<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, 1998
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 2, 1998, there were outstanding 183,754,630 shares of Common
Stock, par value $.01, of the registrant.
Page 1 of 18 pages
<PAGE> 2
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
--------------------- ----
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1998 and March 31, 1998 3
Condensed Consolidated Statements of Operations
for the three months and six months ended 4
September 30, 1998 and 1997
Condensed Consolidated Statements of Cash Flows
for the six months ended September 30, 1998 and 1997 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 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
- ----------
</TABLE>
2
<PAGE> 3
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
ASSETS 1998 1998
------ ------------- ----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 123,719 $ 206,278
Investments 240,756 54,349
Accounts receivable, net 415,367 388,573
Deferred tax asset 13,358 14,133
Income taxes refundable 2,594
Prepaid expenses and other current assets 21,738 10,348
---------- ----------
Total current assets 814,938 676,275
---------- ----------
INVESTMENTS 189,053 107,721
---------- ----------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION 88,498 84,494
---------- ----------
CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION 48,184 50,455
---------- ----------
OTHER:
Accounts receivable 84,939 64,282
Deferred tax asset 10,831 12,926
Excess of cost over fair value of net assets acquired,
less accumulated amortization 56,381 57,607
Other 18,456 18,880
---------- ----------
Total other assets 170,607 153,695
---------- ----------
TOTAL ASSETS $1,311,280 $1,072,640
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 21,455 $ 19,985
Accrued expenses 120,360 113,792
Income taxes payable 9,908
Deferred revenue 204,231 180,174
---------- ----------
Total current liabilities 355,954 313,951
DEFERRED REVENUE 49,999 43,437
LONG TERM DEBT 4,338 6,956
---------- ----------
Total liabilities 410,291 364,344
---------- ----------
SHAREHOLDERS' EQUITY:
Common stock 1,834 1,802
Additional paid-in capital 346,694 282,668
Retained earnings 556,090 427,455
Foreign currency translation adjustment (3,629) (3,629)
---------- ----------
Total shareholders' equity 900,989 708,296
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,311,280 $1,072,640
========== ==========
See notes to condensed consolidated financial statements.
</TABLE>
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,
------------------------------- -----------------------------
1998 1997 1998 1997
------------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Software license fees $135,043 $ 88,098 $263,673 $164,359
Maintenance fees 79,948 58,923 154,642 115,240
Professional services fees 151,578 100,360 286,877 192,260
-------- -------- -------- --------
Total revenues 366,569 247,381 705,192 471,859
-------- -------- -------- --------
OPERATING EXPENSES:
Cost of software license fees 7,280 5,354 13,900 10,168
Cost of maintenance 9,029 7,660 18,309 14,773
Cost of professional services 123,683 86,692 236,409 167,513
Software product development 16,003 13,681 31,318 27,243
Sales and marketing 90,278 68,843 187,138 135,078
Administrative and general 18,118 15,347 33,151 27,282
Purchased research and development 2,750 2,750
-------- -------- -------- --------
Total operating expenses 267,141 197,577 522,975 382,057
-------- -------- -------- --------
INCOME FROM OPERATIONS 99,428 49,804 182,217 89,802
OTHER INCOME 6,794 2,145 12,630 4,534
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 106,222 51,949 194,847 94,336
INCOME TAX PROVISION 36,434 17,299 66,212 31,414
-------- -------- -------- --------
NET INCOME $ 69,788 $ 34,650 $128,635 $ 62,922
======== ======== ======== ========
Basic earnings per share $ 0.38 $ 0.20 $ 0.71 $ 0.36
======== ======== ======== ========
Diluted earnings per share $ 0.35 $ 0.18 $ 0.64 $ 0.33
======== ======== ======== ========
</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,
-------------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 128,635 $ 62,922
Adjustments to reconcile net income to cash provided by
operations:
Depreciation and amortization 19,939 17,882
Tax benefit from exercise of stock options 44,706 15,929
Deferred income taxes 2,870 (685)
Other (113) (474)
Net change in assets and liabilities, net of effects from
acquisitions:
Accounts receivable (47,451) 5,098
Prepaid expenses and other current assets (11,390) (1,317)
Other assets 144 (1,006)
Accounts payable and accrued expenses 8,038 (13,172)
Deferred revenue 30,619 (20,004)
Income taxes 12,502 (12,751)
--------- ---------
Net cash provided by operating activities 188,499 52,422
--------- ---------
CASH USED IN INVESTING ACTIVITIES:
Purchase of:
Businesses (533) (709)
Property and equipment (11,670) (14,465)
Capitalized software (5,786) (7,997)
Investments:
Proceeds from maturity 115,894 31,447
Purchases (385,459) (80,553)
Other (140)
--------- ---------
Net cash used in investing activities (287,694) (72,277)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of stock options 9,840 10,243
Net proceeds from sale of common stock 9,512
Payment of long term debt (2,716)
--------- ---------
Net cash provided by financing activities 16,636 10,243
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (82,559) (9,612)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 206,278 107,341
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 123,719 $ 97,729
========= =========
</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, 1998
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, 1998 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 - COMPUTATION OF EARNINGS PER COMMON SHARE
Earnings per common share ("EPS") data were computed as follows (in thousands,
except for per share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
BASIC EPS:
- ----------
Numerator: Net Income $ 69,788 $ 34,650 $128,635 $ 62,922
-------- -------- -------- --------
Denominator: Weighted-average
common shares outstanding 182,793 173,876 181,819 173,136
-------- -------- -------- --------
Basic EPS $ 0.38 $ 0.20 $ 0.71 $ 0.36
======== ======== ======== ========
DILUTED EPS:
- ------------
Numerator: Net Income $ 69,788 $ 34,650 $128,635 $ 62,922
-------- -------- -------- --------
Denominator: Weighted-average
common shares outstanding 182,793 173,876 181,819 173,136
Dilutive effect of stock options 18,287 15,334 18,469 14,961
-------- -------- -------- --------
Total shares 201,080 189,210 200,288 188,097
-------- -------- -------- --------
Diluted EPS $ 0.35 $ 0.18 $ 0.64 $ 0.33
======== ======== ======== ========
</TABLE>
6
<PAGE> 7
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED SEPTEMBER 30, 1998
(CONTINUED)
NOTE 3 - COMPREHENSIVE INCOME
Effective April 1, 1998, Compuware adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("Statement 130"). Statement
130 establishes standards for reporting and presenting comprehensive income and
its components in consolidated financial statements. Comprehensive income is
defined as net income plus the change in equity of a business enterprise during
a period from transactions and other events and circumstances from nonowner
sources. For the three-month and six-month periods ended September 30, 1998 and
1997, Compuware had other comprehensive income resulting from foreign currency
translation adjustments. Comprehensive income for the three-month and six-month
periods ended September 30, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
--------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 69,788 $ 34,650 $128,635 $ 62,922
Foreign currency translation
adjustment, net of tax 283 (665) 0 (840)
-------- -------- -------- --------
Total comprehensive income $ 70,071 $ 33,985 $128,635 $ 62,082
======== ======== ======== ========
</TABLE>
NOTE 4 - ACQUISITIONS
In July 1998, the Company acquired certain software products from Centerline
Software, Inc. for approximately $2,900,000 in cash and notes payable that are
due within one year. Of the total purchase price, $2,750,000 was allocated to
in-process research and development and in accordance with SFAS No. 2, this
amount was expensed as of the purchase date.
7
<PAGE> 8
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operational
data from the Company's consolidated statements of operations as a percentage of
total revenues and the percentage change in such items compared to the prior
period:
<TABLE>
<CAPTION>
Period-
Percentage of to-Period
Total Revenues Change
---------------------------- --------------
Three Months Ended
September 30, 1997
---------------------------- to
1998 1997 1998
------------ ------------ --------------
<S> <C> <C> <C>
Revenues:
Software license fees 36.8% 35.6% 53.3%
Maintenance fees 21.8 23.8 35.7
Professional services fees 41.4 40.6 51.0
------------ ------------
Total revenues 100.0 100.0 48.2
------------ ------------
Operating expenses:
Cost of software license fees 2.0 2.2 36.0
Cost of maintenance 2.5 3.1 17.9
Cost of professional services 33.7 35.1 42.7
Software product development 4.4 5.5 17.0
Sales and marketing 24.6 27.8 31.1
Administrative and general 4.9 6.2 18.1
Purchased research and development 0.8 *
------------ ------------
Total operating expenses 72.9 79.9 35.2
------------ ------------
INCOME FROM OPERATIONS 27.1 20.1 99.6
OTHER INCOME 1.8 0.9 216.7
------------ ------------
INCOME BEFORE INCOME TAXES 28.9 21.0 104.5
INCOME TAX PROVISION 9.9 7.0 110.6
------------ ------------
NET INCOME 19.0% 14.0% 101.4%
============ ============
</TABLE>
The following table sets forth, for the periods indicated, certain operational
data as a percentage of total revenues and the percentage change in such items
compared to prior periods after excluding special charges for purchased research
and development associated with the acquisition of products in July 1998 from
CenterLine Software Inc. from the calculations for the three months ended
September 30, 1998 and 1997:
<TABLE>
<S> <C> <C> <C>
Income from operations 27.9% 20.1% 105.2%
Other income 1.8 0.9 216.7
----------- -----------
Income before income taxes 29.7 21.0 109.8
Income tax provision 10.2 7.0 116.2
----------- -----------
Net income 19.5% 14.0% 106.6%
=========== ===========
</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)
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
----------------------------- ----------------
Six Months ended
September 30, 1997
----------------------------- to
1998 1997 1998
------------ ------------- ----------------
<S> <C> <C> <C>
REVENUES:
Software license fees 37.4% 34.8% 60.4%
Maintenance fees 21.9 24.4 34.2
Professional services fees 40.7 40.8 49.2
------------ -------------
Total revenues 100.0 100.0 49.4
------------ -------------
OPERATING EXPENSES:
Cost of software license fees 2.0 2.2 36.7
Cost of maintenance 2.6 3.1 23.9
Cost of professional services 33.5 35.5 41.1
Software product development 4.4 5.8 15.0
Sales and marketing 26.6 28.6 38.5
Administrative and general 4.7 5.8 21.5
Purchased research and development 0.4 *
------------ -------------
Total operating expenses 74.2 81.0 36.9
------------ -------------
INCOME FROM OPERATIONS 25.8 19.0 102.9
OTHER INCOME 1.8 1.0 178.6
------------ -------------
INCOME BEFORE INCOME TAXES 27.6 20.0 106.5
INCOME TAX PROVISION 9.4 6.7 110.8
------------ -------------
NET INCOME 18.2% 13.3% 104.4%
============ =============
</TABLE>
The following table sets forth, for the periods indicated, certain operational
data as a percentage of total revenues and the percentage change in such items
compared to prior periods after excluding special charges for purchased research
and development associated with the acquisition of products in July 1998 from
CenterLine Software Inc. from the calculations for the six months ended
September 30, 1998 and 1997:
<TABLE>
<S> <C> <C> <C>
Income from operations 26.2% 19.0% 106.0%
Other income 1.8 1.0 178.6
----------- -----------
Income before income taxes 28.0 20.0 109.5
Income tax provision 9.5 6.7 113.8
----------- -----------
Net income 18.5% 13.3% 107.3%
=========== ===========
</TABLE>
* Period-to-period change expressed as a percentage is not meaningful.
9
<PAGE> 10
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1997
Total revenues for the second quarter of fiscal 1999 were $366.6 million, an
increase of $119.2 million, or 48.2%, as compared to $247.4 million for the
second quarter of fiscal 1998. The Company experienced significant growth in
license fees, maintenance fees, and professional services fees as compared to
the three months ended September 30, 1997.
Software license fees increased $46.9 million, or 53.3%, to $135.0 million in
the second quarter of fiscal 1999 from $88.1 million in the second quarter of
fiscal 1998. 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 $21.0 million, or 35.7%, to $79.9 million in
the second quarter of fiscal 1999 from $58.9 million in the second quarter of
fiscal 1998. 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 $51.2 million, or 51.0%, to $151.6
million in the second quarter of fiscal 1999 from $100.4 million in the second
quarter of fiscal 1998. 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.
The costs of software license fees in the second quarter of fiscal 1999
increased $1.9 million to $7.3 million compared to $5.4 million in the second
quarter of fiscal 1998. The increase was due primarily to an increase in
amortization of internally developed software products and to a lesser extent
increased author royalties. As a percentage of software license fees, these
costs decreased to 5.4% in the second quarter of fiscal 1999 from 6.1% for the
same period in fiscal 1998.
Cost of maintenance in the second quarter of fiscal 1999 increased $1.3 million,
or 17.9%, to $9.0 million as compared to $7.7 million in the second quarter of
fiscal 1998. As a percentage of maintenance fees, these costs decreased to 11.3%
in the second quarter of fiscal 1999 from 13.0% in the second quarter of fiscal
1998. This increase is due to the additional requirements needed to support the
increased worldwide products installed base.
Cost of professional services increased $37.0 million, or 42.7%, to $123.7
million in the second quarter of fiscal 1999 from $86.7 million in the second
quarter of fiscal 1998. The increase in these expenses was due primarily to the
growth in the Services Division billable staff to 5,061 people at September 30,
1998 from 3,955 at September 30, 1997, an increase of 1,106. As a percentage of
professional services fees, these costs decreased to 81.6% in the second quarter
of fiscal 1999 from 86.4% in the second quarter of fiscal 1998.
10
<PAGE> 11
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Software product development costs increased $2.3 million, or 17.0%, to $16.0
million in the second quarter of fiscal 1999 from $13.7 million in the second
quarter of fiscal 1998. Before the capitalization of internally developed
software products, total research and development expenditures increased $3.0
million to $19.0 million, or 18.7%, in the second quarter of fiscal 1999 from
$16.0 million in the second quarter of fiscal 1998. Capitalized research and
development expenditures increased $662,000, or 29.0%, to $2.9 million in the
second quarter of fiscal 1999 from $2.3 million in the second quarter of fiscal
1998.
Sales and marketing costs increased $21.4 million, or 31.1%, to $90.3 million in
the second quarter of fiscal 1999 from $68.8 million in the second quarter of
fiscal 1998. The increase in sales and marketing costs was due primarily to the
expansion of the worldwide sales and marketing force, increased advertising
expense, and higher sales commissions associated with increased product sales.
As a percentage of license fees, these costs decreased to 66.9% in the second
quarter of fiscal 1999 from 78.1% in the second quarter of fiscal 1998.
Administrative and general costs increased $2.8 million, or 18.1%, to $18.1
million in the second quarter of fiscal 1999 from $15.3 million in the second
quarter of fiscal 1998. The increase in these costs was due primarily to the
increase in the costs of administration, corporate communications, corporate
support systems and employee development programs in order to support the
Company's growth. As a percentage of total revenue, these costs decreased to
4.9% in the second quarter of fiscal 1999 from 6.2% in the second quarter of
fiscal 1998.
During the second quarter of fiscal 1999, the Company recognized $2.8 million of
expense for purchased research and development costs associated with the
acquisition of products from CenterLine Software, Inc. in July 1998.
Income from operations increased $49.6 million, or 99.6%, to $99.4 million in
the second quarter of fiscal 1999 from $49.8 million in the second quarter of
fiscal 1998. Excluding the purchased research and development expense of $2.8
million described above, income from operations during the second quarter of
fiscal 1999 increased $52.4 million, or 105.2%, to $102.2 million, from $49.8
million in the second quarter of fiscal 1998. As a percentage of revenues,
income from operations before special charges increased to 27.9% in the second
quarter of fiscal 1999 from 20.1% in the same period of fiscal 1998.
Net interest and investment income for the second quarter of fiscal 1999 was
$6.8 million as compared to $2.1 million in the second quarter of fiscal 1998.
This increase in income was due to higher average cash and investment balances
resulting from cash generated from higher operating earnings.
In the second quarter of fiscal 1999, the Company recognized an income tax
provision of $36.4 million, an effective tax rate of 34.3%, as compared to an
income tax provision of $17.3 million, an effective tax rate of 33.3%, for the
same period in the prior year. The increase in the effective tax rate was due to
the uncertainty surrounding the renewal of the research and development credit
at the close of the quarter as well as the growth in pre-tax earnings which
dilutes the effect of the tax credits on the effective tax rate.
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, 1998 COMPARED TO THE SIX MONTHS ENDED SEPTEMBER
30, 1997
Total revenues for the first six months of fiscal 1999 were $705.2 million, an
increase of $233.3 million, or 49.4%, as compared to $471.9 million for the
first six months of fiscal 1998. The Company experienced significant growth in
license fees, maintenance fees, and professional services fees during the six
months ended September 30, 1998.
Software license fees increased $99.3 million, or 60.4%, to $263.7 million in
the first six months of fiscal 1999 from $164.4 million in the first six months
of fiscal 1998. Almost all 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 $39.4 million, or 34.2%, to $154.6 million in
the first six months of fiscal 1999 from $115.2 million in the first six months
of fiscal 1998. 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 $94.6 million, or 49.2%, to $286.9
million in the first six months of fiscal 1999 from $192.3 million in the first
six months of fiscal 1998. 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.
Cost of software license fees increased $3.7 million, or 36.7%, to $13.9 million
in the first six months of fiscal 1999 from $10.2 million in the first six
months of fiscal 1998. The increase was due primarily to an increase in
amortization of internally developed software products and to a lesser extent
increased author royalties. As a percentage of software license fees, these
costs decreased to 5.3% in the first six months of fiscal 1999 from 6.2% for the
same period in fiscal 1998.
Cost of maintenance in the first six months of fiscal 1999 increased $3.5
million, or 23.9%, to $18.3 million as compared to $14.8 million in the first
six months of fiscal 1998. As a percentage of maintenance fees, these costs
decreased to 11.8% in the first six months of fiscal 1999 from 12.8% for the
same period in fiscal 1998.
Cost of professional services increased $68.9 million, or 41.1%, to $236.4
million in the first six months of fiscal 1999 from $167.5 million in the first
six months of fiscal 1998. The increase in these expenses was due primarily to
the growth in the Services Division billable staff by 1,106 to 5,061 people at
September 30, 1998 from 3,955 at September 30, 1997. As a percentage of
professional services fees, these costs decreased to 82.4% in the first six
months of fiscal 1999 from 87.1% in the first six months of fiscal 1998.
12
<PAGE> 13
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Software product development costs increased $4.1 million, or 15.0%, to $31.3
million in the first six months of fiscal 1999 from $27.2 million in the first
six months of fiscal 1998. Before the capitalization of internally developed
software products, total research and development expenditures increased $5.2
million to $37.1 million, or 16.1%, in the first six months of fiscal 1999 from
$32.0 million in the first six months of fiscal 1998. Capitalized research and
development expenditures increased $1.1 million to $5.8 million, or 22.9%, in
the first six months of fiscal 1999 from $4.7 million in the first six months of
fiscal 1998.
Sales and marketing costs increased $52.0 million, or 38.5%, to $187.1 million
in the first six months of fiscal 1999 from $135.1 million in the first six
months of fiscal 1998. The increase in sales and marketing costs was due
primarily to the expansion of the worldwide sales force, increased advertising
expenses, and higher sales commissions associated with increased product sales.
As a percentage of license fees, these costs decreased to 71.0% in the first six
months of fiscal 1999 from 82.2% in the first six months of fiscal 1998.
Administrative and general costs increased $5.9 million, or 21.5%, to $33.2
million in the first six months of fiscal 1999 from $27.3 million in the first
six months of fiscal 1998. The increase in these costs was due primarily to the
increase in corporate administration and recruiting, corporate support systems,
corporate communications, and employee development programs in order to support
the Company's growth. As a percentage of total revenue, these costs decreased to
4.7% in the first six months of fiscal 1999 from 5.8% in the first six months of
fiscal 1998.
During the first six months of fiscal 1999, the Company recognized $2.8 million
of expense for purchased research and development costs associated with the
acquisition of products from CenterLine Software, Inc..
Income from operations increased $92.4 million, or 102.9%, to $182.2 million in
the first six months of fiscal 1999 from $89.8 million in the first six months
of fiscal 1998. Excluding special charges for purchased research and development
associated with the acquisition of products from CenterLine Software, Inc.
of $2.8 million, the Company's income from operations would have
increased $95.2 million, or 106.0%, to $185.0 million in the first six months of
fiscal 1999 from $89.8 million in the first six months of fiscal 1998. As a
percentage of total revenues, income from operations exclusive of special
charges increased to 26.2% in the first six months of fiscal 1999 from 19.0% in
the same period of fiscal 1998.
Net interest and investment income for the first six months of fiscal 1999 was
$12.6 million as compared to $4.5 million in the first six months of fiscal
1998. This increase was due to higher average cash and investment balances as a
result of increased operating earnings in the first six months of fiscal 1999.
In the first six months of fiscal 1999, the Company had an income tax provision
of $66.2 million, which was an effective tax rate of 34.0%, as compared to an
income tax provision of $31.4 million, which was an effective tax rate of 33.3%,
for the same period in the prior year. The increase in the effective tax rate
was due to the uncertainty surrounding the renewal of the research and
development credit at September 30, 1998, as well as the growth in pre-tax
earnings which dilutes the effect of the tax credits on the effective tax rate.
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, 1998, the Company held $553.5 million in cash and
investments. The Company has no debt other than the $4.3 million of notes issued
as part of prior years' 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.
YEAR 2000
The Year 2000 problem is the result of the widespread practice of using only 2
digits instead of 4 to represent the year in computing equipment and computer
software. Failure to address this problem could cause erroneous results in the
proper interpretation of years after 1999. The Company has instituted various
projects to address this issue which include three major areas: the software
products which the Company develops and markets, its internal information
technology (IT) assets, and aspects not directly related to the Company's IT
assets or software products. This last area includes such items as embedded
systems in infrastructure components (such as building security and HVAC
systems), as well as the business relationships the Company has with its
customers and suppliers, especially those third parties with whom the Company
has a systems interaction.
The Company undertook a project to inventory and assess the impact of the Year
2000 on its software products in the middle of 1994. As a part of this project
the Company identified the software products that would be supported beyond
December 31, 1999. Plans were put in place to complete the necessary changes to
make the identified software products Year 2000 compliant. The Company believes
that all of the Company's current product offerings are Year 2000 compliant and
that plans are on schedule to ensure compliance for those products the Company
will continue to support.
The Company has established a WEB page to update customers on the Year 2000
status of the software products. This site assists the customers in
understanding the Year 2000 strategy. Part of the site gives customers access to
frequently asked Year 2000 questions. The Company is committed to supporting our
customers into the year 2000 and beyond. The strategy provides leadership and
tools needed to meet the challenge of the millennium change.
The Company has undertaken a project to inventory, assess and remediate its
significant internal software applications and other IT assets. Many of these
applications are essential for day-to-day operations. The Company believes it
has completed remediation for all critical software, and is currently testing
the remediated software. The remediation and testing activities are being
performed exclusively by internal resources. All projects are currently on
schedule and the Company does not anticipate any problems with respect to these
projects.
14
<PAGE> 15
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
The Company is also in the process of assessing and remediating its other IT and
non-IT assets. These include areas such as PCs, networks, voice mail, email,
building security, etc. This portion of the project is planned for completion by
October 1, 1999, and appears to be on schedule.
The Company has also undertaken a project to identify and assess its significant
third-party suppliers, and is developing a plan to address vendor or supplier
Year 2000 issues (through remediation, repair, replacement, or upgrade) so as to
avoid any business disruption. Contingency plans are being developed for certain
key third parties which are deemed to be critical for the Company's operation.
Embedded systems and other non-IT systems are being evaluated for Year 2000
compliance, and being repaired or replaced as necessary.
Costs of the Company's Year 2000 compliance activities are not expected to have
a material impact on the Company's results of operations or financial position.
This expectation assumes that the Company will not be obligated to incur
significant Year 2000 related costs on behalf of its customers or suppliers.
15
<PAGE> 16
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 25, 1998 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 1999
Annual Meeting of Shareholders and until their successors are elected and
qualified:
<TABLE>
<CAPTION>
Nominee for Director Total Votes For Total Votes Withheld
- -------------------- --------------- --------------------
<S> <C> <C>
Elizabeth A. Chappell 169,114,975 328,964
Elaine K. Didier 169,112,148 331,791
Bernard M. Goldsmith 169,124,939 319,000
William O. Grabe 169,127,738 316,201
William R. Halling 169,120,000 323,939
Peter Karmanos, Jr. 169,117,302 326,637
Joseph A. Nathan 169,116,485 327,454
W. James Prowse 169,110,923 333,016
G. Scott Romney 169,098,991 344,948
Thomas Thewes 169,099,740 344,199
Lowell P. Weicker, Jr. 169,093,530 350,409
</TABLE>
2. PROPOSAL TWO - The approval of the Fiscal 1999 Stock Option Plan.
For 131,090,559
Against 38,058,011
Abstain 295,269
Broker non votes 100
The total number of the Company's common shares issued and outstanding and
entitled to be voted at the Annual Meeting was 181,967,996. The total number of
shares voted at the Annual Meeting was 169,443,939 or 93.117% of the shares
outstanding and eligible to vote.
16
<PAGE> 17
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
------ -----------------------
27 Financial Data Schedule
(b) Reports on Form 8-K.
None
17
<PAGE> 18
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, 1998 By:/s/ Joseph A. Nathan
----------------- -------------------------
Joseph A. Nathan
President
Chief Operating Officer
Date: November 11, 1998 By: /s/ Laura L. Fournier
----------------- ----------------------
Laura L. Fournier
Senior Vice President
Chief Financial Officer
18
<PAGE> 19
INDEX TO EXHIBITS
-----------------
Exhibit Description
- ------- -----------
EX-27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 123,719
<SECURITIES> 0
<RECEIVABLES> 427,724
<ALLOWANCES> 12,357
<INVENTORY> 0
<CURRENT-ASSETS> 814,938
<PP&E> 147,114
<DEPRECIATION> 58,616
<TOTAL-ASSETS> 1,311,280
<CURRENT-LIABILITIES> 355,954
<BONDS> 4,338
0
0
<COMMON> 1,834
<OTHER-SE> 902,784
<TOTAL-LIABILITY-AND-EQUITY> 900,989
<SALES> 705,192
<TOTAL-REVENUES> 705,192
<CGS> 522,975
<TOTAL-COSTS> 522,975
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 270
<INCOME-PRETAX> 194,847
<INCOME-TAX> 66,212
<INCOME-CONTINUING> 128,635
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 128,635
<EPS-PRIMARY> .71
<EPS-DILUTED> .64
</TABLE>
