44 and $9.52, respectively. The fair value of grants made to employees of MicroStrategy and Strategy.com under the 2000 Strategy.com Stock Option Plan during 2000 is $2.67 and $2.49, respectively. During the year ended December 31, 1998, Microstrategy granted options to purchase 3,753,380 shares of Class A common stock, of which options to purchase 1,071,670 shares of Class A common stock were granted at exercise prices below fair market value. The Company is amortizing $1.4 million of compensation expense related to these options ratably over the five-year vesting period. For the years ended December 31, 2000, 1999 and 1998, the Company recorded compensation expense of $271,000, $269,000 and $186,000, respectively. The Company will record compensation expense of $270,000 in 2001 and 2002 and $84,000 in 2003, if all of the related options vest. (c) Distribution to S Corporation Stockholders In 1998, the Company declared a $10.0 million dividend to the existing stockholders of the S corporation in the form of short-term one-year notes prior to the termination of the Company's S corporation election, which occurred immediately prior to the initial public offering. The notes issued to the existing stockholders of the Company bore interest at the applicable federal rate for short-term obligations and were repaid in 1999. (d) Stock Warrants In June 1999, the Company issued warrants to a customer to purchase 14,000 shares of Class A common stock at $12.47 per share, which immediately vested and were exercisable upon issuance. The fair value of the warrants of $139,000 was recorded as a reduction of revenue at the date of grant. Fair value was determined using the Black-Scholes option-pricing model with the following assumptions: volatility factor of 80%, weighted average expected life of 8 years, risk-free interest rate of 6%, and no dividend yield. As of December 31, 2000, the customer had exercised all 14,000 warrants in its possession. In December 1998, the Company issued warrants to a customer to purchase 100,000 shares of Class A common stock at $11.75 per share, which become exercisable ratably over the five-year vesting period. The fair value of the warrants of $934,000 was recorded as general and administrative expense at the date of grant. Fair value was determined using the Black-Scholes option-pricing model with the following assumptions: volatility factor of 80%, weighted average expected life of 5 years, risk-free interest rate of 5%, and no dividend yield. As of December 31, 2000, the customer had exercised 21,666 warrants in its possession. (e) Other stock-related transaction In June 2000, the Company entered into an agreement with the controlling stockholder of a software integrator. The primary purpose of the agreement was to grant the Company the right to hire certain employees of the software integrator. In exchange, the Company issued 57,143 shares of Class A common stock to the controlling stockholder, which had a value of $1.6 million as of the consummation date and which are restricted until registered with the SEC. The Company will issue up to $3.4 million in additional shares of Class A common stock over the next two years at the then current market price of the Class A common stock on the date of issuance based on an agreed upon formula including revenue and attrition objectives. The Company recorded the initial issuance of stock as an intangible asset in the amount of $1.6 million and has recognized $451,000 of amortization expense through December 31, 2000. The Company is amortizing the intangible asset over its estimated period of benefit of two years. (16) Employee Benefit Plan The Company sponsors a benefit plan to provide retirement and incidental benefits for its employees, known as the MicroStrategy 401(k) Plan (the "Plan"). Participants may make voluntary contributions to the Plan of up to 20% of their annual base pre-tax compensation not to exceed the federally determined maximum allowable contribution. The Plan permits for discretionary company contributions; however, no contributions were made for the years presented. 88 (17) Segment Information 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 business intelligence systems. Revenues are derived from sales of product licenses and product support and other services, including technical support, education and consulting services. Strategy.com's hosted one-to-one messaging platform enables third-party content providers to offer their customers highly personalized, timely information services through a wide variety of delivery methods including the web, wireless applications protocol-enabled devices, e-mail, mobile phone, fax, pager and regular telephone. Revenues are derived from license fees, programming services, and subscriber and messaging services. The Company began operating its business as two segments in the latter part of 1999. 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. Prior to the establishment of Strategy.com as a stand-alone subsidiary in October 2000, certain corporate support costs were allocated to Strategy.com based on factors such as headcount, gross asset value and the specific level of activity directly related to such costs. Upon completion of the reorganization which resulted in the establishment of Strategy.com as a stand-alone subsidiary, the Company entered into various intercompany agreements whereby consulting services, sales and marketing activities and administrative services are provided by MicroStrategy to Strategy.com for a fee based on rates and factors specified in the agreements. These rates and factors for determining fees are based upon the same allocations utilized prior to the reorganization and include factors such as headcount, gross asset value and specific level of activity directly related to such services. The following summary discloses certain financial information regarding the Company's operating segments (in thousands):
MicroStrategy Platform Strategy.com Consolidated -------- ------------ ------------ Year ended December 31, 2000 Total license and service revenues .... $ 215,261 $ 8,669 $ 223,930 Gross profit (loss) ................... 137,700 (1,741) 135,959 Depreciation and amortization ......... 29,622 5,268 34,890 Operating expenses .................... 255,540 44,252 299,792 Loss from operations .................. (117,840) (45,993) (163,833) Total assets .......................... 198,331 60,756 259,087 Year ended December 31, 1999 Total license and service revenues .... $ 151,258 $ -- $ 151,258 Gross profit .......................... 114,225 -- 114,225 Depreciation and amortization ......... 6,839 1,000 7,839 Operating expenses .................... 139,522 9,236 148,758 Loss from operations .................. (25,297) (9,236) (34,533) Total assets .......................... 195,150 8,218 203,368 Year ended December 31, 1998 Total license and service revenues .... $ 95,489 $ -- $ 95,489 Gross profit .......................... 75,708 -- 75,708 Depreciation and amortization ......... 3,242 8 3,250 Operating expenses .................... 77,916 341 78,257 Loss from operations .................. (2,208) (341) (2,549) Total assets .......................... 76,476 95 76,571
The following summary discloses total revenues and long-lived assets, excluding long-term deferred tax assets and long-term investments, relating to the Company's geographic regions (in thousands): 89
Domestic International Consolidated -------- ------------- ------------ Year ended December 31, 2000 Total license and service revenues... $168,138 $ 55,792 $ 223,930 Long-lived assets.................... 95,603 3,340 98,943 Year ended December 31, 1999 Total license and service revenues... $114,907 $ 36,351 $ 151,258 Long-lived assets.................... 78,159 2,028 80,187 Year ended December 31, 1998 Total license and service revenues... $ 70,573 $ 24,916 $ 95,489 Long-lived assets.................... 13,776 2,754 16,530
Transfers of $12.7 million, $8.3 million and $6.6 million for the year ended December 31, 2000, 1999 and 1998, respectively, from international to domestic operations have been excluded from the above table and eliminated in the consolidated financial statements. For the years ended December 31, 2000, 1999 and 1998, no one customer accounted for 10% or more of consolidated total revenue. (18) Restructuring and Related Charges During 2000, the Company announced a restructuring plan designed to bring costs more in line with revenues and strengthen the financial performance of the business. The restructuring plan included a reduction of the Company's workforce by 231 or approximately 10% of the worldwide headcount and the cancellation of a number of new jobs for which candidates had not yet started with the Company. As a result of the reduction in headcount, the Company plans to consolidate its facilities located in the vicinity of its Northern Virginia headquarters. In addition, the Company is eliminating or reducing certain quarterly corporate events, including the cancellation of its annual cruise. Finally, the Company is reducing expenditures on external consultants and contractors across all functional areas. In connection with this restructuring plan, the Company incurred severance costs for terminated employees and costs for rescinded offers of employment, accelerated the vesting provisions of certain stock option grants, wrote-off certain assets that are no longer of service, and accrued related professional fees. In addition, Michael J. Saylor, the chairman and CEO of the Company, made grants of the Company's Class A common stock to terminated employees from his personal stock holdings. Since he is a principal shareholder of the Company, his actions are deemed to be an action undertaken on behalf of the Company for accounting purposes. Accordingly, the Company recognized an expense and a capital contribution by Mr. Saylor for approximately $3.0 million, which represents the fair value of the stock on the date of grant. The Company also recognized a liability related to its commitments associated with the annual cruise that the Company will no longer sponsor. The following table sets forth a summary of these restructuring costs and related charges (in thousands): Severance and rescinded employment offers......................... $ 2,854 Stock grant and applicable payroll taxes.......................... 3,192 Compensation expense on accelerated stock options 1,483 Elimination of corporate events................................... 2,838 Write-off of impaired assets...................................... 360 Accrual for professional fees..................................... 108 ------- Total restructuring costs and related charges..................... $10,835 ======= Included in the $10.8 million restructuring charge incurred during 2000 are $6.2 million of cash costs and $4.6 million in non-cash related costs. Substantially all restructuring costs and related charges had been paid as of December 31, 2000. The unpaid amount of $48,000 is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets. 90 (19) Subsequent Events On February 9, 2001, the Company entered into a loan and security agreement which provides for aggregate borrowing capacity of up to $30.0 million to be used for general working capital purposes (the "Credit Facility"). The Credit Facility consists of a $10.0 million term loan and a revolving line of credit for up to $20.0 million, subject to certain borrowing base limitations, as defined in the agreement. The Credit Facility, which matures in February 2004, is collateralized by substantially all of the Company's assets, and replaces the previous line of credit agreement. On February 9, 2001, the Company borrowed $10.0 million under the term loan. At the Company's option, borrowings under the revolving line of credit will bear interest at a variable rate equal to LIBOR plus 3.25% or 3.75% or at a variable rate equal to the prime rate plus 1.50% or 2.00%, depending on the outstanding balance. The Credit Facility also includes a 1.50% unused letter of credit fee and requires monthly payments of interest and other fees beginning on the first day of the month following the execution of the agreement. Borrowings under the term loan are based upon certain levels of maintenance revenue and bear interest at a variable rate equal to the prime rate plus 3.00%. In addition to the interest and other fees on borrowings under the Credit Facility, the lender has been granted warrants to purchase 50,000 shares of the Company's Class A common stock at an exercise price of $14.825 per share, subject to adjustment as set forth therein. Under the terms of the Credit Facility, the Company is required to maintain certain financial covenants, the most restrictive of which are achieving certain minimum earnings amounts, as defined in the agreement, limitations on capital expenditures ($11.2 million in 2001, $14.4 million in 2002 and $21.0 million in 2003), minimizing the ability to invest further in subsidiaries, and limitations on incurring additional indebtedness. On March 20, 2001, NCR Corporation asked the Company to consider licensing certain technology which NCR alleges is covered under patents that they hold. NCR has implied that if the Company is unwilling to license this technology they may seek to enforce their patents against the Company. Management has not yet had an opportunity to fully review these matters. In the event NCR seeks to enforce any of these patents and if such patents are found to be valid and enforceable against the Company, the Company's business, operating results and financial condition may be materially adversely affected. The Company is not currently able to estimate the potential range of loss and the outcome of the uncertainty is unknown. Accordingly, no provision for this matter has been made in the accompanying consolidated financial statements. (20) Selected Quarterly Financial Data (Unaudited) The following tables contain unaudited Statement of Operations information for each quarter of 2000 and 1999. The Company believes that the following information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.
(in thousands, except per share data) Quarter Ended March 31 June 30 September 30 December 31 Year 1999 Revenues ...................... $ 29,322 $ 40,465 $ 35,309 $ 46,162 $ 151,258 Gross profit .................. 22,193 31,996 25,442 34,594 114,225 Net loss ...................... (3,804) (3) (12,774) (17,162) (33,743) Net loss attributable to common stockholders ............. (3,804) (3) (12,774) (17,162) (33,743) Basic and diluted net loss per share .................... (0.05) -- (0.17) (0.22) (0.44) 2000 Revenues ...................... $ 50,615 $ 50,344 $ 64,855 $ 58,116 $ 223,930 Gross profit .................. 34,249 28,176 38,582 34,952 135,959 Net loss ...................... (32,850) (52,142) (168,228) (8,086) (261,306) Net loss attributable to common stockholders ............. (32,850) (71,829) (170,416) (10,273) (285,368) Basic and diluted net loss per share .................... (0.42) (0.90) (2.13) (0.13) (3.58)
91 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Vienna, Commonwealth of Virginia, on this 30th day of March, 2001. MICROSTRATEGY INCORPORATED (Registrant) By: /s/ Michael J. Saylor ------------------------------------- Name: Michael J. Saylor Title: Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name Position Date - -------------------------------------- -------------------------------------------- ------------------ /s/ Michael J. Saylor Chairman of the Board of Directors and Chief - -------------------------------------- Executive Officer Michael J. Saylor (Principal Executive Officer) March 30, 2001 /s/ Eric F. Brown President and Chief Financial Officer March 30, 2001 - -------------------------------------- (Principal Financial and Accounting Officer) Eric F. Brown /s/ Sanju K. Bansal Director March 30, 2001 - -------------------------------------- Sanju K. Bansal /s/ Frank A. Ingari Director March 30, 2001 - -------------------------------------- Frank A. Ingari Director - -------------------------------------- Jonathan J. Ledecky /s/ John W. Sidgmore Director March 30, 2001 - -------------------------------------- John W. Sidgmore /s/ Ralph S. Terkowitz Director March 30, 2001 - -------------------------------------- Ralph S. Terkowitz
92 SCHEDULE II VALUATION AND QUALIFYING ACCOUNT For the years ended December 31, 1998, 1999 and 2000 (in thousands) Allowance for doubtful accounts Balance at Additions Balance at beginning of charged to the end of the period expenses Deductions the period ---------- -------- ---------- ---------- 31-Dec-98 ..... 770 1,468 (653) 1,585 31-Dec-99 ..... 1,585 4,625 (2,881) 3,329 31-Dec-00 ..... 3,329 10,129 (3,814) 9,644 93 INDEX TO EXHIBITS Exhibit Number Description ------ ----------- 3.1 Amended and Restated Certificate of Incorporation of the registrant, as amended (Filed as Exhibit 3.1 to the registrant's Registration Statement on Form S-1 (Registration No. 333-49899) and incorporated by reference herein). 3.2 Certificate of Designations, Preferences and Rights of the Series A Convertible Preferred Stock (Filed as Exhibit 3.1 to the registrant's Current Report on Form 8-K (File No. 000-24435) filed on June 19, 2000 and incorporated by reference herein). 3.3 Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the registrant (Filed as Exhibit 3.2 to the registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000 (File No. 000-24435) and incorporated by reference herein). 3.4 Bylaws of the registrant (Filed as Exhibit 3.2 to the registrant's Registration Statement on Form S-1 (Registration No. 333-49899) and incorporated by reference herein). 4.1 Form of Certificate of Class A Common Stock of the registrant (Filed as Exhibit 4.1 to the registrant's Registration Statement on Form S-1 (Registration No. 333-49899) and incorporated by reference herein). 10.1 1996 Stock Plan (as amended) of the registrant (Filed as Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (File No. 000-24435) and incorporated by reference herein). 10.2 1997 Stock Option Plan for French Employees of the registrant (Filed as Exhibit 10.6 to the registrant's Registration Statement on Form S-1 (Registration No. 333-49899) and incorporated by reference herein). 10.3 1997 Director Option Plan (as amended) of the registrant (Filed as Exhibit 10.3 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 000-24435) and incorporated by reference herein). 10.4 1998 Employee Stock Purchase Plan of the registrant (Filed as Exhibit 10.4 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (File No. 000-24435) and incorporated by reference herein). 10.5 1999 Stock Option Plan of the registrant (Filed as Exhibit 10.3 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (File No. 000-24435) and incorporated by reference herein). 10.6 Amendment No. 1 to the 1999 Stock Option Plan of the registrant (Filed as Exhibit 10.3 to the registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000 (File No. 000-24435) and incorporated by reference herein). 10.7 Master Lease Agreement No. VAC180, dated November 1, 1999, between MLC Group, Inc. and the registrant (Filed as Exhibit 10.8 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 000-24435) and incorporated by reference herein). 10.8 Letter Agreement, dated December 1, 1999, between ePlus, Inc. (f/k/a MLC Group, Inc.) and the registrant (Filed as Exhibit 10.9 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 000-24435) and incorporated by reference herein). 94 Exhibit Number Description ------ ----------- 10.9 Software Development and OEM Agreement, dated December 28, 1999, between the registrant and Exchange Applications, Inc. (Filed as Exhibit 10.10 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 000-24435) and incorporated by reference herein). 10.10 Software License Agreement, dated December 28, 1999, between the registrant and Exchange Applications, Inc. (Filed as Exhibit 10.11 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 000-24435) and incorporated by reference herein). 10.11 Value-Added Reseller Agreement, dated December 28, 1999, between the registrant and Exchange Applications, Inc. (Filed as Exhibit 10.12 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 000-24435) and incorporated by reference herein). 10.12 Payment and Registration Rights Agreement, dated December 28, 1999, between the registrant and Exchange Applications, Inc. (Filed as Exhibit 10.13 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 000-24435) and incorporated by reference herein). 10.13 DSS Partner MicroStrategy Incorporated OEM Agreement, between the registrant and NCR Corporation (Filed as Exhibit 10.14 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 000-24435) and incorporated by reference herein). 10.14 Memorandum of Understanding (Purchase), dated as of September 30, 1999, between, the registrant and NCR Corporation (Filed as Exhibit 10.15 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 000-24435) and incorporated by reference herein). 10.15 Memorandum of Understanding (Joint Marketing), dated as of September 30, 1999, between the registrant and NCR Corporation (Filed as Exhibit 10.16 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 000-24435) and incorporated by reference herein). 10.16 Asset Purchase Agreement, dated December 23, 1999, between the registrant and NCR Corporation (Filed as Exhibit 10.17 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 000-24435) and incorporated by reference herein). 10.17 Deed of Lease, dated January 7, 2000, between Tysons Corner Property LLC and the registrant (Filed as Exhibit 10.18 to the registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 000-24435) and incorporated by reference herein). 10.18 Registration Rights Agreement, dated as of June 17, 2000, by and among MicroStrategy Incorporated and each of the signatories thereto (Filed as Exhibit 10.1 to the registrant's Current Report on Form 8-K (File No. 000-24435) filed on June 19, 2000 and incorporated by reference herein). 10.19 Series A Preferred Stock Purchase Agreement by and among Strategy.com Incorporated, Aether Capital LLC and the other parties thereto, dated as of October 18, 2000 (Filed as Exhibit 10.1 to the registrant's Current Report of Form 8-K (File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein). 10.20 Amended and Restated Certificate of Incorporation of Strategy.com Incorporated, dated as of October 17, 2000 (Filed as Exhibit 10.2 to the registrant's Current Report of Form 8-K (File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein). 95 Exhibit Number Description ------ ----------- 10.21 Investor Rights Agreement by and among Strategy.com Incorporated, the registrant, Aether Capital LLC and the other parties thereto, dated as of October 18, 2000 (Filed as Exhibit 10.3 to the registrant's Current Report of Form 8-K (File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein). 10.22 Stockholders' Voting Agreement by and among Strategy.com Incorporated, the registrant, Aether Capital LLC and the other parties thereto, dated as of October 18, 2000 (Filed as Exhibit 10.4 to the registrant's Current Report of Form 8-K (File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein). 10.23 Memorandum of Understanding by and among the registrant, Strategy.com Incorporated and certain other affiliates of the registrant, dated as of October 17, 2000 (Filed as Exhibit 10.5 to the registrant's Current Report of Form 8-K (File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein). 10.24 United States Intellectual Property Assignment and License Back Agreement by and between the registrant and Strategy.com Incorporated, dated as of October 17, 2000 (Filed as Exhibit 10.6 to the registrant's Current Report of Form 8-K (File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein). 10.25 U.S. Intellectual Property License Agreement by and between the registrant and Strategy.com Incorporated, dated as of October 17, 2000 (Filed as Exhibit 10.7 to the registrant's Current Report of Form 8-K (File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein). 10.26 U.S. Software License Agreement by and between the registrant and Strategy.com Incorporated, dated as of October 17, 2000 (Filed as Exhibit 10.8 to the registrant's Current Report of Form 8-K (File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein). 10.27 International Software License Agreement by and between MicroStrategy International II Limited and Strategy.com International Limited, dated as of October 17, 2000 (Filed as Exhibit 10.9 to the registrant's Current Report of Form 8-K (File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein). 10.28 International Intellectual Property License Agreement by and between MicroStrategy International II Limited and Strategy.com International Limited, dated as of October 17, 2000 (Filed as Exhibit 10.10 to the registrant's Current Report of Form 8-K (File No. 000-24435) filed on November 6, 2000 and incorporated by reference herein). 10.29 Stipulation of Settlement regarding the settlement of the class action lawsuit, dated as of January 11, 2001. 10.30 Loan and Security Agreement by and among Foothill Capital Corporation, the registrant and MicroStrategy Services Corporation, dated as of February 9, 2001 (Filed as Exhibit 10.1 to the registrant's Current Report of Form 8-K (File No. 000-24435) filed on February 15, 2001 and incorporated by reference herein). 10.31 General Continuing Guaranty by and among the registrant, Aventine Incorporated, MicroStrategy Capital Corporation and MicroStrategy Management Corporation, dated as of February 9, 2001 (Filed as Exhibit 10.2 to the registrant's Current Report of Form 8-K (File No. 000-24435) filed on February 15, 2001 and incorporated by reference herein). 96 Exhibit Number Description ------ ----------- 10.32 Security Agreement by and among the registrant, Aventine Incorporated, MicroStrategy Capital Corporation, MicroStrategy Management Corporation and Foothill Capital Corporation, dated as of February 9, 2001 (Filed as Exhibit 10.3 to the registrant's Current Report of Form 8-K (File No. 000-24435) filed on February 15, 2001 and incorporated by reference herein). 10.33 Warrant to Purchase Class A Common Stock of the registrant, dated February 9, 2001, issued to 10.33 Woothill Capital Corporation (Filed as Exhibit 10.4 to the registrant's Current Report of Form 8-K (File No. 000-24435) filed on February 15, 2001 and incorporated by reference herein). 10.34 Registration Rights Agreement by and between the registrant and Foothill Capital Corporation, dated as of February 9, 2001 (Filed as Exhibit 10.5 to the registrant's Current Report of Form 8-K (File No. 000-24435) filed on February 15, 2001 and incorporated by reference herein). 21.1 Subsidiaries of the registrant. 23.1 Consent of PricewaterhouseCoopers LLP. 97 EX-10.29 2 dex1029.txt MEMORANDUM OF UNDERSTANDING IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF VIRGINIA Alexandria Division ) IN RE MICROSTRATEGY INC. ) Civil Action No. 00-473-A SECURITIES LITIGATION ) ) STIPULATION OF SETTLEMENT This Stipulation of Settlement, dated as of January 11, 2001 (the "Stipulation") is submitted pursuant to Rule 23 of the Federal Rules of Civil Procedure. Subject to the approval of the Court, the Stipulation is entered into among: Lead Plaintiffs Akiko Minami, Atsukuni Minami and Local 144 Nursing Home Pension Fund, on behalf of themselves and the Class and Settlement Subclass (as defined below), defendant MicroStrategy Incorporated ("MicroStrategy"); and defendants Michael J. Saylor, Sanju K. Bansal, Mark S. Lynch, Stephen S. Trundle, Ralph S. Terkowitz, and Frank A. Ingari (the "Individual Defendants") (collectively, the "Settling Defendants"), by and through their respective counsel. WHEREAS: A. The actions listed in Exhibit A (the "actions") were commenced in March and April 2000, alleging that: (i) the Settling Defendants and MicroStrategy's auditor, PricewaterhouseCoopers LLP ("PwC") (collectively, the "Defendants") violated Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule lOb-S promulgated thereunder; (ii) several of the Individual Defendants violated Section 20(a) of the Exchange Act; and (iii) the Individual Defendants are liable under Section 20A of the Exchange Act; B. By Order dated June 6, 2000, the Court consolidated for all purposes the actions into this Action pursuant to Rule 42(a) of the Federal Rules of Civil Procedure; C. By Order dated June 27, 2000, the Court (i) granted the motion of Akiko and Atsukuni Minami and Local 144 Nursing Home Pension Fund to be appointed Lead Plaintiffs, and (ii) designated the law firms Milberg Weiss Bershad Hynes & Lerach LLP, and Wolf, Haldenstein, Adler, Freeman & Herz LLP as Paintiffs' Co-Lead Counsel; D. A Consolidated Amended Class Action Complaint ("Complaint") was filed on July 7, 2000. The Complaint asserts claims against Defendants based upon, inter alia, the following allegations: i) During the Class Period (as defined below), Defendants allegedly caused MicroStrategy to improperly recognize revenues on software licensing agreements prior to those contracts being finalized and/or when they were subject to significant contingencies or yet-to-be fulfilled obligations by MicroStrategy. Such alleged practices violated Generally Accepted Accounting Principles and significantly distorted MicroStrategy's publicly reported financial results and condition, rendering them materially false and misleading throughout the Class Period; ii) These financial reports were included in MicroStrategy's public filings with the Securities and Exchange Commission and in various press releases; iii) PwC actively participated in the alleged fraud by reason of its preparation and release of false and unqualified audit reports concerning MicroStrategy's financial statements for its fiscal years 1997, 1998 and 1999 and by its participation in the preparation of MicroStrategy's publicly misstated quarterly financial reports; iv) The financial and audit reports allegedly artificially inflated the market price of MicroStrategy's common stock during the Class Period; -2- v) On March 20, 2000, MicroStrategy disclosed that its financial statements for 1998 and 1999 had to be restated; that all of MicroStrategy's previously reported earnings for those two years were being eliminated; and that those results would, instead, reflect losses. As a result of these disclosures, MicroStrategy's common stock dropped from $226 3/4 per share on March 17, 2000 (the last trading day prior to the revelations) to $86 3/4 per share on the day the disclosures were made; vi) Prior to the March 20, 2000 disclosures, the Individual Defendants sold MicroStrategy common stock at allegedly artificially inflated prices, receiving aggregate proceeds in excess of $90 million; E. By Order dated August 10, 2000, as subsequently amended on August 25, 2000, the Court (i) conditionally certified the Action to proceed as a class action on behalf of all persons or entities who, during the period June 11, 1998 through March 20, 2000, inclusive (the "Class Period"), purchased MicroStrategy common stock or call options or sold MicroStrategy put options, and who were allegedly damaged thereby (the "Class"), (ii) conditionally certified a subclass consisting of all persons or entities who, during the Class Period, purchased MicroStrategy common stock contemporaneously with the sales of MicroStrategy common stock by those defendants who traded contemporaneously with Vera Schwartz, and who were allegedly damaged thereby (the "Certified Subclass"), and (iii) designated the Lead Plaintiffs and Vera Schwartz and Paul Schweitzer as the representatives of the Class and Ms. Schwartz as the representative of the Certified Subclass; F. By Order dated September 15, 2000, the Court denied the Defendants' motions to dismiss the Complaint, with the exception that the Court dismissed a claim that Defendant Frank A. Ingari is liable under Section 20A of the Exchange Act, leaving Defendant Stephen S. Trundle -3- as the sole Defendant against whom such claim remains, and held that, based on the allegations in the Complaint, a "one-day contemporaneity period" was "appropriate"; G. Plaintiffs' Co-Lead Counsel have conducted and completed extensive research, discovery and investigation during the prosecution of the Action, including: (i) inspection and analysis of hundreds of thousands of pages of documents produced by Defendants and numerous third parties; (ii) review of MicroStrategy's public filings, press releases, and other public statements; (iii) interviews and/or depositions of several MicroStrategy officers and employees; and (iv) consultation with accounting and damages consultants retained by Plaintiffs' Co-Lead Counsel; H. Plaintiffs' Co-Lead Counsel and counsel for the Settling Defendants have engaged in extensive arms-length settlement negotiations; I. On October 23, 2000, Plaintiffs' Co-Lead Counsel and counsel for the Settling Defendants, on behalf of their respective clients, executed a Memorandum of Understanding containing the material terms of a proposed partial settlement of this Action; J. Plaintiffs' Co-Lead Counsel have carefully considered and evaluated the relevant legal authorities and evidence to support the claims asserted against the Settling Defendants, the likelihood of prevailing on those claims, the Settling Defendants' respective abilities to pay any judgment obtained in light of their current financial condition, and the likely appeals and subsequent proceedings necessary if the Class and Certified Subclass did prevail against the Settling Defendants, and have concluded that the settlement set forth herein is in the best interests of the Class and Certified Subclass; -4- K. The Settling Defendants, while affirmatively denying wrongdoing of any kind whatsoever, or liability to Lead Plaintiffs, the Class or Certified Subclass, and without conceding any infirmity in the defenses they have asserted or could assert in the Action, consider it desirable that the Action be settled on the terms set forth herein in order to avoid further expense and to dispose of burdensome and protracted litigation. NOW THEREFORE, IT IS HEREBY STIPULATED AND AGREED, by and among the parties to this Stipulation, through their respective attorneys, subject to approval of the Court pursuant to Rule 23(e) of the Federal Rules of Civil Procedure, that the Action be settled as against the Settling Defendants subject to the following terms and conditions: I. DEFINITIONS 1. As used herein, the following capitalized terms shall have the following meanings: (a) "Action" means In re MicroStrategy Inc. Securities Litigation, Civil Action No. 00-473-A. (b) "Authorized Claimant" means a Class Member who files a timely, valid Proof of Claim. (c) "Claims Administrator" means Gilardi & Co. LLC, the firm to be designated and supervised solely by Plaintiffs' Co-Lead Counsel to administer the Settlement. (d) "Class" means all persons and entities who, during the period June 11, 1998 through March 20, 2000, inclusive, purchased MicroStrategy common stock or call options or sold MicroStrategy put options, and who allegedly were damaged thereby. Excluded from the Class are Defendants, any person, firm, trust, corporation or other individual or entity in which -5- any Defendant has a controlling interest or which is related to or affiliated with any of the Defendants, the partners, principals, officers, directors, employees, affiliates, legal representatives, heirs, predecessors, successors and assigns of Defendants, and the immediate family members of any such individual. (e) "Class Member" means any person or entity included within the Class, including the Plaintiffs. (f) "Class Period" means the period of time from June 11, 1998 through March 20, 2000, inclusive. (g) "Complaint" means the Consolidated Amended Class Action Complaint filed on or about July 7, 2000. (h) "Defendants" means MicroStrategy, the Individual Defendants, and PwC. (i) "Effective Date" means the date by which all of the following have occurred: (i) the Settlement has been approved in all material respects by the Court (unless any such material change has been agreed upon by the Settling Parties); (ii) an Order and Final Judgment, reflecting the terms of this Stipulation, has been entered by the Court and not vacated or modified in any material way upon appeal or otherwise (unless any such material change has been agreed upon by the Settling Parties); and (iii) either (a) the time to appeal or otherwise seek review of the Order and Final Judgment has expired without any appeal having been taken or review sought, or (b) if an appeal is taken or review sought, the expiration of five days after an appeal or review shall have been finally determined by the highest court before which appeal or review is sought which upholds the terms of the Stipulation and/or an Order and Final Judgment and is not subject to further judicial review. -6- (j) "Exchange Act" means the Securities Exchange Act of 1934. (k) "Excess Amount" means the costs of notice and administration of the Settlement which exceed the sum of seven hundred and fifty thousand dollars ($750,000). (l) "Fee and Expense Application" means the application submitted by Plaintiffs' Counsel seeking attorneys' fees, expenses and costs. (m) "Fee Award" means the attorneys' fees, expenses and costs, including the fees of experts and consultants, as may be awarded by the Court to Plaintiffs' Counsel. (n) "Final Distribution Order" means an Order of the Court allowing distribution of the Settlement Consideration. (o) "Individual Defendants" means Michael J. Saylor, Sanju K. Bansal, Mark S. Lynch, Stephen S. Trundle, Ralph S. Terkowitz, and Frank A. Ingari. (p) "Lead Plaintiffs" means Akiko Minami, Atsukuni Minami, and Local 144 Nursing Home Pension Fund. (q) "MicroStrategy" means MicroStrategy Incorporated, and any subsidiary or corporate affiliate thereof. (r) "Net Settlement Consideration" means the Settlement Consideration, less the amount of the Fee Award and Court-approved expenses, taxes, costs of notice and costs of administration. (s) "Non-Settling Defendant" means PwC. -7- (t) "Notice Order" means the order attached hereto as Exhibit C which provides for notice of the proposed settlement to the Class and Settlement Subclass, which is incorporated by reference in this Stipulation. (u) "Notes" means the 7-1/2% Series A Unsecured Notes to be issued by MicroStrategy in connection with the Settlement. The Notes will be subject to the terms and conditions as set forth in Exhibit B, which is incorporated by reference in this Stipulation. (v) "Order and Final Judgment" means the proposed Order and Final Judgment in the form attached hereto as Exhibit D, which is incorporated by reference in this Stipulation. (w) "Plaintiffs" means the Lead Plaintiffs and all other persons or entities identified as plaintiffs in the Complaint. (x) "Plaintiffs' Co-Lead Counsel" means the law firms Milberg Weiss Bershad Hynes & Lerach LLP, and Wolf Haldenstein Adler Freeman & Herz LLP. (y) "Plaintiffs' Counsel" means the Plaintiffs' Co-Lead Counsel and all of the other attorneys representing any of the named Plaintiffs in this Action. (z) "Plan of Allocation" means the terms and procedures for allocating the Net Settlement Consideration among, and distributing the Net Settlement Consideration to, Authorized Claimants as set forth in the Settlement Notice, or such other Plan of Allocation as the Court shall approve. (aa) "Proof of Claim" means the Proof of Claim and Substitute Form W-9 annexed hereto as Exhibit C-2 which will be mailed to members of the Class and Settlement Subclass with the Settlement Notice. (bb) "PwC" means Non-Settling Defendant PricewaterhouseCoopers LLP. -8- (cc) "Released Parties" means the Settling Defendants and any person, firm, company, trust, corporation, or entity in which any Settling Defendant has a controlling interest, and each of their past, present and future corporate parents (including intermediate and ultimate parents), subsidiaries, affiliates, predecessors, successors and assigns, and each of their respective past, present and future officers, directors, employees, representatives, agents, solicitors, attorneys, heirs, investment advisors, administrators, executors, insurers, predecessors, successors and assigns, or any of them, including any person or entity acting on behalf or at the direction of any of them. Notwithstanding any of the foregoing, "Released Parties" shall not mean or include PwC, or any other person or entity other than the Settling Defendants and their related parties as described in the sentence immediately preceding this sentence (dd) "Securities Act" means the Securities Act of 1933. (ee) "Settled Claims" means any and all claims, rights or causes of action or liabilities whatsoever, whether based on federal, state, local, statutory or common law or any other law, rule or regulation, including both known claims and Unknown Claims, that have been or could have been asserted in any forum by Plaintiffs or any Class Member (excluding any persons or entities who timely and properly exclude themselves from the Class and Settlement Subclass), or any of them, against any of the Released Parties, which arise out of or relate in any way to the allegations, transactions, facts, matters or occurrences, representations or omissions involved, set forth, referred to or that could have been asserted in the Complaint, relating to the purchase of MicroStrategy common stock or call options or sale of MicroStrategy put options during the Class Period. -9- (ff) "Settled Defendants' Claims" means any and all claims, rights or causes of action or liabilities whatsoever, whether based on federal, state, local, statutory or common law or any other law, rule or regulation, including both known claims and Unknown Claims, that have been or could have been asserted in the Action or any forum by the Settling Defendants or any of them or the successors and assigns of any of them against any of the Plaintiffs, Class Members or Plaintiffs' Counsel, which arise out of or relate in any way to the institution, maintenance, or prosecution of the Action. (gg) "Settlement" means the terms and conditions set forth in this Stipulation. (hh) "Settlement Consideration" means the Notes, Settlement Shares and Warrants as described in paragraph 3 below, and the costs of notice and administration as provided in paragraph 4 below. (ii) "Settlement Hearing" means a hearing to be held by the Court on notice to the Class, to consider approval of the Settlement, Plan of Allocation and the Fee and Expense Application. (jj) "Settlement Notice" means the Notice of Pendency of Class Action and Partial Settlement, which is to be mailed to the Class in the form attached hereto as Exhibit C-1. (kk) "Settlement Shares" shall mean five hundred fifty thousand (550,000) shares of MicroStrategy Class A common stock, or such greater number of shares as may be issued in the Settlement, to be contributed by MicroStrategy and, directly or indirectly through MicroStrategy, Messrs. Saylor, Bansal and Lynch, in amounts set out in the October 23, 2000 letter from John K. Villa to Steven G. Schulman and Daniel W. Krasner. The Settlement Shares will be subject to the terms and conditions as set forth in Exhibit B. -10- (ll) "Settlement Subclass" means all members of the Class who purchased MicroStrategy common stock contemporaneously with sales of MicroStrategy common stock by any of the Individual Defendants, that is on one or more of the following dates: July 26, 27, 28 or 29, 1999, August 16, 17 or 18, 1999, October 21, 22, 25, 26, 27, 28, or 29, 1999, November 1, 18, 19, or 22, 1999, February 28 or 29, 2000 or March 1, 2000. The definition of the Settlement Subclass represents a modification of the Certified Subclass defined in the Amended Stipulation and Agreement Regarding Class Certification, entered into by the Parties on or about August 10, 2000, and subsequently approved by the Court, as amended, on August 25, 2000. The Settling Parties will request the Court to certify the Settlement Subclass, as modified from the Court's prior Order, solely for the purposes of the Settlement contemplated herein. Anyone excluded from the Class is also excluded from the Settlement Subclass. (mm) "Settling Defendants" means MicroStrategy and the Individual Defendants. (nn) "Settling Defendants' Counsel" means the law firm of Williams & Connolly LLP. (oo) "Settling Parties" means the Settling Defendants and the Lead Plaintiffs. (pp) "Unknown Claims" means any and all Settled Claims which any Plaintiff or Class Member does not know or suspect to exist in his, her or its favor at the time of the release of the Released Parties, and any Settled Defendants' Claims which any Settling Defendant does not know or suspect to exist in his, her or its favor, which if known by him, her or it might have affected his, her or its decision(s) with respect to the Settlement. With respect to any and all Settled Claims and Settled Defendants' Claims, the Settling Parties stipulate and agree that the -11- Plaintiffs, the Class Members, and the Settling Defendants shall, by operation of the Order and Final Judgment, have waived any and all provisions, rights and benefits conferred by any law of any state or territory of the United States, or principle of common law, which is similar, comparable, or equivalent to Cal Civ. Code ss. 1542, which provides: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. Lead Plaintiffs and Settling Defendants acknowledge, and members of the Class and Settlement Subclass by operation of law shall be deemed to have acknowledged, that the inclusion of "Unknown Claims" in the definition of Settled Claims and Settled Defendants' Claims was separately bargained for and was a key element of the Settlement (qq) "Warrants" means the warrants to be issued by MicroStrategy in connection with the Settlement. The Warrants will be subject to the terms and conditions as set forth in Exhibit B. II TERMS AND CONDITIONS 2. The Settling Parties agree to the following terms and conditions in full and final disposition of the Action as against the Settling Defendants, and any and all Settled Claims as against all Released Parties, and any and all Settled Defendants' Claims. 3. Payment of the Settlement Consideration: a. The Notes: Pursuant to the Trust Indenture attached hereto as Exhibit F and being signed concurrently herewith, and in accordance with the terms and conditions set out in Exhibit B, MicroStrategy shall, after the Effective Date, and as soon as practicable after entry of the Final Distribution Order, deliver the Notes as directed by Plaintiffs' Co-Lead Counsel. -12- b. The Settlement Shares: In accordance with the terms and conditions set out in Exhibit B, the Settling Defendants shall, after the Effective Date, and as soon as practicable after entry of the Final Distribution Order, deliver the Settlement Shares as directed by Plaintiffs' Co-Lead Counsel. c. The Warrants: In accordance with the terms and conditions set out in Exhibit B, MicroStrategy shall execute and deliver to Plaintiffs' Co-Lead Counsel the Warrant Agreement, annexed hereto as Exhibit E. The Warrant Agreement shall be effective currently but may hereafter be modified from the forms annexed hereto to the extent required by the Nasdaq National Market (or such other market on which the Warrants may be traded), in connection with the listing of the Warrants or the common shares issuable upon the exercise of the Warrants, or by the Warrant Agent, as defined in the Warrant Agreement, in connection with the issuance or the administration of the Warrants. Any such modification shall be preceded by not less than five (5) business days notice to Plaintiffs' Co-Lead Counsel The Warrant certificates shall be prepared by MicroStrategy in such form as may be required by the Nasdaq National Market (or such other market on which the Warrants may be traded) and by the Warrant Agent. Such form shall be subject to the approval of Plaintiffs' Co-Lead Counsel, which shall not be unreasonably withheld. If Plaintiffs' Co-Lead Counsel do not object in writing within ten (10) days after MicroStrategy has presented them with a copy of the proposed final form of the Warrant certificate, then Plaintiffs' Co-Lead Counsel shall be deemed to have approved the form. d. MicroStrategy or its designees shall, within ten (10) business days after entry of the Final Distribution Order, and upon receipt from Plaintiffs' Co-Lead Counsel of a disk -13- containing a list of the names, addresses and tax identification numbers of all Authorized Claimants and Plaintiffs' Counsel (to the extent awarded by the Court), as well as the number of Settlement Shares, Warrants and the principal amount of the Promissory Note each such Authorized Claimant and Plaintiffs' Counsel is entitled to receive, issue Settlement Shares, Warrants and Notes to Authorized Claimants and Plaintiffs' Counsel in accordance with the terms of this Stipulation, the provisions set forth in the Final Distribution Order and the directions of Plaintiffs' Co-Lead Counsel. e. In the event MicroStrategy and Plaintiffs' Co-Lead Counsel are unable to agree, after good faith negotiations, on an appropriate adjustment in the number of shares to be issued to the Class hereunder in the event of any one or more of the following contingencies occur prior to the distribution of the Settlement Consideration: (a) MicroStrategy ceases to be a public company; (b) MicroStrategy Class A common shares cease to be listed on the Nasdaq National Market, the American Stock Exchange or the New York Stock Exchange; (c) there is a MicroStrategy recapitalization, corporate merger, acquisition, combination or other type of reorganization which results in eliminating the Class A common stock; and/or (d) there is a halt in trading of Class A Common stock during all or part of the valuation period(s), then Plaintiffs' Co-Lead Counsel and MicroStrategy shall each appoint one arbitrator. In the event the two arbitrators are unable to agree on an appropriate adjustment in the number of shares to be issued to the Class hereunder within two weeks of their appointment, they shall select a neutral third arbitrator and the three shall determine, by majority vote, the appropriate adjustment in the number of shares to be issued to the Class hereunder. The decision of the arbitrators shall be final -14- and binding and not subject to appeal. The cost of the arbitration shall be borne equally by MicroStrategy and the Settlement Consideration. f. In addition, in the event of any merger, reorganization, or other change in control, the contractual rights and obligations created in connection with this Settlement shall not be diminished or impaired in any way and shall be assumed by the acquirer or successor as appropriate. 4. MicroStrategy shall pay in cash the costs of notice and administration of the Settlement up to a maximum of seven hundred and fifty thousand dollars ($750,000) as and when incurred (not including any attorneys' fees or expenses, which fees and expenses shall be payable from the Notes, Settlement Shares and Warrants, as may be approved by the Court). For the purposes hereof, the costs of notice and administration shall include up to $150,000 for the fees of the trustee under the Trust Indenture up until the Notes are issued. If the costs of notice and administration of the Settlement exceed seven hundred and fifty thousand dollars ($750,000), MicroStrategy shall pay such costs as and when incurred and shall be entitled to a credit equal to the Excess Amount against the installment of interest on the Notes next due, to be applied against the Notes then outstanding on a pro rata basis. If the Excess Amount exceeds the amount of interest next due, MicroStrategy may at its option either reduce the principal of the balance of the Notes then outstanding on a pro rata basis by the balance of the Excess Amount not previously applied or apply such amount against subsequent installments of interest. MicroStrategy shall not be entitled to any refund or reimbursement of the costs of notice and administration in the event that the Settlement is not approved, is terminated or does not become final and effective for any -15- reason. The notice and administration shall be performed by the Claims Administrator. MicroStrategy shall, without charge, (i) provide information from MicroStrategy's transfer records concerning the identity of members of the Class and Settlement Subclass and their transactions, and (ii) issue the Notes, Settlement Shares, and Warrants, as directed by Plaintiffs' Co-Lead Counsel, and, if applicable, cash or other consideration as provided in Exhibit B hereto. 5. The Settling Parties agree to the entry of the Order and Final Judgment, annexed hereto as Exhibit D. 6. Upon the Effective Date, by operation of the Order and Final Judgment, all Class Members (excluding any persons or entities who timely and properly exclude themselves from the Class and Settlement Subclass) on behalf of themselves, their heirs, executors, administrators, successors and assigns, and any persons they represent, shall release and forever discharge, and shall forever be enjoined from prosecuting, any Settled Claims against any of the Released Parties. 7. The Order and Final Judgment shall include a bar order pursuant to which the Court permanently bars and enjoins PwC and any other person or entity from asserting in this Court, or in any other federal court, or in any state court or other forum, any action or claim arising out of, based upon or related to any of the allegations in the Complaint or any other pleadings filed in the Action, or any claim for contribution or equitable indemnity, by which such person or entity attempts to recover losses arising out of claims made by Lead Plaintiffs or any Class Member (excluding any persons or entities who timely and properly exclude themselves from the Class and Settlement Subclass), against any of the Settling Defendants or the Released Parties. -16- 8. Upon the Effective Date of this Settlement, by operation of the Order and Final Judgment, each of the Settling Defendants, on behalf of themselves and the Released Parties, shall release and forever discharge, and shall forever be enjoined from prosecuting, each and every of the Settled Defendants' Claims. 9. As part of the Settlement, all claims against the Settling Defendants by all Class Members (excluding any persons or entities who timely and properly exclude themselves from the Class and Settlement Subclass) will be dismissed with prejudice in the Action pursuant to an appropriate order under Rule 54(b) of the Federal Rules of Civil Procedure and all Class Members (excluding any persons or entities who timely and properly exclude themselves from the Class and Settlement Subclass) shall be deemed to have released such claims and will be enjoined from any further prosecution thereof. 10. The following are express conditions precedent to the effectiveness of the Settlement: (i) certification of the Settlement Subclass as defined herein, to which the Settling Parties hereby stipulate, subject to Court approval; (ii) approval of the Settlement and entry of an Order and Final Judgment substantially in the form as annexed hereto as Exhibit D; (iii) the Settlement becomes final because of the exhaustion of any and all appeals or the time to appeal from final Court approval; and (iv) the securities constituting the Settlement Consideration are issued pursuant to Section 3(a)(10) or, in lieu thereof, there shall be filed an effective registration statement covering the securities (subject to the provisions of section 4 of Exhibit B), or a no-action letter will be obtained from the Securities and Exchange Commission covering such issuance. -17- 11. MicroStrategy may, at its sole option, terminate the Settlement if securities (including common stock, calls and puts) representing losses of more than a dollar amount that was agreed to by the Settling Parties in a separate letter agreement dated October 23, 2000, opt out of the Class and/or Settlement Subclass. 12. If the Settlement is terminated, canceled, rejected, or if the Effective Date otherwise does not and cannot occur: (a) MicroStrategy shall remain liable to pay any notice and administration costs incurred prior to the termination, cancellation, rejection or event that precludes the Effective Date from occurring; and (b) the Settling Parties shall be deemed to have reverted to their respective status as of the date and time immediately prior to October 23, 2000 and they shall proceed in all respects as if this Stipulation had not been executed. 13. As soon as practicable after execution of this Stipulation, the Settling Parties shall jointly move the Court for entry of a Notice Order in the form annexed as Exhibit C hereto. 14. If the Settlement is approved by the Court after the Settlement Hearing, the Settling Parties shall jointly move the Court for entry of an Order and Final Judgment in the form annexed as Exhibit D hereto. 15. At the Settlement Hearing, Lead Plaintiffs will seek approval of the Court for a Plan of Allocation for the Net Settlement Consideration to Class Members. The terms and conditions of the proposed Plan of Allocation shall be set forth in the Settlement Notice. After all timely claims have been received and processed Plaintiffs' Co-Lead Counsel shall file a motion to -18- distribute the Net Settlement Consideration to the Class Members in accordance with the Plan of Allocation approved by the Court. 16. a. Plaintiffs' Counsel may submit a Fee and Expense Application for distribution to them solely from the Settlement Consideration for an award of attorneys' fees and reimbursement of expenses, including the fees of experts and consultants incurred in connection with prosecuting the Action. Plaintiffs' Co-Lead Counsel reserves the right to make additional applications for fees and expenses incurred in connection with administration of the Settlement, to be distributed solely from the Settlement Consideration. Plaintiffs' Co-Lead Counsel shall allocate the Fee Award among other Plaintiffs' Counsel in a manner in which they in good faith believe reflects the contributions of such Plaintiffs' Counsel to the prosecution and settlement of the Action. b. The Fee Award and the amount awarded by the Court for reimbursement of expenses shall be payable solely from the Settlement Consideration. c. The Fee Award shall be paid pari passu from the Settlement Shares, Notes and Warrants, and shall be paid at the same time, and in the same proportion, as the Net Settlement Consideration is distributed to the Class and Settlement Subclass. 17. The procedure for the allowance or disallowance by the Court of any applications by Plaintiffs' Counsel for attorneys' fees, costs and expenses, including the fees of experts and consultants to be paid out of the Settlement Consideration, are distinct from the Settlement set forth in the Stipulation, and are to be considered by the Court separately from the Court's consideration of the fairness, reasonableness and adequacy of the Settlement set forth in the -19- Stipulation, and any order or proceedings relating to the Fee and Expense Application, or any appeal from any order relating thereto or reversal or modification thereof, shall not operate to terminate or cancel the Stipulation, or affect or delay the finality of the Order and Final Judgment approving the Stipulation and the Settlement of the Action set forth herein. 18. Plaintiffs' Co-Lead Counsel have retained a Claims Administrator and may retain such other persons or organizations as may be necessary to review, assess and process the Proofs of Claim submitted by Class Members. Defendants shall have no role in or responsibility for review or evaluation of Proofs of Claim. Promptly upon the Claims Administrator's completion of the processing of claims, Plaintiffs' Co-Lead Counsel shall file a motion for the Final Distribution approving the Claims Administrator's administrative determinations concerning the acceptance and rejection of claims filed by Class Members, and approving the fees and expenses of the Claims Administrator (which application shall be separate from the Fee and Expense Application) and, if the Effective Date has occurred, directing payment of the Net Settlement Consideration to Authorized Claimants. 19. In order to receive a distribution from the Settlement Consideration, a Class Member must file a Proof of Claim in the form and manner to be approved by the Court. 20. Defendants shall have no role in or responsibility for the form, substance, method or manner of administration or distribution of the Net Settlement Consideration to Authorized Claimants. Except with respect to the payment of notice and administration costs as set forth in paragraph 4 above, neither the Released Parties nor their respective counsel shall have any responsibility for or liability with respect to the administration or processing of claims or the allocation of the Settlement Consideration, including, without limitation, determinations as to the -20- validity of Proofs of Claim, the amounts of claims, or distributions of the Net Settlement Consideration 21. The Settling Parties and their attorneys agree to cooperate fully with one another in seeking Court approval of this Stipulation. 22. This Stipulation shall be binding upon and inure to the benefit of the Settling Parties, the Class Members, and the Released Parties, and their respective heirs, executors, administrators, successors and assigns, and upon any corporation or other entity into or with which any party hereto may merge or consolidate. It is not intended, and shall not be construed, to create rights in or confer benefits on anyone else. 23. Except as provided in the Exhibits to this Stipulation that the law of MicroStrategy's state of incorporation, Delaware, shall govern the securities to be issued as the Settlement Consideration, the Settlement shall be governed by Federal Law, including Rule 23 of the Federal Rules of Civil Procedure, and to the extent not covered by Federal Law the contractual provisions of this Stipulation shall be construed in accordance with the laws of the Commonwealth of Virginia, excluding its choice of law provisions. 24. The Settling Defendants shall take no position on and shall neither interfere with nor delay the efforts by Plaintiffs to pursue any claims they may have against any actual or potential party to this Action or any other person or entity. Nor shall the Settling Defendants materially aid or assist any actual or potential party to this Action or any other person or entity in their or its defense of this Action. Notwithstanding anything to the contrary in this Stipulation or accompanying exhibits, nothing herein shall prevent the Settling Defendants from defending the rights or protecting the interests of any Released Party. If the Settlement is approved and -21- becomes final, the Settling Defendants shall, at the request of Plaintiffs' Co-Lead Counsel, be subject to formal discovery and trial testimony in connection with any remaining claims asserted in this Action as if they were parties to the continuing Action, such that non-party discovery procedures against them will not be necessary. Settling Defendants shall not interpose any objection to providing trial testimony beyond 100 miles from their residence. If requested by Plaintiffs' Co-Lead Counsel, the Settling Defendants shall further direct their employees to provide discovery and trial testimony in this Action as if the employees were parties to the continuing Action. Settling Defendants shall assist Plaintiffs' Co-Lead Counsel in locating former employees. Settling Defendants shall not interpose the terms of any confidentiality agreements with such former employees which might interfere with the former employees' candid discussions with Plaintiffs' Co-Lead Counsel or their testimony. Settling Defendants shall relieve former employees from the obligations of any confidentiality agreements insofar as they would interfere with or obstruct those employees' discussions with Plaintiffs' Co-Lead Counsel or their testimony. Any confidential information provided pursuant to this paragraph shall be subject to the Stipulation and Order Governing Confidential Information, So Ordered by the Court in this Action on November 6, 2000. 25. Nothing contained in this Stipulation or in other agreements executed in connection with the Settlement shall be construed as an admission (i) by any Settling Defendant of any alleged liability, fault or wrongdoing whatsoever of the Settling Defendants or any of them, or (ii) by any member of the Class or Settlement Subclass that their claims are without merit or lack validity 26 Subject to MicroStrategy's obligations under the securities laws, the Settling Parties agree to consult with each other prior to issuing any public announcement or similar public -22- statement concerning the Settlement until the earlier of the filing of the Form 10-K or Form l0-Q following the Effective Date of the Settlement. 27. The waiver by one Settling Party of any breach of this Stipulation by another Settling Party shall not be deemed a waiver of any other prior or subsequent breach of this Stipulation. 28. The Settling Parties intend the Settlement to be a final and complete resolution of all disputes asserted or which could be asserted between Plaintiffs, the Class Members and the Released Parties with respect to the Settled Claims and the Settled Defendants' Claims. Accordingly, the Settling Parties agree not to assert in any forum that the litigation was brought by Plaintiffs or defended by the Settling Defendants in bad faith or without a reasonable basis. The Settling Parties shall assert no claims of any violation of Rule 11 of the Federal Rules of Civil Procedure relating to the prosecution, defense, or settlement of the Action. The Settling Parties agree that the Settlement Consideration and the other terms of the Settlement were negotiated at arm's-length and in good faith, and reflect a settlement that was reached voluntarily after consultation with experienced legal counsel. 29. All of the exhibits attached hereto are hereby incorporated by reference as though fully set forth herein. The foregoing, including the documents referred to in this Stipulation and in the exhibits hereto, constitute the entire agreement among the parties hereto with respect to the Settlement of the Action, and may not be modified or amended, except in writing, signed by all parties hereto, or their successors in interest. No representations or warranties other than those contained or referenced herein are made to any party Counsel may sign this Stipulation on behalf of the parties. -23- 30. This Stipulation shall not be construed more strictly against one party than another merely by virtue of the fact that it, or any part of it, may have been prepared by counsel for one of the parties, it being recognized that it is the result of arm's-length negotiations between the parties and all parties have contributed substantially and materially to the preparation of this Stipulation. 31. The Court shall retain jurisdiction with respect to implementation and enforcement of the terms of the Stipulation. 32. This Stipulation may be executed in counterparts. MILBERG WEISS BERSHAD HYNES & LERACH LLP By: /s/ Melvin I. Weiss ------------------------------ Melvin I. Weiss Steve G. Shulman George A. Bauer III Ariana J. Tadler One Pennsylvania Plaza New York, NY 10119 Tel: (212) 594-5900 WOLF HALDENSTEIN ADLER FREEMAN & HERZ LLP By: /s/ Daniel Krasner ------------------------------ Daniel Krasner Fred Taylor Isquith 270 Madison Avenue New York, NY 10016 Tel: (212) 545-4600 Plaintiffs' Co-Lead Counsel -24- WILLLAMS & CONNOLLY LLP By By: /s/ John K. Villa ------------------------------ Brendan V. Sullivan, Jr. John K. Villa Steven M. Farina 725 12th Street, NW. Washington, D.C. 20005 Tel: (202) 434-5000 Counsel for Defendants MicroStrategy Incorporated, Michael J. Saylor, Sanju K. Bansal, Mark S. Lynch, Stephen S. Trundle, Ralph S. Terkowitz and Frank A. Ingari -25- Exhibit B Settlement Amount and Payment Method: 1. Notes: From the date of issuance (as defined in section 5 below) five-year, unsecured promissory Notes (face amounts in $100 multiples) issued by MicroStrategy having an aggregate principal amount of eighty million five hundred thousand dollars ($80,500,000) bearing interest from the date of commencement of the Settlement Hearing at a rate of seven and one-half percent (7.5%) per annum, payable solely in cash, with interest originally accruing and compounding annually until six (6) months after the date of issuance of the first Notes to be issued hereunder and to be paid on that date and, thereafter, accruing semi-annually and payable semi-annually in arrears. The Notes shall be issued pursuant to Section 3(a)(10) of the Securities Act and shall not constitute "restricted securities." In the event that the Notes cannot be issued pursuant to Section 3(a)(10), MicroStrategy shall take such steps as are necessary to permit such issuance, or, in lieu thereof, shall file a registration statement covering the issuance of the Notes or seek a "no action" letter from the Securities and Exchange Commission covering such issuance. The Notes may be prepaid at any time, upon thirty (30) days prior written notice, in whole or in part on a pro rata basis, without premium or penalty, and may be mandatorily converted at the option of MicroStrategy at any time, upon thirty (30) days prior written notice, in whole or in part on a pro rata basis, without premium or penalty except as described herein, into MicroStrategy Class A common stock. The combination of prepayments, mandatory conversions and purchases in the open market by MicroStrategy shall not reduce the total original issue by more than forty percent (40%) unless the entire issue shall be prepaid, converted and/or purchased by MicroStrategy. MicroStrategy shall not mandatorily convert the Notes while a petition in bankruptcy relating to MicroStrategy is pending and not discharged or stayed. If notice of a mandatory conversion is given during the thirty (30) day period prior to the filing date of a petition in bankruptcy relating to MicroStrategy, then the conversion will take place five (5) days after the petition is discharged or stayed or thirty (30) days after the notice, whichever is later. If the Notes are converted into shares of Class A common stock, they shall be converted into such number of shares as would be determined by dividing the principal and accrued but unpaid interest on the Notes to be converted by an amount equal to eighty percent (80%) of the dollar weighted average trading price per share for all round lot transactions in the stock on the Nasdaq National Market for the ten (10) trading days ending two (2) days prior to the date of the written notice. MicroStrategy shall not mandatorily convert the Notes if, during the ten (10) day period used for calculating the conversion price, MicroStrategy, any member of the MicroStrategy Board of Directors or any MicroStrategy officer subject to the requirements of Section 16 of the Securities and Exchange Act of 1934 has purchased shares of Class A common stock (excluding any issuance of stock to any officer or director of MicroStrategy pursuant to any MicroStrategy stock option, employee stock purchase or similar plan or rights plan in effect on the date of the commencement of the Settlement Hearing or subsequently approved by MicroStrategy's Board of Directors, or any exercises of options or rights issued under such plans). The Notes will be subordinated to all present and future (a) secured indebtedness and (b) unsecured institutional indebtedness evidenced by promissory notes. The Notes will rank pari passu with all other indebtedness. The Notes will contain only covenants for timely payment of principal and interest and for maintenance of MicroStrategy's corporate -2- existence. The Notes will be tenderable in lieu of cash on the exercise of the Warrants provided herein, at a value equal to 133% of the sum of par value plus interest accrued to the date of the tender but unpaid. The Notes will be issued pursuant to an indenture with the indenture trustee being a financial institution mutually satisfactory to MicroStrategy and Plaintiffs' Co-Lead Counsel. Events of default under the indenture will be a failure to pay principal or interest when due or a filing of a bankruptcy petition relating to MicroStrategy that remains undischarged or unstayed for a period of sixty (60) days. The Notes shall also contain provisions concerning any change of control or sale of all or substantially all MicroStrategy assets such that any buyer must assume the Notes and the stock provisions to be translated into the acquirer's stock. In the event any Plaintiff would be entitled to a fractional share of a $100 Note (after adding any increase to the principal amount in lieu of any fractional Class A share and/or Warrant as provided below) MicroStrategy shall be entitled, in lieu thereof, at MicroStrategy's option, either to pay cash or to issue additional shares of Class A common stock valued at the dollar weighted average trading price per share for all round lot transactions in the stock on the Nasdaq National Market for the twenty (20) trading days ending two (2) days prior to the date on which the shares are distributed to the Plaintiff 2. Settlement Shares: Five hundred fifty thousand (550,000) shares of MicroStrategy Class A common stock to be contributed by MicroStrategy and, directly or indirectly through MicroStrategy, Michael Saylor, Sanju Bansal and Mark Lynch. The respective contributions of Messrs. Saylor, Bansal and Lynch shall be limited to those set out in an October 23, 2000 letter from MicroStrategy's -3- counsel to Settling Defendants' Counsel. The contribution obligations of Messrs. Saylor, Bansal and Lynch set forth in the letter shall be several, and not joint and several, obligations and shall have a total value often million dollars ($10,000,000) with the total number of shares to be contributed to be determined by dividing that ten million dollars ($10,000,000) by the Trading Price (defined below). All the Settlement Shares shall be issued pursuant to Section 3(a)(10) of the Securities Act and shall not constitute "restricted securities." In the event that the Settlement Shares cannot be issued pursuant to Section 3(a)(10), MicroStrategy shall take such steps as are necessary to permit such issuance, or, in lieu thereof, shall file a registration statement covering the issuance of the shares or seek a "no action" letter from the Securities and Exchange Commission covering such issuance. The Settlement Shares will be valued at the dollar weighted average trading price per share for all round lot transactions in the stock on the Nasdaq National Market for the twenty (20) trading days ending two (2) days prior to the date that the Settlement Hearing commences (the "Trading Price"). If the Trading Price is less than thirty dollars ($30) per share, then MicroStrategy will issue such number of Class A common shares which, when added to the number of shares being contributed by Messrs. Saylor, Bansal and Lynch and that total is multiplied by the Trading Price, will yield a product equal to sixteen million five hundred thousand dollars ($16,500,000). MicroStrategy shall issue and deliver such shares as instructed by Plaintiffs' Co-Lead Counsel, in whole or in part and from time to time as instructed by Plaintiffs' Co-Lead Counsel at MicroStrategy's sole expense. To protect against dilution, the number of shares to be issued will be increased based on a dollar weighted average anti-dilution formula in the event that MicroStrategy issues or sells any equity securities or equity linked securities to any person, for a price -4- per Class A common share less than the lesser of thirty dollars ($30) per share or the Trading Price, provided, however, that there shall be excluded from such anti-dilution protection (a) any issuance of options or stock to any employee, officer, director or consultant of MicroStrategy or any of its subsidiaries pursuant to any MicroStrategy stock option, employee stock purchase or similar plan or rights plan in effect on the date of the commencement of the Settlement Hearing or subsequently approved by the MicroStrategy Board of Directors, or any exercises of options or rights issued under such plans, (b) shares of stock issuable upon conversion of any shares of Series A Preferred Stock outstanding on the date of commencement of the Settlement Hearing or any issuance of common stock in lieu of dividends thereon, (c) shares of stock issuable upon the conversion of shares of Class B common stock outstanding as of the date of the commencement of the Settlement Hearing, (d) shares of stock issuable upon the exercise of any warrants which are outstanding as of the date of the commencement of the Settlement Hearing, (e) any shares of equity securities issued as consideration in a merger, combination or other acquisition of any business or the assets of such a business, (f) any shares of equity securities issued in connection with any vendor, lease or similar commercial arrangement, (g) any shares of equity securities issued in connection with any strategic alliance to the extent that such shares constitute less than 5% (unless a greater percentage is approved by Plaintiffs' Co-Lead Counsel) of the common stock of MicroStrategy (including both Class A and Class B shares) issued and outstanding prior to such issuance. The anti-dilution protection shall apply only during the period beginning on the date of the commencement of the Settlement Hearing and ending sixty (60) days -5- from the date on which the Court enters an order approving the settlement described herein. In the event any Plaintiff would be entitled to a fractional share of Class A common stock, MicroStrategy shall be entitled to pay cash in lieu of the fractional share at the lesser of thirty dollars ($30) per share or the Trading Price or, in lieu thereof, at MicroStrategy's option, to increase the principal amount of the Notes distributable to the shareholder entitled to the shares by the same amount. 3. Warrants: Warrants issued by MicroStrategy to purchase one million nine hundred thousand (1,900,000) shares of MicroStrategy Class A common stock at an exercise price determined as follows: if the Trading Price is eleven dollars ($11.00) or less, then the exercise price shall be forty dollars ($40.00) per share; if the Trading Price is twenty-four dollars ($24.00) or more, then the exercise price shall be fifty dollars ($50) per share; if the Trading Price is between eleven dollars ($11 00) and twenty-four dollars ($24 00), then the exercise price shall be increased over forty dollars ($40.00) and up to fifty dollars ($50.00) in the same proportion as the Trading Price exceeds eleven dollars ($11.00) up to twenty-four dollars ($24.00). The Warrants shall expire five years from the date of issuance (as defined in section 5 below). The Warrants shall be immediately exercisable, immediately separable from the Notes, and non-redeemable. The Warrants shall be issued pursuant to Section 3(a)(10) of the Securities Act and shall not constitute "restricted securities." In the event that the Warrants cannot be issued pursuant to Section 3(a)(10), MicroStrategy shall take such steps as are necessary to permit such issuance, or, in lieu thereof, shall file a registration statement covering the issuance of the Warrants or seek a "no action" letter from the Securities and Exchange Commission covering such issuance The Warrants shall be exercisable for cash, -6- or in lieu thereof, at the option of the holder, in Notes provided herein valued at one hundred thirty three percent (133%) of the sum of par value plus interest accrued to the date of the tender but unpaid. The number and kind of securities purchasable upon the exercise of each Warrant and the exercise price will be subject to adjustment in the event of a stock split or stock dividends on the Class A common stock, reorganizations, recapitalizations and reclassifications, and extraordinary distributions of other property to holders of the Class A common stock. Notwithstanding the foregoing, there shall be no adjustment with respect to any securities issued by MicroStrategy upon conversion of any shares of Series A Preferred Stock outstanding on the date of the commencement of the Settlement Hearing or any issuance of Class A common stock in lieu of dividends on such Series A Preferred Stock. In the event any Plaintiff would be entitled to a fractional Warrant, MicroStrategy shall be entitled to issue cash in lieu of fractional Warrants with each Warrant valued at $21.0988 for purposes of this calculation, or in lieu thereof, at MicroStrategy's option, to increase the principal amount of the Note distributable to the Plaintiff entitled to the Warrants by the same amount. 4. Registration and Listing Obligations: During the period that any Warrants are outstanding, MicroStrategy agrees that it will, at its sole cost, use its best efforts to keep a registration statement relating to the issuance of the Class A common shares upon exercise of the Warrants effective under the Securities Act; provided, however, that MicroStrategy shall have the right in its sole discretion to delay the effectiveness of any registration statement or suspend offers and sales under any effective registration statement, at any time and for -7- any period, if (a) such action is required by applicable law, (b) the effectiveness of a registration statement or the continuation of offers and sales under a registration would require MicroStrategy to disclose a material financing, acquisition or other corporate development and MicroStrategy's Board of Directors (or where due to the nature of the circumstances, timely consultation with the Board of Directors is not, in the good faith determination of the Chairman of the Board, the Chief Executive Officer or the Chief Financial Officer of MicroStrategy, possible, then such person) shall have determined in good faith that such disclosure is not in the best interests of MicroStrategy and its shareholders, or (c) if the Board of Directors shall have determined in good faith that there is a valid business purpose or reason for such delay or suspension. This right to delay the effectiveness of any registration statement or suspend offers and sales under any effective registration statement may only be invoked for ninety (90) trading days out of any three hundred sixty five (365) calendar day period. MicroStrategy will comply with all Blue Sky laws applicable to the Warrants, Notes and Class A common stock. MicroStrategy will use its best efforts to effect the listing of the Notes, Warrants and the underlying shares on the Nasdaq National Market, the American Stock Exchange or the New York Stock Exchange (or other such principal market as approved by Plaintiffs' Co-Lead Counsel) commencing on the date of their issuance and will use its best efforts to maintain such listing during the period that any Notes or Warrants are outstanding. MicroStrategy shall have no obligation to make a market in the Notes or the Warrants. 5. Definition of Issuance and Term of Notes and Warrants: Notwithstanding anything in this Exhibit A to the contrary, there shall be a single date on which all Notes and Warrants issued as -8- Settlement Consideration shall mature or expire, as the case may be. That date shall be the date that is five (5) years from the date of issuance of the first Note or Warrant issued as Settlement Consideration. In addition, there shall be common semi-annual dates on which interest is payable on all Notes issued as Settlement Consideration. Those semi-annual dates shall be determined on the basis of the date of issuance of the first Note to be issued hereunder. MicroStrategy shall issue and deliver the Notes and Warrants as instructed by Plaintiffs' Co-Lead Counsel, in whole or in part and from time to time as instructed by Plaintiffs' Co-Lead Counsel, at MicroStrategy's sole expense. -9- WARRANT AGREEMENT THIS WARRANT AGREEMENT (this "Agreement") is entered into as of January 11, 2001, by and between MICROSTRATEGY INCORPORATED, a Delaware corporation (the "Company"), and AMERICAN STOCK TRANSER & TRUST COMPANY, a New York limited purpose trust company, as Warrant Agent (together with any successors and assigns, the "Warrant Agent"). Recitals A. WHEREAS, the Company is a defendant in a class-action lawsuit (the "Action") pending in the United States District Court for the Eastern District of Virginia (the "Court"), entitled In re MicroStrategy Incorporated Securities Litigation, Civil Action No. 00-473-A; B. WHEREAS, in connection with the Action and as part of the transactions to be consummated pursuant to the Stipulation of Settlement dated the date hereof (the "Stipulation"), the Company has agreed to issue Warrants for the purchase of one million nine hundred thousand (1,900,000) shares of Class A common stock, par value $0.001 per share, of the Company (each, a "Warrant"): C. WHEREAS, the Stipulation contemplates that the Company will enter into certain agreements, including, without limitation, this Agreement; D. WHEREAS, the Company desires to issue the Warrants, each of which entitles the holder thereof to purchase one share of its Class A Common Stock (each of said shares of Class A Common Stock deliverable upon exercise of the Warrants, a "Warrant Share"); and E. WHEREAS, the Company wishes the Warrant Agent to act on behalf of the Company, and the Warrant Agent is willing to so act, in connection with the issuance, division, transfer, exchange and exercise of Warrants. Agreement NOW, THEREFORE, in consideration of the foregoing and of the mutual promises and covenants contained herein and for other good and valuable consideration, the receipt and adequacy of which hereby are acknowledged, to implement the terms of the Stipulation, and for the purpose of defining the terms and provisions of the Warrants and the respective rights and obligations thereunder of the Company and the registered owners of the Warrants and any security into which they may be exchanged (the "Holders"), the parties hereto covenant and agree as follows: SECTION 1 DEFINITIONS In this Agreement, the following terms have the meanings specified or referred to in this Section 1 and shall be equally applicable to both the singular and plural forms. Any agreement referred to below shall mean such agreement as amended, supplemented and modified from time to time to the extent permitted by the applicable provisions thereof and by this Agreement. "Action" has the meaning specified in Recital A hereof. "Agreement" has the meaning specified in the introductory paragraph of this Warrant Agreement. "Assets" has the meaning specified in Section 9.1(c) hereof. "Business Day" means a day other than (a) a Saturday or Sunday, (b) any day on which banking institutions located in the City of New York, New York are required or authorized by law or by local proclamation to close or (c) any day on which the New York Stock Exchange is closed. "Class A Common Stock" shall mean the shares of the Company's Class A common stock, par value $0.001 per share. "Class B Common Stock" shall mean the shares of the Company's Class B common stock, par value $0.001 per share. "Commercially Reasonable Efforts," when used with respect to any obligation to be performed or term or provision to be observed hereunder, means such efforts as a prudent Person seeking the benefits of such performance or action would make, use, apply or exercise to preserve, protect or advance its rights or interests; provided that such efforts do not require the Person whose performance or observance is required hereunder to incur a material financial cost or a substantial risk of material liability unless such cost or liability (i) is specifically contained in this Agreement or the Stipulation; (ii) would customarily be incurred in the course of performance or observance of the relevant obligation, term or provision, (iii) is caused by or results from the wrongful act or negligence of the Person whose performance or observance is required hereunder or (iv) is not excessive or unreasonable in view of the rights or interests to be preserved, protected or advanced. Such efforts may include, without limitation, the expenditure of such funds and retention by such Person of such accountants, attorneys or other experts or advisors as may be necessary or appropriate to effect the relevant action; the undertaking of any special audit or internal investigation that may be necessary or appropriate to effect the relevant action; and the commencement, termination or settlement of any action, suit or proceeding involving the Person whose performance or observance is required hereunder to the extent necessary or appropriate to effect the relevant action. 2 "Common Stock" shall mean the Class A Common Stock and/or the Class B Common Stock of the Company. "Court" has the meaning specified in Recital A of this Agreement. "Current Market Price" has the meaning specified in Section 9.1(d)(i) hereof. "Effective Date" has the meaning specified in Section 4.1 hereof. "Exercise Period" has the meaning specified in Section 4.1 hereof. "Exercise Price" means a price determined in accordance with the following formula. If the Trading Price (as hereinafter defined) of the Class A Common Stock is $11 or less, the exercise price shall be $40.00 per share. If the Trading Price of the Class A Common Stock is $24.00 or more, the exercise price shall be $50.00 per share. if the Trading Price is between $11.00 and $24.00, the exercise price shall be the sum of (1) $40.00 and (2) an amount, not to exceed $10.00, that is the product of 10/13 multiplied by the amount by which the Trading Price of the Class A Common Stock exceeds $11.00. "Holders" has the meaning specified in the preamble to this Agreement. "Market" means the Nasdaq National Market, or if the Class A Common Stock is no longer authorized for quotation on such market, such national securities exchange upon which the Class A Common Stock is listed, or if the Class A Common Stock is not authorized for quotation on the Nasdaq National Market or listed on any national securities exchange, the over-the-counter market as reported by the National Association of Securities Dealers Automated Quotation System, or if not so quoted, as reported by National Quotation Bureau, Incorporated. or a similar organization. "NASD" shall mean the National Association of Securities Dealers. "Number of Shares" has the meaning specified in Section 9.1(d)(ii) hereof. "Person" means a natural person, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization, limited liability company, limited liability partnership, government or any agency or political subdivision thereof or any other entity or organization. "Proceeds" has the meaning specified in Section 9.l(d)(ii) hereof. "Qualifying Prospectus" means a prospectus contained in a Registration Statement that satisfies all legal requirements. "Registration Statement" means a registration statement relating to the issuance of the Warrant Shares. 3 "Rights" has the meaning specified in Section 9.1(b) hereof. "SEC" means the United States Securities and Exchange Commission, or any successor governmental agency or authority thereto. "Securities Act" means the Securities Act of 1933, as amended. "Stipulation" has the meaning specified in Recital B hereof, "Subsidiary" has the meaning specified in Section 9.1(c) hereof. "Trading Price" means the dollar weighted average trading price per share for all round lot transactions in the Class A Common Stock on the Market for the twenty (20) trading days ending two (2) days prior to the date that the settlement hearing in the Action commences. "Transfer Agent" has the meaning specified in Section 7 hereof. "Warrant" has the meaning specified in Recital B hereof. "Warrant Agent" shall mean American Stock Transfer & Trust Company and any successor hereunder. "Warrant Certificate" has the meaning ascribed to such term in Section 2.1 hereof. "Warrant Register" has the meaning specified in Section 2.2 hereof. "Warrant Share" has the meaning specified in Recital D hereof. SECTION 2 FORM OF WARRANT; EXECUTION; REGISTRATION 2.1 Form of Warrant; Execution of Warrants. The certificates evidencing the Warrants (the "Warrant Certificates") shall be in a form satisfying the requirements of the Market. The Warrant Certificates shall be signed on behalf of the Company by its Chairman of the Board, President or one of its Vice Presidents. The signature of any such officer on the Warrant Certificates may be manual or by facsimile. Any Warrant Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Warrant Certificate, shall be a proper officer of the Company to sign such Warrant Certificate. Each Warrant Certificate shall be dated the date it is countersigned by the Warrant Agent pursuant to Section 2.3 hereof 2.2 Registration. The Warrant Certificates shall be numbered and shall be registered on the books of the Company maintained at the principal office of the Warrant Agent initially in New York, New York (or such other place in the continental United States as the Warrant Agent shall from time to time notify the Company and the Holders in writing) (the 4 "Warrant Register") as they are issued. The Company and the Warrant Agent shall be entitled to treat the registered owner of any Warrant as the owner in fact thereof for all purposes and shall not be bound to recognize any equitable or other claim to or interest in such Warrant on the part of any other person. 2.3 Countersignature of Warrants. The Warrant Certificates shall be countersigned by the Warrant Agent and shall not be valid for any purpose unless so countersigned. Warrant Certificates may be countersigned, however, by the Warrant Agent and may be delivered by the Warrant Agent notwithstanding that the persons whose manual or facsimile signatures appear thereon as proper officers of the Company shall have ceased to be such officers at the time of such countersignature, issuance or delivery. The Warrant Agent shall, upon written instructions of the Chairman of the Board, the President, any Vice President, the Treasurer or the Secretary of the Company, countersign, issue and deliver Warrant Certificates entitling the Holders thereof to purchase not more than an aggregate of 1,900,000 Warrant Shares (subject to adjustment pursuant to Section 9 hereof) and shall countersign, issue and deliver Warrant Certificates as otherwise provided in this Agreement. SECTION 3 TRANSFER AND EXCHANGE OF WARRANTS Subject to the terms hereof, the Warrant Agent shall initially countersign, register in the Warrant Register and deliver Warrants hereunder in accordance with the written instructions of the Company. Subject to the terms hereof and the receipt of such documentation as the Warrant Agent may reasonably require, the Warrant Agent shall thereafter from time to time register the transfer of any outstanding Warrants upon the Warrant Register upon surrender of the Warrant Certificate or Certificates evidencing such Warrants duly endorsed or accompanied (if so required by it) by a written instrument or instruments of transfer in form reasonably satisfactory to the Warrant Agent, duly executed by the registered Holder or Holders thereof or by the duly appointed legal representative thereof or by a duly authorized attorney. Subject to the terms of this Agreement, each Warrant Certificate may be exchanged for another Warrant Certificate or Certificates entitling the Holder thereof to purchase a like aggregate number of Warrant Shares as the Warrant Certificate or Certificates surrendered then entitles such Holder to purchase. Any Holder desiring to exchange a Warrant Certificate or Certificates shall make such request in writing delivered to the Warrant Agent, and shall surrender, duly endorsed or accompanied (if so required by the Warrant Agent) by a written instrument or instruments of transfer in form reasonably satisfactory to the Warrant Agent, the Warrant Certificate or Certificates to be so exchanged. Upon registration of transfer, the Company shall issue and the Warrant Agent shall countersign and deliver by certified mail a new Warrant Certificate or Certificates to the persons entitled thereto. No service charge shall be made for any exchange or registration of transfer of a Warrant Certificate or of Warrant Certificates, but the Company may require payment of a sum sufficient to cover any stamp tax or other tax or other governmental charge that is imposed in connection with any such exchange or registration of transfer pursuant to Section 5 hereof. 5 By accepting the initial delivery, transfer or exchange of Warrants, each Holder shall be deemed to agree to the terms of this Agreement as it may be in effect from time to time, including any amendments or supplements duly adopted in accordance with Section 16.3 hereof. A copy of this Agreement may be obtained by a Holder without cost upon written request to the Company at its principal office or the Warrant Agent. SECTION 4 TERM OF WARRANTS; EXERCISE OF WARRANTS; REGISTRATION OF WARRANT SHARES 4.1 Term of Warrants. Subject to the terms of this Agreement, each Holder shall have the right, which may be exercised, on any Business Day, from and after the later of the date the Warrants are issued to the initial Holders and the Effective Date (as defined below) and until 5:00 p.m., New York City time, on the fifth anniversary of such later date (the "Exercise Period"), to receive from the Company the number of Warrant Shares which the Holder may at the time be entitled to receive upon exercise of such Warrants and payment of the Exercise Price then in effect for such Warrant Shares, and the Warrant Shares issued to a Holder upon exercise of its Warrants shall be duly authorized, validly issued, fully paid, nonassessable and shall not have been issued in violation of or subject to any preemptive rights. Each Warrant not exercised prior to the expiration of the Exercise Period shall become void, and all rights thereunder and all rights in respect thereof under this Agreement shall cease as of the expiration of the Exercise Period, provided, however, that if the Exercise Period ends during a suspension pursuant to Section 4.3 hereof, the Exercise Period shall be extended for an additional period of time equal to the longer of the period of such suspension during the Exercise Period and twenty (20) Business Days after the date on which the Warrant Agent sends notice to the Holders of the expiration of such suspension period. As used herein, the term "Effective Date" means the first date on which the Company's Registration Statement is declared effective by the SEC. 4.2 Exercise of Warrants. During the Exercise Period, except as such may be suspended from time to time as set forth in Section 4.3 hereof, each Holder may, subject to this Agreement, exercise from time to time some or all of the Warrants evidenced by its Warrant Certificate(s) by (i) surrendering to the Company at the principal office of the Warrant Agent such Warrant Certificate(s) with the form of notice attached thereto duly filled in and signed, which signature shall be guaranteed by an eligible guarantor institution (a bank, savings and loan association or credit union with membership in an approved signature guarantee medallion program) pursuant to Rule l7Ad-15 of the Securities Exchange Act of 1934, and (ii) paying to the Warrant Agent for the account of the Company the aggregate Exercise Price for the number of Warrant Shares in respect of which such Warrants are exercised. Warrants shall be deemed exercised on the date such Warrant Certificate(s) are surrendered to the Warrant Agent and tender of payment of the aggregate Exercise Price is made. Payment of the aggregate Exercise Price shall be made in cash by wire transfer of immediately available funds to the Warrant Agent for the account of the Company or by certified or official bank check or checks to order of the Company or by tender of 7 1/2% Series A Unsecured Notes issued pursuant to the Stipulation (the "Notes") in such amount and such manner as set forth in Section 12 hereof, or by any combination thereof or by such other form or method of payment acceptable to the Warrant Agent. 6 Upon the exercise of any Warrants in accordance with this Agreement, the Company shall cause the Warrant Agent, on the Company's behalf, to issue and deliver with all reasonable dispatch, to or upon the written order of the Holder and in such name or names as the Holder may designate, a certificate or certificates for the number of full Warrant Shares issuable upon the exercise of such Warrants and shall take such other actions or cause the Warrant Agent to take such other actions at the Company's sole expense as are necessary to complete the exercise of the Warrants (including, without limitation, payment of any cash with respect to fractional interests required under Section 10 hereof). The certificate or certificates representing such Warrant Shares shall be deemed to have been issued and any person so designated to be named therein shall be deemed to have become a holder of record of such Warrant Shares as of the date the Warrants are exercised hereunder. Each Warrant Share, when issued upon exercise of the Warrants, shall be duly authorized, validly issued, fully paid and non-assessable and will not have been issued in violation of or subject to any preemptive rights. In the event that less than all of the Warrants evidenced by a Warrant Certificate are exercised, the Holder, thereof shall be entitled to receive a new Warrant Certificate or Certificates as specified by such Holder evidencing the remaining Warrant or Warrants, and the Warrant Agent is hereby irrevocably authorized by the Company to countersign, issue and deliver the required new Warrant Certificate or Certificates evidencing such remaining Warrant or Warrants pursuant to the provisions of this Section 4.2 hereof and of Section 3 hereof The Company, whenever required by the Warrant Agent, will supply the Warrant Agent with Warrant Certificates duly executed on behalf to the Company for such purpose. Upon delivery of the Warrant Shares issuable upon exercise in accordance herewith and of any required new Warrant Certificates, the Company shall direct the Warrant Agent by written order to cancel the Warrant Certificates surrendered upon exercise. Such canceled Warrant Certificates shall then be disposed of by the Warrant Agent in a manner permitted by applicable laws and satisfactory to the Company in accordance with its written instructions to the Warrant Agent. The Warrant Agent shall account promptly to the Company with respect to Warrants exercised and concurrently pay to the Company all amounts received by the Warrant Agent upon exercise of such Warrants. The Warrant Agent shall keep copies of this Agreement and any notices given or received hereunder available for inspection by the Holders during normal business hours at its office. The Company shall at its sole expense supply the Warrant Agent from time to time with such numbers of copies of this Agreement as the Warrant Agent may reasonably request. 4.3 Registration of Warrant Shares; Suspension of Exercise Period. The Company covenants that, at its sole cost, it will at all times keep available such number of authorized shares of its Class A Common Stock, free from all preemptive rights with respect thereto, which will be sufficient to permit the exercise of the Warrants for the full number of Warrant Shares. The Company covenants that the Warrant Shares, when issued pursuant to the exercise of the Warrants, will be duly and validly issued, fully paid and nonassessable and free from all taxes, liens, and charges with respect to the issuance thereof The Company covenants that it will use its Commercially Reasonable Efforts to keep Registration Statement effective 7 under the Securities Act, and will make such number of Qualifying Prospectuses available to Holders as they shall reasonably request; provided, however, that no shares of Class A Common Stock shall be issued, and the right to exercise all Warrants shall be suspended, for all periods during which there is not an effective a Registration Statement and/or there is not a Qualifying Prospectus available to Holders. The Company shall promptly notify the Warrant Agent of any such suspension, and the Warrant Agent shall have no duty, responsibility or liability in respect of any shares of Class A Common Stock issued or delivered prior to its receipt of such notice. The Company shall promptly notify the Warrant Agent of the termination of any such suspension and the Company shall cause the Warrant Agent to notify the Holders of the termination of such suspension within twenty (20) business days following notice to the Warrant Agent by the Company. The Company represents and warrants that the issuance of the Warrants is exempt from registration pursuant to Section 3(a)(10) of the Securities Act, the Warrants and the Warrant Shares will be authorized for quotation on the Market on the Effective Date and, accordingly, the Warrants are transferable without registration under the Securities Act or state "Blue Sky" laws. The Company shall file a Registration Statement with the SEC not later than the commencement of the settlement hearing in the Action as defined above. SECTION 5 PAYMENT OF TAXES The Company will pay all documentary stamp and other like taxes, if any, attributable to the initial issuance and delivery of the Warrants and the initial issuance and delivery of the Warrant Shares upon the exercise of Warrants; provided that the Company shall not be required to pay any tax or taxes which may be payable in respect of any transfer of the Warrants or involved in the issuance or delivery of any Warrant Shares in a name other than that of the Holder of the Warrants being exercised, and the Warrant Agent shall not register any such transfer or issue or deliver any Warrant Certificate(s) or Warrant Shares unless or until the persons requesting the registration or issuance shall have paid to the Warrant Agent for the account of the Company the amount of such tax, if any, or shall have established to the reasonable satisfaction of the Company that such tax, if any, has been paid. SECTION 6 MUTILATED OR MISSING WARRANT CERTIFICATES In the event that any Warrant Certificate shall be mutilated, lost, stolen or destroyed, the Company shall issue, and at the direction of the Company by written order the Warrant Agent shall countersign and deliver in exchange and substitution for and upon cancellation of the mutilated Warrant Certificate or in lieu of and substitution for the Warrant Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor and representing an equivalent right or interest, but only upon receipt of evidence reasonably satisfactory to the Company and the Warrant Agent of such loss, theft or destruction of such Warrant Certificate and an indemnity or bond, if requested by the Company or the Warrant Agent, also reasonably satisfactory to them. An applicant for such a substitute Warrant Certificate shall also comply with such other reasonable procedures as the Company or the Warrant Agent may reasonably require. 8 SECTION 7 RESERVATION OF WARRANT SHARES There have been reserved, and the Company shall at all times keep reserved, out of its authorized Class A Common Stock, free of all preemptive rights, a number of shares of Class A Common Stock sufficient to provide for the exercise of the rights of purchase represented by the outstanding Warrants. The transfer agent for the Class A Common Stock and every subsequent or other transfer agent for any shares of the Company's capital stock issuable upon the exercise of the Warrants (each, a "Transfer Agent") will be and are hereby irrevocably authorized and directed at all times to reserve such number of authorized shares as shall be required for such purpose. The Company will keep a copy of this Agreement on file with each Transfer Agent. The Warrant Agent is hereby irrevocably authorized to requisition from time to time from the Company or a Transfer Agent, as the case may be, the certificate for Warrant Shares required to honor outstanding Warrants upon exercise thereof in accordance with the terms of this Agreement. The Company will supply its Transfer Agent with duly executed stock certificates for such purposes and will itself provide or otherwise make available any cash which may be payable as provided in Section 10 hereof The Company will furnish to its Transfer Agent a copy of all notices of adjustments and certificates related thereto, transmitted to each Holder pursuant to Section 9.3 hereof. The Company will give the Warrant Agent prompt notice of any change in any Transfer Agent or any change of address of any Transfer Agent. Before taking any action which would cause an adjustment pursuant to Section 9 reducing the Exercise Price, the Company will take any and all corporate action which may be necessary in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares at the Exercise Price as so adjusted. SECTION 8 STOCK EXCHANGE LISTINGS The Company shall use its Commercially Reasonable Efforts (including requests for waivers) to have the Warrants listed for quotation on the Market, and shall use its Commercially Reasonable Efforts to maintain such listing or inclusion. In the event the Warrants do not qualify for such listing or inclusion, the Company will use its Commercially Reasonable Efforts (including, requests for waivers) to effect such inclusion or listing whenever the Warrants qualify therefor. Any such listing and inclusion shall be at the Company's sole expense. In connection with any such listing or inclusion, the Company shall (i) cause a CUSIP number to be provided for the Warrants, (ii) if necessary, file with the SEC a registration statement under the Exchange Act with respect to all such Warrants and (iii) cause such registration statement to be declared effective and such effectiveness to be maintained for the term of the Warrants. Assuming that there will be at least 400 Holders of the Warrants, the Company believes that, on the date of their original issuance, the Warrants will meet the objective criteria for listing on the Market. 9 SECTION 9 ADJUSTMENT OF EXERCISE PRICE: NUMBER OF WARRANT SHARES AND SHARES OF CAPITAL STOCK INTO WHICH WARRANTS ARE EXERCISABLE The number and kind of securities purchasable upon the exercise of each Warrant, and the Exercise Price, shall be subject to adjustment from time to time upon the happening of certain events, as hereinafter described. 9.1 Mechanical Adjustments. The number of Warrant Shares purchasable upon the exercise of each Warrant and the Exercise Price shall be subject to adjustment as follows: (a) Adjustment for Change in Capital Stock. Subject to paragraphs (e) and (g) below, in case the Company shall (i) pay a dividend on its outstanding shares of Common Stock in shares of Common Stock or make a distribution of shares of Common Stock on its outstanding shares of Common Stock, (ii) make a distribution on its outstanding shares of Common Stock in shares of its capital stock other than Common Stock, (iii) subdivide its outstanding shares of Common Stock into a greater number of shares of Common Stock, (iv) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (v) issue, by reclassification of its shares of Common Stock, other securities of the Company (including any such reclassification in connection with a consolidation or merger in which the Company is the surviving entity), then the number of Warrant Shares purchasable upon exercise of each Warrant immediately prior thereto shall be adjusted so that the Holder of each Warrant shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which such Holder would have owned or have been entitled to receive upon the happening of any of the events described above had such Warrant been exercised in full immediately prior to the happening of such event or any record date with respect thereto. If a Holder is entitled to receive shares of two or more classes of capital stock of the Company pursuant to the foregoing upon exercise of Warrants, the allocation of the adjusted Exercise Price between such classes of capital stock shall be determined reasonably and in good faith by the Board of Directors of the Company. After such allocation, the exercise privilege and the Exercise Price with respect to each class of capital stock shall thereafter be subject to adjustment on terms substantially identical to those applicable to Common Stock in this Section 9. An adjustment made pursuant to this paragraph (a) shall become effective immediately after the record date for such event or, if none, immediately after the effective date of such event. Such adjustment shall be made successively whenever such an event occurs. (b) Adjustment for Rights Issue. Subject to paragraphs (e) and (g) below, in case the Company shall issue rights, options or warrants (collectively, "Rights") to all holders of its outstanding Common Stock entitling them to subscribe for or purchase shares of Common Stock at a Price Per Share (as defined in paragraph (d) below) which is lower at the record date mentioned below than the then Current Market Price (as defined in paragraph (d) below) per share of Common Stock, the number of Warrant Shares thereafter purchasable upon the exercise of each Warrant shall be determined by multiplying the number of Warrant Shares theretofore purchasable upon exercise of each Warrant by a fraction, the numerator of which shall be the 10 number of shares of Common Stock outstanding on the date of issuance of such Rights plus the additional Number of Shares (as defined in paragraph (d) below) of Common Stock offered for subscription or purchase in connection with such Rights and the denominator of which shall be the number of shares of Common Stock outstanding on the date of issuance of such Rights plus the number of shares which the aggregate Proceeds (as defined in paragraph (d) below) received or receivable by the Company upon exercise of such Rights would purchase at the Current Market Price per share of Common Stock at such record date. Such adjustment shall be made whenever Rights are issued, and shall become effective immediately after the record date for the determination of stockholders entitled to receive Rights. (c) Adjustment for Other Distributions. Subject to paragraphs (e) and (g) below, in case the Company shall distribute to all holders of its shares of Common Stock (x) evidences of indebtedness or assets (excluding cash dividends or distributions payable out of the consolidated earnings or surplus legally available for such dividends or distributions and dividends or distributions referred to in paragraphs (a) or (b) above) of the Company or any corporation or other legal entity a majority of the voting equity or equity interests of which are owned, directly or indirectly, by the Company (a "Subsidiary"), or (y) shares of capital stock of a Subsidiary (such evidences of indebtedness, assets and securities as set forth in clauses (x) and (y) above, collectively, "Assets"), then in each case the number of Warrant Shares thereafter purchasable upon the exercise of each Warrant shall be determined by multiplying the number of Warrant Shares theretofore purchasable upon the exercise of each Warrant by a fraction, the numerator of which shall be the Current Market Price per share of Common Stock on the date of such distribution and the denominator of which shall be such Current Market Price per share of Common Stock less the fair value as of such record date as determined reasonably and in good faith by the Board of Directors of the Company of the portion of the Assets applicable to one share of Common Stock. Such adjustment shall be made whenever any such distribution is made, and shall become effective on the date of distribution retroactive to the record date for the determination of stockholders entitled to receive such distribution. (d) Current Market Price; Price Per Share. For the purpose of any computation hereunder: (i) the "Current Market Price" per share of Common Stock at any date shall be the average of the daily closing prices for the 20 consecutive trading days preceding the date of such computation. The closing price for each day shall be (x) if the Common Stock shall be then authorized for quotation on the Nasdaq National Market, the closing price on The Nasdaq National Market -- Composite Tape (or any successor composite tape reporting transactions on The Nasdaq National Market) or, if such a composite tape shall not be in use or shall not report transactions in the Common Stock, or if the Common Stock shall be listed on a stock exchange other than The Nasdaq National Market, the last reported sales price regular way or, in case no such reported sale takes place on such day, the average of the closing bid and asked prices regular way for such day, in each case on the principal national securities exchange on which the shares of Common Stock are listed or admitted to trading (which shall be the national securities exchange on which the greatest number of shares of the Common Stock have been traded during such 20 consecutive trading days) or (y) if the Common Stock is not listed or authorized for quotation on the Nasdaq National Market or a national securities exchange, the average of the 11 closing bid and asked prices of the Common Stock in the over-the-counter market, the average of the closing bid and asked prices as furnished by two members of the NASD selected reasonably and in good faith from time to time by the Board of Directors for that purpose. In the absence of one or more such quotations, the Current Market Price per share of the Common Stock shall be determined reasonably and in good faith by the Board of Directors of the Company. (ii) "Price Per Share" shall be defined and determined according to the following formula: P = RJN where P = Price Per Share; R = the "Proceeds" received or receivable by the Company which (x) in the case of shares of Common Stock, is the total amount received or receivable by the, Company in consideration for the issuance and sale of such shares; and (y) in the case of Rights with respect to shares of Common Stock, is the total amount received or receivable by the Company in consideration for the issuance and sale of Rights, plus the minimum aggregate amount of additional consideration payable to the Company upon exercise, conversion or exchange thereof; provided that in each case the proceeds received or receivable by the Company shall be the net cash proceeds after deducting therefrom any compensation or expenses paid or discount allowed in the sale, underwriting or purchase thereof by underwriters or dealers or others performing similar services; and N = the "Number of Shares," which (x) in the case of Common Stock is the number of shares issued; and (y) in the case of Rights with respect to shares of Common Stock, is the maximum number of shares of Common Stock initially issuable upon exercise, conversion or exchange thereof. (e) Minimum Adjustment. No adjustment in the number of Warrant Shares purchasable hereunder shall be required unless such adjustment would require an increase or decrease of at least one percent (1%) in the number of Warrant Shares purchasable upon the exercise of each Warrant; provided that any adjustments which by reason of this paragraph (e) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations shall be made to the nearest one-thousandth of a Warrant Share and the nearest cent. (f) Adjustment in Exercise Price. Whenever the number of Warrant Shares purchasable upon the exercise of each Warrant is adjusted as herein provided, the Exercise Price payable upon exercise of each Warrant immediately prior to such adjustment shall be adjusted by multiplying such Exercise Price by a fraction, the numerator of which shall be the number of Warrant Shares purchasable upon the exercise of each Warrant immediately prior to such 12 adjustment and the denominator of which shall be the number of Warrant Shares purchasable immediately thereafter. (g) When No Adjustment Required. No adjustment in the number of Warrant Shares purchasable upon the exercise of each Warrant need be made under this Section 9.1 in connection with: (i) shares of Common Stock, options, rights, warrants or other securities issued pursuant to any plan adopted by the Company or its subsidiaries for the benefit of employees or directors; (ii) shares of Common Stock, options, rights, warrants or other securities issued pursuant to any rights issued pursuant to the Company's 1999 Stock Option Plan, 1996 Stock Option Plan, 1997 Stock Option Plan for French Employees, 1999'Directors' Option Plan, and 1998 Employee Stock Purchase Plan, as the same may be amended or supplemented from time to time or pursuant to any successor plans adopted by the Company; (iii) sales of Common Stock pursuant to a plan adopted by the Company for reinvestment of dividends or interest. (iv) any shares of Common Stock issued by the Company upon conversion of any shares of its Series A Preferred Stock outstanding on the date hereof or any shares of Common Stock issued in lieu of dividends on such Series A Preferred Stock, or (v) any shares of Common Stock, options, rights, warrants or other securities issued to a strategic investor, vendor, lessor, lender or similar arrangement. Additionally, no adjustment need be made if the Company issues or distributes to each Holder of Warrants the shares, rights, options, warrants, evidences of indebtedness, assets or other securities referred to in those paragraphs which each Holder of Warrants would have been entitled to receive had the Warrants been exercised for the number of Warrant Shares for which Warrants are then exercisable prior to the happening of such event or the record date with respect thereto. No adjustment in the number of Warrant Shares will be made for a change in the par value of the shares of Common Stock. If any action or transaction would require an adjustment of the Exercise Price and the number of Warrant Shares purchasable upon the exercise of each Warrant pursuant to more than one paragraph of this Section 9, only one adjustment shall be made and such adjustment shall be the amount of adjustment that has the highest absolute value. (h) Shares of Common Stock. For all purposes of this Agreement, the term "shares of Common Stock" shall mean (i) the Class A Common Stock and Class B Common Stock of the Company at the date of this Agreement or (ii) any other class of stock resulting from successive changes or reclassification of such shares consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. In the event that at any time, as a result of an adjustment made pursuant to this Section 9.1, the Holders shall become entitled to purchase any securities of the Company other than shares of Class A Common Stock, thereafter the number of such other shares so purchasable upon exercise of each Warrant and the Exercise Price of such shares shall be subject to adjustment from time to time in a manner and on terms substantially identical to the provisions with respect to the Warrant Shares contained in paragraphs (a) through (g) above, and the provisions of this Agreement with respect to the Warrant Shares shall apply on like terms to any such other securities. (i) Expiration of Rights, Etc. Upon the expiration of any Rights or conversion or exchange or exercise rights, if any thereof shall not have been exercised, the Exercise Price and the number of Warrant Shares purchasable upon the exercise of each Warrant shall, upon such expiration, be readjusted and shall thereafter be such as it would have been had 13 it been originally adjusted (or had the original adjustment not been required, as the case may be) as if (A) the only shares of Class A Common Stock so issued were the shares of Class A Common Stock, if any, actually issued or sold upon the exercise of such Rights or conversion or exchange or exercise rights and (B) such shares of Class A Common Stock, if any, were issued or sold for the consideration actually received by the Company upon such exercise plus the aggregate consideration, if any, actually received by the Company for the issuance, sale or grant of all of such Rights or conversion or exchange or exercise rights whether or not exercised; provided that no such readjustment shall have the effect of increasing the Exercise Price or decreasing the number of Warrant Shares purchasable upon the exercise of each Warrant by an amount in excess of the amount of the adjustment initially made in respect of the issuance, sale or grant of such Rights or conversion or exchange or exercise rights. 9.2 Voluntary Adjustment by the Company. The Company may, at its option and at any time during the term of the Warrants, reduce the then current Exercise Price to any amount deemed appropriate by the Board of Directors of the Company. 9.3 Notice of Adjustment. Whenever the number of Warrant Shares purchasable upon the exercise of each Warrant or the Exercise Price of Warrant Shares is adjusted as herein provided, the Company shall cause the Warrant Agent promptly to mail to each Holder, at the sole expense of the Company by first class mail, postage prepaid, notice of such adjustment or adjustments and shall deliver to the Warrant Agent a certificate of an officer of the Company setting forth the number of Warrant Shares purchasable upon the exercise of each Warrant and the Exercise Price of Warrant Shares after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth in reasonable detail the computations by which such adjustment was made. The Warrant Agent shall be entitled to rely on such certificate and shall be under no duty or responsibility with respect to any such certificate, except to exhibit the same, from time to time, to any Holder requesting an inspection thereof during reasonable business hours. The Warrant Agent shall not at any time be under any duty or responsibility to any Holder to determine whether any facts exist which may require any adjustment of the Exercise Price or the number of Warrant Shares or other stock or property purchasable on exercise of Warrants, or with respect to the nature or extent of any such adjustment when made, or with respect to the method employed in making such adjustment. 9.4 Preservation of Purchase Rights upon Merger or Consolidation, in case of any consolidation of the Company with or merger of the Company into another entity, the Company or such successor entity shall execute and deliver to the Warrant Agent an agreement, which shall be binding on the Holders, that each Holder shall have the right thereafter upon payment of the Exercise Price in effect immediately prior to such action (after giving effect to any applicable adjustments under Section 9.1 hereof) to purchase upon exercise of each Warrant the kind and amount of shares and other securities and property (including cash) which such Holder would have owned or have been entitled to receive after the happening of such consolidation or merger had such Warrant been exercised immediately prior to such action. The Company shall at its sole expense mail by first class mail, postage prepaid, to each Holder notice of the execution of any such agreement. Such agreement shall provide for adjustments, which shall be substantially identical to the adjustments provided for in this Section 9. In addition, the Company shall not merge or consolidate with or into any other entity, unless the successor entity 14 (if not the Company) shall expressly assume, by supplemental agreement reasonably satisfactory in form and substance to the Warrant Agent in its sole judgment and executed and delivered to the Warrant Agent, the due and punctual performance and observance of each and every covenant and condition of this Agreement to be performed and observed by the Company. The provisions of this Section 9.4 shall similarly apply to successive consolidations or mergers. 9.5 Statement on Warrants. Irrespective of any adjustments in the Exercise Price or the number or kind of shares purchasable upon the exercise of the Warrants, Warrants theretofore or thereafter issued may continue to express the same Exercise Price and number and kind of Warrant Shares as are stated in the Warrants initially issuable pursuant to this Agreement. 9.6 No Impairment. The Company shall not, for the purpose of avoiding or seeking to avoid the observance or performance of any of the terms and provisions of this Agreement, amend its Certificate of Incorporation or engage in any reclassification, reorganization, consolidation, merger, dissolution, liquidation, issue, sale or exchange of securities or any other voluntary action, but will at all times in good faith assist in the implementation of all such terms and provisions and in the taking of all such actions as may be necessary or appropriate in order to enable the Holders to realize the benefits of this Agreement and the Warrant Certificate. SECTION 10 FRACTIONAL INTERESTS Neither the Company nor the Warrant Agent shall be required to issue fractional Warrant Shares on the exercise of Warrants. If more than one Warrant shall be exercised at the same time by the same Holder, the number of full Warrant Shares which shall be issuable upon such exercise shall be computed on the basis of the aggregate number of Warrants so exercised. If any fraction of a Warrant Share would, except for the provisions of this Section 10, be issuable on the exercise of any Warrant, the Company shall pay an amount in cash equal to the closing price for one share of Class A Common Stock on the date the Warrant Certificate is presented for exercise (determined in accordance with the second sentence of Section 9.1(d)(i) hereof), multiplied by such fraction. SECTION 11 NO RIGHTS AS STOCKHOLDERS, NOTICES TO HOLDERS Nothing contained in this Agreement or in any of the Warrants shall be construed as conferring upon the Holders or their transferees the right to vote or to receive dividends or to consent or to receive notice as stockholders in respect of any meeting of stockholders for the election of directors of the Company or any other matter, or any rights whatsoever as stockholders of the Company. In case 15 (a) the Company shall authorize the issuance to all holders of shares of Common Stock of rights, options or warrants to subscribe for or purchase shares of Common Stock or of any other subscription rights or warrants; or (b) the Company shall authorize the distribution to all holders of shares of Common Stock of securities or assets (other than cash dividends); or (c) of any consolidation or merger to which the Company is a party and for which approval of any stockholders of the Company is required, or of the conveyance or transfer of a substantial portion of the assets of the Company for which approval of any stockholders of the Company is required, or of any reclassification or change of Common Stock issuable upon exercise of the Warrants (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or a tender offer or exchange offer for shares of Common Stock; or (d) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; then the Company shall cause to be filed with the Warrant Agent and shall cause to be given to each Holder at its address appearing on the Warrant Register, at least twenty (20) days prior to the applicable record date hereinafter specified, or promptly in the case of events for which there is no record date, by first class mail, postage prepaid, a written notice stating (i) the date as of which the Holders of record of shares of Common Stock entitled to receive any such rights, options, warrants or distribution are to be determined, (ii) the initial expiration date set forth in any tender offer or exchange offer for shares of Common Stock, or (iii) the date on which any such reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up is expected to become effective or consummated, as well as the date as of which it is expected that Holders of record of shares of Common Stock shall be entitled to exchange such shares for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation, or winding up. The failure to give the notice required by this Section 11 or any defect therein shall not affect the legality or validity of any distribution, right, option, warrant, reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation, winding up or action, or the vote upon any of the foregoing. SECTION 12 PAYMENTS OF EXERCISE PRICE All payments required to be made hereunder shall be made in lawful money of the United States of America and/or in the form of Notes. If a Holder elects to exercise a Warrant by tendering a Note, the value of such Note for purposes of the payment of the Exercise Price shall be the principal of and the accrued and unpaid interest on the Note multiplied by 133%. In accepting payment in the form of a Note, the Company shall reduce the principal and accrued but unpaid interest of such Note pro rata when used as payment of the Exercise Price hereunder. In the event that upon payment of all or part of the Exercise Price in the form of a Note, the Holder is entitled to the return of a new Note reflecting the remaining principal balance thereof, the 16 Company shall issue such new Note in a denomination of no less than $100 and in integral multiples of $100, and will pay any remaining principal amount, together with accrued and unpaid interest thereon, to the Holder in cash. SECTION 13 MERGER OR CONSOLIDATION OR CHANGE OF NAME OF WARRANT AGENT Any corporation into which the Warrant Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Warrant Agent shall be a party, or any corporation succeeding to the corporation trust business of the Warrant Agent, shall be the successor to the Warrant Agent hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that such corporation would be eligible for appointment as a successor Warrant Agent under the provisions of Section 15 hereof. In case at the time such successor to the Warrant Agent shall succeed to the agency created by this Agreement, any of the Warrant Certificates shall have been countersigned but not delivered, any such successor to the Warrant Agent may adopt the countersignature of the original Warrant Agent and deliver such Warrant Certificates so countersigned; and in case at that time any of the Warrant Certificates shall not have been countersigned, any successor to the Warrant Agent may countersign such Warrant Certificates either in the name of the predecessor Warrant Agent or in the name of the successor Warrant Agent; and in all such cases such Warrant Certificates shall be fully valid and effective as provided therein and in this Agreement. In case at any time the name of the Warrant Agent shall be changed and at such time any of the Warrant Certificates shall have been countersigned but not delivered, the Warrant Agent may adopt the countersignatures under its prior name and deliver such Warrant Certificates so countersigned; and in case at that time any of the Warrant Certificates shall not have been countersigned, the Warrant Agent may countersign such Warrant Certificates either in its prior name or in its changed name; and in all such cases such Warrant Certificates shall be fully valid and effective as provided therein and in this Agreement. SECTION 14 APPOINTMENT OF WARRANT AGENT The Company hereby appoints the Warrant Agent to act as agent for the Company hereunder and in accordance with the terms and conditions hereof, and the Warrant Agent hereby accepts such appointment. The Warrant Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the Holders, by their acceptance of the Warrant Certificates, shall be bound: 14.1 Correctness of Statements. The statements contained herein and in the Warrant Certificates shall be taken as statements of the Company, and the Warrant Agent assumes no responsibility for the correctness of any of the same except such as described the 17 Warrant Agent or action taken by it. The Warrant Agent assumes no responsibility with respect to the distribution of the Warrant Certificates or Warrants except as herein otherwise provided. 14.2 Breach of Covenants. The Warrant Agent shall not be responsible for any failure of the Company to comply with any of the covenants contained in this Agreement or in the Warrants to be complied with by the Company. 14.3 Performance of Duties. The Warrant Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents and shall not be responsible for the misconduct or negligence of any attorney or agent (which shall not include an employee of the Warrant Agent) appointed with due care. 14.4 Reliance on Counsel. The Warrant Agent may consult at any time with legal counsel satisfactory to it (who may be counsel for the Company), and the Warrant Agent shall incur no liability or responsibility to the Company or to any Holder in respect of any action taken, suffered or omitted by it hereunder in good faith and in accordance with the opinion or the advice of such counsel. 14.5 Proof of Action Taken. Whenever in the performance of its duties under this Agreement the Warrant Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed conclusively to be proved and established by a certificate signed by the Chairman of the Board, the President, a Vice President, the Treasurer or the Secretary of the Company and delivered to the Warrant Agent; and such certificate shall be full authorization to the Warrant Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. 14.6 Compensation. The Company agrees to pay the Warrant Agent reasonable compensation for all services rendered by the Warrant Agent in the performance of its duties under this Agreement, to reimburse the Warrant Agent for all reasonable expenses, taxes and governmental charges and other charges of any kind and nature incurred by the Warrant Agent in the performance of its duties under this Agreement (including but not limited to legal fees and expenses), and to indemnify the Warrant Agent and save it harmless against any and all liabilities, including judgments, costs and counsel fees, for anything done or omitted by the Warrant Agent or any of its agents in the performance of its duties under this Agreement, except as a result of the Warrant Agent's gross negligence or willful misconduct as determined in a final judgment of a court of competent jurisdiction and authority. The Company's obligations under this Section 14.6 and any claim arising hereunder shall survive the resignation or removal of the Warrant Agent and the termination or discharge of the Company's obligations under this Agreement. 14.7 Legal Proceeding. The Warrant Agent shall be under no obligation to institute any action, suit or legal proceeding or to take any other action likely to involve expense unless the Company or any one or more Holders shall furnish the Warrant Agent with reasonable 18 security and indemnity for any costs and expenses which may be incurred or any liabilities which may arise, but this provision shall not affect the power of the Warrant Agent to take such action as the Warrant Agent may consider proper, whether with or without any such security or indemnity. All rights of action of any Holder under this Agreement or under any of the Warrants may be enforced by the Warrant Agent without the possession of any of the Warrant Certificates or the production thereof at any trial or other proceeding relative thereto, and any such action, suit or proceeding instituted by the Warrant Agent shall be brought in its name as Warrant Agent, and any recovery of judgment shall be for the ratable benefit of the Holders, as their respective rights or interests may appear. 14.8 Other Transactions in Securities of the Company. The Warrant Agent and any stockholder, director, officer or employee of the Warrant Agent may buy, sell or deal in any of the Warrants or any other securities of the Company or become pecuniary interested in any transaction in which the Company may be interested or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Warrant Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other Person. 14.9 Liability of Warrant Agent. The Warrant Agent shall act hereunder solely as agent, and its duties shall be determined solely by the provisions hereof. The Warrant Agent shall not be liable for anything which it may do or refrain from doing in connection with this Agreement except for its own gross negligence or bad faith. 14.10 Reliance on Documents. The Warrant Agent will not incur any liability or responsibility to the Company or to any Holder for any action taken in reliance on any notice, resolution, waiver, consent, order, certificate or other paper, document or instrument reasonably believed by it to be genuine and to have been signed, sent or presented by the proper party or parties. 14.11 Validity of Agreement. The Warrant Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Warrant Agent) or in respect of the validity or execution of any Warrant Certificate (except its countersignature thereto) or any Warrant; nor shall the Warrant Agent by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any Warrant Shares (or other securities) to be issued pursuant to this Agreement or any Warrant, or as to whether any Warrant Shares (or other securities) will, when issued, be validly issued, fully paid and nonassessable, or as to the Exercise Price or the number or amount of Warrant Shares or other securities or any assets or other property issuable upon exercise of any Warrant. 14.12 Instructions from Company. The Warrant Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from the Chairman of the Board, the President, a Vice President, the Treasurer or the Secretary of the Company, and to apply to such officers for advice or instructions in connection with its duties, and shall not be liable for any action taken or suffered to be taken by it in good faith in 19 accordance with instructions of any such officer or officers, provided such instructions are not in contravention of this Agreement. SECTION 15 CHANGE OF WARRANT AGENT The Warrant Agent may resign and be discharged from its duties under this Agreement by giving to the Company thirty (30) days' notice in writing. The Company may remove the Warrant Agent if: (1) the Warrant Agent fails to comply with the terms of this Agreement; (2) the Warrant Agent is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Warrant Agent under any Bankruptcy Law; (3) a custodian or public officer takes charge of the Warrant Agent or its property; or (4) the Warrant Agent becomes incapable of acting. The Warrant Agent may be removed by like notice to the Warrant Agent and the Holders from the Company, such notice to specify the date when removal shall become effective. If the Warrant Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Warrant Agent. If the Company shall fail to make such appointment within a period of thirty (30) days after such removal or notification in writing of such resignation or incapacity by the resigning or incapacitated Warrant Agent or by any Holder (who shall with such notice submit his Warrant Certificate or Certificates for inspection by the Company), then any Holder may apply to any court of competent jurisdiction for the appointment of a successor to the Warrant Agent. Any successor Warrant Agent, whether appointed by the Company or such a court, shall be a bank or trust Company, in good standing, incorporated under the laws of the United States of America or any state thereof and having at the time of its appointment as Warrant Agent a combined capital and surplus of at least $100,000,000. After appointment and acceptance of such appointment in writing, the successor Warrant Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Warrant Agent without further act or deed; but the former Warrant Agent shall deliver and transfer to the successor Warrant Agent any property at the time held by it hereunder, and shall execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Failure to file any notice provided for in this Section 15, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Warrant Agent or the appointment of the successor Warrant Agent, as the case may be. In the event of such resignation or removal, the successor Warrant Agent shall mail, by first class mail, postage prepaid, to each Holder, written notice of such removal or resignation and the name and address of such successor Warrant Agent. SECTION 16 MISCELLANEOUS 16.1 Notices. Any notice pursuant to this Agreement by the Company or by any Holder to the Warrant Agent, or by the Warrant Agent or by any Holder to the Company, shall be in writing and shall be delivered in person or by facsimile transmission, or mailed first class, postage prepaid, (a) to the Company, at its offices at 8000 Towers Crescent Drive, Vienna, VA 22182, Attn: General Counsel, Facsimile No: 703-848-8610, or (b) to the Warrant Agent, at its offices at 59 Maiden Lane, New York, New York 10038, Attention: Executive Vice President, 20 Facsimile No.: (718) 236-4588. Each party hereto may from time to time change the address to which notices to it are to be delivered or mailed hereunder by notice to the other party. Any notice mailed pursuant to this Agreement by the Company or the Warrant Agent to the Holders shall be in writing and shall be mailed first class, postage prepaid, or otherwise delivered, to such Holders at their respective addresses in the Warrant Register. The initial address of each Holder shall be as provided by the Company to the Warrant Agent. Any Holder may change its address by notice to the Company and the Warrant Agent given in accordance with this Section 16.1. 16.2 Cancellation of Warrants. In the event the Company shall purchase or otherwise acquire Warrants, the same shall thereupon be delivered to the Warrant Agent and be cancelled by it and retired. The Warrant Agent shall cancel any Warrant Certificate surrendered for exchange, substitution, transfer or exercise in whole or in part. 16.3 Supplements and Amendments. The Company and the Warrant Agent may from time to time supplement or amend this Agreement, the Warrants and the Warrant Certificates without approval of any Holder, in order to cure any ambiguity or to correct or supplement any provision contained herein which may be defective or inconsistent with any other provision herein, or to comply with the requirements of any national securities exchange or the Market (including but not limited to the deletion of Section 9.2), or to make any other provisions in regard to matters or questions arising hereunder which the Company and the Warrant Agent may deem necessary or desirable and which shall not be inconsistent with the provisions of the Warrants and this Agreement. Any other supplement or amendment to this Agreement may be made with the approval of the holders of a majority of the then outstanding Warrants; provided, however, that any such amendment or supplement that (i) increases the Exercise Price; (ii) decreases the number of shares of Class A Common Stock issuable upon exercise of a Warrant; or (iii) shortens the period during which the Warrants may be exercised shall require the consent of each Holder of a Warrant affected thereby. 16.4 Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Warrant Agent shall bind and inure to the benefit of the Company or the Warrant Agent and their respective successors hereunder. 16.5 Applicable Law. This Agreement, the Warrants, the rights and obligations of the parties hereto and any claims or disputes relating thereto shall be governed by and construed in accordance with the laws of Delaware (excluding the choice of law rules thereof). 16.6 Benefits of this Agreement. Nothing in this Agreement shall be construed to give any person or corporation other than the Company, the Warrant Agent and the Holders any legal or equitable right, remedy or claim under this Agreement; and this Agreement shall be for the sole and exclusive benefit of the Company, the Warrant Agent, their respective assigns and the Holders. 16.7 Execution in Counterparts. This Agreement may be executed in multiple counterparts, which, when taken together, shall constitute an original. 21 16.8 Captions. The captions of the sections and subsections of this Agreement have been inserted for convenience only and shall have no substantive effect. [SIGNATURES APPEAR ON NEXT PAGE] 22 Signatures IN WITNESS WHEREOF, each of the undersigned have duly caused this Agreement to be executed on their behalf as of the day and year first above written. MICROSTRATEGY INCORPORATED By: /s/ Lewis H. Ferguson ----------------------------- Name: Lewis H. Ferguson --------------------------- Title: Counsel for MicroStrategy -------------------------- AMERICAN STOCK TRANSFER & TRUST COMPANY By: /s/ Herbert J. Lemmer ----------------------------- Name: Herbert J. Lemmer --------------------------- Title: VICE PRESIDENT -------------------------- 23 CUSIP No. _________ THIS WARRANT IS GOVERNED BY AND SUBJECT TO THE TERMS AND CONDITIONS CONTAINED IN THE WARRANT AGREEMENT (AS DEFINED HEREIN). A COPY OF THE WARRANT AGREEMENT MAY BE OBTAINED UPON REQUEST FROM MICROSTRATEGY INCORPORATED OR THE WARRANT AGENT (AS DEFINED HEREIN). Warrant to Purchase Class A Common Stock of MicroStrategy Incorporated Void after __________ __, 200_ [5 years from date of issue] This Warrant (the "Warrant") is issued to _________________________, or his, her or its registered assigns (the "holder") by MicroStrategy Incorporated, a Delaware corporation (the "Company"), on ___________________, 2001 (the "Warrant Issue Date"). This Warrant is issued pursuant to that certain Warrant Agreement dated as of January 11, 2001 (the "Warrant Agreement"), between the Company and American Stock Transfer & Trust Company, a New York limited purpose trust company, as Warrant Agent (together with any successors and assigns, the "Warrant Agent") and in furtherance of that certain Stipulation of Settlement in settlement of a class-action lawsuit (the "Action") pending in the United States District Court for the Eastern District of Virginia, entitled In re MicroStrategy Incorporated Securities Litigation, Civil Action No. 00-473-A (the "Stipulation"). All capitalized terms not defined herein shall have the meanings ascribed to them in the Warrant Agreement. 1. Purchase Shares. Subject to the terms and conditions hereinafter set forth, the holder is entitled, upon surrender of this Warrant to the Warrant Agent (or at such other place as the Company shall notify the holder hereof in writing), to purchase from the Company up to _____________________________ (____________) fully paid and nonassessable shares of the Company's Class A common stock, par value $0.001 per share, as constituted on the Warrant Issue Date (the "Common Stock"). The number of shares of Common Stock issuable pursuant to this Section 1 (the "Warrant Shares") shall be subject to adjustment pursuant to Section 9 of the Warrant Agreement. 2. Exercise Price. The purchase price for the Warrant Shares shall be $_____ per share, as adjusted from time to time pursuant to Sections 9.1(f) and 9.2 of the Warrant Agreement (the "Exercise Price"). All payments required to be made hereunder shall be made in lawful money of the United States of America and/or in the form of 7 1/2% Series A Unsecured Notes due five (5) years from date of initial issuance of the 7 1/2% Series A Unsecured Notes unless extended pursuant to Section 4.1 of the Warrant Agreement (the "Notes"). To the extent a holder validly elects to exercise a Warrant by tendering a Note, the value of such Note for purposes of the payment of the Exercise Price shall be the principal of and the accrued and unpaid interest on the Note tendered to the date of tender multiplied by l33%. 3. Exercise Period. This Warrant shall be exercisable, in whole or in part, on any Business Day, from and after the later of ___________ __, 2001 and the Effective Date and until 5:00 p.m., New York City time, on the fifth anniversary of such later date (the "Exercise Period"). 4. Method of Exercise. While this Warrant remains outstanding and exercisable in accordance with Section 3 above, the holder may exercise, in whole or in part, the purchase rights evidenced hereby. Such exercise shall be effected by: (a) the surrender of the Warrant, together with a duly executed copy of the form of Notice of Election attached hereto, to the Warrant Agent at its principal offices; and (b) the payment to the Warrant Agent for the account of the Company in the manner provided for and in an amount equal to the aggregate Exercise Price as set forth in Section 2 herein for the number of Warrant Shares being purchased. 5. Certificates for Warrant Shares. Upon the exercise of the purchase rights evidenced by this Warrant, one or more certificates for the number of Warrant Shares so purchased shall be issued as soon as practicable thereafter (with appropriate restrictive legends, if applicable), and in any event within thirty (30) days of the delivery of the Notice of Election. In case the holder shall exercise this Warrant with respect to less than all of the Warrant Shares that may be purchased under this Warrant, the Company shall execute a new warrant in the form of this Warrant for the balance of such Warrant Shares and deliver such new warrant to the holder of this Warrant. 6. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant, but in lieu of such fractional shares the Company shall make a cash payment therefor on the basis of the Exercise Price then in effect. 7. No Shareholder Rights. Prior to exercise of this Warrant, the holder shall not be entitled to any rights of a shareholder with respect to the Warrant Shares, including (without limitation) the right to vote such Warrant Shares, receive dividends or other distributions thereon, exercise preemptive rights or be notified of shareholder meetings, and such holder shall not be entitled to any notice or other communication concerning the business or affairs of the Company. However, nothing in this Section 7 shall limit the right of the holder to be provided the notices required under the Warrant Agreement. 8. Transfers of Warrant. Subject to compliance with applicable federal and state securities laws, this Warrant and all rights (but only with all related obligations) hereunder are transferable in whole or in part by the holder. The transfer shall be recorded on the books of the Company upon (i) the surrender of this Warrant, properly endorsed, or as otherwise provided for in Section 3 of the Warrant Agreement to the Warrant Agent at its principal offices, and (ii) the payment to the Company of all transfer taxes and other governmental charges imposed on such transfer. In the event of a partial transfer, the Company shall issue to the holders one or more appropriate new warrants. 9. Successors and Assigns. The terms and provisions of this Warrant and the Warrant Agreement shall inure to the benefit of, and be binding upon, the Company and the holders hereof and their respective successors and assigns. 10. Amendments and Waivers. Any term of this Warrant may be amended and the observance of any term of this Warrant may be waived (either generally or in a particular instance and either retroactively or prospectively), with the written consent of the Company and the holder. Any waiver or amendment effected in accordance with this Section shall be binding upon each holder of any Warrant Shares purchased under this Warrant at the time outstanding (including securities into which such Warrant Shares have been converted), each future holder of all such Warrant Shares, and the Company. 11. Notices. All notices required under this Warrant shall be deemed to have been given or made for all purposes (i) upon personal delivery, (ii) upon confirmation receipt that the communication 2 was successfully sent to the applicable number if sent by facsimile; (iii) one (1) business day after being sent, when sent by professional overnight courier service, or (iv) five (5) days after posting when sent by registered or certified mail. Notices to the Company shall be sent to the principal office of the Company (or at such other place as the Company shall notify the holder hereof in writing). Notices to the holder shall be sent to the address of the holder on the books of the Company (or at such other place as the holder shall notify the Company hereof in writing). Notices to the Warrant Agent shall be sent to: American Stock Transfer & Trust Company, 59 Maiden Lane, New York, New York 10038, Attn: Executive Vice President, facsimile (718) 236-4588 or such other address as the Warrant Agent shall indicate in a notice to the Company and the holder. 12. Captions. The section and subsection headings of this Warrant are inserted for convenience only and shall not constitute a part of this Warrant in construing or interpreting any provision hereof. 13. Governing Law. This Warrant shall be governed by the laws of Delaware (excluding the choice of law rules thereof). 14. Warrant Agreement. This Warrant is governed by and subject to the terms and conditions contained in the Warrant Agreement. In the event of a conflict between the provisions of the Warrant Agreement and this Warrant, the provisions of the Warrant Agreement shall govern. A copy of the Warrant Agreement may be obtained at no cost upon request from the Company at its principal office or from the Warrant Agent. IN WITNESS WHEREOF, the Company and the Warrant Agent have caused this Warrant to be executed by officers thereunto duly authorized. MICROSTRATEGY INCORPORATED _____________________________ Name: _______________________ Title: ______________________ AMERICAN STOCK TRANSFER & TRUST COMPANY _____________________________ Name: _______________________ Title: ______________________ 3 MICROSTRATEGY INCORPORATED WARRANT NOTICE OF EXERCISE To: AMERICAN STOCK TRANSFER & TRUST COMPANY 59 Maiden Lane New York, New York 10038 Attn: Executive Vice President Facsimile (718) 236-4588 (a) The undersigned hereby elects to purchase ___________________ shares of Class A Common Stock of MicroStrategy Incorporated (the "Company"), pursuant to the terms of the attached Warrant and the Warrant Agreement referenced therein. To the extent the undersigned is not exercising this Warrant in full, please reissue and return to the undersigned a new warrant to purchase the remaining number of shares of Class A Common Stock. (b) Payment of the Exercise Price per share required under such Warrant accompanies this notice in the form of [mark as applicable]: _____ Cash in the amount of __________________ by means of _____ wire transfer of immediately available funds to the Warrant Agent for the account of the Company, or _____ certified or official bank check or checks to the order of the Company; or: _____ Tender of 7 1/2% Series A Unsecured Notes in the amount of _______________. To the extent that the 7 1/2% Series A Unsecured Notes tendered to pay the warrant exercise price exceeds the warrant exercise price, a new 7 1/2% Series A Unsecured Note for the balance shall be issued to the Holder and any fractional amount not evenly divisible by $100 shall at the Company's option either be paid in cash or in additional shares of Class A Common Stock rounded up to the next whole number of shares. ________________________________________________ By:_____________________________________________ [NAME] Taxpayer I.D. No. or Soc. Sec. No: _______________________ Address: _____________________________________________ __________________________________________________ Date:__________________ Name in which shares should be registered: __________________________________________________ Taxpayer I.D. No. or Soc. Sec. No.________________ Address: _________________________________________ __________________________________________________ Signatures must be guaranteed by an eligible guarantor institution (a bank, stockbroker, savings and loan association or credit union with membership in an approved signature guarantee medallion program) pursuant to Rule l7Ad-15 of the Securities Exchange Act of 1934. Signature Guaranteed by: __________________________________________________ __________________________________________________ MICROSTRATEGY INCORPORATED WARRANT TRANSFER To: AMERICAN STOCK TRANSFER & TRUST COMPANY 59 Maiden Lane New York, New York 10038 Attn: Executive Vice President Facsimile: (718) 236-4588 For value received, the undersigned hereby sells, assigns and transfers unto __________________________________________________________ the right to purchase __________________________ (________) shares of Series A Common Stock, par value $0.00l per share, of MicroStrategy Incorporated (the "Corporation") pursuant to the attached Warrant and does hereby irrevocably constitute and appoint ___________ attorney to transfer the Warrant, or such portion as is transferred hereby, on the books of the Corporation with full power of substitution in the premises. The undersigned requests said attorney to issue to the transferee a Warrant certificate evidencing such transfer and to issue to the undersigned a new Warrant evidencing the right to purchase Series A Common Stock for the balance not so transferred, if any. Signature: _________________________________________ By:_________________________________________ [NAME] Taxpayer I.D. No. or Soc. Sec. No: _________________ Address: _________________________________________ ______________________________________________ Date:__________________ Name in which new Warrant(s) should be registered: Right to Purchase No. of Shares of Series A Common Stock: __________________ Name: _________________________________________________ Taxpayer I.D. No. or Soc. Sec. No: _________________________ Address: ________________________________________________ ______________________________________________ ______________________________________________ The balance of the attached Warrant not so transferred shall be returned to the transferor in the form of a new Warrant reflecting such reduced amount. Signatures must be guaranteed by an eligible guarantor institution (a bank, stockbroker, savings and loan association or credit union with membership in an approved signature guarantee medallion program) pursuant to Rule l7Ad-15 of the Securities Exchange Act of 1934. Signature Guaranteed by: ______________________________________________ ______________________________________________ - -------------------------------------------------------------------------------- MICROSTRATEGY INCORPORATED, Issuer, and AMERICAN STOCK TRANSFER & TRUST COMANY Trustee INDENTURE Dated as of January 11, 2001 $80,500.000 as adjusted pursuant to the Stipulation of Settlement defined herein 7 1/2% Series A Unsecured Notes - -------------------------------------------------------------------------------- TABLE OF CONTENTS ARTICLE I DEFINITIONS; TRUST INDENTURE ACT ................................ 1 SECTION 1.01. DEFINITIONS ................................................ 1 SECTION 1.02. OTHER DEFINITIONS .......................................... 5 SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT .......... 5 SECTION 1.04. RULES OF CONSTRUCTION ...................................... 6 ARTICLE II THE NOTES ...................................................... 6 SECTION 2.01. FORM AND DATING ............................................ 6 SECTION 2.02. EXECUTION AND AUTHENTICATION ............................... 8 SECTION 2.03. REGISTRAR AND PAYING AGENT ................................. 8 SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST ........................ 9 SECTION 2.05. HOLDER LISTS ............................................... 9 SECTION 2.06. TRANSFER AND EXCHANGE ...................................... 9 SECTION 2.07. REPLACEMENT NOTES .......................................... 10 SECTION 2.08. OUTSTANDING NOTES .......................................... 10 SECTION 2.09. TREASURY NOTES ............................................. 10 SECTION 2.10. TEMPORARY NOTES ............................................ 11 SECTION 2.11. CANCELLATION ............................................... 11 SECTION 2.12. ADDITIONAL REDUCTION IN PRINCIPAL AMOUNT OF AND INTEREST ON THE NOTES .................................................... 11 SECTION 2.13. DEFAULTED INTEREST ......................................... 11 SECTION 2.14. CUSIP NUMBERS .............................................. 12 ARTICLE III REDEMPTION .................................................... 12 SECTION 3.01. REDEMPTION ................................................. 12 SECTION 3.02. NOTICES TO TRUSTEE ......................................... 12 SECTION 3.03. SELECTION OF NOTES TO BE REDEEMED .......................... 12 SECTION 3.04. NOTICE TO HOLDERS OF REDEMPTION ............................ 13 SECTION 3.05. EFFECT OF NOTICE OF REDEMPTION ............................. 14 SECTION 3.06. DEPOSIT OF REDEMPTION PRICE ................................ 14 SECTION 3.07. NOTES REDEEMED IN PART ..................................... 14 SECTION 3.08. PAYMENT OF INTEREST FOLLOWING NOTICE OF REDEMPTION ......... 14 ARTICLE IV MANDATORY CONVERSION ........................................... 14 SECTION 4.01. MANDATORY CONVERSION ....................................... 14 SECTION 4.02. NOTICES TO TRUSTEE ......................................... 14 SECTION 4.03. SELECTION OF NOTES TO BE CONVERTED ......................... 15 SECTION 4.04. NOTICE TO HOLDERS OF CONVERSION ............................ 15 SECTION 4.05. EFFECT OF NOTICE OF CONVERSION ............................. 16 SECTION 4.06. DEPOSIT OF CONVERSION SHARES AND MONEY ..................... 16 SECTION 4.07. NOTES CONVERTED IN PART .................................... 16 SECTION 4.08. FRACTIONAL SHARES .......................................... 17 -i- SECTION 4.09. TAXES ON CONVERSION ........................................ 17 SECTION 4.10. COMPANY TO PROVIDE STOCK ................................... 17 SECTION 4.11. PAYMENT OF INTEREST AND DIVIDENDS FOLLOWING NOTICE OF CONVERSION ............................................................... 17 ARTICLE V COVENANTS ....................................................... 18 SECTION 5.01. PAYMENT OF NOTES ........................................... 18 SECTION 5.02. COMPLIANCE CERTIFICATE ..................................... 18 SECTION 5.03 REPORTS ..................................................... 19 SECTION 5.04. CORPORATE EXISTENCE ........................................ 19 SECTION 5.05. OBLIGATION TO REDEEM/CONVERT ............................... 19 SECTION 5.06. RESTRICTIONS ON CONVERSION ................................. 19 ARTICLE VI SUBORDINATION .................................................. 20 SECTION 6.01. AGREEMENT TO SUBORDINATE AND RANKING ....................... 20 SECTION 6.02. NO PAYMENT ON NOTES IF SENIOR DEBT IN DEFAULT .............. 20 SECTION 6.03. DISTRIBUTION ON ACCELERATION OF NOTES; DISSOLUTION AND REORGANIZATION; SUBROGATION OF NOTES ..................................... 21 SECTION 6.04. RELIANCE BY SENIOR DEBT ON SUBORDINATION PROVISIONS ........ 24 SECTION 6.05. NO WAIVER OF SUBORDINATION PROVISIONS ...................... 24 SECTION 6.06. TRUSTEE'S RELATION TO SENIOR DEBT .......................... 25 SECTION 6.07. OTHER PROVISIONS SUBJECT HERETO ............................ 25 ARTICLE VII SUCCESSORS .................................................... 26 SECTION 7.01. LIMITATION ON MERGER, SALE OR CONSOLIDATION ................ 26 SECTION 7.02. SUCCESSOR CORPORATION SUBSTITUTED .......................... 26 ARTICLE VIII DEFAULTS AND REMEDIES ........................................ 27 SECTION 8.01. EVENTS OF DEFAULT .......................................... 27 SECTION 8.02. ACCELERATION ............................................... 28 SECTION 8.03. OTHER REMEDIES ............................................. 28 SECTION 8.04. WAIVER OF PAST DEFAULTS .................................... 28 SECTION 8.05. CONTROL BY MAJORITY ........................................ 29 SECTION 8.06. LIMITATION ON SUITS ........................................ 29 SECTION 8.07. RIGHTS OF HOLDERS TO RECEIVE PAYMENT ....................... 29 SECTION 8.08. COLLECTION SUIT BY TRUSTEE ................................. 29 SECTION 8.09. TRUSTEE MAY FILE PROOFS OF CLAIM............................ 30 SECTION 8.10. PRIORITIES ................................................. 30 SECTION 8.11. UNDERTAKING FOR COSTS ...................................... 30 ARTICLE IX TRUSTEE ........................................................ 31 SECTION 9.01. DUTIES OF TRUSTEE .......................................... 31 SECTION 9.02. RIGHTS OF TRUSTEE .......................................... 31 SECTION 9.03. INDIVIDUAL RIGHTS OF TRUSTEE ............................... 32 SECTION 9.04. TRUSTEE'S DISCLAIMER ....................................... 32 SECTION 9.05. NOTICE OF DEFAULTS ......................................... 32 SECTION 9.06. REPORTS BY TRUSTEE TO HOLDERS .............................. 32 -ii- SECTION 9.07. COMPENSATION AND INDEMNITY ................................. 33 SECTION 9.08. REPLACEMENT OF TRUSTEE ..................................... 34 SECTION 9.09. SUCCESSOR TRUSTEE BY MERGER, ETC. .......................... 35 SECTION 9.10. ELIGIBILITY; DISQUALIFICATION .............................. 35 SECTION 9.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY .......... 35 ARTICLE X DISCHARGE OF INDENTURE .......................................... 35 SECTION 10.01. TERMINATION OF COMPANY'S OBLIGATIONS ...................... 35 SECTION 10.02. REPAYMENT TO COMPANY ...................................... 35 ARTICLE XI AMENDMENTS, SUPPLEMENTS AND WAIVERS ............................ 36 SECTION 11.01. WITHOUT CONSENT OF HOLDERS ................................ 36 SECTION 11.02. WITH CONSENT OF HOLDERS ................................... 36 SECTION 11.03. COMPLIANCE WITH TRUST INDENTURE ACT ....................... 37 SECTION 11.04. REVOCATION AND EFFECT OF CONSENTS ......................... 37 SECTION 11.05. NOTATION ON OR EXCHANGE OF NOTES .......................... 38 SECTION 11.06. TRUSTEE PROTECTED ......................................... 38 ARTICLE XII MISCELLANEOUS ................................................. 38 SECTION 12.01. TRUST INDENTURE ACT CONTROLS .............................. 38 SECTION 12.02. NOTICES ................................................... 38 SECTION 12.03. COMMUNICATION BY HOLDERS WITH OTHER HOLDERS ............... 39 SECTION 12.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT ........ 39 SECTION 12.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION ............. 39 SECTION 12.06. RULES BY TRUSTEE AND AGENTS ............................... 39 SECTION 12.07. LEGAL HOLIDAYS ............................................ 40 SECTION 12.08. NO RECOURSE AGAINST OTHERS ................................ 40 SECTION 12.09. COUNTERPARTS AND FACSIMILE SIGNATURES ..................... 40 SECTION 12.10. VARIABLE PROVISIONS ....................................... 40 SECTION 12.11. GOVERNING LAW, SUBMISSION TO JURISDICTION ................. 41 SECTION 12.12. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS ............. 42 SECTION 12.13. SUCCESSORS ................................................ 42 SECTION 12.14. SEVERABILITY .............................................. 42 SECTION 12.15. TABLE OF CONTENTS, HEADINGS, ETC. ......................... 42 Exhibit Exhibit A. Form of Note ................................................... Al -iii- INDENTURE, dated as of January 11, 2001, between MicroStrategy Incorporated, a Delaware corporation with a principal place of business at 8000 Towers Crescent Drive, Suite 1400, Vienna, Virginia 22182 (the "COMPANY"), and American Stock Transfer & Trust Company, a New York limited purpose trust company with a principal place of business at 59 Maiden Lane, New York, New York 10038, as trustee (the "TRUSTEE"). Each party agrees as follows for the benefit of the other party and for the equal and ratable benefit of the Holders (as defined in Section 1.01 hereof) of the Company's 7 1/2% Series A Unsecured Notes due five years after the Initial Issuance Date of the Notes (the "NOTES"): ARTICLE I DEFINITIONS; TRUST INDENTURE ACT SECTION 1.01. DEFINITIONS. "AFFILIATE" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise. "AGENT" means any Registrar, Paying Agent, Presenting Agent or Conversion Agent. "BOARD OF DIRECTORS" means the Board of Directors of the Company or any authorized committee of the Board of Directors. "BOARD RESOLUTION" means a duly authorized resolution of the Board of Directors. "BUSINESS DAY" means any day that is not a Legal Holiday. "CAPITAL STOCK" means any and all shares, interests, participations, rights or other equivalents, however designated, of corporate stock, including, without limitation, partnership interests. "COMMON STOCK" means the Class A common stock, par value $0.001 per share, of the Company as the same exists at the date of the execution of this Indenture or as such stock may be constituted from time to time. "COMPANY" means the party named as such above until a successor replaces it in accordance with Article VII and thereafter means the successor. 1 "DEFAULT" means any event that is, or with the passage of time or the giving of notice or both would be, an Event of Default. "DESIGNATED SENIOR DEBT" means Senior Debt in which the instrument creating or evidencing the same or the assumption or guarantee thereof (or related agreements or documents to which the Company is a party) expressly provides that such Senior Debt shall be "Designated Senior Debt" for the purposes of the Indenture. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "EXCHANGE RATE CONTRACT" means, with respect to any Person, any currency swap agreements, forward exchange rate agreements, foreign currency futures or options, exchange rate collar agreements, exchange rate insurance and other agreements or arrangements, or combination thereof, the principal purpose of which is to provide protection against fluctuations in currency exchange rates. An Exchange Rate Contract may also include an Interest Rate Agreement. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession, which are in effect from time to time. "GUARANTEE" means a guarantee, other than by endorsement of negotiable instruments for collection in the ordinary course of business, direct or indirect, in any manner, including, without limitation, letters of credit and reimbursement agreements in respect thereof, of all or any part of any Indebtedness. "HOLDER" means a Person in whose name a Note is registered in the register referred to in Section 2.03. "INDEBTEDNESS" means, with respect to any Person, any indebtedness of such Person, whether or not contingent, in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit, or reimbursement agreements in respect thereof, or representing the balance deferred and unpaid of the purchase price of any property (which purchase price is due more than six months after the placing into service or delivery of such property) including pursuant to capital leases and sale-and-leaseback transactions, or representing any hedging obligations under an Exchange Rate Contract or an Interest Rate Agreement, except any such balance that constitutes an accrued expense or trade payable, if and to the extent any of the foregoing indebtedness, other than obligations under an Exchange Rate Contract or an Interest Rate Agreement, would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, and also includes, to the extent not otherwise included, the Guarantee of items which would be included within this definition if incurred directly by such Person. The amount of any Indebtedness outstanding as of any date shall be the accreted value thereof, in the case of any Indebtedness issued with original issue discount. Indebtedness shall not include liabilities for taxes of any kind. "INDENTURE" means this Indenture, as amended from time to time. 2 "INITIAL ISSUANCE DATE" shall be the date of the first issuance of a 7 1/2% Series A Unsecured Note. "INITIAL RECIPIENTS" means those Persons initially receiving Notes pursuant to the Stipulation of Settlement. "INTEREST ACCRUAL COMMENCEMENT DATE" shall be the date of the commencement of the Settlement Hearing in respect of a class-action lawsuit in the United Stated District Court for the Eastern District of Virginia, entitled In re MicroStrategy Incorporated Securities Litigation, Civil Action No. 00-473-A. "INTEREST RATE AGREEMENT" means, with respect to any Person, any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or other similar agreement the principal purpose of which is to protect the party indicated therein against fluctuations in interest rates. "ISSUANCE DATE" means the date on which the Notes are first authenticated and issued. "MARKET" means the Nasdaq National Market, or if the Common Stock is no longer authorized for quotation on such market, such national securities exchange upon which the Common Stock is listed, or if the Common Stock is not authorized for quotation on the Nasdaq National Market or listed on any national securities exchange, the over-the-counter market as reported by the National Association of Securities Dealers Automated Quotation System, or if not so quoted, as reported by National Quotation Bureau, Incorporated, or a similar organization. "NOTES" has the meaning set forth in the preamble hereto. "OBLIGATIONS" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "OFFICER" means the Chairman or Vice Chairman of the Board, the President, any Vice President, the Treasurer, the Secretary, any Assistant Treasurer or any Assistant Secretary of the Company. "OFFICERS' CERTIFICATE" means a certificate of the Company signed by two Officers, one of whom must be the Chairman of the Board, the President, the Treasurer or a Vice President of the Company. "OPINION OF COUNSEL" means a written opinion from legal counsel who is reasonably acceptable to the Trustee. The counsel may be an employee of or counsel to the Company or the Trustee. "PERSON" means any natural person, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization, limited liability 3 company, limited liability partnership, government or any agency or political subdivision thereof or any other entity or organization. "SEC" means the Securities and Exchange Commission. "SECURITIES ACT" means the Securities Act of 1933, as amended. "SENIOR DEBT" means the principal of, interest on and other amounts due on: (i) secured Indebtedness of the Company, whether outstanding on the date hereof or thereafter created, incurred, assumed or guaranteed by the Company; and (ii) unsecured institutional Indebtedness of the Company evidenced by one or more promissory notes, whether outstanding on the date hereof or thereafter created, incurred, assumed or guaranteed by the Company: unless, in the instrument creating or evidencing or pursuant to which Indebtedness under (i) or (ii) is outstanding, it is expressly provided that such Indebtedness is not senior in right of payment to the Notes. "STIPULATION OF SETTLEMENT" means that certain Stipulation of Settlement, dated as of January 11,2001, entered into among Akiko and Atsukuni Minami and Local 144 Nursing Home Pension Fund on behalf of the Class (as such term is defined in the Stipulation of Settlement), the Company as defendant, and defendants Michael J. Saylor, Sanju K. Bansal, Mark S. Lynch, Stephen S. Trundle, Ralph S. Terkowitz, and Frank A. Ingari, by and through their respective counsel, and filed in the United States District Court for the Eastern District of Virginia (Alexandria Division). "SUBSIDIARY" means any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled, without regard to the occurrence of any contingency, to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by any Person or one or more of the other Subsidiaries of that Person or a combination thereof. "TIA" means the Trust Indenture Act of 1939 (15 U.S. Code Sections 77aaa-77bbbb) as in effect on the date of execution of this Indenture. "TRUST OFFICER" means any officer or assistant officer of the Trustee assigned by the Trustee to administer its corporate trust matters. "TRUSTEE" means the party named as such above until a successor replaces it in accordance with the applicable provisions of this Indenture and thereafter means the successor. "WHOLLY-OWNED SUBSIDIARY" of any specified Person means a Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly-Owned Subsidiaries of such Person or a combination thereof. 4 SECTION 1.02. OTHER DEFINITIONS. DEFINED TERM IN SECTION "BANKRUPTCY LAW" .................................................. 8.01 "CHANGE OF CONTROL"................................................ 7.01 "CONVERSION AGENT"................................................. 2.03 "CUSTODIAN" ....................................................... 8.01 "DESIGNATED SENIOR DEBT DEFAULT" .................................. 6.02 "EVENT OF DEFAULT" ................................................ 8.01 "EXCESS AMOUNT".................................................... 2.12 "INTEREST PAYMENT DATE" ........................................... 2.01(b) "LEGAL HOLIDAY" ................................................... 12.07 "PAYING AGENT" .................................................... 2.03 "PAYMENT BLOCKAGE NOTICE" ......................................... 6.02 "PAYMENT BLOCKAGE PERIOD" ......................................... 6.02 "PRESENTING AGENT" ................................................ 2.03 "REGISTRAR" ....................................................... 2.03 "SENIOR DEBT DEFAULT" ............................................. 6.02 "SETTLEMENT COSTS" ................................................ 2.12 SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "INDENTURE SECURITIES" means the Notes; "INDENTURE SECURITY HOLDER" means a Holder of a Note; "INDENTURE TO BE QUALIFIED" means this Indenture; "INDENTURE TRUSTEE" or "INSTITUTIONAL TRUSTEE" means the Trustee; and "OBLIGOR" on the Notes means the Company or any other obligor on the Notes. All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule under the TIA have the meanings so assigned to them. 5 SECTION 1.04. RULES OF CONSTRUCTION. Unless the context otherwise requires: (a) a term has the meaning assigned to it; (b) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP consistently applied; (c) "OR" is not exclusive; (d) words in the singular include the plural, and in the plural include the singular; (e) provisions apply to successive events and transactions; (f) references to sections of or rules under the Securities Act shall be deemed to include substitute, replacement or successor sections or rules adopted by the SEC from lime to time; and (g) a reference to "$" or U.S. Dollars is to United States dollars. ARTICLE II THE NOTES SECTION 2.01. FORM AND DATING. (a) GENERAL. The Notes and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A hereto, which is hereby incorporated by reference and expressly made a part of this Indenture, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture. The Notes may have notations, legends or endorsements required by law, stock exchange rule, agreements to which the Company is subject, if any, or usage (provided that any such notation, legend or endorsement is in a form acceptable to the Company and, if such notation, legend or endorsement would have any material effect on the rights of the Holders, to Co-Lead Counsel for the Holders (as defined in the Stipulation of Settlement)). The Company shall furnish any such legend not contained in Exhibit A to the Trustee in writing. Each Note shall be dated the date of its authentication. The Notes shall be in registered form without coupons in denominations of $100 and integral multiples thereof. The terms and provisions of the Notes set forth in Exhibit A are part of this Indenture and to the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. However, to the extent any provision of any Note conflicts with the express provisions of this Indenture, the provisions of this Indenture shall govern and be controlling. 6 (b) NOTES. The Notes are being issued by the Company pursuant to the Stipulation of Settlement. The Notes are exempt from registration by virtue of an exemption pursuant to Section 3(a)(I0) of the Securities Act. In the event that such exemption from registration is not available under the Securities Act, the Company shall take such steps as are necessary either to cause the registration of the Notes under the Securities Act or to obtain relief from the registration requirements of the Securities Act by obtaining a "no action" letter from the SEC. The Notes shall be issued to the Initial Recipients on the Issuance Date in the form of certificated Notes in definitive, fully registered form without interest coupons in the form set forth in Exhibit A hereto, each of which Notes shall be registered in the name of the appropriate Initial Recipient or its nominee, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the Notes which may be authenticated and delivered under this Indenture is limited to eighty million five hundred thousand dollars and no cents ($80,500,000), except that, pursuant to the Stipulation of Settlement, such amount may be increased, at the Company's option, to account for the issuance of Notes in lieu of fractional shares of Common Stock or warrants to purchase fractional shares of Common Stock, and except for Notes authenticated and delivered pursuant to Section 2.07 hereof in exchange for, or in lieu of, other Notes previously authenticated and delivered under this Indenture. The Notes shall be known as the "7 1/2% Series A Unsecured Notes" of the Company. The Notes shall mature on the date which is five (5) years from the Initial Issuance Date. The principal amount of the Notes shall bear interest at a rate of seven and one half percent (7 1/2%) per annum from the Interest Accrual Commencement Date until maturity. The Company shall pay interest semiannually commencing six (6) months after the Initial Issuance Date of the Notes until maturity, or if any such day is not a Business Day, on the next succeeding Business Day, beginning on the date which is six (6) months after the date of issuance of the Notes (each an "INTEREST PAYMENT DATE"). Principal of the Notes shall be due at maturity. Interest on the Notes will accrue and compound annually from the Interest Accrual Commencement Date until the Initial Issuance Date and thereafter will accrue semiannually. The Company shall pay interest (including post-petition interest in any proceeding under Bankruptcy Law) on overdue principal from time to time at the same rate per annum on the Notes then in effect; it shall pay interest (including post-petition interest in any proceeding under Bankruptcy Law) on overdue installments of interest (without regard to any applicable grace periods) from time to time on demand at the same rate to the extent lawful. Interest will be computed on the basis of a 360 day year consisting of 12 months of 30 days each. The principal and interest shall be payable as provided in the form of the Notes attached hereto as Exhibit A. The Notes shall be redeemable at the option of the Company at any time, in whole or in part, subject to the conditions provided in Article III hereof. The Notes shall be convertible at the option of the Company at any time, in whole or in part, as 7 provided in Article IV hereof. The Notes shall be subordinated in right of payment and in right of remedies to Senior Debt of the Company as provided in Article VI hereof. SECTION 2.02. EXECUTION AND AUTHENTICATION. One Officer shall sign the Notes for the Company by manual or facsimile signature. If an Officer whose signature is on a Note no longer holds that office at the time the Note is authenticated, the Note shall nevertheless be valid. A Note shall not be valid until authenticated by the signature of an authorized officer of the Trustee. The signature shall be conclusive evidence that the Note has been authenticated under this Indenture. The Trustee shall, upon a written order of the Company signed by an Officer, authenticate one or more Notes for original issue up to an aggregate principal amount stated in Section 2.01(b) hereof. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Notes. An authenticating agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with Holders, the Company or an Affiliate. SECTION 2.03. REGISTRAR AND PAYING AGENT. The Company shall maintain in New York, New York an office or agency where the Notes may be presented for registration of transfer or for exchange, payment or conversion (collectively, the "PRESENTING AGENT"), which Presenting Agent may, but need not, be the Trustee. The Company initially designates American Stock Transfer & Trust Company to act as Presenting Agent. The Trustee is initially appointed to act as Note registrar to maintain a register of transfers of the Notes (the "REGISTRAR") and to act as paying agent with respect to the Notes ("PAYING AGENT") and to act as agent for conversion of the Notes ("CONVERSION AGENT"). The Registrar shall keep a register of the Notes and of their transfer and exchange. The Company may appoint one or more co-Registrars, one or more additional Paying Agents and one or more additional Conversion Agents in such other locations as it shall determine. The term "Registrar" includes any co-Registrar, the term "Paying Agent" includes any additional Paying Agent and the term "Conversion Agent" includes any additional conversion agent. The Company may change any Paying Agent, Registrar, Presenting Agent or Conversion Agent without prior notice to any Holder. The Company shall notify the Trustee of the name and address of any Agent not a party to this Indenture. If the Company fails to appoint or maintain another entity as Registrar, Paying Agent, Presenting Agent or Conversion Agent, the Trustee shall act as such. The Company or any of its Affiliates may act as Paying Agent, Registrar, Presenting Agent or Conversion Agent. 8 SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST. The Company shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent will hold in trust for the benefit of Holders or the Trustee all money held by the Paying Agent for the payment of principal or interest on the Notes, and will notify the Trustee of any default by the Company in making any such payment. While any such default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee and to account for any money disbursed by it. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon such payment over to the Trustee, the Paying Agent (if other than the Company or an Affiliate of the Company) shall have no further liability for the money. If the Company or an Affiliate of the Company acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Holders all money held by it as Paying Agent. SECTION 2.05. HOLDER LISTS. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders. If the Trustee is not the Registrar, the Company shall furnish to the Trustee on or before each interest payment date and at such other times as the Trustee may request in writing a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Holders. SECTION 2.06. TRANSFER AND EXCHANGE. Whenever Notes are presented to the Registrar or a co-Registrar with a request to register a transfer or to exchange them for an equal principal amount of Notes of other denominations, the Registrar shall register the transfer or make the exchange if its requirements for such transactions are met. To permit registrations of transfers and exchanges, the Company shall issue and the Trustee shall authenticate Notes at the Registrar's request. No service charge shall be made to a Holder for any registration of transfer or exchange (except as otherwise expressly permitted herein), but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer tax or similar governmental charge payable upon exchanges pursuant to Sections 2.10, 3.07, 4.07 or 11.05 hereof). The Company shall not be required (i) to issue, register the transfer of or exchange any Note for a period beginning at the opening of business 15 days before the day of any selection of Notes to be redeemed under Section 3.01 hereof or to be converted under Section 4.01 hereof and ending at the close of business on the day of selection, or (ii) to register the transfer, or exchange, of any Note so selected for redemption or conversion in whole or in part, except the unredeemed or unconverted portion of any Note being redeemed or converted in part. Notwithstanding anything contained herein to the contrary, neither the Trustee nor the Registrar shall be responsible for ascertaining whether any purchase or transfer complies with the registration provisions of or exemptions from the Securities Act or any applicable state securities laws. 9 Any transfer or exchange of a Note in certificated form shall be accompanied by surrender of the certificated Note, endorsed or accompanied by an instrument of transfer acceptable to the Registrar, executed by the Holder or an attorney in fact acting on its behalf. SECTION 2.07. REPLACEMENT NOTES. If the Holder of a Note claims that the Note has been lost, destroyed or wrongfully taken or if such Note is mutilated and is surrendered to the Trustee, the Company shall issue and the Trustee shall authenticate a replacement Note if the Trustee's and the Company's requirements are met. If required by the Trustee or the Company, an indemnity bond must be supplied by the Holder that is sufficient in the judgment of both to protect the Company, the Trustee, any Agent or any authenticating agent from any loss which any of them may suffer if a Note is replaced. The Company may charge for its expenses in replacing a Note. In case any such mutilated, destroyed, lost or stolen Note has become or is about to become due and payable, or is about to be purchased by the Company pursuant to Article III hereof, the Company in its discretion may, instead of issuing a new Note, pay or purchase such Note, as the case may be. Every replacement Note shall be in exchange for, or in lieu of, other Notes previously issued and shall be entitled to all of the benefits of this Indenture equally and proportionately with all other Notes duly issued hereunder. SECTION 2.08. OUTSTANDING NOTES. The Notes outstanding at any time are all the Notes authenticated by the Trustee except for those canceled by it, those delivered to it for cancellation, and those described in this Section 2.08 as not outstanding. If a Note is replaced, paid or purchased pursuant to Section 2.07 hereof, it ceases to be outstanding. If the principal amount of any Note is considered paid under Section 5.01 hereof, it ceases to be outstanding and interest on it ceases to accrue. Except as set forth in Section 2.09 hereof, a Note does not cease to be outstanding because the Company or an Affiliate of the Company holds the Note. SECTION 2.09. TREASURY NOTES. In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver or consent, Notes owned by the Company or an Affiliate of the Company shall be considered as though they are not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Notes that the Trustee knows are so owned shall be so disregarded. 10 SECTION 2.10. TEMPORARY NOTES. Until definitive Notes are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Notes. Temporary Notes shall be substantially in the form of definitive Notes but may have variations that the Company considers appropriate for temporary Notes. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate definitive Notes in exchange for temporary Notes. Holders of temporary Notes shall be entitled to all of the benefits of this Indenture. SECTION 2.11. CANCELLATION. The Company at any time may deliver Notes to the Trustee for cancellation. The Presenting Agent, Registrar, Paying Agent and Conversion Agent shall forward to the Trustee any Notes surrendered to them for registration of transfer, exchange, payment, redemption or conversion. The Trustee shall promptly cancel all Notes surrendered for registration of transfer, exchange, payment, redemption, conversion, replacement or cancellation and shall dispose of canceled Notes as the Company directs. The Company may not issue new Notes to replace Notes that it has paid or that have been delivered to the Trustee for cancellation. SECTION 2.12. ADDITIONAL REDUCTION IN PRINCIPAL AMOUNT OF AND INTEREST ON THE NOTES. Pursuant to the Stipulation of Settlement, the Company is obligated to pay all costs of notice and administration of all transactions contemplated by the Stipulation of Settlement (exclusive of any attorneys' fees and expenses, the "SETTLEMENT COSTS"). If the Settlement Costs exceed $750,000, then the Company shall pay such excess (the "EXCESS AMOUNT") as and when incurred but shall be entitled to a credit equal to the Excess Amount against the installment of interest on the Notes next due, to be applied against the Notes then outstanding on a pro rata basis. If the Excess Amount exceeds the total amount of interest due on the Notes on the next subsequent interest payment date, the Company may, in its sole discretion, either reduce the principal amount of the Notes then outstanding on a pro rata basis by the balance of the Excess Amount not previously applied or apply such amount against subsequent installments of interest, provided, however, that no Note shall be reduced to an amount not divisible by $100. The Company shall not be entitled to any refund or reimbursement of the costs of notice and administration in the event that the Settlement is not approved, terminated, or does not become final and effective for any reason. The Company shall notify the Trustee in writing of the reduction of interest due on and/or principal amount of the Notes and will supply the Trustee with such documentation of Settlement Costs as the Trustee may reasonably request. The Company shall promptly thereafter provide notice, or cause the Trustee to provide notice, to the Holders of the reduction in interest payable on or principal amount of the Notes. SECTION 2.13. DEFAULTED INTEREST. If the Company fails to make a payment of interest on the Notes, it shall pay such defaulted interest plus any interest payable on the defaulted interest, in any lawful manner. It may pay such defaulted interest, plus any such interest payable on it, to the Persons who are 11 Holders on a subsequent special record date. The Company shall fix any such record date and payment date, provided that no such record date shall be less than 10 days prior to the related payment date for such defaulted interest. At least 15 days before any such record date, the Company shall mail to Holders a notice that states the special record date, the related payment date and amount of such interest to be paid. SECTION 2.14. CUSIP NUMBERS. The Company in issuing the Notes shall use "CUSIP" numbers if then generally in use, and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption or conversion and other notices as a convenience to Holders of Notes; provided, that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Notes or as contained in any notice of a redemption or conversion and that reliance may be placed only on the other identification numbers printed on the Notes, and any redemption or conversion shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee of any change in the "CUSIP" numbers. ARTICLE III REDEMPTION SECTION 3.01. REDEMPTION. Subject to Sections 5.05 and 5.06 hereof, the Company, in its sole discretion, may redeem all or any of the Notes, in whole or in part, selected in accordance with the provisions of Section 3.03 hereof, at any time upon thirty (30) days written notice to the record Holders thereof, without premium or penalty, at a redemption price payable solely in cash equal to the principal of and (except if the redemption date shall be an Interest Payment Date) any accrued but unpaid interest on the Notes through but excluding the redemption date. Any redemption pursuant to this Section 3.01 shall be made pursuant to the provisions of Sections 3.02 through 3.07 hereof SECTION 3.02. NOTICES TO TRUSTEE. If the Company elects to redeem Notes pursuant to the redemption provisions of Section 3.01 hereof, it shall notify the Trustee in writing of the redemption date and the accrued interest on and principal amount of Notes to be redeemed. The Company shall give the notice provided for in this Section 3.02 at least 45 days before the redemption date, unless a shorter notice period shall be satisfactory to the Trustee. The Company may not give notice of any redemption if the Company has defaulted in payment of interest and the default is continuing. SECTION 3.03. SELECTION OF NOTES TO BE REDEEMED. If less than all of the Notes are to be redeemed at any time, selection of Notes shall be made by the Trustee on a pro rata basis considering all of the Notes outstanding on the redemption date, provided that no partial redemption shall leave a balance that is not evenly divisible by $100. The Trustee shall make the selection not more that five (5) Business Days 12 after it receives the notice described in Section 3.02 hereof from the Notes outstanding not previously called for redemption or conversion. Notes and portions of Notes selected shall be in amounts of $100 or integral multiples of $100. Provisions of this Indenture that apply to Notes called for redemption also apply to portions of Notes called for redemption. The Trustee shall notify the Company promptly of the Notes or portions of Notes to be called for redemption. SECTION 3.04. NOTICE TO HOLDERS OF REDEMPTION. At least 30 days but not more than 60 days before a redemption date which date shall also be at least 5 days after notice to the Trustee pursuant to Section 3.02, the Company shall mail or cause the Trustee to mail, by first class mail, a notice of redemption to each Holder whose Notes are to be redeemed at its registered address. The notice shall identify the Notes to be redeemed and shall state: (a) the redemption date; (b) the redemption price together with accrued interest separately stated on the portion of the Notes to be redeemed to the date of redemption; (c) if any Note is to be redeemed in part only (but not in any amount not divisible by $100), the portion of the principal amount thereof redeemed, and that, after the redemption date, upon surrender of such Note, a new Note in principal amount equal to the unredeemed portion thereof shall be issued in the name of the Holder thereof upon cancellation of the original Note; (d) the name and address of the Paying Agent; (e) that Notes called for redemption must be surrendered to the Paying Agent to collect the redemption price plus accrued interest, if any; (f) that interest on Notes called for redemption ceases to accrue on and after the redemption date; (g) the paragraph of the Notes pursuant to which the Notes called for redemption are being redeemed; and (h) the "CUSIP" number of the Notes to be redeemed. At the Company's request, the Trustee shall give notice of redemption in the Company's name and at the Company's expense; provided that the Company shall have delivered to the Trustee, at least 30 days prior to the redemption date, an Officers' Certificate requesting that the Trustee give such notice and setting forth the information to be stated in such notice, as provided in the preceding paragraph. 13 3.05. EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption is mailed in accordance with Section 3.04 hereof, Notes called for redemption become due and payable on the redemption date at the price set forth in the Note. A notice of redemption may not be conditional. SECTION 3.06. DEPOSIT OF REDEMPTION PRICE. On or before 1:00 p.m. (Eastern Standard Time) on the redemption date, the Company shall deposit with the Paying Agent money (in immediately available funds) sufficient to pay the redemption price of and (except if the redemption date shall be an Interest Payment Date) accrued interest on all Notes to be redeemed on that date. The Paying Agent shall return to the Company any money not required or used for that purpose. SECTION 3.07. NOTES REDEEMED IN PART. Subject to Sections 5.05 and 5.06 hereof, upon surrender of a Note that is redeemed in part, the Company shall issue and the Trustee shall authenticate for the Holder at the expense of the Company a new Note equal in principal amount to the unredeemed portion of the Note surrendered. SECTION 3.08. PAYMENT OF INTEREST FOLLOWING NOTICE OF REDEMPTION. Interest shall not accrue and no payment for interest shall be made on any Note or portion thereof called for redemption pursuant to this Article III with respect to the period following the date of redemption. In the case of any Note surrendered for redemption after the close of business on any record date for the payment of an installment of interest but before the opening of business on the next succeeding Interest Payment Date, such Note, when surrendered for redemption, must be accompanied by payment in an amount equal to the interest payable on such Interest Payment Date on the principal amount of the Note so converted. Accrued interest shall be paid on such Interest Payment Date to the holder of the Note on such record date. If less than all of the Notes are to be redeemed at any time, the foregoing provision shall apply only to the portion so redeemed and interest shall accrue and be paid on the balance of the Notes in accordance with the provisions of Article II. ARTICLE IV MANDATORY CONVERSION SECTION 4.01. MANDATORY CONVERSION. Subject to Sections 5.05 and 5.06 hereof, the Company, in its sole discretion, may cause the Holders to convert all or any of the Notes, in whole or in part, selected in accordance with the provisions of Section 4.03 hereof, at any time upon thirty (30) days written notice to the record Holders thereof, without premium or penalty, into shares of Common Stock. The number of shares of Common Stock into which the Notes, or any parts thereof, shall be converted shall be such number of shares of Common Stock as may be 14 obtained by dividing the principal of and (except if the redemption date is an Interest Payment Date) any accrued but unpaid interest (through but excluding the conversion date) on the Notes to be converted by an amount equal to eighty percent (80%) of the dollar-weighted average trading price per share for all round lot transactions in the Common Stock on the Market for the ten (10) trading days ending two (2) days prior to the date of the written notice to the Trustee and issuance of a press release by the Company describing the redemption. Any conversion pursuant to this Section 4.01 shall be made pursuant to the provisions of Sections 4.02 through 4.07 hereof. SECTION 4.02. NOTICES TO TRUSTEE. If the Company elects to convert any of the Notes pursuant to the mandatory conversion provisions of Section 4.01 hereof, it shall notify the Trustee in writing of the conversion date and the accrued interest on and principal amount of Notes to be converted. The Company shall give the notice provided for in this Section 4.02 at least 45 days before the conversion date, unless a shorter notice period shall be satisfactory to the Trustee. The Company may not give notice of any conversion if the Company has defaulted in payment of interest and the default is continuing. SECTION 4.03. SELECTION OF NOTES TO BE CONVERTED. If less than all of the Notes are to be converted at any time, selection of Notes shall be made by the Trustee on a pro rata basis considering all of the Notes outstanding on the redemption date provided that no partial conversion shall leave a balance that is not evenly divisible by $100. The Trustee shall make the selection not more that five (5) Business Days after it receives the notice described in Section 4.02 hereof from the Notes outstanding not previously called for redemption or conversion. Notes and portions of Notes selected shall be in amounts of $100 or integral multiples of $100. Provisions of this Indenture that apply to Notes called for conversion also apply to portions of Notes called for conversion. The Trustee shall notify the Company promptly of the Notes or portions of Notes to be called for conversion. SECTION 4.04. NOTICE TO HOLDERS OF CONVERSION. At least 30 days but not more than 60 days before a conversion date which date shall also be at least 5 days after the notice to the Trustee pursuant to Section 4.02, the Company shall mail or cause the Trustee to mail, by first class mail, a notice of conversion to each Holder whose Notes are to be converted at its registered address. The notice shall identify the Notes to be converted and shall state: (a) the conversion date; (b) the conversion ratio which shall specify in reasonable detail the methodology used to determine the conversion ratio, including the stock price, the discount rate and the trading dates used to calculate the conversion ratio; (c) if any Note is to be converted in part only, the portion of the principal amount thereof converted, and that, after the conversion date, upon surrender of such Note, a new 15 Note in principal amount equal to the unconverted portion thereof shall be issued in the name of the Holder thereof upon cancellation of the original Note; (d) the name and address of the Conversion Agent; (e) that Notes called for conversion must be surrendered to the Conversion Agent to collect the shares of Common Stock which shall be based on the principal amount of the Notes to be converted together with interest accrued to the conversion date and cash in lieu of fractional shares, if any; (f) that interest on Notes called for conversion ceases to accrue on and after the conversion date; (g) the paragraph of the Notes pursuant to which the Notes called for conversion are being converted; and (h) the "CUSIP" number of the Notes to be converted. At the Company's request, the Trustee shall give notice of conversion in the Company's name and at the Company's expense; provided that the Company shall have delivered to the Trustee, at least 30 days prior to the conversion date, an Officers' Certificate requesting that the Trustee give such notice and setting forth the information to be stated in such notice, as provided in the preceding paragraph. SECTION 4.05. EFFECT OF NOTICE OF CONVERSION. Once notice of conversion is mailed in accordance with Section 4.04 hereof, Notes called for conversion shall be deemed convened into the requisite number of shares of Common Stock on the conversion date at the conversion ratio set forth in the Note. A notice of conversion may not be conditional. SECTION 4.06. DEPOSIT OF CONVERSION SHARES AND MONEY. On or before 1:00 p.m. (Eastern Standard Time) on the conversion date, the Company shall deposit with the Conversion Agent certificates for the number of whole shares of Common Stock issuable upon the conversion and money (in immediately available funds) sufficient to pay for any fractional shares determined pursuant to Section 4.08 hereof sufficient to convert all Notes to be converted and to acquire all fractional shares to be acquired on that date. The Conversion Agent shall return to the Company any shares and/or money not required or used for such purposes. SECTION 4.07. NOTES CONVERTED IN PART. Subject to Sections 5.05 and 5.06 hereof, upon surrender of a Note that is converted in part, the Company shall issue and the Trustee shall authenticate for the Holder at the expense of the Company a new Note equal in principal amount to the unconverted portion of the Note surrendered. 16 SECTION 4.08. FRACTIONAL SHARES. The Company will not issue fractional shares of Common Stock upon conversion of a Note. In lieu thereof, the Company will pay either an amount in cash calculated by multiplying the fractional share times the per share price based upon the dollar-weighted average trading price per share for all round lot transactions in the Common Stock on the Market for the ten (10) trading days ending two (2) days prior to the date of notice to the Trustee pursuant to Section 4.01 or issue additional shares of Common Stock rounded up to the next whole number of shares, or a combination of the two. SECTION 4.09. TAXES ON CONVERSION. The issuance of certificates for shares of Common Stock upon the conversion of any Note shall be made without charge to the converting Holder for such certificates or for any tax in respect of the issuance of such certificates, and such certificates shall be issued in the respective names of, or in such names as may be directed by, the Holder or Holders of the converted Note; provided, however, that in the event that certificates for shares of Common Stock are to be issued in a name other than the name of the Holder of the Note converted, such Note, when surrendered for conversion, shall be accompanied by an instrument of transfer, in form satisfactory to the Company, duly executed by the registered Holder thereof or his duly authorized attorney; and provided further, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificates in a name other than that of the Holder of the converted Note, and the Company shall not be required to issue or deliver such certificates unless or until the Person or Persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid or is not applicable. SECTION 4.10. COMPANY TO PROVIDE STOCK. The Company shall at all times, after the giving of a notice of conversion pursuant to Section 4.04 hereof, reserve and keep available, free from preemptive rights, out of its authorized but unissued Common Stock, solely for the purpose of issuance upon conversion of Notes as herein provided with respect to such notice of conversion, a sufficient number of shares of Common Stock to permit the conversion of all outstanding Notes subject to such notice of conversion for shares of Common Stock. All shares of Common Stock which may be issued upon conversion of the Notes shall be duly authorized, validly issued, fully paid and nonassessable when so issued. SECTION 4.11. PAYMENT OF INTEREST AND DIVIDENDS FOLLOWING NOTICE OF CONVERSION. Interest shall not accrue and no payment for interest shall be made on any Note or portion thereof called for conversion pursuant to this Article IV with respect to the period following the date of conversion. In the case of any Note surrendered for conversion after the close of business on any record date for the payment of an installment of interest but before the opening of business on the next succeeding Interest Payment Date, such Note, when surrendered for conversion, must be accompanied by payment in an amount equal to the 17 interest payable on such Interest Payment Date on the principal amount of the Note so convened. Accrued interest shall be paid on such Interest Payment Date to the bolder of the Note on such record date. If less than all of the Notes are to be converted at any time, the foregoing provision shall apply only to the portion so converted and interest shall accrue and be paid on the balance of the Notes in accordance with the provisions of Article II. Interest that accrues from the last Interest Payment Date to a date of conversion preceding a record date shall only be paid on the date of conversion in the form of Common Stock or cash in lieu of Common Stock in accordance with the provisions of this Article IV and Holders of Shares of Common Stock issued upon conversion will not be entitled to receive any dividends payable to holders of shares of Common Stock as of any record date before the close of business on the conversion date. ARTICLE V COVENANTS SECTION 5.01. PAYMENT OF NOTES. The Company shall pay the principal of, and interest on, the Notes on the dates and in the manner provided in the Notes. Principal and interest shall be considered paid on the date due if the Paying Agent (other than the Company or an Affiliate of the Company) holds on that date money designated for and sufficient to pay all principal and interest then due. To the extent lawful, the Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on (i) overdue principal at the rate borne by the Notes, compounded semiannually; and (ii) overdue installments of interest (without regard to any applicable grace period) at the same rate, compounded semiannually. SECTION 5.02. COMPLIANCE CERTIFICATE. The Company shall deliver to the Trustee, within 90 days after the end of each fiscal year of the Company, an Officers' Certificate stating that a review of the activities of the Company and its Subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether the Company has kept, observed, performed and fulfilled its obligations under, and complied with the covenants and conditions contained in, this Indenture, and further stating, as to each such Officer signing such certificate, that to the best of his knowledge [he Company has kept, observed, performed and fulfilled each and every covenant, and complied with the covenants and conditions contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions and conditions hereof (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he may have knowledge) and that to the best of his knowledge no event has occurred and remains in existence by reason of which payments on account of the principal or of interest, if any, on the Notes are prohibited. One of the Officers signing such Officers' Certificate shall be either the Company's principal executive officer, principal financial officer or principal accounting officer. 18 The Company will, so long as any of the Notes are outstanding, deliver to the Trustee forthwith upon becoming aware of any Default or Event of Default, an Officers' Certificate specifying such Default or Event of Default. SECTION 5.03. REPORTS. Whether or not required by the rules and regulations of the SEC, so long as any Notes are outstanding, the Company shall file with the SEC and furnish to the Trustee and to the Holders of Notes, all quarterly and annual financial information required to be contained in a filing with the SEC on Forms l0-Q and 10-K, including a "Management's Discussion and Analysis of Results of Operations and Financial Condition" and, with respect to the annual information only, a report thereon by the Company's certified independent accountants, in each case, as required by the rules and regulations of the SEC as in effect on the Issuance Date. The Trustee shall be under no obligation or duty to review such reports, such delivery to it being for the purpose of having the same on file with the Trustee and available for examination. SECTION 5.04. CORPORATE EXISTENCE. Subject to Article VII hereof, to the extent permitted by law the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence. SECTION 5.05. OBLIGATION TO REDEEM, CONVERT OR REPURCHASE. The Company shall not reduce the outstanding principal amount of the Notes below sixty percent (60%) of the original outstanding principal amount of such Notes, unless it shall, without penalty or premium, redeem or cause the conversion into Common Stock of the entire remaining outstanding principal amount of the Notes pursuant to Article III or IV hereof. SECTION 5.06. RESTRICTIONS ON CONVERSION OR REDEMPTION. The provisions of Articles III or IV or anything else in this Indenture to the contrary notwithstanding, the Company shall not convert or redeem any Notes while a petition in bankruptcy relating to the Company is pending and is not discharged or stayed. If notice of conversion or redemption is given during the thirty (30) day period prior to the filing date of a petition in bankruptcy relating to the Company, then conversion or redemption as the case may be shall take place five (5) days after such petition is discharged or stayed or thirty (30) days after the notice of conversion, whichever is later. Furthermore, the Company shall not convert any Notes if, during the ten (10) trading day period used for calculating the conversion ratio as set forth in Section 4.01 hereof, the Company, any member of the Board of Directors or any officer of the Company subject to the requirements of Section 16 of the Exchange Act purchased shares of Common Stock (excluding any issuance of Common Stock to any director or officer of the Company pursuant to any Company stock option, employee stock purchase or similar plan or rights plan in effect on the date hereof or subsequently approved by the Board of Directors, or any exercise of options or rights issued under such plans). 19 ARTICLE VI SUBORDINATION SECTION 6.01. AGREEMENT TO SUBORDINATE AND RANKING. The Company, for itself and its successors, and each Holder, by its acceptance of Notes, agree that the indebtedness represented by, and the payment of the principal of or interest on or any other amounts due on, the Notes is subordinated in right of payment, to the extent and in the manner stated in this Article VI, to the prior payment in full of all existing and future Senior Debt. The Notes shall rank pari passu with, and shall not be senior in right of payment to, such other Indebtedness of the Company whether outstanding on the date of this Indenture or hereafter created, incurred, issued or guaranteed by the Company. SECTION 6.02. NO PAYMENT ON NOTES IF SENIOR DEBT IN DEFAULT. Anything in this Indenture to the contrary notwithstanding, no payment on account of principal of or redemption of, interest on, or other amounts due on the Notes, and no redemption, conversion, purchase, or other acquisition of the Notes, shall be made by or on behalf of the Company (i) unless full payment of amounts then due for principal and interest and of all other amounts then due on all Senior Debt has been made or duly provided for pursuant to the terms of the instrument governing such Senior Debt, (ii) if, at the time of such payment, redemption, conversion, purchase or other acquisition, or immediately after giving effect thereto, there shall exist under any Senior Debt, or any agreement pursuant to which any Senior Debt is issued, any default, which default shall have resulted in the full amount of such Senior Debt being declared due and payable (any such event, a "SENIOR DEBT DEFAULT"), or (iii) if, at the time of such payment, redemption, conversion, purchase or other acquisition, the Trustee shall have received written notice from any of the holders of Designated Senior Debt or such holder's representative (a "PAYMENT BLOCKAGE NOTICE") that there exists under such Designated Senior Debt, or any agreement pursuant to which such Designated Senior Debt is issued, any default, permitting the holders thereof to declare any amounts of such Designated Senior Debt due and payable (any such event, a "DESIGNATED SENIOR DEBT DEFAULT"), but only for the period (the "PAYMENT BLOCKAGE PERIOD") commencing on the date of receipt by the Trustee of the Payment Blockage Notice and ending (unless earlier terminated by notice given to the Trustee by the holders of such Designated Senior Debt) on the earlier of (a) the date on which such Designated Senior Debt Default shall have been cured or waived or (b) 90 days from the receipt of the Payment Blockage Notice, unless the holders of the Designated Senior Debt that provided the Payment Blockage Notice have so accelerated the Designated Senior Debt. Upon termination of the Payment Blockage Period, subject to Section 6.03 hereof, payments on account of regularly scheduled principal of or interest on the Notes which are then due and payable or which had been blocked and redemptions, conversions, purchases or other acquisitions may be made by or on behalf of the Company. Notwithstanding anything herein to the contrary, (a) only one Payment Blockage Notice may be given during any period of 360 consecutive days with respect to the same Designated Senior Debt Default or any other Designated Senior Debt Defaults on the same issue of Designated Senior Debt existing or continuing at the time of such notice unless such Designated Senior Debt Default or such other Designated Senior Debt Defaults have been cured or waived for a period of not less than 20 90 consecutive days and (b) no new Payment Blockage Period may be commenced by the holder or holders of the same issue of Designated Senior Debt or their representative or representatives during any period of 360 consecutive days unless all Designated Senior Debt Defaults which were the subject of the immediately preceding Payment Blockage Notice have been cured or waived. In the event that, notwithstanding the provisions of this Section 6.02, payments are made by or on behalf of the Company in contravention of the provisions of this Section 6.02, such payments shall be held by the Trustee or any Paying Agent, as applicable, in trust for the benefit of, and shall be paid over to and delivered to, the holders of Senior Debt or their representative or the trustee under the indenture or other agreement (if any), pursuant to which any instruments evidencing any Senior Debt may have been issued (as to which the Trustee shall be entitled to request and rely upon written certification from such holders of Senior Debt or related trustees) for application to the payment of all Senior Debt ratably according to the aggregate amounts remaining unpaid to the extent necessary to pay all Senior Debt in full in cash in accordance with the terms of such Senior Debt, after giving effect to any concurrent payment or distribution to or for the holders of Senior Debt. The Company shall give prompt written notice to the Trustee and any Paying Agent of any Senior Debt Default or Designated Senior Debt Default. This Section 6.02 shall not be construed or interpreted to mean that a failure to pay principal or interest on the Notes when due does not constitute a Default under the Notes despite the fact that such principal or interest may not be paid on the Notes pursuant to the terms of this Section 6.02. SECTION 6.03. DISTRIBUTION ON ACCELERATION OF NOTES; DISSOLUTION AND REORGANIZATION; SUBROGATION OF NOTES. (a) If the Notes are declared due and payable because of the occurrence of an Event of Default, the Company or the Trustee shall give prompt written notice to the holders of all Senior Debt or to the trustee(s) for such Senior Debt (in each case to the extent known to the Trustee) of such acceleration. The Company may not pay the principal of or interest on or any other amounts due on the Notes until five days after such holders or trustee(s) of Senior Debt receive such notice and, thereafter, the Company may pay the principal of or interest on or any other amounts due on the Notes only if the provisions of this Article VI permit such payment. (b) Upon (i) any acceleration of the principal amount due on the Notes because of an Event of Default or (ii) any distribution of assets of the Company upon any dissolution, winding up, liquidation or reorganization of the Company (whether in bankruptcy, insolvency or receivership proceedings or upon an assignment for the benefit of creditors or any other dissolution, winding up, liquidation or reorganization of the Company): (1) the holders of all Senior Debt shall first be entitled to receive payment in full of the principal thereof, the interest thereon and any other amounts due thereon before the Holders are entitled to receive payment on account of the principal of or interest on or any other amounts due on the Notes: 21 (2) any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the Holders or the Trustee would be entitled except for the provisions of this Article VI, shall be paid by the liquidating trustee or agent or other Person making such a payment or distribution, directly to the holders of Senior Debt (or their representatives(s) or trustee(s) acting on their behalf), ratably according to the aggregate amounts remaining unpaid on account of the principal of or interest on and other amounts due on the Senior Debt held or represented by each, to the extent necessary to make payment in full in cash of all Senior Debt remaining unpaid, after giving effect to any concurrent payment or distribution to the holders of such Senior Debt; and (3) in the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, shall be received by the Trustee or the Holders before all Senior Debt is paid in full in cash, such payment or distribution shall be held in trust for the benefit of, and be paid over to the holders of the Senior Debt remaining unpaid (or their representatives) or trustee(s) acting on their behalf, ratably as aforesaid, for application to the payment of such Senior Debt until all such Senior Debt shall have been paid in full in cash, after giving effect to any concurrent payment or distribution to the holders of such Senior Debt. Subject to the payment in full in cash of all Senior Debt, the Holders shall be subrogated to the rights of the holders of Senior Debt to receive payments or distributions of cash, property or securities of the Company applicable to the Senior Debt to the extent of the payments or distributions made to the holders of such Senior Debt pursuant to the provisions of this Article VI until the principal of and interest on the Notes shall be paid in full and, for purposes of such subrogation, no such payments or distributions to the holders of Senior Debt of cash, property or securities which otherwise would have been payable or distributable to Holders shall, as between the Company, its creditors other than the holders of Senior Debt, and the Holders, be deemed to be a payment by the Company to or on account of the Senior Debt, it being understood that the provisions of this Article VI are, and are intended solely for the purpose of, defining the relative rights of the Holders, on the one hand, and the holders of Senior Debt, on the other hand. Nothing contained in this Article VI or elsewhere in this Indenture or in the Notes is intended to or shall (i) impair, as between the Company and its creditors other than the holders of Senior Debt, the obligation of the Company, which is absolute and unconditional, to pay to the Holders the principal of and interest on the Notes as and when the same shall become due and payable in accordance with the terms of the Notes, or, (ii) affect the relative rights of the Holders and creditors of the Company other than holders of Senior Debt or, as between the Company and the Trustee, the obligations of the Company to the Trustee, or (iii) prevent the Trustee or the Holders from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article VI of the holders of Senior Debt in respect of cash, property and securities of the Company received upon the exercise of any such remedy. 22 Upon distribution of assets of the Company referred to in this Article VI, the Trustee, subject to the provisions of Section 9.01 hereof, and the Holders shall be entitled to rely upon a certificate of the liquidating trustee or agent or other Person making any distribution to the Trustee or to the Holders for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of the Senior Debt and other Indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article VI, unless the Trustee reasonably believes or should believe that such information is not correct or accurate. (c) The provisions of this Article VI shall not be applicable to any cash, properties or securities received by the Trustee or by any Holder when received as a holder of Senior Debt and nothing in Section 9.11 hereof or elsewhere in this Indenture shall deprive the Trustee or such Holder of any of its rights as such holder. (d) The Company shall give prompt written notice to the Trustee of any fact known to the Company which would prohibit the making of any payment of money to or by the Trustee in respect of the Notes pursuant to the provisions of this Article VI. The Trustee, subject to the provisions of Section 9.01 hereof, shall be entitled to assume that no such fact exists unless the Company or any holder of Senior Debt or any trustee therefor has given such notice to the Trustee. Notwithstanding the provisions of this Article VI or any other provisions of this Indenture, the Trustee shall not be charged with knowledge of the existence of any fact which would prohibit the making of any payment of monies to or by the Trustee in respect of the Notes pursuant to the provisions in this Article VI, unless, and until, the Trustee shall have received written notice thereof from the Company or any holder or holders of Senior Debt or from any trustee therefor; and, prior to the receipt of any such written notice, the Trustee, subject to the provisions of Section 9.01 hereof, shall be entitled in all respects to assume that no such facts exist; provided that if on a date not less than two (2) Business Days immediately preceding the date upon which by the terms hereof any such monies may become payable for any purpose (including, without limitation, the principal of or interest on any Note), the Trustee shall not have received with respect to such monies the notice provided for in this Section 6.03(d), then anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such monies and to apply the same to the purpose for which they were received, and shall not be affected by any notice to the contrary which may be received by it on or after such prior date. The Trustee shall be entitled to rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Debt (or a trustee on behalf of such holder) to establish that such notice has been given by a holder of Senior Debt (or a trustee on behalf of any such holder or holders). In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior Debt to participate in any payment or distribution pursuant to this Article VI, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Debt held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article VI, and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment; nor shall the Trustee be charged with knowledge of the curing or 23 waiving of any default of the character specified in Section 6.02 hereof or that any event or any condition preventing any payment in respect of the Notes shall have ceased to exist, unless and until the Trustee shall have received an Officers' Certificate to such effect. (e) The provisions of this Section 6.03 applicable to the Trustee shall also apply to any Paying Agent for the Company. SECTION 6.04. RELIANCE BY SENIOR DEBT ON SUBORDINATION PROVISIONS. Each Holder of any Note by his acceptance thereof acknowledges and agrees that the foregoing subordination provisions are, and are intended to be, an inducement and a consideration for each holder of any Senior Debt, whether such Senior Debt was created or acquired before or after the issuance of the Notes, to acquire and continue to hold, or to continue to hold, such Senior Debt, and such holder of Senior Debt shall be deemed conclusively to have relied on such subordination provisions in acquiring and continuing to hold, or in continuing to hold, such Senior Debt, and no amendment or modification of the provisions contained in this Article VI shall diminish the rights of such holders of Senior Debt unless such holders have expressly agreed thereto in writing. Notice of any default in the payment of any Senior Debt, except as expressly stated in this Article VI, and notice of acceptance of the provisions hereof are hereby expressly waived. Except as otherwise expressly provided herein, no waiver, forbearance or release by any holder of Senior Debt under such Senior Debt or under this Article VI shall constitute a release of any of the obligations or liabilities of the Trustee or Holders of the Notes provided in this Article VI. SECTION 6.05. NO WAIVER OF SUBORDINATION PROVISIONS. Except as otherwise expressly provided herein, no right of any present or future holder of any Senior Debt to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof any such holder may have or be otherwise charged with. Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Debt may, at any time and from time to time, without the consent of, or notice to, the Trustee or the Holders of the Notes, without incurring responsibility to the Holders of the Notes and without impairing or releasing the subordination provided in this Article VI or the obligations hereunder of the Holders of the Notes to the holders of Senior Debt, do any one or more of the following: (i) change the manner, place or terms of payment of, or renew or alter, Senior Debt (including, without limitation, changing the principal amount of, interest rate on, or maturity date of, such Senior Debt), or otherwise amend or supplement in any manner Senior Debt or any instrument evidencing the same or any agreement under which Senior Debt is outstanding; (ii) sell, exchange, release or otherwise dispose of any property pledged, mortgaged or otherwise securing Senior Debt; (iii) release any Person liable in any manner for the collection of Senior Debt; and (iv) exercise or refrain from exercising any rights against the Company or any other Person. 24 SECTION 6.06. TRUSTEE'S RELATION TO SENIOR DEBT. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article VI in respect of any Senior Debt at any time held by it, to the same extent as any holder of Senior Debt, and nothing in Section 9.11 hereof or elsewhere in this Indenture shall deprive the Trustee of any of its rights as such holder. With respect to the holders of Senior Debt, the Trustee undertakes to perform or to observe only such of its covenants and obligation, as are specifically set forth in this Article VI, and no implied covenants or obligations with respect to the holders of Senior Debt shall be read into this Indenture against the Trustee. The Trustee shall not owe any fiduciary duty to the holders of Senior Debt but shall have only such obligations to such holders as are expressly set forth in this Article VI; and in no event shall the Trustee be liable to any such holders if it shall in good faith mistakenly pay over or distribute to Holders of the Notes or to the Company (or any other Person) amounts to which such holders of Senior Debt would be entitled under this Article VI. Each Holder of a Note by his acceptance thereof authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article VI and appoints the Trustee his attorney-in-fact for any and all such purposes, including, in the event of any dissolution, winding up or liquidation or reorganization under any applicable bankruptcy law of the Company (whether in bankruptcy, insolvency or receivership proceedings or otherwise), the timely filing of a claim for the unpaid balance of such Holder's Notes in the form required in such proceedings and the causing of such claim to be approved. If the Trustee does not file a claim or proof of debt in the form required in such proceedings prior to 30 days before the expiration of the time to file such claims or proofs, then any Holder or holders of Senior Debt or their representative or representatives shall have the right to demand, sue for, collect, receive and receipt for the payments and distributions in respect of the Notes which are required to be paid or delivered to the holders of Senior Debt as provided in this Article VI and to file and prove all claims therefore and to take all such other action in the name of the holders or otherwise, as such holders of Senior Debt or representative thereof may determine to be necessary or appropriate for the enforcement of the provisions of this Article VI. SECTION 6.07. OTHER PROVISIONS SUBJECT HERETO. Except as expressly stated in this Article VI, notwithstanding anything contained in this Indenture to the contrary, all the provisions of this Indenture and the Notes are subject to the provisions of this Article VI. However, nothing in this Article VI shall apply to or adversely affect the claims of, or payment, to, the Trustee pursuant to Section 9.07 hereof. Notwithstanding the foregoing, the failure to make a payment on account of principal of or interest on the Notes by reason of any provision of this Article VI shall not be construed as preventing the occurrence of an Event of Default under Section 8.01 hereof 25 ARTICLE VII SUCCESSORS SECTION 7.01. LIMITATION ON MERGER, SALE OR CONSOLIDATION. The Company may not, directly or indirectly, consolidate with or merge with or into, or sell, lease or otherwise dispose of all or substantially all of its assets, on a consolidated basis, whether in a single transaction or a series of related transactions, to another person or group of affiliated persons, other than to its Wholly-Owned Subsidiaries, unless: (a) either: (i) in the case of a merger or consolidation, the Company is the surviving entity; or (ii) the resulting, surviving or transferee entity is a corporation organized under the laws of the United States, any state thereof or the District of Columbia and expressly assumes by supplemental indenture all of the Company's obligations in connection with the Notes and the Indenture; and (b) no Default or Event of Default shall exist immediately before or after giving effect on a pro forma basis to such transaction. Upon any permitted consolidation or merger or any permitted sale, lease or other disposition of all or substantially all of the assets of the Company in accordance with the foregoing (a "CHANGE OF CONTROL"), the successor corporation formed by such consolidation or into which the Company is merged or to which such sale, lease or other disposition is made, shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor corporation had been named therein in the same manner as the Company is named, but such a transaction will not release the Company from its obligations under the Indenture and the Notes. For purposes of the foregoing, the transfer, by lease, assignment, sale or otherwise, of all or substantially all of the properties and assets of one or more Subsidiaries, which properties and assets, if held by the Company instead of such Subsidiary, would constitute all or substantially all of the Company's properties and assets, shall be deemed to be the transfer of all or substantially all of the Company's properties and assets. This Section 7.01 will not apply to a sale, assignment, transfer, conveyance or other disposition of assets between or among the Company and any of its Wholly-Owned Subsidiaries SECTION 7.02. SUCCESSOR CORPORATION SUBSTITUTED. Upon any Change of Control, the successor corporation formed by such consolidation or into or with which the Company is merged or to which such sale, assignment, transfer, lease, conveyance or other disposition is made shall succeed to, and be substituted for and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person has been named as the Company herein. 26 ARTICLE VIII DEFAULTS AND REMEDIES SECTION 8.01. EVENTS OF DEFAULT. An "EVENT OF DEFAULT" occurs if: (a) the Company defaults in the payment of interest on any Note when the same becomes due and payable; (b) the Company defaults in the payment of the principal of any Note when the same becomes due and payable at maturity, upon redemption or mandatory conversion, or otherwise; (c) the Company fails to observe or perform any covenant or agreement contained in Section 5.01, 5.04, 5.05, 5.06 and 7.01 hereof; (d) the Company fails to observe or perform any other covenant or agreement contained in this Indenture or the Notes, required by it to be performed and the failure continues for a period of 60 days after notice from the Trustee to the Company or from the Holders of at least thirty-five percent (35%) in principal amount of the then outstanding Notes to the Company and the Trustee stating that such notice is a "Notice of Default"; (e) the Company, pursuant to or within the meaning of any Bankruptcy Law: (i) commences a voluntary case; (ii) consents to the entry of an order for relief against it in an involuntary case in which it is the debtor; (iii) consents to the appointment of a Custodian of it or for all or substantially all of its property; (iv) makes a general assignment for the benefit of its creditors; or (v) generally is unable to pay its debts as the same become due; or (f) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (i) is for relief against the Company in an involuntary case which order remains unstayed or unwithdrawn for 60 days; (ii) appoints a Custodian of the Company or for all or substantially all of its property which order is not stayed or withdrawn within 60 days; and (iii) orders the liquidation of the Company, and the order or decree remains unstayed and in effect for 60 days. (g) there shall exist under any Senior Debt, or any agreement pursuant to which any Senior Debt is issued, any default which (i) shall remain uncured after the expiration of any 27 applicable notice or cure period and (ii) shall have caused such Senior Debt to become due and payable. The term "BANKRUPTCY LAW" means Title 11, U.S. Code or any similar Federal, state or foreign law for the relief of debtors or the protection of creditors. The term "CUSTODIAN" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. SECTION 8.02. ACCELERATION. If an Event of Default (other than an Event of Default specified in clauses (e) or (f) of Section 8.01 hereof) occurs and is continuing, the Trustee by notice to the Company, or the Holders of at least thirty-five percent (35%) in principal amount of the then outstanding Notes by notice to the Company and the Trustee, may declare all the Notes to be due and payable. Upon such declaration, the principal of, and interest on the Notes shall be due and payable immediately. If an Event of Default specified in clause (e) or (f) of Section 8.01 hereof occurs, such an amount shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. The Holders of a majority in principal amount of the then outstanding Notes by notice to the Trustee may rescind an acceleration and its consequences (i) if the recession would not conflict with any judgment or decree of a court of competent jurisdiction and (ii) if all existing Events of Default have been cured or waived except nonpayment of principal or interest on the Notes that has become due solely because of the acceleration of the Notes. SECTION 8.03. OTHER REMEDIES. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal or interest on the Notes or to enforce the performance of any provision of the Notes or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. SECTION 8.04. WAIVER OF PAST DEFAULTS. The Holders of a majority in principal amount of the then outstanding Notes by notice to the Trustee may on behalf of all of the Holders of the Notes waive an existing Default or Event of Default and its consequences except a continuing Default or Event of Default in the payment of the principal of or interest on any Note. Any such waiver of an existing Default or Event of Default and its consequences may be made subject to such conditions as may be requested by the Holders of a majority in principal amount of the then outstanding Notes by notice to the Trustee and agreed upon by the Trustee in its sole and absolute discretion. When a Default or Event of Default is waived, it is cured and ceases; provided, however, that no such waiver shall extend to any subsequent or other Default or impair any right consequent 28 thereon and any such waivers shall be subject to the provisions of Section 11.02 hereof; provided, further, that a conditional waiver shall be effective only in accordance with its conditions. SECTION 8.05. CONTROL BY MAJORITY. The Holders of a majority in principal amount of the then outstanding Notes may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture, is unduly prejudicial to the rights of other Holders, or would involve the Trustee in personal liability. SECTION 8.06. LIMITATION ON SUITS. Subject to the provisions of Section 8.07 hereof, a Holder may pursue a remedy with respect to this Indenture or the Notes only if: (a) the Holder gives to the Trustee notice of a continuing Event of Default; (b) the Holders of at least thirty-five percent (35%) in principal amount of the then outstanding Notes make a request to the Trustee to pursue the remedy; (c) such Holder or Holders offer to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense: (d) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and (e) during such 60-day period the Holders of a majority in principal amount of the then outstanding Notes do not give the Trustee a direction inconsistent with the request. A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over another Holder. SECTION 8.07. RIGHTS OF HOLDERS TO RECEIVE PAYMENT. Notwithstanding any other provision of this Indenture, the right of any Holder of a Note to receive payment of principal, and interest on the Note, on or after the respective due dates and in accordance with the terms set forth in the Note, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of the Holder. SECTION 8.08. COLLECTION SUIT BY TRUSTEE. If an Event of Default specified in Section 8.01(a) or (b), hereof occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company for the whole amount of principal and interest remaining unpaid on the Notes and interest on overdue principal and interest and such further amount as shall be 29 sufficient to cover the costs and, to the extent lawful, expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. SECTION 8.09. TRUSTEE MAY FILE PROOFS OF CLAIM. The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and the Holders allowed in any judicial proceedings relative to the Company, its creditors or its property. Nothing contained herein shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 8.10. PRIORITIES. Subject to the provisions of Article VI hereof, if the Trustee collects any money pursuant to this Article VIII, it shall pay out the money in the following order: First: to the Trustee for amounts due under Section 9.07 hereof; Second: to the holders of Senior Debt, if and to the extent required by Article VI; Third: to Holders for amounts due and unpaid on the Notes for principal and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes for principal and interest, respectively, and Fourth: to the Holders for any other payments pursuant to the terms of this Indenture; and Fifth: to the Company. The Trustee may fix a record date and payment date for any payment to Holders made pursuant to this Section 8.10. SECTION 8.11. UNDERTAKING FOR COSTS. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 8.11 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 8.07 hereof, or a suit by Holders of more than 10% in principal amount of the then outstanding Notes. 30 ARTICLE IX TRUSTEE SECTION 9.01. DUTIES OF TRUSTEE. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of an Event of Default: (i) the Trustee need perform only those duties that are specifically set forth in this Indenture and no others and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform on their face to the requirements of this Indenture. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) this paragraph does not limit the effect of paragraph (b) of this Section 9.01; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 8.05 hereof (d) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this Section 9.01. (e) The Trustee may refuse to perform any duty or exercise any right or power (including, without limitation, as requested or directed by a Holder) unless it receives indemnity satisfactory to it against any loss, liability or expense. (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. SECTION 9.02. RIGHTS OF TRUSTEE. (a) The Trustee may rely on any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel, or both. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. 31 (c) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers. (e) The Trustee shall not be charged with knowledge of any Event of Default under subsections (c) through (f) (and subsection (a) or (b) if the Trustee does not act as Paying Agent) of Section 8.01, unless either (1) a Trust Officer of the Trustee assigned to its corporate trust department shall have actual knowledge thereof, or (2) the Trustee shall have received written notice thereof in accordance with Section 12.02 hereof from the Company or any Holder. (f) The grant of any permissive rights, power or authority hereunder to the Trustee shall not be construed to be a duty. SECTION 9.03. INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee in its individual or any other capacity may become the owner or pledgee of Notes and may otherwise deal with the Company or an Affiliate with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. However, the Trustee is subject to Sections 9.10 and 9.11 hereof SECTION 9.04. TRUSTEE'S DISCLAIMER. The Trustee makes no representation as to the validity or adequacy of this Indenture or the Notes, it shall not be accountable for the Company's use of the proceeds from the Notes, and it shall not be responsible for any statement of the Company in the Indenture or any statement in the Notes other than its authentication. SECTION 9.05. NOTICE OF DEFAULTS. If a Default or Event of Default occurs and is continuing and if it is known to the Trustee, the Trustee shall mail to Holders a notice of the Default or Event of Default within 30 days after the Trustee becomes aware of such Default or Event of Default. Except in the case of a Default or Event of Default in payment of principal or interest on any Note, the Trustee may withhold the notice if and so long as a committee of its Trust Officers in good faith determines that withholding the notice is in the interests of Holders. SECTION 9.06. REPORTS BY TRUSTEE TO HOLDERS. Within 60 days after the reporting date stated in Section 12.10, the Trustee shall mail to Holders a brief report dated as of such reporting date that complies with TIA Section 313(a) if and to the extent required by such Section 313(a). The Trustee also shall comply with TIA Section 313(b)(2). The Trustee shall also transmit by mail all reports as required by TIA Section 313(c). 32 A copy of each report at the time of its mailing to Holders shall be filed with the SEC and each stock exchange on which the Notes are listed. The Company shall notify the Trustee when the Notes are listed on any stock exchange. SECTION 9.07. COMPENSATION AND INDEMNITY. The Company shall pay to the Trustee from time to time reasonable compensation for its services hereunder as to which the Company and the Trustee shall from time to time mutually agree in writing. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee upon request for all reasonable disbursements, expenses and advances incurred or made by it. Such disbursements and expenses may include the reasonable disbursements, compensation and expenses of the Trustee's agents and counsel. The Company shall indemnify the Trustee against any claims, demands, expenses (including but not limited to reasonable compensation, fees, disbursements and expenses of the Trustee's agents and counsel), losses, damages or liabilities incurred by it, except as set forth in the next paragraph, arising out of, related to, or in connection with the acceptance or administration of this trust and its rights or duties hereunder, including the reasonable costs and expenses, and the costs and expenses of enforcing this Indenture (including this Section 9.07) against the Company and of defending itself against any claim (whether asserted by the Company, or any Holder or any other person) or liability in connection with the exercise or performance of any of its powers or duties hereunder. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. The Company shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and the Company shall pay the reasonable fees, disbursements and expenses of such counsel. The Company need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. The Company need not reimburse any expense or indemnify against any loss or liability incurred by the Trustee through the Trustee's negligence or willful misconduct. To secure the Company's payment obligations in this Section 9.07, the Trustee shall have a lien prior to the Notes on all money or property held or collected by the Trustee, except money or property held in trust to pay principal and interest on particular Notes. Without prejudice to any other rights available to the Trustee under applicable law, when the Trustee incurs expenses or renders services after an Event of Default specified in Section 8.01(e) or (f) hereof occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy Law. All amounts owing to the Trustee under this Section 9.07 shall be payable by the Company in United States dollars. 33 SECTION 9.08. REPLACEMENT OF TRUSTEE. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section 9.08. The Trustee may resign by so notifying the Company. The Holders of a majority in principal amount of the then outstanding Notes may remove the Trustee by so notifying the Trustee and the Company. The Company may remove the Trustee if: (a) the Trustee fails to comply with Section 9.10 hereof, unless the Trustee's duty to resign is stayed as provided in TIA Section 310(b); (b) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (c) a Custodian or public officer takes charge of the Trustee or its property; or (d) the Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the then outstanding Notes may appoint a successor Trustee to replace the successor Trustee appointed by the Company. If a successor Trustee does not take office within 30 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or any Person that has been a bona fide Holder of a Note for at least six (6) months may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 9.10 hereof, unless the Trustee's duty to resign is stayed as provided in TIA Section 310(b), any Holder who has been a bona fide Holder of a Note for at least six months may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Holders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided for in Section 9.07 hereof. Notwithstanding replacement of the Trustee pursuant to this Section 9.08 hereof, the Company's obligations under Section 9.07 hereof shall continue for the benefit of the retiring trustee with respect to expenses and liabilities incurred by it prior to such replacement. 34 SECTION 9.09. SUCCESSOR TRUSTEE BY MERGER, ETC. If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business (including the administration of this Indenture) to, another corporation, the successor corporation without any further act shall be the successor Trustee. SECTION 9.10. ELIGIBILITY; DISQUALIFICATION. This Indenture shall always have a Trustee who satisfies the requirements of TIA Section 310(a)(1) and (5). The Trustee shall always have a combined capital and surplus as stated in Section 12.10 hereof. The Trustee is subject to TIA Section 310(b). SECTION 9.11. PREFERENTIAL COLLECTION OF CLANS AGAINST COMPANY. The Trustee is subject to TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated therein. ARTICLE X DISCHARGE OF INDENTURE SECTION 10.01. TERMINATION OF COMPANY'S OBLIGATIONS. This Indenture shall cease to be of further effect (except that the Company's obligations under Sections 9.07 and 10.02 hereof shall survive) when all outstanding Notes theretofore authenticated and issued have been delivered to the Trustee for cancellation and the Company has paid all sums payable hereunder. In the event that any payment made under the Indenture is avoided under any bankruptcy or reorganization law following termination of the Indenture, the Indenture shall be revived as if the challenged amount had never been paid. SECTION 10.02 REPAYMENT TO COMPANY. The Trustee and the Paying Agent shall promptly pay to the Company upon request any excess money or securities held by them at any time. The Trustee and the Paying Agent shall pay to the Company upon request any money held by them for the payment of principal or interest that remains unclaimed for two years after the date upon which such payment shall have become due (subject to the requirements of any abandoned property laws that may be applicable); provided, however, that the Company shall have first caused notice of such payment to the Company to be mailed to each Holder entitled thereto no less than 30 days prior to such payment. After payment to the Company, the Trustee and the Paying Agent shall have no further liability with respect to such money and Holders entitled to the money must look to the Company for payment as general creditors unless any applicable abandoned property law designates another Person. 35 ARTICLE XI AMENDMENTS, SUPPLEMENTS AND WAIVERS SECTION 11.01. WITHOUT CONSENT OF HOLDERS. The Company and the Trustee may amend or supplement this Indenture or the Notes without the consent of any Holder: (a) to cure any ambiguity, defect or inconsistency; (b) to comply with Section 7.01 hereof; (c) to provide for uncertificated Notes in addition to or in place of certificated Notes; (d) to make any change that provides additional rights or benefits to the Holders of the Notes; (e) to make any change that does not adversely affect the interests hereunder of any Holder; or (f) to qualify the Indenture under the TIA or to comply with the requirements of the SEC in order to maintain the qualification of the Indenture under the TIA. SECTION 11.02. WITH CONSENT OF HOLDERS. Subject to Section 8.07 hereof, the Company and the Trustee may amend or supplement this Indenture or the Notes with the written consent of the Holders of at least a majority in principal amount of the then outstanding Notes. Subject to Sections 8.04 and 8.07 hereof, the Holders of a majority in principal amount of the Notes then outstanding may also waive compliance in a particular instance by the Company with any provision of this Indenture or the Notes. However, without the consent of each Holder affected, an amendment, supplement or waiver under this Section 11.02 may not: (a) reduce the principal amount of Notes whose Holders must consent to an amendment, supplement or waiver; (b) reduce the principal of or change the fixed maturity of any Note or alter the provisions of Section 7 of the Notes in a manner adverse to the Holders; (c) reduce the rate of or change the time for payment or accrual of interest on any Note; (d) waive a continuing default or Event of Default in the payment of the principal of or interest on any Note, except a rescission of acceleration of the Notes by the Holders of at least a majority in aggregate principal amount of the Notes and a waiver of the payment default that resulted from such acceleration; (e) make any Note payable in money other than that stated in the Note: 36 (f) make any change in Section 8.04 or 8.07 hereof; (g) waive a redemption payment with respect to any Note; (h) modify Article V or VI in a manner adverse to the Holders of Notes; and (i) make any change in the foregoing amendment and waiver provisions of this Article XI. To secure a consent of the Holders under this Section 11.02, it shall not be necessary for the Holders to approve the particular form of any proposed amendment, supplement or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement or waiver under this Section 11.02 becomes effective, the Company shall mail to Holders a notice briefly describing the amendment or waiver. SECTION 11.03. COMPLIANCE WITH TRUST INDENTURE ACT. Every amendment to this Indenture or the Notes shall be set forth in a supplemental indenture that complies with the TIA as then in effect. SECTION 11.04. REVOCATION AND EFFECT OF CONSENTS. Until an amendment. supplement or waiver becomes effective, a consent to it by a Holder of a Note is a continuing consent by the Holder and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note, even if notation of the consent is not made on any Note. However, any such Holder or subsequent Holder may revoke the consent as to his Note or portion of a Note if the Trustee receives the notice of revocation before the date on which the Trustee receives an Officers' Certificate certifying that the Holders of the requisite principal amount of Notes have consented to the amendment, supplement or waiver. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any amendment, supplement or waiver. If a record date is fixed, then notwithstanding the provisions of the immediately preceding paragraph, those Persons who were Holders at such record date (or their duly designated proxies), and only those Persons, shall be entitled to consent to such amendment, supplement or waiver or to revoke any consent previously given, whether or not such Persons continue to be Holders after such record date. No consent shall be valid or effective for more than 90 days after such record date unless consents from Holders of the principal amount of Notes required hereunder for such amendment or waiver to be effective shall have also been given and not revoked within such 90-day period. After an amendment, supplement or waiver becomes effective it shall bind every Holder, unless it is of the type described in any of clauses (a) through (i) of Section 11.02 hereof. In such case, the amendment or waiver shall bind each Holder who has consented to it and every subsequent Holder that evidences the same debt as the consenting Holder's Note. 37 SECTION 11.05. NOTATION ON OR EXCHANGE OF NOTES. The Trustee may place an appropriate notation about an amendment or waiver on any Note thereafter authenticated. The Company in exchange for all Notes may issue and the Trustee shall authenticate new Notes that reflect the amendment or waiver. Failure to make such notation on a Note or to issue a new Note as aforesaid shall not affect the validity and effect of such amendment or waiver. SECTION 11.06. TRUSTEE PROTECTED. The Trustee shall sign all supplemental indentures, except that the Trustee may, but need not, sign any supplemental indenture that adversely affects its rights, obligations or protections. Upon request by the Company to sign any amendment or supplement, the Trustee shall be entitled to request and receive from the Company, and to rely upon, an Opinion of Counsel and Officer's Certificate to the effect that such supplement or amendment is authorized or permitted under this Article XI. ARTICLE XII MISCELLANEOUS SECTION 12.01. TRUST INDENTURE ACT CONTROLS. This Indenture is subject to the provisions of the TIA that are required to be incorporated into this Indenture, and shall, to the extent applicable, be governed by such provisions. If any provision of this Indenture limits, qualifies, or conflicts with another provision which is required (or would be so required) to be incorporated in this Indenture by the TIA, the incorporated provision shall control. SECTION 12.02. NOTICES. Any notice or communication by the Company or the Trustee to the other is duly given if in writing and delivered in Person or mailed by first class mail to the other's address stated in Section 12.10 hereof. The Company or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. Any notice or communication to a Holder shall be mailed by first class mail to his address shown on the register kept by the Registrar. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. If the Company mails a notice or communication to Holders, it shall mail a copy to the Trustee and each Agent at the same time. All other notices or communications shall be in writing. 38 In case by reason of the suspension of regular mail service, or by reason of any other cause, it shall be impossible to mail any notice as required by the Indenture, then such method of notification as shall be made with the approval of the Trustee shall constitute a sufficient mailing of such notice. SECTION 12.03. COMMUNICATION BY HOLDERS WITH OTHER HOLDERS. Holders may communicate pursuant to TIA Section 3 12(b) with other Holders with respect to their rights under this Indenture or the Notes. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). SECTION 12.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT. Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee upon the Trustee's request: (a) an Officers' Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (b) an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. SECTION 12.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than pursuant to Section 5.03) shall include: (a) a statement that the Person signing such certificate or rendering such opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such Person, such Person has made such examination or investigation as is necessary to enable such Person to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether or not, in the opinion of such Person, such condition or covenant has been complied with. SECTION 12.06. RULES BY TRUSTEE AND AGENTS. The Trustee may make reasonable rules for action by, or a meeting of, Holders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its functions. 39 SECTION 12.07. LEGAL HOLIDAYS. A "LEGAL HOLIDAY" is a Saturday, a Sunday or a day on which banking institutions in the State of Delaware are not required to be open. If a payment date is a Legal Holiday, payment may be made on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. If any other operative date for purposes of this Indenture shall occur on a Legal Holiday then for all purposes the next succeeding day that is not a Legal Holiday shall be such operative date. SECTION 12.08. NO RECOURSE AGAINST OTHERS. A director, officer, employee, incorporator or shareholder of the Company, as such, shall not have any liability for any Obligations of the Company under the Notes or this Indenture or for any claim based on, in respect of or by reason of such Obligations or their creation. Each Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Notes. SECTION 12.09. COUNTERPARTS AND FACSIMILE SIGNATURES. This Indenture may be executed by manual or facsimile signature in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. SECTION 12.10. VARIABLE PROVISIONS. The first certificate pursuant to Section 5.03 hereof shall be for the fiscal year ended on December 31 of the year of the Initial Issuance Date or such other date as may be required under the Trust Indenture Act. The reporting date for Section 9.06 hereof is May 1st of each year. The first reporting date shall be the first day of May of the year following the year in which the Notes are first issued. The Trustee shall always have a combined capital and surplus of at least $10,000,000 as set forth in its most recent published annual report of condition and any Successor Trustee shall have a combined capital and surplus of at least $100,000,000. The Company's address is: MICROSTRATEGY INCORPORATED 8000 Towers Crescent Drive Vienna, Virginia 22182 Attention: General Counsel Facsimile No. (703) 848-8610 40 With a copy to: Williams & Connolly 725 Twelfth Street, N.W. Washington, D.C. 20005 Attn: John K. Villa, Esq. Facsimile No. (202) 434-5029 The Trustee's address is: if by mail: American Stock Transfer & Trust Company 59 Maiden Lane New York, New York 10038 Attention: Executive Vice President if by delivery or overnight courier: American Stock Transfer & Trust Company 59 Maiden Lane New York, New York 10038 Attention: Executive Vice President SECTION 12.11. GOVERNING LAW, SUBMISSION TO JURISDICTION. THE INTERNAL LAWS OF THE STATE OF DELAWARE SHALL GOVERN THIS INDENTURE AND THE NOTES, WITHOUT REGARD TO THE CONFLICT OF LAWS PROVISIONS THEREOF To the extent permitted by applicable law, the Company irrevocably submits to the nonexclusive jurisdiction of the United States District Court for the Eastern District of Virginia in any suit or proceeding based on or arising under this Indenture and the Notes and irrevocably agrees that all claims in respect of such suit or proceeding may be determined in any such court. The Company irrevocably and fully waives the defense of an inconvenient forum to the maintenance of such suit or proceeding. The Company hereby irrevocably designates and appoints CT Corporation System as the authorized agent of the Company upon whom process may be served in any such suit or proceeding (the "PROCESS AGENT'), it being understood that the designation and appointment of the Process Agent as such authorized agent shall become effective immediately without any further action on the part of the Company. The Company represents to the Trustee that it has notified the Process Agent of such designation and appointment and that the Process Agent has accepted the same. The Company hereby irrevocably authorizes and directs the Process Agent to accept such service. The Company further agrees that service of process upon the Process Agent shall be deemed in every respect effective service of process upon the Company in any such suit or proceeding. Nothing herein shall affect the right of the Trustee or any Holder to serve process in any other manner permitted by law. In the event that CT Corporation System ceases to be 41 the Process Agent, the Company agrees that it will take any and all action, including the execution and filing of any and all such documents and instruments as may be necessary to validly designate and appoint an alternate agent as Process Agent, and to maintain such designation and appointment in full force and effect so long as the Company has any outstanding obligations under this Indenture or the Notes, on terms that are reasonably acceptable to the Trustee. To the extent that the Company has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether through service of notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to itself or its property, the Company hereby irrevocably waives such immunity in respect of its obligations hereunder and thereunder, to the extent permitted by law. SECTION 12.12. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS. This Indenture may not be used to interpret another indenture, loan or debt agreement of the Company or an Affiliate. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. SECTION 12.13. SUCCESSORS. All agreements of the Company in this Indenture and the Notes shall bind its successor. All agreements of the Trustee in this Indenture shall bind its successor. SECTION 12.14. SEVERABILITY. In case any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 12.15. TABLE OF CONTENTS, HEADINGS, ETC. The Table of Contents, Cross-Reference Table, and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. [SIGNATURES APPEAR ON FOLLOWING PAGE] 42 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, all as of the date first written above. MICROSTRATEGY INCORPORATED, as Issuer By: /s/ [Illegible] ------------------------------------ Name: counsel for Title: MicroStrategy, Incorporated AMERICAN STOCK TRANSFER & TRUST COMPANY as Trustee By: /s/ Herbert J. Lemmer ------------------------------------ Name: HERBERT J. LEMMER Title: VICE PRESIDENT 43 EXHIBIT A (Face of Security) 7 1/2% SERIES A UNSECURED NOTE Due five (5) years from date of first issuance of any 7 1/2% Series A Unsecured Note Cusip No. _____________ Note No. _____________ $_____________ MICROSTRATEGY INCORPORATED promises to pay to the order of ________________________________________________ or registered assigns, the principal sum of _________________________ Dollars on _____________ Interest Payment Dates: ______________________ and ____________________ commencing _______________________________________________________ Record Dates: ______________________ and ____________________ Authenticated: Dated: ___________________ ____________________, MICROSTRATEGY INCORPORATED as Trustee By:______________________________ By:_____________________________________ Authorized Officer Officer of the Company Attest: ________________________________ Officer of the Company (SEAL) A-1 (Back of Security) 7 1/2% SERIES A UNSECURED NOTE Due five (5) years from date of first issuance of any 7 1/2% Series A Unsecured Note Capitalized terms used herein shall have the meanings ascribed to them in that certain Indenture dated as of January 11, 2001 (the "Indenture") between MicroStrategy Incorporated, a Delaware corporation (the "Company"), and American Stock Transfer & Trust Company, a New York limited purpose trust company (the "Trustee") unless otherwise indicated. 1. Interest and Principal. The Company promises to pay interest on the principal amount of this 7 1/2% Series A Unsecured Note due five (5) years from date of first issuance of any 7 1/2% Series A Unsecured Note (the "Note") at a rate of seven and one half percent (7 1/2%) per annum from the date of the commencement of the Settlement Hearing in respect of a class-action lawsuit in the United States District Court for the Eastern District of Virginia, entitled In re MicroStrategy Incorporated Securities Litigation, Civil Action No. 00-473-A (the "Interest Accrual Commencement Date") until maturity. The Company will pay interest semiannually commencing after the date of issuance of the Note on dates that shall be common for all 7 1/2% Series A Unsecured Notes and shall be the date that is six (6) months after the issuance of the first 7 1/2% Series A Unsecured Notes until maturity (each an "Interest Payment Date"), or if any such day is not a Business Day, on the next succeeding Business Day. Principal of the Notes will be due at maturity. Interest on the Notes will accrue and compound annually from the Interest Accrual Commencement Date until the date of issuance and thereafter will accrue semiannually. The Company shall pay interest (including post-petition interest in any proceeding under Bankruptcy Law) on overdue principal from time to time at the same rate per annum on the Notes then in effect; it shall pay interest (including post-petition interest in any proceeding under Bankruptcy Law) on overdue installments of interest (without regard to any applicable grace periods) from time to time at the same rate to the extent lawful. Interest will be computed on the basis of a 360 day year of 12 months of 30 days each. 2. Method of Payment. The Company will pay interest on the Notes by check or wire transfer (pursuant to wire instructions provided by the Holder no later than 30 days prior to the applicable Interest Payment Date) to the Persons who are registered Holders of Notes at the close of business on the record date next preceding the Interest Payment Date. The Notes will be payable both as to principal and interest at the office of the Paying Agent maintained for such purpose within the City and State of New York. Interest shall not accrue and no payment for interest shall be made on this Note if called for Redemption or Mandatory Conversion pursuant to Section 5 or 6 of the Note with respect to any period following the date of redemption or conversion. In the case of any Note surrendered for redemption or conversion after the close of business on any record date for the payment of an installment of interest but before the opening of business on the next succeeding Interest Payment Date, such Note when surrendered for conversion, must be accompanied by payment in an amount equal to the interest payable on such Interest Payment Date on the principal amount of the Note so redeemed or converted. Accrued interest shall be paid on such Interest Payment Date to the holder of this Note on such record date. If less than all of this Note is to be converted at any time, the preceding provisions shall apply only to the A-2 portion so converted and interest shall accrue and be paid on the balance of this Note in accordance with the provisions of Article II of the Indenture. 3. Presenting Agent, Paving Agent, Conversion Agent and Registrar. Initially, the Trustee will act as Presenting Agent, Paying Agent, Conversion Agent and Registrar. The Company may change any Presenting Agent, Paying Agent, Conversion Agent or Registrar without notice to any Holder. The Company or any of its subsidiaries may act in any such capacity. 4. Indenture. The Company issued the Notes under the Indenture. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code ss.ss. 77aaa-77bbbb) (the "TIA"). The Notes are subject to all such terms, and Holders are referred to the Indenture and the TIA for a statement of such terms. The Notes are limited to eighty million five hundred thousand dollars and no cents ($80,500,000) in aggregate principal amount, except that, pursuant to the Stipulation of Settlement, such amount may be increased, at the Company's option, to account for the issuance of Notes in lieu of fractional shares of Common Stock or Warrants (as defined below) to purchase fractional shares of Common Stock. 5. Redemption. The Company, in its sole discretion, may redeem all or any of the Notes, in whole or in part, pro rata, at any time, without premium or penalty, at a redemption price payable solely in cash equal to the principal of and any accrued but unpaid interest on the Notes in accordance with Article III of the Indenture. 6. Mandatory Conversion. The Company, in its sole discretion, may cause the Holder to convert all or any of the Notes, in whole or in part, pro rata, without premium or penalty, into shares of Common Stock in accordance with Article IV of the Indenture, provided, however, that nothing contained herein shall be construed as conferring upon the Holders any rights whatsoever as stockholders of the Company prior to such conversion. The number of shares of Common Stock into which the Notes, or any part thereof, shall be converted shall be such number of shares of Common Stock as may be obtained by dividing the principal and any accrued but unpaid interest thereon to be converted by an amount equal to eighty percent (80%) of the dollar-weighted average trading price per share for all round lot transactions in the Common Stock on the Market for the ten (10) trading days ending two (2) days prior to the date of the written notice to the Trustee and issuance of a press release by the Company describing the conversion. In the event of any such conversion, the Company shall pay the holder cash in lieu of any fractional shares (valued in the same manner as the shares actually issued) and shall pay, at the Company's option, in lieu of any Note that would otherwise be reissued in an amount not evenly divisible by $100, either cash or additional shares of Common Stock rounded up to the next whole number of shares, or a combination of the two. 7. Possible Reduction in Principal Amount of and Interest on the Notes. Pursuant to the Stipulation of Settlement dated January 11, 2001, the Company is obligated to pay all costs of notice and administration of all transactions contemplated by the Stipulation of Settlement (exclusive of any attorneys' fees and expenses, the "Settlement Costs"). If the Settlement Costs exceed $750,000, then the Company shall pay such excess (the "Excess Amount") as and when incurred but shall be entitled to a credit equal to the Excess Amount against the installment of A-3 interest on the Notes next due, to be applied against the Notes then outstanding on a pro rata basis. If the Excess Amount exceeds the total amount of interest then due on the Notes, the Company may, in its sole discretion, either apply such remaining Excess Amount against subsequent installments of interest on the next subsequent interest payment date or reduce the principal amount of the Notes outstanding on a pro raw basis by the balance of the Excess Amount not previously applied, provided however, that this Note may not be reduced to an amount not divisible by $100. S. Obligation to Redeem/Convert. The Company shall not reduce the outstanding principal amount of the Notes below sixty percent (60%) of their original outstanding principal amount, unless it shall redeem or convert into Class A Common Stock, without penalty or premium, the entire remaining outstanding principal amount of the Notes pursuant to Section 5 or Section 6 hereof. 9. Change in Control. In the event of a Change in Control of the Company (as defined in Article VII of the Indenture), the resulting, surviving or transferee entity shall expressly assume all of the Company's obligations in connection with the Notes and the Indenture. 10. Denominations, Transfer. Exchange. The Notes are exempt from registration by virtue of an exemption pursuant to Section 3(a)(I0) of the Securities Act of 1933, as amended (the "Securities Act"). In the event that such exemption from registration is not available under the Securities Act, the Company shall take such steps as are necessary either to cause the registration of the Notes under the Securities Act or to obtain relief from the registration requirements of the Securities Act by obtaining a "no action" letter from the U.S. Securities and Exchange Commission (the "SEC"). The Notes shall be in registered form without coupons in denominations of $100 and integral multiples of $100. The transfer of Notes may be registered and Notes may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents, and the Company may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. The Company need not exchange or register the transfer of any Note or portion of a Note selected for redemption, except for the unredeemed portion of any Note being redeemed in part. 11. Persons Deemed Owners. The registered Holder of a Note may be treated as its owner for all purposes. 12. Amendments and Waivers. Without the consent of any Holder, the Company and the Trustee may amend or supplement the Indenture or the Notes to cure any ambiguity, defect or inconsistency; to provide for uncertificated Notes in addition to or in place of certificated Notes; to make any change that would provide any additional rights or benefits to the Holders or that does not adversely affect the rights under the Indenture of any Holder; or to comply with requirements of the SEC in order to effect or maintain the qualification of the Indenture under the TIA. 13. Defaults and Remedies. Events of Default are described in the Indenture and include default in payment when due of principal of and interest on the Notes. If an Event of Default occurs and A-4 is continuing, the Trustee or the holders of at least thirty-five percent (35%) in principal amount of the then outstanding Notes may declare all the Notes to be due and payable immediately, except that in the case of an Event of Default arising from certain events of bankruptcy or insolvency, all outstanding Notes shall become due and payable immediately without further action or notice. Holders of Notes may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Notes. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power. 14. No Recourse Against Others. A director, officer, employee, incorporator or stockholder of the Company, as such, shall not have any liability for any obligations of the Company under the Notes or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Notes. 15. Authentication. This Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 16. Use of Notes to Exercise Warrants. Under the Stipulation of Settlement, the Company has issued certain warrants (the "Warrants") to purchase shares of Common Stock. Pursuant to that certain Warrant Agreement between the Company and American Stock Transfer & Trust Company, which governs the terms of the Warrants, this Note may be used to pay the exercise price payable upon exercise of Warrants (the "Exercise Price"). If a Holder elects to exercise a Warrant by tendering this Note, the value of this Note for purposes of the payment of the Exercise Price shall be the principal of and the accrued but unpaid interest on the Note multiplied by 133%. In accepting payment in the form of a Note, the Company shall reduce the principal and accrued but unpaid interest of this Note pro rata when used as payment of the Exercise Price. In the event that upon payment of all or part of the Exercise Price with this Note, the Holder is entitled to the return of a new Note reflecting the remaining principal balance hereof, the Company shall issue such new Note in a denomination of no less than $100 and in integral multiples of $100, and will pay any remaining principal amount, together with accrued and unpaid interest thereon, to the Holder in cash. 17. Abbreviations. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 18. Subordination. This Note is subordinated to certain other indebtedness of the Company as described more fully in the Indenture. 19. Governing Law. The internal laws of the State of Delaware shall govern this Note without regard to its provisions of conflicts of laws. The Company will furnish to any Holder upon written request and without charge a copy of the Indenture. Requests may be made to the Trustee at the following address: A-5 American Stock Transfer & Trust Company 59 Maiden Lane New York, New York 10038 A-6 ASSIGNMENT FORM To assign this Note, fill in the form below: (I) or (we) assign and transfer this Note to ________________________________________________________________________________ _____________________________________________ (Insert assignee's soc. sec. or tax I.D. no.) ________________________________________________________________________________ _____________________________________________ ________________________________________________________________________________ _____________________________________________ ________________________________________________________________________________ _____________________________________________ (Print or type assignee's name. address and zip code) and irrevocably appoint _____________________________________________________ to transfer this Note on the books of the Company. The agent may substitute another to act for him. ________________________________________________________________________________ Date: Your Signature:_________________________________ (Sign exactly, as your name appears on the face of this Note) Signature Guarantee. Signatures must be guaranteed by an eligible guarantor institution (a bank, stockbroker, savings and loan association or credit union with membership in an approved signature guarantee medallion program) pursuant to Rule l7Ad-15 of the Securities Exchange Act of 1934. A-7 EX-21.1 3 dex211.txt SUBSIDIARIES OF THE REGISTRANT Exhibit 21.1 MICROSTRATEGY INCORPORATED Subsidiaries ------------ Aventine, Incorporated (Delaware) MicroStrategy Capital Corporation (Delaware) MicroStrategy Management Corporation (Delaware) MicroStrategy Services Corporation (Delaware) Strategy.com Incorporated (Delaware) MicroStrategy Australia Pty. Ltd. (Australia) MicroStrategy Benelux B.V. (Netherlands) MicroStrategy Brasil Ltda. (Brazil) MicroStrategy Brasil Ltda. Sucursal Argentina (Argentina) MicroStrategy Canada Incorporated (Canada) MicroStrategy Deutschland GmbH (Germany) MicroStrategy France SARL (France) MicroStrategy-FSC, Inc. (Barbados) MicroStrategy GmbH (Austria) MicroStrategy Iberica, S.A. (Spain) MicroStrategy International Limited (Bermuda) MicroStrategy International II Limited (Bermuda) MicroStrategy Italy S.r.l. (Italy) MicroStrategy Korea Co., Ltd. (Korea) MicroStrategy Limited (United Kingdom) MicroStrategy Mexico, Sde R.L. de C.V. (Mexico) MicroStrategy Schweiz AG (Switzerland) Strategy.com International Limited (Bermuda) EX-23.1 4 dex231.txt CONSENT OF PRICEWATERHOUSE COOPERS LLP CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We hereby consent to the incorporation by reference in the Registration Statement on Forms S-3 and S-8 (No. 333-31042, No. 333-42994, No. 333-58189, No. 333-44844, and No. 333-44846) of MicroStrategy Incorporated and its subsidiaries of our report dated February 2, 2001, except as to Note 19 which is as of March 20, 2001, relating to the financial statements, which appear in this Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP McLean, Virginia March 30, 2001 -----END PRIVACY-ENHANCED MESSAGE-----