Why were MicroStrategy's 1999, 1998 and 1997 financial results restated?

The company revised its revenue recognition to conform with Statement of Position 97-2, which spreads recognition over the contract period for large, complex contracts combining products and services. It also corrected cases where revenue was recorded in a period in which the contract had not been fully executed by both parties. The filing says these revisions were made with the concurrence of the auditors.

How did the restatement change the 1999 financial results?

Revenue was reduced from $205.3 million to $151.3 million, and diluted net income per share of $0.15 became a diluted net loss per share of $(0.44). Deferred revenue at year end rose from $16.8 million to $71.3 million. The restatement also included balance sheet revisions, including reclassifying about $21.5 million from accounts receivable to short-term investments and increasing goodwill by about $31.4 million.

What legal and regulatory risks does the filing disclose?

In March 2000, numerous class action complaints were filed under Section 10(b) and Rule 10b-5 and Section 20(a), alleging materially false and misleading statements about the 1999 and 1998 results. The SEC also issued a formal order of private investigation related to the restatement. The complaints do not specify damages, and the company says the outcomes cannot yet be determined.

What is the company's near-term financing position?

The company had $25.9 million in cash and cash equivalents and $42.4 million in short-term investments at December 31, 1999. It states that it will require additional external financing to support its Strategy.com investment, that it does not comply with all covenants of its $25.0 million line of credit, and that it has a waiver through April 30, 2000, at which time it expects to restructure the facility.

How is control of the company held?

Class A common stock carries one vote per share and Class B carries ten votes per share. As of March 1, 2000, Class B holders owned or controlled 95.9% of total voting power, and Michael J. Saylor controlled 75.3%. The filing states that Mr. Saylor can determine the outcome of director elections and prevent a change of control, regardless of whether Class A holders would receive a premium.

Strategy 10-K FY1999 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed April 13, 2000. Cited figures are marked; the original filing is the authoritative source.

MicroStrategy Incorporated's Form 10-K for the fiscal year ended December 31, 1999 reports a restatement that turned a reported profit into a loss.

The company reduced 1999 reported revenue from $205.3 million to $151.3 million^a and changed diluted net income per share from $0.15 to a diluted net loss per share of $(0.44). The revisions primarily relate to applying SOP 97-2 revenue recognition, so that large, complex contracts are recognized over time, and to a cutoff issue on contracts not fully executed by both parties within the reporting period. Deferred revenue at December 31, 1999 rose from $16.8 million to $71.3 million.

The filing states that financial statements and announced earnings for the affected quarterly periods should not be relied upon. The company reported a 1999 loss from operations of $(34.5) million and a net loss of $(33.7) million, and it expects operating losses to increase significantly in 2000 as it invests in its Strategy.com personal intelligence network, which had recognized no revenue through December 31, 1999. Management states that it will require additional external financing, that it is not in compliance with all covenants of its $25.0 million^b line of credit and has a waiver through April 30, 2000, and that it expects to restructure the facility.

Governance risk is also significant: Class B shares held by insiders represented 95.9%^c of total voting power as of March 1, 2000, and Michael J. Saylor alone controlled 75.3%. Investors face litigation and regulatory exposure.

Securities class actions were filed in March 2000 alleging false statements about the 1999 and 1998 results, and the SEC issued a formal order of private investigation related to the restatement. The company states the outcome of both cannot yet be determined and that it intends to defend the actions vigorously.

02—Key points

Key Highlights

Restated 1999 revenue of $151.3 million, down from $205.3 million as originally reported; diluted EPS restated to $(0.44) from $0.15
Restated 1999 net loss of $(33.7) million, with loss from operations of $(34.5) million
Deferred revenue at December 31, 1999 increased to $71.3 million from $16.8 million as reported
Expected operating losses to increase significantly in 2000 due to Strategy.com investment; Strategy.com had recognized no revenue as of December 31, 1999
Not in compliance with all covenants of the $25.0 million line of credit; waiver runs through April 30, 2000
Securities class actions filed in March 2000 and an SEC formal investigation related to the restatement
Class B holders controlled 95.9% of total voting power as of March 1, 2000; Michael J. Saylor controlled 75.3%

03—Questions

Frequently Asked Questions

Why were MicroStrategy's 1999, 1998 and 1997 financial results restated?
The company revised its revenue recognition to conform with Statement of Position 97-2, which spreads recognition over the contract period for large, complex contracts combining products and services. It also corrected cases where revenue was recorded in a period in which the contract had not been fully executed by both parties. The filing says these revisions were made with the concurrence of the auditors.
How did the restatement change the 1999 financial results?
Revenue was reduced from $205.3 million to $151.3 million, and diluted net income per share of $0.15 became a diluted net loss per share of $(0.44). Deferred revenue at year end rose from $16.8 million to $71.3 million. The restatement also included balance sheet revisions, including reclassifying about $21.5 million from accounts receivable to short-term investments and increasing goodwill by about $31.4 million.
What legal and regulatory risks does the filing disclose?
In March 2000, numerous class action complaints were filed under Section 10(b) and Rule 10b-5 and Section 20(a), alleging materially false and misleading statements about the 1999 and 1998 results. The SEC also issued a formal order of private investigation related to the restatement. The complaints do not specify damages, and the company says the outcomes cannot yet be determined.
What is the company's near-term financing position?
The company had $25.9 million in cash and cash equivalents and $42.4 million in short-term investments at December 31, 1999. It states that it will require additional external financing to support its Strategy.com investment, that it does not comply with all covenants of its $25.0 million line of credit, and that it has a waiver through April 30, 2000, at which time it expects to restructure the facility.
How is control of the company held?
Class A common stock carries one vote per share and Class B carries ten votes per share. As of March 1, 2000, Class B holders owned or controlled 95.9% of total voting power, and Michael J. Saylor controlled 75.3%. The filing states that Mr. Saylor can determine the outcome of director elections and prevent a change of control, regardless of whether Class A holders would receive a premium.

04—Continue

← View all 10-K filings