Why did MicroStrategy post such a large net loss in 2000?

The net loss of $261.3 million reflected several large items: an $89.7 million provision for the litigation settlement, $17.7 million of intangible amortization, a $10.8 million restructuring charge, and a $9.4 million loss on investments. Operating expenses also grew faster than revenues, with sales and marketing rising to $151.1 million and general and administrative expenses to $58.8 million, largely from increased staffing, advertising and investment in Strategy.com.

How is the company funding its operations?

Funding came mainly from the $119.6 million (net) Series A redeemable convertible preferred stock sold in June 2000, the $39.8 million (net) initial closing and $10.0 million second closing of Strategy.com preferred stock, and a $30.0 million Foothill Capital credit facility entered February 9, 2001. Management believes existing cash, internally generated cash and the new facility will meet working capital requirements for the next 12 months, but says additional financing may be needed if revenues do not grow as anticipated.

What are the terms of the securities class action settlement?

Class members are to receive five-year unsecured promissory notes with an aggregate principal of $80.5 million bearing 7.5% interest, 550,000 shares of Class A common stock (increased if the trading price is below $30 so the minimum value is $16.5 million), and warrants for 1.9 million Class A shares at exercise prices of $40 to $50. The settlement remains subject to court approval, with a hearing scheduled for April 2, 2001.

Who controls the company and what are the dilution risks?

Chairman and CEO Michael J. Saylor controlled 73.8% of total voting power as of March 1, 2001, through Class B shares, and the filing notes he can prevent a change of control. Dilution risks include the possible conversion of the $80.5 million notes at 80% of the trading price, conversion of Series A preferred stock (3,744,152 shares at the current $33.39 price, which could rise substantially if the price falls), and the issuance of settlement shares and warrants.

Strategy 10-K FY2000 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed April 2, 2001. Cited figures are marked; the original filing is the authoritative source.

MicroStrategy Incorporated's 10-K for fiscal 2000 reports total revenues of $223.9 million^a, up from $151.3 million in 1999, but a net loss of $261.3 million (net loss attributable to common stockholders of $285.4 million, or $3.58 per share).

The loss was driven by an $89.7 million^b provision for litigation settlement, a $163.8 million loss from operations, $17.7 million of intangible amortization, a $10.8 million restructuring charge and a $9.4 million loss on investments. Operating expenses rose sharply, with sales and marketing at $151.1 million and general and administrative at $58.8 million. Cash used in operations was $87.8 million, and the accumulated deficit reached $299.3 million, with total stockholders' deficit of $145.5 million at year-end.

The company's liquidity position rests on several recent financings. It issued $119.6 million^c (net) of Series A redeemable convertible preferred stock in June 2000, and its Strategy.com subsidiary raised $49.8 million (net) in preferred stock financing completed in January 2001, with the company retaining about 84% of the economic interest. In February 2001 MicroStrategy entered a $30.0 million Credit Facility with Foothill Capital Corporation, consisting of a $10.0 million term loan and a $20.0 million revolver.

Management states that existing cash, operating cash flow and this facility will meet working capital needs for the next 12 months, but it also warns that further financing may be needed if revenues do not grow as expected. The filing is dominated by legal and governance matters. Settlements of the securities class action and the Delaware derivative suit, both tied to the restatement of 1997 to 1999 results, call for $80.5 million^d of five-year notes, 550,000 or more Class A shares (minimum value $16.5 million), and warrants for 1.9 million shares.

A final approval hearing was scheduled for April 2, 2001. The company also consented to an SEC cease-and-desist order with no monetary penalty.

Michael J. Saylor controls about 73.8% of voting power through Class B stock, and NCR has raised a possible patent licensing dispute.

02—Key points

Key Highlights

Total revenues rose to $223.9 million in 2000 from $151.3 million in 1999, while the net loss widened to $261.3 million from $33.7 million.
Loss from operations was $163.8 million, driven by operating expenses of $299.8 million, including sales and marketing of $151.1 million and an $89.7 million litigation settlement provision.
Net loss attributable to common stockholders was $285.4 million, or $3.58 per share, after $4.7 million in preferred dividends and a $19.4 million beneficial conversion feature charge.
Cash used in operations was $87.8 million in 2000, compared with cash provided of $89,000 in 1999; the accumulated deficit stood at $299.3 million.
Stockholders' equity was a deficit of $145.5 million at December 31, 2000, versus equity of $101.8 million a year earlier.
A $30.0 million Foothill Capital credit facility was entered in February 2001, and Strategy.com completed $49.8 million (net) of preferred financing in January 2001.
Class action and derivative settlements call for $80.5 million in notes, at least 550,000 Class A shares and warrants for 1.9 million shares, with final approval hearing set for April 2, 2001.

03—Questions

Frequently Asked Questions

Why did MicroStrategy post such a large net loss in 2000?
The net loss of $261.3 million reflected several large items: an $89.7 million provision for the litigation settlement, $17.7 million of intangible amortization, a $10.8 million restructuring charge, and a $9.4 million loss on investments. Operating expenses also grew faster than revenues, with sales and marketing rising to $151.1 million and general and administrative expenses to $58.8 million, largely from increased staffing, advertising and investment in Strategy.com.
How is the company funding its operations?
Funding came mainly from the $119.6 million (net) Series A redeemable convertible preferred stock sold in June 2000, the $39.8 million (net) initial closing and $10.0 million second closing of Strategy.com preferred stock, and a $30.0 million Foothill Capital credit facility entered February 9, 2001. Management believes existing cash, internally generated cash and the new facility will meet working capital requirements for the next 12 months, but says additional financing may be needed if revenues do not grow as anticipated.
What are the terms of the securities class action settlement?
Class members are to receive five-year unsecured promissory notes with an aggregate principal of $80.5 million bearing 7.5% interest, 550,000 shares of Class A common stock (increased if the trading price is below $30 so the minimum value is $16.5 million), and warrants for 1.9 million Class A shares at exercise prices of $40 to $50. The settlement remains subject to court approval, with a hearing scheduled for April 2, 2001.
Who controls the company and what are the dilution risks?
Chairman and CEO Michael J. Saylor controlled 73.8% of total voting power as of March 1, 2001, through Class B shares, and the filing notes he can prevent a change of control. Dilution risks include the possible conversion of the $80.5 million notes at 80% of the trading price, conversion of Series A preferred stock (3,744,152 shares at the current $33.39 price, which could rise substantially if the price falls), and the issuance of settlement shares and warrants.

04—Continue

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