How did MicroStrategy return to positive net income in 2002?

Net income of $38.1 million in 2002 was driven largely by non-operating and non-cash items as well as operating improvement. Income from operations was $10.4 million, compared with an operating loss of $66.7 million in 2001. Other significant items included a $16.8 million gain on contract termination with Exchange Applications, a $36.1 million net gain on the refinancing of series B, C and D convertible preferred stock, and an $11.4 million reduction in the estimated cost of the securities litigation settlement. Net income attributable to common stockholders was $67.4 million after preferred stock items.

Is the company's financial position stable enough to fund operations?

The filing shows a constrained balance sheet at December 31, 2002, with cash and cash equivalents of $15.0 million, a working capital deficit of $6.9 million, and a stockholders' deficit of $34.5 million. Management believes existing cash and cash generated internally will be sufficient through the end of 2003. However, it states that it continues to explore additional financing and that if financing is not available on acceptable terms, it will need to take further actions to reduce costs. The company is also seeking a new credit facility and a letter of credit arrangement that does not require cash collateralization.

What dilution risk do the 7.5% series A unsecured notes pose to shareholders?

The company has $63.3 million principal amount of 7.5% series A unsecured notes outstanding, maturing June 24, 2007. The company may convert them at any time before maturity, subject to certain limitations, into class A common stock at 80% of the dollar-volume weighted average trading price over a ten-day period. The filing gives an example that, based on the ten trading days ending March 1, 2003, conversion of the remaining notes would require issuing 3,798,812 shares. The filing warns that conversions could cause substantial dilution and downward pressure on the stock price, and that conversions at prices above the notes' balance sheet value would produce a non-cash charge to earnings.

Who controls voting power at MicroStrategy, and what does that mean for minority shareholders?

Holders of class B common stock, which carry ten votes per share, owned or controlled 4,619,252 shares, or 83.4% of total voting power, as of March 1, 2003. Michael J. Saylor, Chairman and Chief Executive Officer, controlled 67.1% of total voting power. The filing states that Mr. Saylor can determine the outcome of director elections, amend the certificate of incorporation and by-laws, and approve mergers and other extraordinary transactions, and that he can prevent a change of control even if class A holders might otherwise receive a premium.

What litigation and facility-related risks does the filing disclose?

The company is in patent and trade secret litigation with Business Objects, S.A. Business Objects sued MicroStrategy in the Northern District of California alleging patent infringement, and MicroStrategy sued Business Objects in the Eastern District of Virginia alleging infringement of two of its patents and other claims. The tortious interference and trade secret claims are scheduled for trial beginning May 20, 2003, and the patent claims are stayed pending reexamination. The company says it cannot estimate a potential range of gain or loss and has made no provision for these matters. Separately, the company holds leases on approximately 103,000 unoccupied square feet, with a restructuring reserve of $8.6 million based on assumed sublease income of about $7.8 million.

Strategy 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 14, 2003. Cited figures are marked; the original filing is the authoritative source.

MicroStrategy Incorporated, filed under that name on March 14, 2003 (now Strategy Inc), reported its annual results for fiscal 2002 in this Form 10-K.

Total revenues fell to $147.8 million^a in 2002 from $182.1 million in 2001 and $218.3 million in 2000, with product license revenue of $62.9 million and product support and other services revenue of $85.0 million. Despite the revenue decline, the company reported net income of $38.1 million for 2002, compared with net losses of $80.9 million in 2001 and $261.3 million in 2000. The 2002 result was helped by non-operating items, including a $16.8 million gain on contract termination, a $36.1 million net gain on refinancing of preferred stock, and an $11.4 million reduction in the estimated cost of the securities litigation settlement.

Income from operations was $10.4 million^b in 2002, against an operating loss of $66.7 million in 2001. The balance sheet remained weak at year-end 2002, with total assets of $79.9 million, cash and cash equivalents of $15.0 million, a working capital deficit of $6.9 million, a stockholders' deficit of $34.5 million, and an accumulated deficit of $342.0 million. Management stated that existing cash and internally generated cash would be sufficient through the end of 2003, but it also said the company continues to explore additional financing and may need to take further cost-reduction actions if financing is not available on acceptable terms.

Significant overhangs include $63.3 million^c of 7.5% series A unsecured notes that are convertible into class A common stock, with the filing noting that conversion could result in substantial dilution; roughly 103,000 square feet of unoccupied leased space; and pending patent and trade secret litigation with Business Objects, S.A. Control is concentrated: holders of class B common stock controlled 83.4% of voting power as of March 1, 2003, and Chairman and CEO Michael J.

Saylor controlled 67.1%^d of total voting power. The company's Class A common stock traded on the Nasdaq National Market under the symbol MSTR, and it has never paid cash dividends on that stock.

02—Key points

Key Highlights

Total revenues declined to $147.8 million in 2002, from $182.1 million in 2001 and $218.3 million in 2000; international revenues were 36.0% of total revenues in 2002.
Net income of $38.1 million in 2002 reversed net losses of $80.9 million in 2001 and $261.3 million in 2000, but this result was aided by a $16.8 million gain on contract termination, a $36.1 million net gain on preferred stock refinancing, and an $11.4 million reduction in the estimated litigation settlement cost.
Income from operations was $10.4 million in 2002, compared with an operating loss of $66.7 million in 2001, following restructuring and cost reductions; research and development expense fell to $26.3 million from $32.8 million.
Balance sheet remained constrained at year-end 2002: cash of $15.0 million, working capital deficit of $6.9 million, stockholders' deficit of $34.5 million, and accumulated deficit of $342.0 million.
$63.3 million of 7.5% series A unsecured notes due June 24, 2007 are convertible into class A common stock at 80% of the trailing dollar-volume weighted average price, which the filing warns could cause substantial dilution.
Holders of class B common stock controlled 83.4% of voting power as of March 1, 2003, with Chairman and CEO Michael J. Saylor controlling 67.1%.
Management expects existing cash and internally generated cash to be sufficient through the end of 2003, but it continues to explore additional financing and may need further cost reductions.

03—Questions

Frequently Asked Questions

How did MicroStrategy return to positive net income in 2002?
Net income of $38.1 million in 2002 was driven largely by non-operating and non-cash items as well as operating improvement. Income from operations was $10.4 million, compared with an operating loss of $66.7 million in 2001. Other significant items included a $16.8 million gain on contract termination with Exchange Applications, a $36.1 million net gain on the refinancing of series B, C and D convertible preferred stock, and an $11.4 million reduction in the estimated cost of the securities litigation settlement. Net income attributable to common stockholders was $67.4 million after preferred stock items.
Is the company's financial position stable enough to fund operations?
The filing shows a constrained balance sheet at December 31, 2002, with cash and cash equivalents of $15.0 million, a working capital deficit of $6.9 million, and a stockholders' deficit of $34.5 million. Management believes existing cash and cash generated internally will be sufficient through the end of 2003. However, it states that it continues to explore additional financing and that if financing is not available on acceptable terms, it will need to take further actions to reduce costs. The company is also seeking a new credit facility and a letter of credit arrangement that does not require cash collateralization.
What dilution risk do the 7.5% series A unsecured notes pose to shareholders?
The company has $63.3 million principal amount of 7.5% series A unsecured notes outstanding, maturing June 24, 2007. The company may convert them at any time before maturity, subject to certain limitations, into class A common stock at 80% of the dollar-volume weighted average trading price over a ten-day period. The filing gives an example that, based on the ten trading days ending March 1, 2003, conversion of the remaining notes would require issuing 3,798,812 shares. The filing warns that conversions could cause substantial dilution and downward pressure on the stock price, and that conversions at prices above the notes' balance sheet value would produce a non-cash charge to earnings.
Who controls voting power at MicroStrategy, and what does that mean for minority shareholders?
Holders of class B common stock, which carry ten votes per share, owned or controlled 4,619,252 shares, or 83.4% of total voting power, as of March 1, 2003. Michael J. Saylor, Chairman and Chief Executive Officer, controlled 67.1% of total voting power. The filing states that Mr. Saylor can determine the outcome of director elections, amend the certificate of incorporation and by-laws, and approve mergers and other extraordinary transactions, and that he can prevent a change of control even if class A holders might otherwise receive a premium.
What litigation and facility-related risks does the filing disclose?
The company is in patent and trade secret litigation with Business Objects, S.A. Business Objects sued MicroStrategy in the Northern District of California alleging patent infringement, and MicroStrategy sued Business Objects in the Eastern District of Virginia alleging infringement of two of its patents and other claims. The tortious interference and trade secret claims are scheduled for trial beginning May 20, 2003, and the patent claims are stayed pending reexamination. The company says it cannot estimate a potential range of gain or loss and has made no provision for these matters. Separately, the company holds leases on approximately 103,000 unoccupied square feet, with a restructuring reserve of $8.6 million based on assumed sublease income of about $7.8 million.

04—Continue

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