<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, 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 February 10, 1998, there were outstanding 179,650,982 shares of Common
Stock, par value $.01, of the registrant.
Page 1 of 15 pages
<PAGE> 2
PART I. FINANCIAL INFORMATION Page
--------------------- ----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
December 31, 1997 and March 31, 1997 3
Condensed Consolidated Statements of Operations
for the three months and nine months ended 4
December 31, 1997 and 1996
Condensed Consolidated Statements of Cash Flows
for the nine months ended December 31, 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 9
PART II. OTHER INFORMATION
-----------------
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
- ----------
2
<PAGE> 3
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
ASSETS 1997 1997
-------- ------------ ------------
(UNAUDITED)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $112,069 $107,341
Investments 38,874 26,604
Accounts receivable, net 343,687 290,922
Deferred tax asset 13,552 9,747
Refundable income taxes 19,792 9,593
Prepaid expenses and other current assets 9,720 7,605
--------- --------
Total current assets 537,694 451,812
--------- --------
INVESTMENTS 117,421 44,465
--------- --------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION 82,092 70,578
--------- --------
CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION 51,767 53,355
--------- --------
OTHER:
Accounts receivable 69,760 54,637
Deferred tax asset 7,886 11,084
Excess of cost over fair value of net assets acquired,
less accumulated amortization 57,586 55,700
Other assets 13,604 13,776
--------- --------
Total other assets 148,836 135,197
--------- --------
TOTAL ASSETS $937,810 $755,407
========= ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable $ 17,720 $ 24,275
Accrued expenses 102,718 83,662
Deferred revenue 163,193 164,367
--------- --------
Total current liabilities 283,631 272,304
DEFERRED REVENUE 36,037 31,399
LONG TERM DEBT 6,876 6,068
--------- --------
Total liabilities 326,544 309,771
--------- --------
SHAREHOLDERS' EQUITY:
Common stock 1,792 429
Additional paid-in capital 261,920 213,422
Retained earnings 350,905 232,630
Foreign currency translation adjustment and other (3,351) (845)
--------- --------
Total shareholders' equity 611,266 445,636
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $937,810 $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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------- --------------------------
1997 1996 1997 1996
---------- ---------- ------------ ------------
REVENUES:
<S> <C> <C> <C> <C>
Software license fees $134,486 $ 88,548 $298,845 $201,794
Maintenance fees 61,746 52,573 176,986 155,512
Professional services fees 113,403 72,592 305,663 203,011
-------- -------- --------- ---------
Total revenues 309,635 213,713 781,494 560,317
-------- -------- --------- ---------
OPERATING EXPENSES:
Cost of software license fees 5,798 5,219 15,966 14,819
Cost of maintenance 7,942 7,609 22,715 20,734
Cost of professional services 95,589 64,208 263,102 180,074
Software product development 14,901 11,516 42,144 33,716
Sales and marketing 88,465 66,061 223,543 178,639
Administrative and general 15,419 12,080 42,701 34,228
Merger-related costs 3,606 3,606
Purchased research and development 21,790
-------- -------- --------- ---------
Total operating expenses 231,720 166,693 613,777 484,000
-------- -------- --------- ---------
INCOME FROM OPERATIONS 77,915 47,020 167,717 76,317
OTHER INCOME 3,750 1,325 8,284 3,605
-------- -------- --------- ---------
INCOME BEFORE INCOME TAXES 81,665 48,345 176,001 79,922
INCOME TAX PROVISION 27,194 16,099 58,608 28,319
-------- -------- ---------- ---------
NET INCOME $ 54,471 $ 32,246 $117,393 $ 51,603
======== ======== ========= =========
BASIC EPS COMPUTATION
Numerator: Net income $ 54,471 $ 32,246 $117,393 $ 51,603
-------- -------- --------- ---------
Denominator:
Common shares outstanding 178,531 170,671 174,953 169,971
--------- -------- --------- ---------
Basic EPS $ 0.31 $ 0.19 $ 0.67 $ 0.30
======== ======== ========= =========
DILUTED EPS COMPUTATION
Numerator: Net income $ 54,471 $ 32,246 $117,393 $ 51,603
-------- -------- --------- ---------
Denominator:
Common shares outstanding 178,531 170,671 174,953 169,971
Dilutive effect of stock options 18,207 9,118 17,205 8,297
-------- -------- --------- ---------
Total shares 196,738 179,789 192,158 178,268
--------- -------- --------- ---------
Diluted EPS $ 0.28 $ 0.18 $ 0.61 $ 0.29
======== ======== ========= =========
</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,
-----------------------------
1997 1996
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 117,393 $ 51,603
Adjustments to reconcile net income to cash provided by
operations:
Purchased research and development 21,790
Depreciation and amortization 26,864 24,589
Deferred income taxes (487) (3,343)
Tax benefit from exercise of stock options 27,481 2,268
Other (471) (1,052)
Net change in assets and liabilities, net of effects from
acquisitions:
Accounts receivable (65,340) (56,685)
Prepaid expenses and other current assets (1,506) 898
Other assets (771) 1,621
Accounts payable and accrued expenses 9,312 7,422
Deferred revenue 1,825 19,164
Refundable income taxes (10,433) 1,580
--------- --------
Net cash provided by operating activities 103,867 69,855
--------- --------
CASH USED IN INVESTING ACTIVITIES:
Purchase of:
Businesses (709) (59,509)
Property and equipment (21,670) (17,899)
Capitalized software (10,686) (10,434)
Investments:
Proceeds from maturity 53,465 48,964
Purchases (134,230) (43,480)
Other (246)
--------- --------
Net cash used in investing activities (113,830) (82,604)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt (3,890)
Net proceeds from sale of common stock 3,710
Net proceeds from exercise of stock options 14,871 9,368
--------- --------
Net cash provided by financing activities 14,691 9,368
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,728 (3,381)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 107,341 77,771
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 112,069 $ 74,390
========= ========
See notes to condensed consolidated financial statements.
</TABLE>
5
<PAGE> 6
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 1997
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 - ACQUISITIONS AND MERGERS
NuMega Technologies, Inc. - In December 1997, the Company issued approximately
3,341,000 shares of its common stock in exchange for all of the outstanding
common stock of NuMega Technologies, Inc. (NuMega). In addition, options to
acquire approximately 858,000 shares of the Company's common stock were
exchanged for all outstanding NuMega options. The merger has been accounted
for by the pooling of interests method, and accordingly, the assets and
liabilities of NuMega were combined with those of the Company at their book
value. The financial results of NuMega have been included in the accompanying
financial statements since October 1, 1997. Due to the immaterial size of the
merger when compared with the Company, prior periods were not restated to
include the financial results of NuMega.
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
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 3 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income" and SFAS
No. 131 "Disclosures about Segments of an Enterprise and Related Information"
in June 1997. The Company is required to adopt these Statements with its
fiscal year ending March 31, 1999. The adoption of these new standards are
not expected to have a material impact on the Company's financial statements.
NOTE 4 - COMMON STOCK AND ADDITIONAL PAID IN CAPITAL
In October 1997, the Company's Board of Directors approved a two-for-one stock
split, payable as a 100% stock dividend, to shareholders of record on October
22, 1997. All prior period EPS amounts have been restated for the stock
split.
Effective December 1997, the Company adopted SFAS No. 128, "Earnings per
Share", which replaces the presentation of primary earnings per share ("EPS")
and fully diluted EPS with presentation of basic EPS and diluted EPS,
respectively. Basic EPS excludes dilution and is computed by dividing earnings
available to common stockholders by the weighted-average number of common
shares outstanding for the period. Similar to fully diluted EPS, diluted EPS
assumes the issuance of common stock for all potentially dilutive equivalent
shares outstanding. All prior-period EPS data have been restated. The
adoption of this new accounting standard did not have a material effect on the
Company's reported EPS amounts.
6
<PAGE> 7
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, 1996
---------------------------- to
1997 1996 1997
---------- ------------ -----
Revenues:
<S> <C> <C> <C>
Software license fees 43.4% 41.4% 51.9%
Maintenance fees 20.0 24.6 17.4
Professional services fees 36.6 34.0 56.2
--------- -------
Total revenues 100.0 100.0 44.9
--------- -------
Operating expenses:
Cost of software license fees 1.9 2.4 11.1
Cost of maintenance 2.5 3.6 4.4
Cost of professional services 30.9 30.0 48.9
Software product development 4.8 5.4 29.4
Sales and marketing 28.6 30.9 33.9
Administrative and general 5.0 5.7 27.6
Merger-related costs 1.1 *
--------- -------
Total operating expenses 74.8 78.0 39.0
--------- -------
INCOME FROM OPERATIONS 25.2 22.0 65.7
OTHER INCOME 1.2 0.6 183.0
--------- -------
INCOME BEFORE INCOME TAXES 26.4 22.6 68.9
INCOME TAX PROVISION 8.8 7.5 68.9
--------- -------
NET INCOME 17.6% 15.1% 68.9
========= =======
</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 merger-related
expenses associated with the NuMega merger from the calculation for the three
months ended December 31, 1997:
<TABLE>
<S> <C> <C> <C>
Income from operations 26.3% 22.0% 73.4%
Other income 1.2 0.6 183.0
--------- -------
Income before income taxes 27.5 22.6 76.4
Income tax provision 9.1 7.5 76.4
--------- -------
Net income 18.4% 15.1% 76.4
========= =======
</TABLE>
* Period-to-period change expressed as a percentage is not meaningful.
7
<PAGE> 8
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>
Period-
Percentage of to-Period
Total Revenues Change
------------------------- ---------
Nine Months ended
December 31, 1996
------------------------- to
1997 1996 1997
------------ ----------- ---------
REVENUES:
<S> <C> <C> <C>
Software license fees 38.2% 36.0% 48.1%
Maintenance fees 22.7 27.8 13.8
Professional services fees 39.1 36.2 50.6
----- -----
Total revenues 100.0 100.0 39.5
----- -----
OPERATING EXPENSES:
Cost of software license fees 2.0 2.7 7.7
Cost of maintenance 2.9 3.7 9.6
Cost of professional services 33.7 32.1 46.1
Software product development 5.4 6.0 25.0
Sales and marketing 28.6 31.9 25.1
Administrative and general 5.5 6.1 24.8
Merger-related costs 0.5 *
Purchased research and development 3.9 *
----- -----
Total operating expenses 78.6 86.4 26.8
----- -----
INCOME FROM OPERATIONS 21.4 13.6 119.8
OTHER INCOME 1.1 0.6 129.8
----- -----
INCOME BEFORE INCOME TAXES 22.5 14.2 120.2
INCOME TAX PROVISION 7.5 5.0 107.0
----- -----
NET INCOME 15.0% 9.2% 127.5%
===== =====
</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 the NuMega merger
for the nine months ended December 31, 1997 and purchased research and
development expenses associated with the Direct Technology Limited and DRD
Promark, Inc. acquisitions from the calculations for the nine months ended
December 31, 1996:
<TABLE>
<S> <C> <C> <C>
Income from operations 21.9% 17.5% 74.6%
Other income 1.1 0.6 129.8
----- -----
Income before income taxes 23.0 18.1 76.6
Income tax provision 7.7 6.0 76.6
----- -----
Net income 15.3% 12.1% 76.6%
===== =====
</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)
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THE THREE MONTHS ENDED
DECEMBER 31, 1996
Total revenues for the third quarter of fiscal 1998 were $309.6 million, an
increase of $95.9 million, or 44.9%, as compared to $213.7 million for the
third quarter of fiscal 1997. The Company experienced growth in license fees,
maintenance fees and professional service fees in the third quarter ended
December 31, 1997 as compared to the third quarter ended December 31, 1996.
Software license fees increased $45.9 million, or 51.9%, to $134.5 million in
the third quarter of fiscal 1998 from $88.5 million in the third 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 $9.2 million, or 17.4%, to $61.7 million in
the third quarter of fiscal 1998 from $52.6 million in the third quarter 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 $40.8 million, or 56.2%, to
$113.4 million in the third quarter of fiscal 1998 from $72.6 million in the
third 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 $9.7 million, $5.0 million, $3.5 million, and $2.9
million, respectively. In addition, revenues from client/server systems
increased $6.2 million and training and implementation services internationally
accounted for $5.9 million of the increase.
The costs of software license fees increased $579,000, or 11.1%, to $5.8
million in the third quarter of fiscal 1998 from $5.2 million in the third
quarter of fiscal 1997. As a percentage of software license fees, these costs
decreased to 4.3% in the third quarter of fiscal 1998 from 5.9% for the same
period in fiscal 1997.
Cost of maintenance increased $333,000, or 4.4%, to $7.9 million in the third
quarter of fiscal 1998 from $7.6 million in the third quarter of fiscal 1997.
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
12.9% in the third quarter of fiscal 1998 from 14.5% in the third quarter of
fiscal 1997.
Cost of professional services increased $31.4 million, or 48.9%, to $95.6
million in the third quarter of fiscal 1998 from $64.2 million in the third
quarter of fiscal 1997. The increase in these expenses was due primarily to
the growth in the Services Division billable staff by 1,107 to 4,210 people at
December 31, 1997 from 3,103 at December 31, 1996 and an increase in training
costs in the professional services division. As a percentage of professional
services fees, these costs decreased to 84.3% in the third quarter of fiscal
1998 from 88.5% in the third quarter of fiscal 1997.
9
<PAGE> 10
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Software product development costs increased $3.4 million, or 29.4%, to $14.9
million in the third quarter of fiscal 1998 from $11.5 million in the third
quarter of fiscal 1997. Before the capitalization of internally developed
software products, total research and development expenditures increased $3.9
million to $17.7 million, or 27.7%, in the third quarter of fiscal 1998 from
$13.9 million in the third quarter of fiscal 1997. Capitalized research and
development expenditures increased $465,000 to $2.8 million, or 19.5%, in the
third quarter of fiscal 1998 from $2.4 million in the third quarter of fiscal
1997.
Sales and marketing costs increased $22.4 million, or 33.9%, to $88.5 million
in the third quarter of fiscal 1998 from $66.1 million in the third quarter of
fiscal 1997. 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, higher sales commissions associated with increased
product sales, and increased advertising expenditures. As a percentage of
software license fees these costs declined to 65.8% in the third quarter of
fiscal 1998 as compared to 74.6% in the third quarter of fiscal 1997.
Administrative and general costs increased $3.3 million, or 27.6%, to $15.4
million in the third quarter of fiscal 1998 from $12.1 million in the third
quarter of fiscal 1997. 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 $30.9 million, or 65.7%, to $77.9 million in
the third quarter of fiscal 1998 from $47.0 million in the third quarter of
fiscal 1997. As a percentage of revenues, income from operations increased to
25.2% in the third quarter of fiscal 1998 from 22.0% in the same period of
fiscal 1997. Excluding the merger-related expenses of $3.6 million incurred in
the third quarter of fiscal 1998 as part of the NuMega merger, the Company's
income from operations would have increased $34.5 million, or 73.4%, to $81.5
million in the third quarter of fiscal 1998 from $47.0 million in the third
quarter of fiscal 1997. As a percentage of total revenues, income from
operations, exclusive of special charges, increased to 26.3% in the third
quarter of fiscal 1998 from 22.0% in the third quarter of fiscal 1997.
Net interest and investment income for the third quarter of fiscal 1998 was
$3.8 million as compared to $1.3 million in the third quarter of fiscal 1997.
This increase in income was due to higher average cash and investment balances
resulting from cash generated from higher operating earnings.
In the third quarter of fiscal 1998, the Company recognized an income tax
provision of $27.2 million, as compared to an income tax provision of $16.1
million in the third quarter of fiscal 1997. The Company had an effective tax
rate of 33.3% for the third quarter of fiscal 1998 and the third quarter of
fiscal 1997.
10
<PAGE> 11
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THE NINE MONTHS ENDED DECEMBER
31, 1996
Total revenues for the first nine months of fiscal 1998 were $781.5 million, an
increase of $221.2 million, or 39.5%, as compared to $560.3 million for the
first nine months of fiscal 1997. The Company experienced growth in license
fees, maintenance fees, and professional service fees during the nine months
ended December 31, 1997 as compared to the nine months ended December 31, 1996.
Software license fees revenue increased $97.1 million, or 48.1%, to $298.8
million in the first nine months of fiscal 1998 from $201.8 million in the
first nine 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 $21.5 million, or 13.8%, to $177.0 million
in the first nine months of fiscal 1998 from $155.5 million in the first nine
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 $102.7 million, or 50.6%, to
$305.7 million in the first nine months of fiscal 1998 from $203.0 million in
the first nine 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 $23.0 million, $11.2 million, $9.2 million
and $8.4 million, respectively. In addition, revenues from client/server
systems increased $14.1 million and training and implementation services
internationally accounted for $14.6 million of the increase.
Cost of software license fees increased $1.1 million, or 7.7%, to $16.0 million
in the first nine months of fiscal 1998 from $14.8 million in the first nine
months of fiscal 1997. As a percentage of software license fees, these costs
decreased to 5.3% in the first nine months of fiscal 1998 from 7.3% for the
same period in fiscal 1997.
Cost of maintenance increased $2.0 million, or 9.6%, to $22.7 million in the
first nine months of fiscal 1998 from $20.7 million in the first nine months of
fiscal 1997. 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 product base. As a percentage of maintenance fees,
these costs decreased to 12.8% in the first nine months of fiscal 1998 from
13.3% during the same period of fiscal 1997.
Cost of professional services increased $83.0 million, or 46.1%, to $263.1
million in the first nine months of fiscal 1998 from $180.0 million in the
first nine months of fiscal 1997. The increase in these expenses was due
primarily to the growth in the Services Division billable staff by 1,107 to
4,210 people at December 31, 1997 from 3,103 at December 31, 1996 and an
increase in training costs in the professional services division. As a
percentage of professional services fees, these costs decreased to 86.1% in the
first nine months of fiscal 1998 from 88.7% in the first nine months of fiscal
1997.
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 $8.4 million, or 25.0%, to $42.1
million in the first nine months of fiscal 1998 from $33.7 million in the first
nine months of fiscal 1997. Before the capitalization of internally developed
software products, total research and development expenditures increased $8.7
million to $49.7 million, or 21.2%, in the first nine months of fiscal 1998
from $41.0 million in the first nine months of fiscal 1997. Capitalized
research and development expenditures increased $257,000 to $7.6 million, or
3.5%, in the first nine months of fiscal 1998 from $7.3 million in the first
nine months of fiscal 1997.
Sales and marketing costs increased $44.9 million, or 25.1%, to $223.5 million
in the first nine months of fiscal 1998 from $178.6 million in the first nine
months of fiscal 1997. The increase in sales and marketing costs was due
primarily to the expansion of the worldwide sales force, higher sales
commissions associated with increased product sales and increased advertising
expenditures. As a percentage of software license fees these costs declined to
74.8% in the first nine months of fiscal 1998 as compared to 88.5% in the first
nine months of fiscal 1997.
Administrative and general costs increased $8.5 million, or 24.8%, to $42.7
million in the first nine months of fiscal 1998 from $34.2 million in the first
nine months of fiscal 1997. 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 1998, the Company recognized $3.6
million for merger-related costs associated with the merger of NuMega. 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 $91.4 million, or 119.8%, to $167.7 million in
the first nine months of fiscal 1998 from $76.3 million in the first nine
months of fiscal 1997. As a percentage of revenues, income from operations
increased to 21.4% in the first nine months of fiscal 1998 from 13.6% in the
same period of fiscal 1997. Excluding special charges for the NuMega merger of
$3.6 million in fiscal 1998 and purchased research and development associated
with the Direct Technology Limited and DRD Promark, Inc. acquisitions of $21.8
million in fiscal 1997, income from operations would have increased $73.2
million, or 74.6%, to $171.3 million in the first nine months of fiscal 1998
from $98.1 million in the first nine months of fiscal 1997. As a percentage of
total revenues, income from operations, exclusive of special charges, increased
to 21.9% in the first nine months of fiscal 1998 from 17.5% in the same period
of fiscal 1997.
Net interest and investment income for the first nine months of fiscal 1998 was
$8.3 million as compared to $3.6 million in the first nine months of fiscal
1997. This increase in income was due to higher average cash and investment
balances resulting from cash generated from higher operating earnings.
In the first nine months of fiscal 1998, the Company had an income tax
provision of $58.6 million, which was an effective tax rate of 33.3%, as
compared to an income tax provision of $28.3 million, which was an effective
tax rate of 35.4% in the first nine months of fiscal 1997. 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 these expenses, the effective tax rate for the first nine
months of fiscal 1997 would have been 33.3%.
12
<PAGE> 13
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, 1997, the Company held $268.4 million in cash and
investments. The Company has no debt other than the $6.9 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.
The Company is in the process of reviewing all of its major operating systems
for any potential Year 2000 compliance issues and making any necessary changes.
From a financial standpoint, the Company believes that the costs of compliance
will not be material.
13
<PAGE> 14
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
14
<PAGE> 15
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 12, 1998 By:/s/ Joseph A. Nathan
----------------- --------------------------
Joseph A. Nathan
President
Chief Operating Officer
Date: February 12, 1998 By:/s/ Ralph A. Caponigro
----------------- --------------------------
Ralph A. Caponigro
Senior Vice President
Chief Financial Officer
15
<PAGE> 16
EXHIBITS INDEX
Exhibit No. Description
- ----------- -----------------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 112,069
<SECURITIES> 7
<RECEIVABLES> 351,616
<ALLOWANCES> 7,928
<INVENTORY> 0
<CURRENT-ASSETS> 537,694
<PP&E> 129,484
<DEPRECIATION> 47,392
<TOTAL-ASSETS> 937,810
<CURRENT-LIABILITIES> 283,631
<BONDS> 6,876
0
0
<COMMON> 1,792
<OTHER-SE> 612,825
<TOTAL-LIABILITY-AND-EQUITY> 937,810
<SALES> 781,494
<TOTAL-REVENUES> 781,494
<CGS> 613,777
<TOTAL-COSTS> 613,777
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 965
<INCOME-PRETAX> 176,001
<INCOME-TAX> 58,608
<INCOME-CONTINUING> 117,393
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 117,393
<EPS-PRIMARY> .67
<EPS-DILUTED> .61
</TABLE>
