<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, 1997
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: (248)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 7, 1997, there were outstanding 174,711,963 shares of Common
Stock, on a post-split basis, par value $.01, of the registrant.
Page 1 of 17 pages
<PAGE> 2
PART I. FINANCIAL INFORMATION Page
--------------------- ----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1997 and March 31, 1997 3
Condensed Consolidated Statements of Operations
for the three months and six months ended 4
September 30, 1997 and 1996
Condensed Consolidated Statements of Cash Flows
for the six months ended September 30, 1997 and 1996 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 16
SIGNATURES 17
- ----------
2
<PAGE> 3
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
ASSETS 1997 1997
------ -------------- ---------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 97,729 $107,341
Investments 29,975 26,604
Accounts receivable, net 274,642 290,922
Deferred tax asset 10,095 9,747
Refundable income taxes 22,133 9,593
Prepaid expenses and other current assets 9,070 7,605
-------- --------
Total current assets 443,644 451,812
-------- --------
INVESTMENTS 89,537 44,465
PROPERTY AND EQUIPMENT, LESS ACCUMULATED -------- --------
DEPRECIATION AND AMORTIZATION 78,196 70,578
-------- --------
CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION 53,028 53,355
-------- --------
OTHER:
Accounts receivable 66,762 54,637
Deferred tax asset 11,421 11,084
Excess of cost over fair value of net assets acquired,
less accumulated amortization 58,579 55,700
Other assets 14,135 13,776
-------- --------
Total other assets 150,897 135,197
-------- --------
TOTAL ASSETS $815,302 $755,407
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 15,273 $ 24,275
Accrued expenses 80,188 83,662
Deferred revenue 136,462 164,367
-------- --------
Total current liabilities 231,923 272,304
DEFERRED REVENUE 39,300 31,399
LONG TERM DEBT 10,609 6,068
-------- --------
Total liabilities 281,832 309,771
-------- --------
SHAREHOLDERS' EQUITY:
Common stock 873 429
Additional paid-in capital 239,150 213,422
Retained earnings 295,552 232,630
Foreign currency translation adjustment and other (2,105) (845)
-------- --------
Total shareholders' equity 533,470 445,636
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $815,302 $755,407
======== ========
</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,
------------------------ ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Software license fees $ 88,098 $ 63,375 $164,359 $113,246
Maintenance fees 58,923 52,316 115,240 102,939
Professional services fees 100,360 68,575 192,260 130,419
-------- -------- -------- --------
Total revenues 247,381 184,266 471,859 346,604
-------- -------- -------- --------
OPERATING EXPENSES:
Cost of software license fees 5,354 4,748 10,168 9,600
Cost of maintenance 7,660 6,662 14,773 13,125
Cost of professional services 86,692 60,581 167,513 115,866
Software product development 13,681 10,536 27,243 22,200
Sales and marketing 68,843 58,623 135,078 112,578
Administrative and general 15,347 12,350 27,282 22,148
Purchased research and development 5,120 21,790
-------- -------- -------- --------
Total operating expenses 197,577 158,620 382,057 317,307
-------- -------- -------- --------
INCOME FROM OPERATIONS 49,804 25,646 89,802 29,297
OTHER INCOME 2,145 1,048 4,534 2,280
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 51,949 26,694 94,336 31,577
INCOME TAX PROVISION 17,299 10,594 31,414 12,220
-------- -------- -------- --------
NET INCOME $ 34,650 $ 16,100 $ 62,922 $ 19,357
======== ======== ======== ========
Net income per common share $ 0.37 $ 0.18 $ 0.67 $ 0.22
======== ======== ======== ========
Weighted average number of common
and common equivalent shares
outstanding (See Note 2) 94,605 89,086 94,048 88,740
======== ======== ======== ========
</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,
----------------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 62,922 $ 19,357
Adjustments to reconcile net income to cash provided by
operations:
Purchased research and development 21,790
Depreciation and amortization 17,882 16,743
Tax benefit from exercise of stock options 15,929 1,365
Other (474) (388)
Net change in assets and liabilities, net of effects from
acquisitions:
Accounts receivable 5,098 9,483
Prepaid expenses and other current assets (1,317) (50)
Other assets (1,006) 564
Accounts payable and accrued expenses (13,172) (6,458)
Deferred revenue (20,004) (9,493)
Refundable income taxes (12,751) (3,706)
Deferred income taxes (685) (4,669)
-------- --------
Net cash provided by operating activities 52,422 44,538
-------- --------
CASH USED IN INVESTING ACTIVITIES:
Purchase of:
Businesses (709) (59,509)
Property and equipment (14,465) (14,347)
Capitalized software (7,997) (5,665)
Investments:
Proceeds from maturity 31,447 32,009
Purchases (80,553) (25,552)
Other (90)
-------- --------
Net cash used in investing activities (72,277) (73,154)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of stock options 10,243 3,845
-------- --------
Net cash provided by financing activities 10,243 3,845
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (9,612) (24,771)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 107,341 77,771
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 97,729 $ 53,000
======== ========
</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, 1997
(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, 1997 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,
-------------------- ------------------
1997 1996 1997 1996
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Weighted average common
shares outstanding 86,938 84,934 86,568 84,808
Dilutive effect of stock options 7,667 4,152 7,480 3,932
--------- --------- -------- --------
Weighted average number of common and
common equivalent shares outstanding 94,605 89,086 94,048 88,740
========= ========= ======== ========
</TABLE>
On August 26, 1997 the Company's shareholders approved an increase in the
Company's authorized shares of common stock from 200,000,000 to 400,000,000
shares. Subsequently, the Board of Directors approved a two-for-one stock
split which was effected by means of a 100% stock dividend, as of November 4,
1997 to holders of record as of October 22, 1997. On the basis of the
additional shares outstanding after November 4, 1997, earnings per share for
the three months ended September 30, 1997 and 1996 would be $0.18 and $0.09,
respectively, and for the six months ended September 30, 1997 and 1996 would be
$0.33 and $0.11, respectively.
NOTE 3 - ACQUISITION
Vine Systems Company Ltd - In April 1997, the Company acquired Vine Systems
Company Ltd., a professional services firm, for approximately 3,100,000 pounds
sterling (approximately $5,022,000). Of the total purchase price, approximately
$566,000 was paid in cash. The Company issued notes for the remaining
$4,456,000. The acquisition has been accounted for as a purchase, and
accordingly, assets and liabilities acquired have been recorded at fair value
6
<PAGE> 7
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 1997
(CONTINUED)
as of the date of acquisition. The amount by which the acquisition cost
exceeded the fair value of the net assets acquired was approximately $4,841,000
and is being amortized over a fifteen-year period on a straight-line basis.
NOTE 4 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 128 "Earnings Per Share" in February 1997.
The Company is required to adopt this Statement with its interim period ending
December 31, 1997. The adoption of this new standard is not expected to have
a material impact on the Company's financial statements.
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:
Percentage of Period-
Total Revenues to-Period
-------------------- Change
Three Months Ended ---------
September 30, 1996
-------------------- to
1997 1996 1997
--------- --------- ---------
Revenues:
Software license fees 35.6% 34.4% 39.0%
Maintenance fees 23.8 28.4 12.6
Professional services fees 40.6 37.2 46.4
-------- --------
Total revenues 100.0 100.0 34.3
-------- --------
Operating expenses:
Cost of software license fees 2.2 2.6 12.8
Cost of maintenance 3.1 3.6 15.0
Cost of professional services 35.1 32.9 43.1
Software product development 5.5 5.7 29.9
Sales and marketing 27.8 31.8 17.4
Administrative and general 6.2 6.7 24.3
Purchased research and development 2.8 *
-------- --------
Total operating expenses 79.9 86.1 24.6
-------- --------
INCOME FROM OPERATIONS 20.1 13.9 94.2
OTHER INCOME 0.9 0.6 104.7
-------- --------
INCOME BEFORE INCOME TAXES 21.0 14.5 94.6
INCOME TAX PROVISION 7.0 5.8 63.3
-------- --------
NET INCOME 14.0% 8.7% 115.2%
======== ========
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 1996 DRD Promark acquisition from
the calculations for the three months ended September 30, 1997 and 1996:
Income from operations 20.1% 16.7% 61.9%
Other income 0.9 0.6 104.7
---- ----
Income before income taxes 21.0 17.3 63.3
Income tax provision 7.0 5.8 63.3
---- ----
Net income 14.0% 11.5% 63.3%
==== ====
* 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:
Percentage of Period-
Total Revenues to-Period
--------------------- Change
Six Months ended ---------
September 30, 1996
--------------------- to
1997 1996 1997
-------- -------- ---------
REVENUES:
Software license fees 34.8% 32.7% 45.1%
Maintenance fees 24.4 29.7 11.9
Professional services fees 40.8 37.6 47.4
----- -----
Total revenues 100.0 100.0 36.1
----- -----
OPERATING EXPENSES:
Cost of software license fees 2.2 2.8 5.9
Cost of maintenance 3.1 3.8 12.6
Cost of professional services 35.5 33.4 44.6
Software product development 5.8 6.4 22.7
Sales and marketing 28.6 32.5 20.0
Administrative and general 5.8 6.4 23.2
Purchased research and development 6.3 *
----- -----
Total operating expenses 81.0 91.6 20.4
----- -----
INCOME FROM OPERATIONS 19.0 8.4 206.5
OTHER INCOME 1.0 0.7 98.9
----- -----
INCOME BEFORE INCOME TAXES 20.0 9.1 198.7
INCOME TAX PROVISION 6.7 3.5 157.1
----- -----
NET INCOME 13.3% 5.6% 225.1%
===== =====
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 1996 Direct Technology Limited and
DRD Promark, Inc. acquisitions from the calculations for the six months ended
September 30, 1997 and 1996:
Income from operations 19.0% 14.7% 75.8%
Other income 1.0 0.7 98.9
---- ----
Income before income taxes 20.0 15.4 76.8
Income tax provision 6.7 5.1 76.8
---- ----
Net income 13.3% 10.3 76.8%
==== ====
* 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, 1997 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1996
Total revenues for the second quarter of fiscal 1998 were $247.4 million, an
increase of $63.1 million, or 34.3%, as compared to $184.3 million for the
second quarter of fiscal 1997. The Company experienced significant growth in
license fees, maintenance fees, and professional service fees as compared to
the three months ended September 30, 1996.
Software license fees increased $24.7 million, or 39.0%, to $88.1 million in
the second quarter of fiscal 1998 from $63.4 million in the second quarter of
fiscal 1997. The majority of the Company's product families experienced
growth in license fees, with the largest percentage increase in its
client/server testing and implementation products.
Maintenance fee revenues increased $6.6 million, or 12.6%, to $58.9 million in
the second quarter of fiscal 1998 from $52.3 million in the second quarter of
fiscal 1997. The Company continues to experience growth in maintenance fees
for almost all of its product families due to the growth in the number of
installed copies of its products.
Revenues from professional services increased $31.8 million, or 46.4%, to
$100.4 million in the second quarter of fiscal 1998 from $68.6 million in the
second quarter of fiscal 1997. All of the Company's professional services
offices experienced growth in revenues. The overall increase was due primarily
to increased business at new and existing clients at the Company's Farmington
Hills, Michigan; Milwaukee, Wisconsin; Columbus, Ohio; and Minneapolis,
Minnesota branches of $7.4 million, $3.5 million, $2.9 million, and $2.6
million, respectively. In addition, revenues from client/server systems
increased $3.7 million and training and implementation services internationally
accounted for $4.7 million of the increase.
The costs of software license fees in the second quarter of fiscal 1998
increased $606,000 to $5.4 million compared to $4.7 million in the second
quarter of fiscal 1997. As a percentage of software license fees, these costs
decreased to 6.1% in the second quarter of fiscal 1998 from 7.5% for the same
period in fiscal 1997.
Cost of maintenance in the second quarter of fiscal 1998 increased $1.0
million, or 15%, to $7.7 million as compared to $6.7 million in the second
quarter of fiscal 1997. As a percentage of maintenance fees, these costs
increased to 13.0% in the second quarter of fiscal 1998 from 12.7% in the
second quarter of fiscal 1997. This increase is due to the additional
requirements needed to support the increased worldwide products installed base.
Cost of professional services increased $26.1 million, or 43.1%, to $86.7
million in the second quarter of fiscal 1998 from $60.6 million in the second
quarter of fiscal 1997. The increase in these expenses was due primarily to
the growth in the Services Division billable staff by 974 to 3,955 people at
September 30, 1997 from 2,981 at September 30, 1996. As a percentage of
professional services fees, these costs decreased to 86.4% in the second
quarter of fiscal 1998 from 88.3% in the second quarter of fiscal 1997.
Software product development costs increased $3.1 million, or 29.9%, to $13.7
million in the second quarter of fiscal 1998 from $10.5 million in the second
quarter of fiscal 1997. Before the capitalization of internally developed
software products, total research and development
10
<PAGE> 11
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
expenditures increased $2.9 million to $16.0 million, or 22.1%, in the second
quarter of fiscal 1998 from $13.1 million in the second quarter of fiscal 1997.
Capitalized research and development expenditures decreased $253,000, or 10.0%,
to $2.3 million in the second quarter of fiscal 1998 from $2.5 million in the
second quarter of fiscal 1997.
Sales and marketing costs increased $10.2 million, or 17.4%, to $68.8 million
in the second quarter of fiscal 1998 from $58.6 million in the second quarter
of fiscal 1997. 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 $3.0 million, or 24.3%, to $15.3
million in the second quarter of fiscal 1998 from $12.4 million in the second
quarter of fiscal 1997. The increase in these costs was due primarily to the
increase in the costs of administration, corporate communications and employee
development programs in order to support the Company's growth. As a percentage
of total revenue, these costs decreased to 6.2% in second quarter of fiscal
1998 from 6.7% in the second quarter of fiscal 1997.
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 $24.2 million, or 94.2%, to $49.8 million in
the second quarter of fiscal 1998 from $25.6 million in the second quarter of
fiscal 1997. Excluding the purchased research and development expense of $5.1
million described above, income from operations during the second quarter of
fiscal 1998 increased $19.0 million, or 61.9%, to $49.8 million, from $30.8
million in the second quarter of fiscal 1997. As a percentage of revenues,
income from operations before special charges increased to 20.1% in the second
quarter of fiscal 1998 from 16.7% in the same period of fiscal 1997.
Net interest and investment income for the second quarter of fiscal 1998 was
$2.1 million as compared to $1.0 million in the second quarter of fiscal 1997.
This increase in income was due to higher average cash balances resulting from
cash generated from higher operating earnings.
In the second quarter of fiscal 1998, the Company recognized an income tax
provision of $17.3 million, an effective tax rate of 33.3%, as compared to an
income tax provision of $10.6 million, an effective tax rate of 39.7%, in the
second quarter of fiscal 1997. 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.
11
<PAGE> 12
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
SIX MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE SIX MONTHS ENDED SEPTEMBER
30, 1996
Total revenues for the first six months of fiscal 1998 were $471.9 million, an
increase of $125.3 million, or 36.1%, as compared to $346.6 million for the
first six months of fiscal 1997. The Company experienced significant growth in
license fees, maintenance fees, and professional service fees during the six
months ended September 30, 1997.
Software license fees increased $51.1 million, or 45.1%, to $164.4 million in
the first six months of fiscal 1998 from $113.2 million in the first six months
of fiscal 1997. The majority of the Company's product families experienced
growth in license fees, with the largest percentage increase in its
client/server testing and implementation products.
Maintenance fee revenues increased $12.3 million, or 11.9%, to $115.2 million
in the first six months of fiscal 1998 from $102.9 million in the first six
months of fiscal 1997. 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 $61.8 million, or 47.4%, to
$192.3 million in the first six months of fiscal 1998 from $130.4 million in
the first six months of fiscal 1997. All of the Company's professional
services offices experienced growth in revenues. The overall increase was due
primarily to increased business at new and existing clients at the Company's
Farmington Hills, Michigan; Milwaukee, Wisconsin; Columbus, Ohio and
Minneapolis, Minnesota branches of $13.3 million, $6.3 million, $5.8 million
and $5.5 million, respectively. In addition, revenues from client/server
systems increased $8.4 million and training and implementation services
internationally accounted for $8.7 million of the increase.
Cost of software license fees increased $568,000, or 5.9%, to $10.2 million in
the first six months of fiscal 1998 from $9.6 million in the first six months
of fiscal 1997. 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 6.2% in the first six months of fiscal 1998 from
8.5% for the same period in fiscal 1997.
Cost of maintenance in the first six months of fiscal 1998 increased $1.6
million, or 12.6%, to $14.8 million as compared to $13.1 million in the first
six months of fiscal 1997. As a percentage of maintenance fees, these costs
remained constant at 12.8% in the first six months of fiscal 1998 as compared
to the same period in fiscal 1997.
Cost of professional services increased $51.6 million, or 44.6%, to $167.5
million in the first six months of fiscal 1998 from $115.9 million in the first
six months of fiscal 1997. The increase in these expenses was due primarily to
the growth in the Services Division billable staff by 974 to 3,955 people at
September 30, 1997 from 2,981 at September 30, 1996. As a percentage of
professional services fees, these costs decreased to 87.1% in the first six
months of fiscal 1998 from 88.8% in the first six months of fiscal 1997.
Software product development costs increased $5.0 million, or 22.7%, to $27.2
million in the first six months of fiscal 1998 from $22.2 million in the first
six months of fiscal 1997. Before the capitalization of internally developed
software products, total research and development
12
<PAGE> 13
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
expenditures increased $4.8 million to $32.0 million, or 17.8%, in the first
six months of fiscal 1998 from $27.1 million in the first six months of fiscal
1997. Capitalized research and development expenditures decreased $208,000 to
$4.7 million, or 4.2%, in the first six months of fiscal 1998 from $4.9 million
in the first six months of fiscal 1997.
Sales and marketing costs increased $22.5 million, or 20.0%, to $135.1 million
in the first six months of fiscal 1998 from $112.6 million in the first six
months of fiscal 1997. 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 $5.1 million, or 23.2%, to $27.3
million in the first six months of fiscal 1998 from $22.1 million in the first
six months of fiscal 1997. 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. As a
percentage of total revenue, these costs decreased to 5.8% in first six months
of fiscal 1998 from 6.4% in the first six months of fiscal 1997.
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 $60.5 million, or 206.5%, to $89.8 million in
the first six months of fiscal 1998 from $29.3 million in the first six months
of fiscal 1997. 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 $38.7 million, or 75.8%, to $89.8 million in the first six months of
fiscal 1998 from $51.1 million in the first six months of fiscal 1997. As a
percentage of total revenues, income from operations exclusive of special
charges increased to 19.0% in the first six months of fiscal 1998 from 14.7% in
the same period of fiscal 1997.
Net interest and investment income for the first six months of fiscal 1998 was
$4.5 million as compared to $2.3 million in the first six months of fiscal
1997. This increase was due to higher average cash and investment balances as
a result of increased operating earnings in the first six months of 1998.
In the first six months of fiscal 1998, the Company had an income tax provision
of $31.4 million, which was an effective tax rate of 33.3%, as compared to an
income tax provision of $12.2 million, which was an effective tax rate of 38.7%
in the first six months of fiscal 1997. 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%.
13
<PAGE> 14
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company held $217.2 million in cash and
investments. The Company has no debt other than the $10.6 million of notes
issued in connection with certain acquisitions.
The Company continues to evaluate business acquisition opportunities that fit
the Company's strategic plans.
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 26, 1997 at the Company's
Headquarters, 31440 Northwestern Highway, Farmington Hills, Michigan.
1. PROPOSAL ONE - Election of directors.
The following directors were elected to hold office for one year until the 1998
Annual Meeting of Shareholders and until their successors are elected and
qualified:
<TABLE>
<S> <C> <C>
Nominee for Director Total Votes For Total Votes Withheld
---------------------- --------------- --------------------
Bernard M. Goldsmith 79,285,069 427,386
William O. Grabe 79,284,469 427,986
William R. Halling 79,284,461 427,994
Peter Karmanos, Jr. 79,159,738 552,717
Joseph A. Nathan 79,159,097 553,358
W. James Prowse 79,150,920 561,535
G. Scott Romney 78,204,644 1,507,811
Thomas Thewes 79,159,379 553,076
Lowell P. Weicker, Jr. 79,275,377 437,078
</TABLE>
2. PROPOSAL TWO - The approval of the Fiscal 1998 Stock Option Plan.
<TABLE>
<S> <C>
For 56,648,031
Against 22,978,279
Abstain 86,145
Broker non votes 0
</TABLE>
3. PROPOSAL THREE - The amendment of the Company's Restated Articles of
Incorporation to increase the number of authorized shares of the Company's
common stock, $.01 par value, from 200,000,000 to 400,000,000 shares.
<TABLE>
<S> <C>
For 75,136,497
Against 4,515,185
Abstain 60,773
Broker non votes 0
</TABLE>
The total number of the Company's common shares issued and outstanding and
entitled to be voted at the Annual Meeting was 86,413,919. The total number of
shares voted at the Annual Meeting was 79,712,455 or 92.2% of the shares
outstanding and eligible to vote.
15
<PAGE> 16
COMPUWARE CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The following exhibits are filed herewith or incorporated by reference.
Exhibit
Number Description of Document
------- -----------------------
4.1 Fiscal 1998 Stock Option Plan (1)
4.7 Certificate of Amendment to the Restated Articles of
Incorporation (1)
27 Financial Data Schedule
(1) Incorporated by reference to the corresponding exhibit to the
Registration Statement on Form S-8 (Registration No. 333-37873)
(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: November 11, 1997 By:/s/ Joseph A. Nathan
----------------- --------------------------
Joseph A. Nathan
President
Chief Operating Officer
Date: November 11, 1997 By: /s/ Ralph A. Caponigro
----------------- --------------------------
Ralph A. Caponigro
Senior Vice President
Chief Financial Officer
17
<PAGE> 18
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------- -----------------------
4.1 Fiscal 1998 Stock Option Plan (1)
4.7 Certificate of Amendment to the Restated Articles of
Incorporation (1)
27 Financial Data Schedule
(1) Incorporated by reference to the corresponding exhibit to the
Registration Statement on Form S-8 (Registration No. 333-37873)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 97,729
<SECURITIES> 7
<RECEIVABLES> 280,633
<ALLOWANCES> 5,991
<INVENTORY> 0
<CURRENT-ASSETS> 443,644
<PP&E> 122,635
<DEPRECIATION> 44,439
<TOTAL-ASSETS> 815,302
<CURRENT-LIABILITIES> 231,923
<BONDS> 10,609
0
0
<COMMON> 873
<OTHER-SE> 534,702
<TOTAL-LIABILITY-AND-EQUITY> 533,470
<SALES> 471,859
<TOTAL-REVENUES> 471,859
<CGS> 382,057
<TOTAL-COSTS> 382,057
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 663
<INCOME-PRETAX> 94,336
<INCOME-TAX> 31,414
<INCOME-CONTINUING> 62,922
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62,922
<EPS-PRIMARY> .67
<EPS-DILUTED> .67
</TABLE>
