<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------- -------
COMMISSION FILE NUMBER 0-20900
COMPUWARE CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2007430
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
31440 NORTHWESTERN HIGHWAY
FARMINGTON HILLS, MI 48334-2564
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (810)737-7300
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
--- ---
As of November 8, 1996, there were outstanding 42,666,755 shares of Common
Stock, par value $.01, of the registrant.
Page 1 of 16 pages
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<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1996 and March 31, 1996 3
Condensed Consolidated Statements of Operations
for the three months and six months ended 4
September 30, 1996 and 1995
Condensed Consolidated Statements of Cash Flows
for the six months ended September 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
</TABLE>
2
<PAGE> 3
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
ASSETS 1996 1996
------ ------------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 53,000 $ 77,771
Investments 28,579 30,151
Accounts receivable, net 202,048 220,918
Deferred tax asset 16,493 17,566
Refundable income taxes 10,671 6,965
Prepaid expenses and other current assets 8,959 8,396
-------- --------
Total current assets 319,750 361,767
-------- --------
INVESTMENTS 23,873 28,379
-------- --------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION 64,885 56,603
-------- --------
CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION 52,581 52,473
-------- --------
OTHER:
Accounts receivable 44,117 29,272
Deferred tax asset 4,751
Excess of cost over fair value of net assets acquired,
less accumulated amortization 48,323 12,206
Other assets 13,921 15,026
-------- --------
Total other assets 111,112 56,504
-------- --------
TOTAL ASSETS $572,201 $555,726
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 17,365 $ 16,951
Accrued expenses 56,796 61,501
Deferred revenue 119,027 141,473
-------- --------
Total current liabilities 193,188 219,925
DEFERRED REVENUE 29,449 15,825
LONG TERM DEBT 5,844
DEFERRED INCOME TAXES 991
-------- --------
Total liabilities 228,481 236,741
-------- --------
SHAREHOLDERS' EQUITY:
Common stock 426 423
Additional paid-in capital 190,556 185,349
Retained earnings 154,552 135,194
Foreign currency translation adjustment and other (1,814) (1,981)
-------- --------
Total shareholders' equity 343,720 318,985
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $572,201 $555,726
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
Software license fees $ 63,375 $ 46,329 $ 113,246 $ 82,960
Maintenance fees 52,316 45,033 102,939 88,517
Professional services fees 68,575 48,592 130,419 94,651
-------- -------- --------- --------
Total revenues 184,266 139,954 346,604 266,128
-------- -------- --------- --------
OPERATING EXPENSES:
Cost of software license fees 4,748 4,722 9,600 8,745
Cost of maintenance 6,662 6,665 13,125 13,148
Cost of professional services 60,581 41,933 115,866 81,468
Software product development 10,536 10,753 22,200 22,011
Sales and marketing 58,623 47,797 112,578 93,704
Administrative and general 12,350 9,289 22,148 18,780
Purchased research and development 5,120 21,790
-------- -------- --------- --------
Total operating expenses 158,620 121,159 317,307 237,856
-------- -------- --------- --------
INCOME FROM OPERATIONS 25,646 18,795 29,297 28,272
OTHER INCOME 1,048 1,815 2,280 4,138
-------- -------- --------- --------
INCOME BEFORE INCOME TAXES 26,694 20,610 31,577 32,410
INCOME TAX PROVISION 10,594 6,782 12,220 10,794
-------- -------- --------- --------
NET INCOME $ 16,100 $ 13,828 $ 19,357 $ 21,616
======== ======== ========= ========
Net income per common share $0.36 $ 0.31 $ 0.44 $ 0.47
======== ======== ========= ========
Weighted average number of common
and common equivalent shares
outstanding (See Note 2) 44,543 45,265 44,370 46,170
======== ======== ========= ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
----------------------------
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 19,357 $ 21,616
Adjustments to reconcile net income to cash provided by
operations:
Purchased research and development 21,790
Depreciation and amortization 8,899 4,573
Amortization of capitalized software 7,844 6,255
Tax benefit from exercise of stock options 1,365 650
Other (388) 1,749
Net change in assets and liabilities, net of effects from
acquisitions:
Accounts receivable 9,483 4,285
Prepaid expenses and other current assets (50) 614
Other assets 564 (2,196)
Accounts payable and accrued expenses (6,458) (2,895)
Deferred revenue (9,493) (5,740)
Refundable income taxes (3,706) (16,317)
Deferred income taxes (4,669) 429
-------- --------
Net cash provided by operating activities 44,538 13,023
-------- --------
CASH USED IN INVESTING ACTIVITIES:
Purchase of:
Technalysis Corporation, net of cash acquired (25,061)
Direct Technology Limited, net of cash acquired (16,201)
Adams & Reynolds Inc., net of cash acquired (12,410)
DRD Promark, net of cash acquired (5,837)
Minority interest in subsidiary (9,419)
Property and equipment (14,347) (7,643)
Capitalized software (5,665) (6,112)
Investments:
Proceeds from maturity 32,009 87,108
Purchases (25,552) (64,411)
Other (90)
-------- --------
Net cash used in investing activities (73,154) (477)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock (53,413)
Net proceeds from exercise of stock options 3,845 3,089
-------- --------
Net cash provided by (used in) financing activities 3,845 (50,324)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (24,771) (37,778)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 77,771 67,227
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 53,000 $ 29,449
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 1996
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of Compuware Corporation and its wholly owned subsidiaries
(collectively, the "Company"). All intercompany balances and transactions have
been eliminated in consolidation.
In the opinion of management of the Company, the accompanying condensed
consolidated financial statements reflect all adjustments, consisting only of
normal recurring adjustments, that are necessary for a fair presentation of the
results for the interim periods presented. These financial statements should
be read in conjunction with the Company's audited consolidated financial
statements and notes thereto for the year ended March 31, 1996 included in the
Company's Annual Report to Shareholders and the Company's Form 10-K filed with
the Securities and Exchange Commission.
NOTE 2 - NET INCOME PER COMMON SHARE
Net income per common share is calculated based upon the weighted average
number of common shares outstanding and the dilutive effect of stock options.
Fully diluted earnings per common share is not materially different from
primary earnings per common share and, accordingly, is not presented.
Shares used in computing net income per common share were calculated as follows
(in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common
shares outstanding 42,467 43,820 42,404 44,578
Dilutive effect of stock options 2,076 1,445 1,966 1,592
------ ------ ------ ------
Weighted average number of common and
common equivalent shares outstanding 44,543 45,265 44,370 46,170
====== ====== ====== ======
</TABLE>
NOTE 3 - RESTRUCTURING AND MERGER-RELATED ACCRUAL
In fiscal 1996, the Company recognized $10,688,000 of special charges related
to the reorganization of the Company's operating units and the decentralization
of certain Corporate office functions. Approximately $6,100,000 of the total
restructuring charge is estimated severance costs for employees made redundant
as a result of the consolidation of certain corporate offices and the
realignment of operating functions and responsibilities. An additional
$1,015,000 was accrued for legal and outplacement services for these employees.
In addition, approximately $3,573,000 was accrued for estimated future leasing
costs of offices that will be closed in the United States and Europe. In
fiscal 1996 and during the first six months of fiscal 1997, $1,761,000 and
$3,937,000, respectively, of the restructuring costs had been expended.
Virtually all of the remaining severance and outplacement costs will be paid in
fiscal 1997. The costs accrued for lease expense are expected to be paid over
the related lease terms which extend through April 2002.
6
<PAGE> 7
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 1996
(CONTINUED)
NOTE 4 - ACQUISITIONS
DRD Promark, Inc. - In July 1996, the Company acquired DRD Promark, Inc., a
privately held supplier of automated client/server performance testing software
products for approximately $5,800,000 in cash. The acquisition has been
accounted for as a purchase, and accordingly, assets and liabilities acquired
have been recorded at fair value as of the date of acquisition. Of the total
purchase price, $5,120,000 was allocated to in-process research and development
based upon an independent valuation of the expected future cash flows, less
costs to complete the development. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 2 "Accounting for Research and Development
Costs", this amount was expensed as of the purchase date. The amount by which
the acquisition cost exceeded the fair value of the net assets acquired was
approximately $697,000 and is being amortized over a fifteen-year period on a
straight-line basis.
Adams & Reynolds Inc. - In May 1996, the Company acquired Adams & Reynolds
Inc., a professional services firm, for approximately $12,491,000 in cash. The
acquisition has been accounted for as a purchase, and accordingly, assets and
liabilities acquired have been recorded at fair value as of the date of
acquisition. The amount by which the acquisition cost exceeded the fair value
of the net assets acquired was approximately $11,206,000 and is being amortized
over a fifteen-year period on a straight-line basis.
Direct Technology Limited - In May 1996, the Company acquired all of the
outstanding stock of Direct Technology Limited, a privately held supplier of
automated software testing products and services based in London, England for
approximately $23,800,000. Of the total purchase price, approximately
$18,000,000 was paid in cash. The Company issued notes for the remaining
$5,800,000 which are due April 30, 1999. Interest is paid semiannually at the
six month LIBOR rate. The acquisition has been accounted for as a purchase,
and accordingly, assets and liabilities acquired have been recorded at fair
value as of the date of acquisition.
Of the total purchase price, $16,670,000 was allocated to in-process research
and development based upon an independent valuation of the expected future cash
flows, less costs to complete the development. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 2 "Accounting for Research and
Development Costs", this amount was expensed as of the purchase date. In
addition, $2,157,000 was allocated to capitalized software and $2,468,000 was
allocated to goodwill. The remaining amount of the purchase price represents
the net operating assets acquired in the transaction.
Technalysis Corporation - In April 1996, the Company acquired all of the
outstanding stock of Technalysis Corporation, a professional services company,
for approximately $31,000,000 in cash. The acquisition has been accounted for
as a purchase, and accordingly, assets and liabilities acquired have been
recorded at fair value as of the date of acquisition. The amount by which the
acquisition cost exceeded the fair value of the net assets acquired of
approximately $22,872,000 is being amortized over a fifteen-year period on a
straight-line basis.
NOTE 5 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued SFAS No. 123 "Accounting for
Stock-Based Compensation" in October 1995. Under SFAS No. 123, companies must
record or disclose expense for stock options and other stock-based employee
compensation plans based on their fair value at the date of grant. The Company
has decided to apply the disclosure provisions of the standard. For the year
ended March 31, 1997, the Company will include in its footnote disclosures the
pro forma impact on net income and earnings per share of the application of the
fair value based method of accounting for stock options.
7
<PAGE> 8
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operational
data from the Company's consolidated statements of operations as a percentage
of total revenues and the percentage change in such items compared to the prior
period:
<TABLE>
<CAPTION>
Percentage of Period-
Total Revenues to-Period
-------------------- Change
Three Months Ended -----------
September 30, 1995
-------------------- to
1996 1995 1996
-------- --------- -----------
<S> <C> <C> <C>
Revenues:
Software license fees 34.4% 33.1% 36.8%
Maintenance fees 28.4 32.2 16.2
Professional services fees 37.2 34.7 41.1
----- -----
Total revenues 100.0 100.0 31.7
----- -----
Operating expenses:
Cost of software license fees 2.6 3.4 0.6
Cost of maintenance 3.6 4.8 *
Cost of professional services 32.9 30.0 44.5
Software product development 5.7 7.7 (2.0)
Sales and marketing 31.8 34.1 22.7
Administrative and general 6.7 6.6 33.0
Purchased research and development 2.8 *
----- -----
Total operating expenses 86.1 86.6 30.9
----- -----
INCOME FROM OPERATIONS 13.9 13.4 36.5
OTHER INCOME 0.6 1.3 (42.3)
----- -----
INCOME BEFORE INCOME TAXES 14.5 14.7 29.5
----- -----
INCOME TAX PROVISION 5.8 4.8 56.2
----- -----
NET INCOME 8.7% 9.9% 16.4%
===== =====
</TABLE>
The following table sets forth, for the periods indicated, certain operational
data as a percentage of total revenues and the percentage change in such items
compared to prior periods after excluding special charges for purchased
research and development associated with the Direct Technology Limited
acquisition from the calculations for the three months ended September 30, 1996
and 1995:
<TABLE>
<S> <C> <C> <C>
Income from operations 16.7% 13.4% 63.7%
Other income 0.6 1.3 (42.3)
---- ----
Income before income taxes 17.3 14.7 54.4
Income tax provision 5.8 4.8 56.2
---- ----
Net income 11.5% 9.9% 53.5
==== ====
</TABLE>
* Period-to-period change expressed as a percentage is not meaningful.
8
<PAGE> 9
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
The following table sets forth, for the periods indicated, certain operational
data from the Company's consolidated statements of operations as a percentage
of total revenues and the percentage change in such items compared to the prior
period:
<TABLE>
<CAPTION>
Percentage of
Total Revenues Period-
---------------- to-Period
Six Months ended Change
September 30, 1995
---------------- to
1996 1995 1996
----- ----- ----
<S> <C> <C> <C>
REVENUES:
Software license fees 32.7% 31.2% 36.5%
Maintenance fees 29.7 33.2 16.3
Professional services fees 37.6 35.6 37.8
----- -----
Total revenues 100.0 100.0 30.2
----- -----
OPERATING EXPENSES:
Cost of software license fees 2.8 3.3 9.8
Cost of maintenance 3.8 4.9 (0.2)
Cost of professional services 33.4 30.6 42.2
Software product development 6.4 8.3 0.9
Sales and marketing 32.5 35.2 20.1
Administrative and general 6.4 7.1 17.9
Purchased research and development 6.3 *
----- -----
Total operating expenses 91.6 89.4 33.4
----- -----
INCOME FROM OPERATIONS 8.4 10.6 3.6
OTHER INCOME 0.7 1.6 (44.9)
----- -----
INCOME BEFORE INCOME TAXES 9.1 12.2 (2.6)
INCOME TAX PROVISION 3.5 4.1 13.2
----- -----
NET INCOME 5.6% 8.1% (10.5)%
===== =====
</TABLE>
The following table sets forth, for the periods indicated, certain operational
data as a percentage of total revenues and the percentage change in such items
compared to prior periods after excluding special charges for purchased
research and development associated with the Direct Technology Limited and DRD
Promark, Inc. acquisitions from the calculations for the six months ended
September 30, 1996 and 1995:
<TABLE>
<S> <C> <C> <C>
Income from operations 14.7% 10.6% 80.7%
Other income 0.7 1.6 (44.9)
----- -----
Income before income taxes 15.4 12.2 64.7
Income tax provision 5.1 4.1 64.6
----- -----
Net income 10.3% 8.1% 64.7
===== =====
</TABLE>
* Period-to-period change expressed as a percentage is not meaningful.
9
<PAGE> 10
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1995
Total revenues for the second quarter of fiscal 1997 were $184.3 million, an
increase of $44.3 million, or 31.7%, as compared to $140.0 million for the
second quarter of fiscal 1996. The Company experienced significant growth in
license fees, maintenance fees, and professional service fees as compared to
the three months ended September 30, 1995.
Software license fees increased $17.0 million, or 36.8%, to $63.4 million in
the second quarter of fiscal 1997 from $46.3 million in the second quarter of
fiscal 1996. This increase was due primarily to increases in mainframe product
sales.
Maintenance fee revenues increased $7.3 million, or 16.2%, to $52.3 million in
the second quarter of fiscal 1997 from $45.0 million in the second quarter of
fiscal 1996. The Company continues to experience growth in maintenance fees
for all of its product families due to the growth in the number of installed
copies of its products.
Revenues from professional services increased $20.0 million, or 41.1%, to $68.6
million in the second quarter of fiscal 1997 from $48.6 million in the second
quarter of fiscal 1996. This increase was due primarily to increased business
at new and existing clients of $1.1 million, $4.4 million, $3.0 million, $2.7
million, $2.4 million and $2.5 million at the Company's Madison, Wisconsin;
Minneapolis, Minnesota; Columbus, Ohio; Dallas, Texas; Farmington Hills,
Michigan and Cleveland, Ohio branches, respectively, and a $2.0 million
increase from international operations.
The costs of software license fees in the second quarter of fiscal 1997 did not
change significantly as compared to the second quarter of fiscal 1996. The
increase in amortization of internally developed software products was offset
by decreases in author royalty and ancillary expenses. As a percentage of
software license fees, these costs decreased to 7.5% in the second quarter of
fiscal 1997 from 10.2% for the same period in fiscal 1996.
Cost of maintenance in the second quarter was constant as compared to the
second quarter of fiscal 1996. An increase in costs associated with increased
maintenance and support staff needed to support the worldwide growth of the
installed product base was offset by decreases in outside consulting and other
related expenses. As a percentage of maintenance fees, these costs decreased
to 12.7% in the second quarter of fiscal 1997 from 14.8% in the second quarter
of fiscal 1996.
Cost of professional services increased $18.6 million, or 44.5%, to $60.6
million in the second quarter of fiscal 1997 from $41.9 million in the second
quarter of fiscal 1996. The increase in these expenses was due primarily to
the growth in the Services Division billable staff by 815 to 2,981 people at
September 30, 1996 from 2,166 at September 30, 1995. As a percentage of
professional services fees, these costs increased to 88.3% in the second
quarter of fiscal 1997 from 86.3% in the second quarter of fiscal 1996.
10
<PAGE> 11
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Software product development costs decreased $217,000, or 2.0%, to $10.5
million in the second quarter of fiscal 1997 from $10.8 million in the second
quarter of fiscal 1996. The decrease in these costs was due primarily to the
restructuring of software product development operations.
Sales and marketing costs increased $10.8 million, or 22.7%, to $58.6 million
in the second quarter of fiscal 1997 from $47.8 million in the second quarter
of fiscal 1996. The increase in sales and marketing costs was due primarily to
the expansion of the worldwide sales force and higher sales commissions
associated with increased product sales.
Administrative and general costs increased $3.1 million, or 33.0%, to $12.4
million in the second quarter of fiscal 1997 from $9.3 million in the second
quarter of fiscal 1996. The increase in these costs was due primarily to
expenses associated with corporate systems and employee development programs
required to support the Company's growth.
During the second quarter of fiscal 1997, the Company recognized $5.1 million
of expense for purchased research and development costs associated with the
acquisition of DRD Promark, Inc. in July 1996.
Income from operations increased $6.9 million, or 36.5%, to $25.6 million in
the second quarter of fiscal 1997 from $18.8 million in the second quarter of
fiscal 1996. Excluding the purchased research and development expense of $5.1
million described above, income from operations during the second quarter of
fiscal 1997 increased $12.0 million, or 63.7%, to $30.8 million, from $18.8
million in the second quarter fiscal 1996. As a percentage of revenues, income
from operations before special charges increased to 16.7% in the second quarter
of fiscal 1997 from 13.4% in the same period of fiscal 1996.
Net interest and investment income for the second quarter of fiscal 1997 was
$1.0 million as compared to $1.8 million in the second quarter of fiscal 1996.
This decrease in income was due to lower average cash balances resulting
primarily from cash expended for acquisitions in fiscal 1997.
In the second quarter of fiscal 1997, the Company recognized an income tax
provision of $10.6 million, an effective tax rate of 39.7%, as compared to an
income tax provision of $6.8 million, an effective tax rate of 33.0%, in the
second quarter of fiscal 1996. The purchased research and development expense
of $5.1 million, incurred in the second quarter of fiscal 1997 as part of the
DRD Promark, Inc. acquisition, is not deductible for income tax purposes.
Without this expense, the Company's effective tax rate was 33.3% for the second
quarter of fiscal 1997.
SIX MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE SIX MONTHS ENDED SEPTEMBER
30, 1995
Total revenues for the first six months of fiscal 1997 were $346.6 million, an
increase of $80.5 million, or 30.2%, as compared to $266.1 million for the
first six months of fiscal 1996. The Company experienced growth in license
fees, maintenance fees, and professional service fees during the six months
ended September 30, 1996.
11
<PAGE> 12
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Software license fees increased $30.3 million, or 36.5%, to $113.2 million in
the first six months of fiscal 1997 from $83.0 million in the first six months
of fiscal 1996. The increase was due primarily to increases in mainframe
product sales.
Maintenance fee revenues increased $14.4 million, or 16.3%, to $102.9 million
in the first six months of fiscal 1997 from $88.5 million in the first six
months of fiscal 1996. The Company continues to experience growth in
maintenance fees for all of its product families due to the growth in the
number of installed copies of its products.
Revenues from professional services increased $35.8 million, or 37.8%, to
$130.4 million in the first six months of fiscal 1997 from $94.7 million in the
first six months of fiscal 1996. This increase was due primarily to increased
business at new and existing clients amounting to $7.8 million, $5.5 million,
$5.4 million, $3.2 million, $5.3 million; $2.1 million at the Company's
Minneapolis, Minnesota; Dallas, Texas; Farmington Hills, Michigan; Cleveland,
Ohio; Columbus, Ohio and Madison, Wisconsin branches respectively, and a $3.3
million increase from international operations.
Cost of software license fees increased $855,000, or 9.8%, to $9.6 million in
the first six months of fiscal 1997 from $8.7 million in the first six months
of fiscal 1996. The increase was due primarily to an increase in amortization
of internally developed software products. As a percentage of software license
fees, these costs decreased to 8.5% in the first six months of fiscal 1997 from
10.5% for the same period in fiscal 1996.
Cost of maintenance was constant in the first six months of fiscal 1997 as
compared to the first six months of fiscal 1996. An increase in cost
associated with increased maintenance and support staff needed to support the
worldwide growth of the installed products base was offset by decreases in
outside consulting and other related expenses. As a percentage of maintenance
fees, these costs decreased to 12.8% in the first six months of fiscal 1997
from 14.9% during the same period of fiscal 1996.
Cost of professional services increased $34.4 million, or 42.2%, to $115.9
million in the first six months of fiscal 1997 from $81.5 million in the first
six months of fiscal 1996. The increase in these expenses was due primarily to
the growth in the Services Division billable staff by 815 to 2,981 people at
September 30, 1996 from 2,166 at September 30, 1995. As a percentage of
professional services fees, these costs increased to 88.8% in the first six
months of fiscal 1997 from 86.1% in the first six months of fiscal 1996.
Software product development costs increased $200,000, or .9%, to $22.2 million
in the first six months of fiscal 1997 from $22.0 million in the first six
months of fiscal 1996. The increase in these costs was due primarily to the
growth of the product development staff in order to meet the demand for new and
enhanced client/server products. These increases were partially offset by
savings from restructuring software product development operations.
Sales and marketing costs increased $18.9 million, or 20.1%, to $112.6 million
in the first six months of fiscal 1997 from $93.7 million in the first six
months of fiscal 1996. The increase in sales and marketing costs was due
primarily to the expansion of the worldwide sales force and higher sales
commissions associated with increased product sales.
12
<PAGE> 13
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Administrative and general costs increased $3.4 million, or 17.9%, to $22.1
million in the first six months of fiscal 1997 from $18.8 million in the first
six months of fiscal 1996. The increase in these costs was due primarily to
the increase in corporate support systems, finance and administration, and
employee development programs in order to support the Company's growth.
During the first six months of fiscal 1997, the Company recognized $21.8
million of expense for purchased research and development costs associated with
the acquisitions of Direct Technology Limited ($16.7 million) and DRD Promark,
Inc. ($5.1 million).
Income from operations increased $1.0 million, or 3.6%, to $29.3 million in the
first six months of fiscal 1997 from $28.3 million in the first six months of
fiscal 1996. Excluding special charges for purchased research and development
associated with the Direct Technology Limited and DRD Promark, Inc.
acquisitions of $21.8 million, the Company's income from operations would have
increased $22.8 million, or 80.7%, to $51.1 million in the first six months of
fiscal 1997 from $28.3 million in the first six months of fiscal 1996. As a
percentage of total revenues, income from operations exclusive of special
charges increased to 14.7% in the first six months of fiscal 1997 from 10.6% in
the same period of fiscal 1996.
Net interest and investment income for the first six months of fiscal 1997 was
$2.3 million as compared to $4.1 million in the first six months of fiscal
1996. This decrease was due primarily to lower average cash and investment
balances as a result of the cash expenditures for acquisitions in fiscal 1997.
In the first six months of fiscal 1997, the Company had an income tax provision
of $12.2 million, which was an effective tax rate of 38.7%, as compared to an
income tax provision of $10.8 million, which was an effective tax rate of 33.3%
in the first six months of fiscal 1996. The difference between the effective
tax rate and the statutory rate in the first six months of fiscal 1997 is due
primarily to the nondeductibility of the purchased research and development
incurred in connection with the DRD Promark, Inc. acquisition. Without this
purchased research and development expense, the effective tax rate for the
first six months of fiscal 1997 was 33.3%.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company held $105.5 million in cash and
investments. The Company has no debt other than the $5.8 million of notes
issued as part of the Direct Technology Limited acquisition. (See note 4 of
Notes to Condensed Consolidated Financial Statements) The Company continues to
finance its growth through funds generated from operations.
During the second quarter of fiscal 1997, the Company completed the acquisition
of DRD Promark, Inc., a privately held supplier of automated client/server
performance testing software products, for approximately $5.8 million in cash.
(See note 4 of Notes to Condensed Consolidated Financial Statements) The
Company continues to evaluate business acquisition opportunities that fit the
Company's strategic plans.
13
<PAGE> 14
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
In May 1995, the Company announced that its Board of Directors had authorized a
stock repurchase program, pursuant to which the Company may purchase up to $100
million of outstanding Company stock. In fiscal year 1996, the Company
purchased approximately 2,915,800 shares at a total cost of approximately $70.3
million. The Company does not currently intend to buy additional shares in
fiscal 1997.
The Company believes that its available cash resources, together with cash flow
from operations will be sufficient to meet its cash needs for the foreseeable
future.
14
<PAGE> 15
COMPUWARE CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders was held on August 27, 1996 at the Company's
Headquarters, 31440 Northwestern Highway, Farmington Hills, Michigan.
Election of Directors:
The following directors were elected to hold office for one year until the 1997
Annual Meeting of Shareholders and until their successors are elected and
qualified:
<TABLE>
<CAPTION>
Nominee for Director Total Votes For Total Votes Withheld
- -------------------- --------------- --------------------
<S> <C> <C>
Bernard M. Goldsmith 39,058,792 335,927
William O. Grabe 39,058,746 335,973
Peter Karmanos, Jr. 39,059,631 335,088
Joseph A. Nathan 39,059,685 335,034
W. James Prowse 39,054,292 340,427
G. Scott Romney 39,058,603 336,116
Thomas Thewes 39,059,991 334,728
</TABLE>
The total number of the Company's common shares issued and outstanding and
entitled to be voted at the Annual Meeting was 42,392,726. The total number of
shares voted at the Annual Meeting was 39,394,719 or 92.9% of the shares
outstanding and eligible to vote.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The following exhibit is filed herewith.
Exhibit
Number Description of Document
------- -----------------------
27 Financial Data Schedule
(b) Reports on Form 8-K.
None
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPUWARE CORPORATION
Date: November 12, 1996 By:/s/ Joseph A. Nathan
----------------- ---------------------------
Joseph A. Nathan
President
Chief Operating Officer
Date: November 12, 1996 By:/s/ Ralph A. Caponigro
----------------- --------------------------
Ralph A. Caponigro
Senior Vice President
Chief Financial Officer
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- -------------
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 53,000
<SECURITIES> 4,464
<RECEIVABLES> 207,145
<ALLOWANCES> 5,097
<INVENTORY> 0
<CURRENT-ASSETS> 319,750
<PP&E> 100,361
<DEPRECIATION> 35,476
<TOTAL-ASSETS> 572,201
<CURRENT-LIABILITIES> 193,188
<BONDS> 5,844
0
0
<COMMON> 426
<OTHER-SE> 345,108
<TOTAL-LIABILITY-AND-EQUITY> 572,201
<SALES> 346,604
<TOTAL-REVENUES> 346,604
<CGS> 317,307
<TOTAL-COSTS> 317,307
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 305
<INCOME-PRETAX> 31,577
<INCOME-TAX> 12,220
<INCOME-CONTINUING> 19,357
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,357
<EPS-PRIMARY> .44
<EPS-DILUTED> .44
</TABLE>
