<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 DECEMBER 31, 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 February 10, 1997, there were outstanding 42,885,988 shares of Common
Stock, par value $.01, of the registrant.
Page 1 of 17 pages
<PAGE> 2
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
--------------------- ----
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
December 31, 1996 and March 31, 1996 3
Condensed Consolidated Statements of Operations
for the three months and nine months ended 4
December 31, 1996 and 1995
Condensed Consolidated Statements of Cash Flows
for the nine months ended December 31, 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 9
PART II. OTHER INFORMATION
-----------------
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
- ----------
</TABLE>
2
<PAGE> 3
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
ASSETS 1996 1996
------ --------- ----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 74,390 $ 77,771
Investments 32,953 30,151
Accounts receivable, net 256,412 220,918
Deferred tax asset 15,716 17,566
Refundable income taxes 5,385 6,965
Prepaid expenses and other current assets 8,011 8,396
--------- ---------
Total current assets 392,867 361,767
--------- ---------
INVESTMENTS 21,518 28,379
--------- ---------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION 65,627 56,603
--------- ---------
CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION 53,302 52,473
--------- ---------
OTHER:
Accounts receivable 55,921 29,272
Deferred tax asset 4,202
Excess of cost over fair value of net assets acquired,
less accumulated amortization 47,817 12,206
Other assets 12,537 15,026
--------- ---------
Total other assets 120,477 56,504
--------- ---------
TOTAL ASSETS $ 653,791 $ 555,726
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 16,969 $ 16,951
Accrued expenses 70,567 61,501
Deferred revenue 148,916 141,473
--------- ---------
Total current liabilities 236,452 219,925
DEFERRED REVENUE 28,217 15,825
LONG TERM DEBT 6,349
DEFERRED INCOME TAXES 991
--------- ---------
Total liabilities 271,018 236,741
--------- ---------
SHAREHOLDERS' EQUITY:
Common stock 428 423
Additional paid-in capital 196,980 185,349
Retained earnings 186,797 135,194
Foreign currency translation adjustment and other (1,432) (1,981)
--------- ---------
Total shareholders' equity 382,773 318,985
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 653,791 $ 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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- ----------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Software license fees $ 88,548 $ 61,159 $201,794 $144,119
Maintenance fees 52,573 47,126 155,512 135,643
Professional services fees 72,592 53,013 203,011 147,664
-------- -------- -------- --------
Total revenues 213,713 161,298 560,317 427,426
-------- -------- -------- --------
OPERATING EXPENSES:
Cost of software license fees 5,219 5,252 14,819 13,997
Cost of maintenance 7,609 6,992 20,734 20,140
Cost of professional services 64,208 45,067 180,074 126,535
Software product development 11,516 10,173 33,716 32,184
Sales and marketing 66,061 51,304 178,639 145,008
Administrative and general 12,080 10,265 34,228 29,045
Purchased research and development 24,943 21,790 24,943
-------- -------- -------- --------
Total operating expenses 166,693 153,996 484,000 391,852
-------- -------- -------- --------
INCOME FROM OPERATIONS 47,020 7,302 76,317 35,574
OTHER INCOME 1,325 1,600 3,605 5,738
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 48,345 8,902 79,922 41,312
INCOME TAX PROVISION 16,099 11,269 28,319 22,063
-------- -------- -------- --------
NET INCOME (LOSS) $ 32,246 $ (2,367) $ 51,603 $ 19,249
======== ======== ======== ========
Net income (loss) per common share $ 0.72 $ (0.06) $ 1.16 $ 0.43
======== ======== ======== ========
Weighted average number of common
and common equivalent shares
outstanding (See Note 2) 44,947 42,353 44,567 45,286
======== ======== ======== ========
</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>
NINE MONTHS ENDED
DECEMBER 31,
----------------------------
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 51,603 $ 19,249
Adjustments to reconcile net income to cash provided by
operations:
Purchased research and development 21,790 24,943
Depreciation and amortization 12,697 7,592
Amortization of capitalized software 11,892 9,547
Deferred income taxes (3,343) 2,161
Tax benefit from exercise of stock options 2,268 1,415
Other (1,052) 2,457
Net change in assets and liabilities, net of effects from
acquisitions:
Accounts receivable (56,685) (37,266)
Prepaid expenses and other current assets 898 1,819
Other assets 1,621 (2,183)
Accounts payable and accrued expenses 7,422 7,825
Deferred revenue 19,164 15,902
Refundable income taxes 1,580 (14,829)
-------- --------
Net cash provided by operating activities 69,855 38,632
-------- --------
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)
CoroNet Systems, Inc., net of cash acquired (25,955)
Property and equipment (17,899) (13,064)
Capitalized software (10,434) (10,311)
Minority interest in subsidiary (9,419)
Investments:
Proceeds from maturity 48,964 130,075
Purchases (43,480) (70,209)
Other (246)
-------- --------
Net cash provided by (used in) investing activities (82,604) 1,117
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of common stock (70,274)
Net proceeds from exercise of stock options 9,368 2,941
-------- --------
Net cash provided by (used in) financing activities 9,368 (67,333)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,381) (27,584)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 77,771 67,227
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 74,390 $ 39,643
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 1996
(CONTINUED)
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 Nine Months
Ended Ended
December 31, December 31,
-------------------- --------------
1996 1995 1996 1995
--------- --------- ------ ------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 42,668 42,353 42,493 43,834
Dilutive effect of stock options (1) 2,279 2,074 1,452
--------- --------- ------ ------
Weighted average number of common and
common equivalent shares outstanding 44,947 42,353 44,567 45,286
========= ========= ====== ======
</TABLE>
(1) Not applicable for the three months ended December 31, 1995 because their
effect was antidilutive.
NOTE 3 - RESTRUCTURING AND MERGER-RELATED ACCRUAL
In the fourth quarter of 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 was attributable to 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
nine months of fiscal 1997, $1,761,000 and $4,713,000 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 future lease expenses 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
NINE MONTHS ENDED DECEMBER 31, 1996
(CONTINUED)
NOTE 4 - ACQUISITIONS
DRD Promark, Inc. - In July 1996, the Company acquired all of the outstanding
stock of DRD Promark, Inc., a privately held supplier of automated
client/server performance testing software products, for approximately
$5,837,000 net cash expended. 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 all of the
outstanding stock of Adams & Reynolds Inc., a privately held professional
services firm, for approximately $12,410,000 net cash expended. 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
$16,201,000 was net cash expended. 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 goodwill is being amortized over a fifteen year
period on a straight-line basis. 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 $25,061,000 net cash expended. 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 $22,872,000, and 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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 1996
(CONTINUED)
NOTE 6 - SUBSEQUENT EVENTS
In January 1997, the Company's Board of Directors approved a plan for a two for
one stock split, pending shareholder approval of an increase in the Company's
authorized shares.
8
<PAGE> 9
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 -------------
December 31, 1995
-------------------- to
1996 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
Revenues:
Software license fees 41.4% 37.9% 44.8%
Maintenance fees 24.6 29.2 11.6
Professional services fees 34.0 32.9 36.9
----- -----
Total revenues 100.0 100.0 32.5
----- -----
Operating expenses:
Cost of software license fees 2.4 3.3 (0.6)
Cost of maintenance 3.6 4.3 8.8
Cost of professional services 30.0 27.9 42.5
Software product development 5.4 6.3 13.2
Sales and marketing 30.9 31.8 28.8
Administrative and general 5.7 6.4 17.7
Purchased research and development 15.5 *
----- -----
Total operating expenses 78.0 95.5 8.3
----- -----
INCOME FROM OPERATIONS 22.0 4.5 *
OTHER INCOME 0.6 1.0 (17.2)
----- -----
INCOME BEFORE INCOME TAXES 22.6 5.5 *
----- -----
INCOME TAX PROVISION 7.5 7.0 42.9
----- -----
NET INCOME (LOSS) 15.1% (1.5)% *
===== =====
</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 CoroNet acquisition from the
calculation for the three months ended December 31, 1995:
<TABLE>
<S> <C> <C> <C>
Income from operations 22.0% 20.0% 45.8%
Other income 0.6 1.0 (17.2)
---- ----
Income before income taxes 22.6 21.0 42.8
Income tax provision 7.5 7.0 42.9
---- ----
Net income 15.1% 14.0% 42.8
==== ====
</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)
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
Nine Months ended ------------
December 31, 1995
-------------------- to
1996 1995 1996
------ ------- ------------
<S> <C> <C> <C>
REVENUES:
Software license fees 36.0% 33.7% 40.0%
Maintenance fees 27.8 31.7 14.7
Professional services fees 36.2 34.6 37.5
----- -----
Total revenues 100.0 100.0 31.1
----- -----
OPERATING EXPENSES:
Cost of software license fees 2.7 3.3 5.9
Cost of maintenance 3.7 4.7 3.0
Cost of professional services 32.1 29.6 42.3
Software product development 6.0 7.5 4.8
Sales and marketing 31.9 33.9 23.2
Administrative and general 6.1 6.8 17.8
Purchased research and development 3.9 5.8 (12.6)
----- -----
Total operating expenses 86.4 91.6 23.5
----- -----
INCOME FROM OPERATIONS 13.6 8.4 114.5
OTHER INCOME 0.6 1.3 (37.2)
----- -----
INCOME BEFORE INCOME TAXES 14.2 9.7 93.5
INCOME TAX PROVISION 5.0 5.2 28.4
----- -----
NET INCOME 9.2% 4.5% 168.1%
===== =====
</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 nine months ended
December 31, 1996 and the CoroNet acquisition for the nine months ended
December 31, 1995:
<TABLE>
<S> <C> <C> <C>
Income from operations 17.5% 14.2% 62.1%
Other income 0.6 1.3 (37.2)
---- ----
Income before income taxes 18.1 15.5 53.5
Income tax provision 6.0 5.2 53.5
---- ----
Net income 12.1% 10.3% 53.5
==== ====
</TABLE>
10
<PAGE> 11
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO THE THREE MONTHS ENDED
DECEMBER 31, 1995
Total revenues for the third quarter of fiscal 1997 were $213.7 million, an
increase of $52.4 million, or 32.5%, as compared to $161.3 million for the
third quarter of fiscal 1996. The Company experienced growth in license fees,
maintenance fees and professional service fees in the third quarter ended
December 31, 1996 as compared to the third quarter ended December 31, 1995.
Software license fees increased $27.4 million, or 44.8%, to $88.5 million in
the third quarter of fiscal 1997 from $61.2 million in the third quarter of
fiscal 1996. This increase was due primarily to a 50.8% increase in mainframe
product sales. Client/server systems product sales also increased 22.0% in the
third quarter of fiscal 1997 from the third quarter of fiscal 1996.
Maintenance fee revenues increased $5.4 million, or 11.6%, to $52.6 million in
the third quarter of fiscal 1997 from $47.1 million in the third 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 $19.6 million, or 36.9%, to $72.6
million in the third quarter of fiscal 1997 from $53.0 million in the third
quarter of fiscal 1996. This increase was due to additional locations in
Minneapolis, Minnesota and Cleveland and Cincinnati, Ohio resulting from
acquisitions. The increase was also attributable to increased business across
all professional services branches with the largest increases amounting to $2.7
million, $2.3 million and $1.0 million at the Company's Farmington Hills,
Michigan; Columbus, Ohio; and Dallas, Texas branches, respectively.
The costs of software license fees in the third quarter of fiscal 1997 did not
change significantly as compared to the third quarter of fiscal 1996. The
increase in amortization of internally developed software products was offset
by decreases in author royalties and ancillary expenses. As a percentage of
software license fees, these costs decreased to 5.9% in the third quarter of
fiscal 1997 from 8.6% for the same period in fiscal 1996.
Cost of maintenance increased $617,000, or 8.8%, to $7.6 million in the third
quarter of fiscal 1997 from $7.0 million in the third quarter of fiscal 1996.
The increase in cost of maintenance was due primarily to the increase in
maintenance and support staff in order to support the worldwide growth of the
installed base. As a percentage of maintenance fees, these costs decreased to
14.5% in the third quarter of fiscal 1997 from 14.8% in the third quarter of
fiscal 1996.
Cost of professional services increased $19.1 million, or 42.5%, to $64.2
million in the third quarter of fiscal 1997 from $45.1 million in the third
quarter of fiscal 1996. The increase in these expenses was due primarily to
the growth in the Services Division billable staff by 880 to 3,103 people at
December 31, 1996 from 2,223 at December 31, 1995 and an increase in training
costs in the professional services division. As a percentage of professional
services fees, these costs increased to 88.5% in the third quarter of fiscal
1997 from 85.0% in the third quarter of fiscal 1996.
11
<PAGE> 12
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Software product development costs increased $1.3 million, or 13.2%, to $11.5
million in the third quarter of fiscal 1997 from $10.2 million in the third
quarter 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.
Sales and marketing costs increased $14.8 million, or 28.8%, to $66.1 million
in the third quarter of fiscal 1997 from $51.3 million in the third quarter of
fiscal 1996. The increase in sales and marketing costs was due primarily to the
increase in staff and facilities costs related to the expansion of the
worldwide sales force and higher sales commissions associated with increased
product sales.
Administrative and general costs increased $1.8 million, or 17.7%, to $12.1
million in the third quarter of fiscal 1997 from $10.3 million in the third
quarter of fiscal 1996. The increase in these costs was due primarily to the
increase in the expenses associated with corporate systems and employee
development programs required to support the Company's growth.
Income from operations increased $39.7 million to $47.0 million in the third
quarter of fiscal 1997 from $7.3 million in the third quarter of fiscal 1996.
As a percentage of revenues, income from operations increased to 22.0% in the
third quarter of fiscal 1997 from 4.5% in the same period of fiscal 1996.
Excluding the purchased research and development expense of $24.9 million,
incurred in the third quarter of fiscal 1996 as part of the CoroNet
acquisition, the Company's income from operations would have increased $14.8
million, or 45.8%, to $47.0 million in the third quarter of fiscal 1997 from
$32.2 million in the third quarter of fiscal 1996. As a percentage of total
revenues, income from operations, exclusive of special charges, increased to
22.0% in the third quarter of fiscal 1997 from 20.0% in the third quarter of
fiscal 1996.
Net interest and investment income for the third quarter of fiscal 1997 was
$1.3 million as compared to $1.6 million in the third 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 third quarter of fiscal 1997, the Company recognized an income tax
provision of $16.1 million, as compared to an income tax provision of $11.3
million in the third quarter of fiscal 1996. The purchased research and
development expense of $24.9 million, incurred in the third quarter of fiscal
1996 as part of the CoroNet acquisition, was not deductible for income tax
purposes. Without this expense, the Company had an effective tax rate of 33.3%
for the third quarter of fiscal 1996 and the third quarter of fiscal 1997.
12
<PAGE> 13
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
NINE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO THE NINE MONTHS ENDED DECEMBER
31, 1995
Total revenues for the first nine months of fiscal 1997 were $560.3 million, an
increase of $132.9 million, or 31.1%, as compared to $427.4 million for the
first nine months of fiscal 1996. The Company experienced growth in license
fees, maintenance fees, and professional service fees during the nine months
ended December 31, 1996 as compared to the nine months ended December 31, 1995.
Software license fees increased $57.7 million, or 40.0%, to $201.8 million in
the first nine months of fiscal 1997 from $144.1 million in the first nine
months of fiscal 1996. The increase was due primarily to increases in sales of
client/server systems management products and mainframe products sales.
Maintenance fee revenues increased $19.9 million, or 14.7%, to $155.5 million
in the first nine months of fiscal 1997 from $135.6 million in the first nine
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 $55.3 million, or 37.5%, to
$203.0 million in the first nine months of fiscal 1997 from $147.7 million in
the first nine months of fiscal 1996. This increase was due to additional
locations in Minneapolis, Minnesota and Cleveland and Cincinnati, Ohio
resulting from acquisitions. The increase was also attributable to increased
business across all professional services branches with the largest increases
amounting to $8.1 million, $7.7 million, $6.6 million at the Company's
Farmington Hills, Michigan; Columbus, Ohio; and Dallas, Texas branches
respectively.
Cost of software license fees increased $822,000, or 5.9%, to $14.8 million in
the first nine months of fiscal 1997 from $14.0 million in the first nine
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 7.3% in the first nine months
of fiscal 1997 from 9.7% for the same period in fiscal 1996.
Cost of maintenance increased $594,000, or 3.0%, to $20.7 million in the first
nine months of fiscal 1997 from $20.1 million in the first nine months of
fiscal 1996. The increase in the cost of maintenance was due primarily to the
increase in maintenance and support staff needed to support the worldwide
growth of the installed products base. As a percentage of maintenance fees,
these costs decreased to 13.3% in the first nine months of fiscal 1997 from
14.8% during the same period of fiscal 1996.
Cost of professional services increased $53.5 million, or 42.3%, to $180.0
million in the first nine months of fiscal 1997 from $126.5 million in the
first nine months of fiscal 1996. The increase in these expenses was due
primarily to the growth in the Services Division billable staff by 880 to 3,103
people at December 31, 1996 from 2,223 at December 31, 1995 and an increase in
training costs in the professional services division. As a percentage of
professional services fees, these costs increased to 88.7% in the first nine
months of fiscal 1997 from 85.7% in the first nine months of fiscal 1996.
13
<PAGE> 14
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Software product development costs increased $1.5 million, or 4.8%, to $33.7
million in the first nine months of fiscal 1997 from $32.2 million in the first
nine 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.
Sales and marketing costs increased $33.6 million, or 23.2%, to $178.6 million
in the first nine months of fiscal 1997 from $145.0 million in the first nine
months of fiscal 1996. The increase in sales and marketing costs was due
primarily to the expansion of the worldwide sales forces and higher sales
commissions associated with increased product sales.
Administrative and general costs increased $5.2 million, or 17.8%, to $34.2
million in the first nine months of fiscal 1997 from $29.0 million in the first
nine months of fiscal 1996. The increase in these costs was due primarily to
the increase in corporate support systems and employee development programs in
order to support the Company's growth.
During the first nine 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 $40.7 million, or 114.5%, to $76.3 million in
the first nine months of fiscal 1997 from $35.6 million in the first nine
months of fiscal 1996. As a percentage of revenues, income from operations
increased to 13.6% in the first nine months of fiscal 1997 from 8.4% in the
same period 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 in fiscal 1997 and the CoroNet acquisition
of $24.9 million in fiscal 1996, income from operations would have increased
$37.6 million, or 62.1%, to $98.1 million in the first nine months of fiscal
1997 from $60.5 million in the first nine months of fiscal 1996. As a
percentage of total revenues, income from operations exclusive of special
charges increased to 17.5% in the first nine months of fiscal 1997 from 14.2%
in the same period of fiscal 1996.
Net interest and investment income for the first nine months of fiscal 1997 was
$3.6 million as compared to $5.7 million in the first nine 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 offset by cash
generated from operations in fiscal 1997.
In the first nine months of fiscal 1997, the Company had an income tax
provision of $28.3 million, which was an effective tax rate of 35.4%, as
compared to an income tax provision of $22.1 million, which was an effective
tax rate of 53.4% in the first nine months of fiscal 1996. The difference
between the effective tax rate and the statutory rate in the first nine months
of fiscal 1997 is due primarily to the non-deductibility of the purchased
research and development incurred in connection with the DRD Promark, Inc.
acquisition. Without this expense, the effective tax rate for the first nine
months of fiscal 1997 was 33.3%. The difference between the effective tax rate
and the statutory rate for the first nine months of fiscal 1996 was due
primarily to the non-deductibility of the purchased research and development
costs incurred during the third quarter of fiscal 1996 in connection with the
CoroNet acquisition.
14
<PAGE> 15
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company held $128.9 million in cash and
investments. The Company has no long term debt other than the $6.3 million of
notes issued as part of the Direct Technology Limited acquisition. (See note 4
of Notes to Condensed Consolidated Financial Statements). The notes are payable
in Pounds Sterling and are revalued monthly using the month end exchange rate.
The Company continues to finance its growth and acquisitions through funds
generated from operations.
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.
15
<PAGE> 16
COMPUWARE CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
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
16
<PAGE> 17
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: February 13, 1997 By:/s/ Joseph A. Nathan
----------------- --------------------
Joseph A. Nathan
President
Chief Operating Officer
Date: February 13, 1997 By: /s/ Ralph A. Caponigro
----------------- ----------------------
Ralph A. Caponigro
Senior Vice President
Chief Financial Officer
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<S> <C> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 74,390
<SECURITIES> 5,623
<RECEIVABLES> 262,073
<ALLOWANCES> 5,661
<INVENTORY> 0
<CURRENT-ASSETS> 392,867
<PP&E> 103,901
<DEPRECIATION> 38,274
<TOTAL-ASSETS> 653,791
<CURRENT-LIABILITIES> 236,452
<BONDS> 6,349
0
0
<COMMON> 428
<OTHER-SE> 383,777
<TOTAL-LIABILITY-AND-EQUITY> 653,791
<SALES> 560,317
<TOTAL-REVENUES> 560,317
<CGS> 484,000
<TOTAL-COSTS> 484,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 470
<INCOME-PRETAX> 79,922
<INCOME-TAX> 28,319
<INCOME-CONTINUING> 51,603
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,603
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.16
</TABLE>
