<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, 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 February 2, 1999, there were outstanding 183,754,630 shares of Common
Stock, 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
December 31, 1998 and March 31, 1998 3
Condensed Consolidated Statements of Operations
for the three months and nine months ended 4
December 31, 1998 and 1997
Condensed Consolidated Statements of Cash Flows
for the nine months ended December 31, 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 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>
DECEMBER 31, MARCH 31,
ASSETS 1998 1998
------ ------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 157,064 $ 206,278
Investments 351,997 54,349
Accounts receivable, net 437,858 388,573
Deferred tax asset 16,155 14,133
Income taxes refundable 2,594
Prepaid expenses and other current assets 18,816 10,348
----------- -----------
Total current assets 981,890 676,275
----------- -----------
INVESTMENTS 174,379 107,721
----------- -----------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION 92,245 84,494
----------- -----------
CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION 50,476 50,455
----------- -----------
OTHER:
Accounts receivable 123,870 64,282
Deferred tax asset 10,438 12,926
Excess of cost over fair value of net assets acquired,
less accumulated amortization 58,885 57,607
Other 16,007 18,880
----------- -----------
Total other assets 209,200 153,695
----------- -----------
TOTAL ASSETS $ 1,508,190 $ 1,072,640
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 20,737 $ 19,985
Accrued expenses 149,213 113,792
Income taxes payable 22,474
Deferred revenue 222,633 180,174
----------- -----------
Total current liabilities 415,057 313,951
DEFERRED REVENUE 54,308 43,437
LONG TERM DEBT 3,719 6,956
----------- -----------
Total liabilities 473,084 364,344
----------- -----------
SHAREHOLDERS' EQUITY:
Common stock 1,850 1,802
Additional paid-in capital 383,182 282,668
Retained earnings 653,350 427,455
Foreign currency translation adjustment (3,276) (3,629)
----------- -----------
Total shareholders' equity 1,035,106 708,296
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,508,190 $ 1,072,640
=========== ===========
</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,
------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Software license fees $ 187,313 $ 134,486 $ 450,986 $ 298,845
Maintenance fees 87,516 61,746 242,158 176,986
Professional services fees 158,289 113,403 445,166 305,663
---------- ---------- ---------- ----------
Total revenues 433,118 309,635 1,138,310 781,494
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Cost of software license fees 6,992 5,798 20,892 15,966
Cost of maintenance 9,452 7,942 27,761 22,715
Cost of professional services 127,358 95,589 363,767 263,102
Software product development 16,803 14,901 48,121 42,144
Sales and marketing 111,456 88,465 298,594 223,543
Administrative and general 19,737 15,419 52,888 42,701
Purchased research and development 1,600 4,350
Merger-related costs 3,606 3,606
---------- ---------- ---------- ----------
Total operating expenses 293,398 231,720 816,373 613,777
---------- ---------- ---------- ----------
INCOME FROM OPERATIONS 139,720 77,915 321,937 167,717
OTHER INCOME 7,644 3,750 20,274 8,284
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 147,364 81,665 342,211 176,001
INCOME TAX PROVISION 50,104 27,194 116,316 58,608
---------- ---------- ---------- ----------
NET INCOME $ 97,260 $ 54,471 $ 225,895 $ 117,393
========== ========== ========== ==========
Basic earnings per share $ 0.53 $ 0.31 $ 1.24 $ 0.67
========== ========== ========== ==========
Diluted earnings per share $ 0.48 $ 0.28 $ 1.13 $ 0.61
========== ========== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 225,895 $ 117,393
Adjustments to reconcile net income to cash provided by
operations:
Depreciation and amortization 30,661 26,864
Tax benefit from exercise of stock options 77,102 27,481
Deferred income taxes 466 (487)
Other 731 (471)
Net change in assets and liabilities, net of effects
from acquisitions:
Accounts receivable (108,873) (65,340)
Prepaid expenses and other current assets (8,468) (1,506)
Other assets 2,453 (771)
Accounts payable and accrued expenses 36,173 9,312
Deferred revenue 53,330 1,825
Income taxes 25,068 (10,433)
--------- ---------
Net cash provided by operating activities 334,538 103,867
--------- ---------
CASH USED IN INVESTING ACTIVITIES:
Purchase of:
Businesses (4,624) (709)
Property and equipment (19,304) (21,670)
Capitalized software (12,946) (10,686)
Investments:
Proceeds from maturity 217,479 53,465
Purchases (585,038) (134,230)
--------- ---------
Net cash used in investing activities (404,433) (113,830)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of stock options 13,948 14,871
Net proceeds from sale of common stock 9,512 3,710
Payment of long term debt (2,779) (3,890)
--------- ---------
Net cash provided by financing activities 20,681 14,691
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (49,214) 4,728
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 206,278 107,341
========= =========
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 157,064 $ 112,069
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 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 Nine Months Ended
December 31, December 31,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
BASIC EPS:
Numerator: Net Income $ 97,260 $ 54,471 $225,895 $117,393
-------- -------- -------- --------
Denominator: Weighted-average
common shares outstanding 184,170 178,531 182,606 174,953
-------- -------- -------- --------
Basic EPS $ 0.53 $ 0.31 $ 1.24 $ 0.67
======== ======== ======== ========
DILUTED EPS:
Numerator: Net Income $ 97,260 $ 54,471 $225,895 $117,393
-------- -------- -------- --------
Denominator: Weighted-average
common shares outstanding 184,170 178,531 182,606 174,953
Dilutive effect of stock options 17,394 18,207 18,132 17,205
-------- -------- -------- --------
Total shares 201,564 196,738 200,738 192,158
-------- -------- -------- --------
Diluted EPS $ 0.48 $ 0.28 $ 1.13 $ 0.61
======== ======== ======== ========
</TABLE>
6
<PAGE> 7
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 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 nine-month periods ended December 31, 1998 and
1997, Compuware had other comprehensive income resulting from foreign currency
translation adjustments. Comprehensive income for the three-month and nine-month
periods ended December 31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
----------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income $ 97,260 $ 54,471 $ 225,895 $ 117,393
Foreign currency translation
adjustment, net of tax 233 (831) 233 (1,672)
--------- --------- --------- ---------
Total comprehensive income $ 97,493 $ 53,640 $ 226,128 $ 115,721
========= ========= ========= =========
</TABLE>
NOTE 4 - ACQUISITIONS
In December 1998, the Company acquired certain software products from Cardume
Software Ltd. for $2,250,000 in cash and notes payable that are due within one
year. Of the total purchase price, $1,400,000 was allocated to in-process
research and development and in accordance with SFAS No. 2, this amount was
expensed as of the purchase date.
In October 1998, the Company acquired certain software products from Vireo
Software Inc., for $4,100,000 in cash and notes payable that are due within one
year. Of the total purchase price, $200,000 was allocated to in-process research
and development and in accordance with SFAS No. 2, this amount was expensed as
of the purchase date.
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>
Percentage of Period-
Total Revenues to-Period
---------------------------- Change
Three Months Ended --------------
December 31, 1997
---------------------------- to
1998 1997 1998
------------ ------------ --------------
<S> <C> <C> <C>
REVENUES:
Software license fees 43.3% 43.4% 39.3%
Maintenance fees 20.2 20.0 41.7
Professional services fees 36.5 36.6 39.6
------------- -------------
Total revenues 100.0 100.0 39.9
------------- -------------
OPERATING EXPENSES:
Cost of software license fees 1.6 1.9 20.6
Cost of maintenance 2.2 2.5 19.0
Cost of professional services 29.4 30.9 33.2
Software product development 3.9 4.8 12.8
Sales and marketing 25.7 28.6 26.0
Administrative and general 4.5 5.0 28.0
Purchased research and development 0.4 *
Merger-related costs 1.1 *
------------- -------------
Total operating expenses 67.7 74.8 26.6
------------- -------------
INCOME FROM OPERATIONS 32.3 25.2 79.3
OTHER INCOME 1.8 1.2 103.8
------------- -------------
INCOME BEFORE INCOME TAXES 34.1 26.4 80.4
INCOME TAX PROVISION 11.6 8.8 84.2
------------- -------------
NET INCOME 22.5% 17.6% 78.6%
============= =============
</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 from Vireo Software,
Inc., in October 1998, and Cardume Software Limited, in December 1998, and
NuMega merger expense from the calculations for the three months ended December
31, 1998 and December 31, 1997:
<TABLE>
<S> <C> <C> <C>
Income from operations 32.6% 26.3% 73.4%
Other income 1.8 1.2 103.8
----------- -----------
Income before income taxes 34.4 27.5 74.7
Income tax provision 11.7 9.1 78.4
=========== ===========
Net income 22.7% 18.4% 72.8%
=========== ===========
</TABLE>
* Period-to-period change expressed as a percentage is not meaningful.
8
<PAGE> 9
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
The following table sets forth, for the periods indicated, certain operational
data from the Company's consolidated statements of operations as a percentage of
total revenues and the percentage change in such items compared to the prior
period:
<TABLE>
<CAPTION>
Percentage of Period-
Total Revenues to-Period
----------------------------- Change
Nine Months ended ------------
December 31, 1997
----------------------------- to
1998 1997 1998
------------ ------------- ------------
<S> <C> <C> <C>
REVENUES:
Software license fees 39.6% 38.2% 50.9%
Maintenance fees 21.3 22.7 36.8
Professional services fees 39.1 39.1 45.6
------------ ------------
Total revenues 100.0 100.0 45.7
------------ ------------
OPERATING EXPENSES:
Cost of software license fees 1.8 2.0 30.9
Cost of maintenance 2.4 2.9 22.2
Cost of professional services 32.0 33.7 38.3
Software product development 4.2 5.4 14.2
Sales and marketing 26.2 28.6 33.6
Administrative and general 4.7 5.5 23.9
Purchased research and development 0.4 *
Merger-related costs 0.5 *
------------ ------------
Total operating expenses 71.7 78.6 33.0
------------ ------------
INCOME FROM OPERATIONS 28.3 21.4 92.0
OTHER INCOME 1.8 1.1 144.7
------------ ------------
INCOME BEFORE INCOME TAXES 30.1 22.5 94.4
INCOME TAX PROVISION 10.2 7.5 98.5
------------ ------------
NET INCOME 19.9% 15.0% 92.4%
============ ============
</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 expenses associated with the acquisition of products from
CenterLine Software, Inc., Vireo Software, Inc., and Cardume Software Limited,
for the nine months ended December 31, 1998 and NuMega merger expense from the
calculations for the nine months ended December 31, 1997:
<TABLE>
<S> <C> <C> <C>
Income from operations 28.7% 21.9% 90.5%
Other income 1.8 1.1 144.7
------------ -----------
Income before income taxes 30.5 23.0 93.0
Income tax provision 10.4 7.7 97.0
============ ===========
Net income 20.1% 15.3% 90.9%
============ ===========
</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 DECEMBER 31, 1998 COMPARED TO THE THREE MONTHS ENDED DECEMBER
31, 1997
Total revenues for the third quarter of fiscal 1999 were $433.1 million, an
increase of $123.5 million, or 39.9%, as compared to $309.6 million for the
third quarter of fiscal 1998. The Company experienced growth in license fees,
maintenance fees and professional services fees during the third quarter ended
December 31, 1998 as compared to the third quarter ended December 31, 1997.
Software license fees increased $52.8 million, or 39.3%, to $187.3 million in
the third quarter of fiscal 1999 from $134.5 million in the third 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 $25.8 million, or 41.7%, to $87.5 million in
the third quarter of fiscal 1999 from $61.7 million in the third 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 $44.9 million, or 39.6%, to $158.3
million in the third quarter of fiscal 1999 from $113.4 million in the third
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 increased $1.2 million, or 20.6%, to $7.0
million in the third quarter of fiscal 1999 from $5.8 million in the third
quarter of fiscal 1998. 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 3.7% in the third quarter of
fiscal 1999 from 4.3% for the same period in fiscal 1998.
Cost of maintenance increased $1.5 million, or 19.0%, to $9.5 million in the
third quarter of fiscal 1999 from $7.9 million in the third quarter of fiscal
1998. 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
10.8% in the third quarter of fiscal 1999 from 12.9% in the third quarter of
fiscal 1998.
Cost of professional services increased $31.8 million, or 33.2%, to $127.4
million in the third quarter of fiscal 1999 from $95.6 million in the third
quarter of fiscal 1998. The increase in these expenses was due primarily to the
growth in the services division billable staff by 1,457 to 5,667 people at
December 31, 1998 from 4,210 at December 31, 1997 and to an increase in training
costs in the professional services division. As a percentage of professional
services fees, these costs decreased to 80.5% in the third quarter of fiscal
1999 from 84.3% in the third 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 $1.9 million, or 12.8%, to $16.8
million in the third quarter of fiscal 1999 from $14.9 million in the third
quarter of fiscal 1998. Before the capitalization of internally developed
software products, total research and development expenditures increased $2.1
million to $19.9 million, or 11.9%, in the third quarter of fiscal 1999 from
$17.7 million in the third quarter of fiscal 1998. Capitalized research and
development expenditures increased $218,000 to $3.1 million, or 7.7%, in the
third quarter of fiscal 1999 from $2.8 million in the third quarter of fiscal
1998. Capitalized research and development expenditures as a percentage of total
research and development expenditures decreased to 15.4% in the third quarter of
fiscal 1999 from 16.0% in the third quarter of fiscal 1998.
Sales and marketing costs increased $23.0 million, or 26.0%, to $111.5 million
in the third quarter of fiscal 1999 from $88.5 million in the third quarter of
fiscal 1998. 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 59.5% in the third quarter of
fiscal 1999 as compared to 65.8% in the third quarter of fiscal 1998.
Administrative and general costs increased $4.3 million, or 28.0%, to $19.7
million in the third quarter of fiscal 1999 from $15.4 million in the third
quarter of fiscal 1998. The increase in these costs was due primarily to the
increase in the expenses associated with corporate systems and facilities needed
to support the Company's growth. As a percentage of total revenue, these costs
decreased to 4.5% in the third quarter of fiscal 1999 from 5.0% in the third
quarter of fiscal 1998.
During the third quarter of fiscal 1999, the Company recognized $1.6 million of
expense for purchased research and development associated with the acquisition
of products from Vireo Software, Inc. and Cardume Software Limited. During the
third quarter of fiscal 1998 the Company incurred merger related costs of $3.6
million associated with the acquisition of NuMega Technologies, Inc.
Income from operations increased $61.8 million, or 79.3%, to $139.7 million in
the third quarter of fiscal 1999 from $77.9 million in the third quarter of
fiscal 1998. As a percentage of revenues, income from operations increased to
32.3% in the third quarter of fiscal 1999 from 25.2% in the same period of
fiscal 1998. Excluding the purchased research and development expense of $1.6
million described above, and the merger related expenses incurred with the
NuMega acquisition, the Company's income from operations would have increased
$59.8 million, or 73.4%, to $141.3 million in the third quarter of fiscal 1999
from $81.5 million in the third quarter of fiscal 1998. As a percentage of total
revenues, income from operations, exclusive of special charges, increased to
32.6% in the third quarter of fiscal 1999 from 26.3% in the third quarter of
fiscal 1998.
Net interest and investment income for the third quarter of fiscal 1999 was $7.6
million as compared to $3.8 million in the third 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 third quarter of fiscal 1999, the Company recognized an income tax
provision of $50.1 million, an effective tax rate of 34.0%, as compared to an
income tax provision of $27.2 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 growth in pre-tax earnings which dilutes the effect of 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)
NINE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THE NINE MONTHS ENDED DECEMBER
31, 1997
Total revenues for the first nine months of fiscal 1999 were $1.1 billion, an
increase of $356.8 million, or 45.7%, as compared to $781.5 million for the
first nine months of fiscal 1998. The Company experienced growth in license
fees, maintenance fees, and professional services fees during the nine months
ended December 31, 1998 as compared to the nine months ended December 31, 1997.
Software license fees increased $152.1 million, or 50.9%, to $451.0 million in
the first nine months of fiscal 1999 from $298.8 million in the first nine
months of fiscal 1998. 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 $65.2 million, or 36.8%, to $242.2 million in
the first nine months of fiscal 1999 from $177.0 million in the first nine
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 $139.5 million, or 45.6%, to
$445.2 million in the first nine months of fiscal 1999 from $305.7 million in
the first nine months of fiscal 1998. The majority 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 $4.9 million, or 30.9%, to $20.9 million
in the first nine months of fiscal 1999 from $16.0 million in the first nine
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 4.6% in the first nine months of fiscal 1999 from 5.3% for
the same period in fiscal 1998.
Cost of maintenance increased $5.0 million, or 22.2%, to $27.8 million in the
first nine months of fiscal 1999 from $22.7 million in the first nine months of
fiscal 1998. 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 11.5% in the first nine months of fiscal 1999 from 12.8% during the
same period of fiscal 1998.
Cost of professional services increased $100.7 million, or 38.3%, to $363.8
million in the first nine months of fiscal 1999 from $263.1 million in the first
nine months of fiscal 1998. The increase in these expenses was due primarily to
the growth in the Services Division billable staff by 1,457 to 5,667 people at
December 31, 1998 from 4,210 at December 31, 1997. As a percentage of
professional services fees, these costs decreased to 81.7% in the first nine
months of fiscal 1999 from 86.1% in the first nine 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 $6.0 million, or 14.2%, to $48.1
million in the first nine months of fiscal 1999 from $42.1 million in the first
nine months of fiscal 1998. Before the capitalization of internally developed
software products, total research and development expenditures increased $7.3
million to $57.0 million, or 14.6%, in the first nine months of fiscal 1999 from
$49.7 million in the first nine months of fiscal 1998. Capitalized research and
development expenditures increased $1.3 million to $8.9 million, or 17.1%, in
the first nine months of fiscal 1999 from $7.6 million in the first nine months
of fiscal 1998.
Sales and marketing costs increased $75.1 million, or 33.6%, to $298.6 million
in the first nine months of fiscal 1999 from $223.5 million in the first nine
months of fiscal 1998. 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
66.2% in the first nine months of fiscal 1999 as compared to 74.8% in the first
nine months of fiscal 1998.
Administrative and general costs increased $10.2 million, or 23.9%, to $52.9
million in the first nine months of fiscal 1999 from $42.7 million in the first
nine months of fiscal 1998. The increase in these costs was due primarily to the
increase in corporate support systems, facilities, 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 nine months of fiscal 1999
from 5.5% in the first nine months of fiscal 1998.
During the first nine months of fiscal 1999, the Company recognized $4.4 million
of expense for purchased research and development associated with the
acquisition of products from CenterLine Software, Inc., Vireo Software, Inc.,
and Cardume Software Limited. During the first nine months of fiscal 1998, the
Company recognized $3.6 million for merger-related costs associated with the
merger of NuMega Technologies, Inc.
Income from operations increased $154.2 million, or 92.0%, to $321.9 million in
the first nine months of fiscal 1999 from $167.7 million in the first nine
months of fiscal 1998. As a percentage of revenues, income from operations
increased to 28.3% in the first nine months of fiscal 1999 from 21.4% in the
same period of fiscal 1998. Excluding special charges of $4.4 million for the
fiscal 1999 purchased research and development discussed above and the NuMega
merger related expenses of $3.6 million in fiscal 1998, income from operations
would have increased $155.0 million, or 90.5%, to $326.3 million in the first
nine months of fiscal 1999 from $171.3 million in the first nine months of
fiscal 1998. As a percentage of total revenues, income from operations,
exclusive of special charges, increased to 28.7% in the first nine months of
fiscal 1999 from 21.9% in the same period of fiscal 1998.
Net interest and investment income for the first nine months of fiscal 1999 was
$20.3 million as compared to $8.3 million in the first nine months 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 first nine months of fiscal 1999, the Company had an income tax provision
of $116.3 million, which was an effective tax rate of 34.0%, as compared to an
income tax provision of $58.6 million, which was an effective tax rate of 33.3%
in the first nine months of fiscal 1998. The increase in the effective tax rate
was due to 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 December 31, 1998, the Company held $683.4 million in cash and
investments. The Company has no debt other than the $3.7 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.
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 ("non-IT assets"). 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, testing, and implementation for all critical
software. The remediation and testing activities have been performed exclusively
by internal resources.
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. In most cases, the Company is forced to rely on
third party representations, without any ability to do independent testing or
evaluation. Contingency plans are being developed for certain key third parties
which are deemed to be critical for the Company's operation. Based upon the
information received to date, the company does not expect any material financial
impacts from third party vendors. Embedded systems and other non-IT systems are
being evaluated for Year 2000 compliance, and being repaired or replaced as
necessary.
The costs for Year 2000-related activities are being budgeted as necessary.
Costs of the Company's Year 2000 compliance activities have not been and 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, and that the Company's critical vendors will be able to
meet their commitments to the Company.
The Company will be adequately prepared to meet the challenges of the coming of
Year 2000 without significant impact to the Company's ability to carry on its
normal business operations. Management estimates that we are approximately 85%
complete with all remediation efforts, which includes 100% completion of all
critical business systems and supported software products. The balance of the
efforts yet to be expended are in the areas of non-IT assets, monitoring
supplier compliance, and contingency planning.
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
------- -----------------------
27 Financial Data Schedule
(b) Reports on Form 8-K.
None
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPUWARE CORPORATION
Date: February 12, 1999 By:/s/ Joseph A. Nathan
----------------- ------------------------
Joseph A. Nathan
President
Chief Operating Officer
Date: February 12, 1999 By: /s/ Laura L. Fournier
----------------- ------------------------
Laura L. Fournier
Senior Vice President
Chief Financial Officer
17
<PAGE> 18
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 157,064
<SECURITIES> 0
<RECEIVABLES> 449,406
<ALLOWANCES> 11,548
<INVENTORY> 0
<CURRENT-ASSETS> 981,890
<PP&E> 155,064
<DEPRECIATION> 62,819
<TOTAL-ASSETS> 1,508,190
<CURRENT-LIABILITIES> 415,057
<BONDS> 3,719
0
0
<COMMON> 1,850
<OTHER-SE> 1,036,532
<TOTAL-LIABILITY-AND-EQUITY> 1,508,190
<SALES> 1,138,310
<TOTAL-REVENUES> 1,138,310
<CGS> 816,373
<TOTAL-COSTS> 816,373
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 441
<INCOME-PRETAX> 342,211
<INCOME-TAX> 116,316
<INCOME-CONTINUING> 225,895
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 225,895
<EPS-PRIMARY> 1.24
<EPS-DILUTED> 1.13
</TABLE>
