<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 JUNE 30, 1999
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 August 6, 1999, there were outstanding 357,106,636 shares of Common Stock,
par value $.01, of the registrant.
Page 1 of 19 pages
<PAGE> 2
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 1999 and March 31, 1999 3
Condensed Consolidated Statements of Operations
for the three months ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows
for the three months ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
<PAGE> 3
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
ASSETS 1999 1999
------ ------------- -------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 94,913 $ 193,128
Investments 131,430 309,787
Accounts receivable, net 507,140 526,469
Deferred tax asset 16,045 16,727
Prepaid expenses and other current assets 28,563 25,979
------------- -------------
Total current assets 778,091 1,072,090
------------- -------------
INVESTMENTS 139,852 175,689
------------- -------------
PROPERTY AND EQUIPMENT, LESS ACCUMULATED
DEPRECIATION AND AMORTIZATION 95,711 94,786
------------- -------------
CAPITALIZED SOFTWARE, LESS ACCUMULATED
AMORTIZATION 46,790 48,095
------------- -------------
OTHER:
Accounts receivable 194,468 145,793
Deferred tax asset 10,831 11,347
Excess of cost over fair value of net assets acquired,
less accumulated amortization 100,405 87,713
Other assets 42,972 41,170
------------- -------------
Total other assets 348,676 286,023
------------- -------------
TOTAL ASSETS $ 1,409,120 $ 1,676,683
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 23,131 $ 71,129
Accrued expenses 165,843 168,254
Income taxes payable 8,730 27,153
Deferred revenue 278,563 254,968
------------- -------------
Total current liabilities 476,267 521,504
DEFERRED REVENUE 83,781 75,657
------------- -------------
Total liabilities 560,048 597,161
------------- -------------
SHAREHOLDERS' EQUITY:
Common stock 3,557 3,679
Additional paid-in capital 458,149 304,825
Retained earnings 393,726 777,318
Foreign currency translation adjustment (6,360) (6,300)
------------- -------------
Total shareholders' equity 849,072 1,079,522
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,409,120 $ 1,676,683
============= =============
</TABLE>
See notes to 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
JUNE 30,
-----------------------
1999 1998
----------- ----------
<S> <C> <C>
REVENUES:
Software license fees $ 160,952 $ 128,630
Maintenance fees 97,740 74,694
Professional services fees 184,359 135,299
----------- ----------
Total revenues 443,051 338,623
----------- ----------
OPERATING EXPENSES:
Cost of software license fees 5,946 6,620
Cost of maintenance 10,380 9,280
Cost of professional services 158,480 112,726
Software product development 17,325 15,315
Sales and marketing 100,315 96,860
Administrative and general 14,690 15,033
----------- ----------
Total operating expenses 307,136 255,834
----------- ----------
INCOME FROM OPERATIONS 135,915 82,789
OTHER INCOME 5,846 5,836
----------- ----------
INCOME BEFORE INCOME TAXES 141,761 88,625
INCOME TAX PROVISION 51,034 29,778
----------- ----------
NET INCOME $ 90,727 $ 58,847
=========== ==========
Basic earnings per share $ 0.25 $ 0.16
=========== ==========
Diluted earnings per share $ 0.24 $ 0.15
=========== ==========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
COMPUWARE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 90,727 $ 58,847
Adjustments to reconcile net income to cash provided by operations:
Depreciation and amortization 10,560 9,899
Tax benefit from exercise of stock options 14,326 25,276
Acquisition tax benefits 1,805
Deferred income taxes 1,198 2,605
Other 2,060 52
Net change in assets and liabilities, net of effects from acquisitions:
Accounts receivable (29,464) 1,738
Prepaid expenses and other current assets (2,569) (6,178)
Other assets (3,133) 5,434
Accounts payable and accrued expenses (52,620) (14,507)
Deferred revenue 31,450 19,996
Income taxes (18,423) 1,055
--------- ---------
Net cash provided by operating activities 45,917 104,217
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of:
Businesses (11,003) (533)
Property and equipment (5,467) (5,681)
Capitalized software (3,215) (2,875)
Investments:
Proceeds from maturity 262,903 43,364
Purchases (50,102) (170,215)
--------- ---------
Net cash provided by (used in) investing activities 193,116 (135,940)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of stock options 11,125 5,721
Repurchase of common stock (348,373)
Payment of long term debt (2,411)
--------- ---------
Net cash (used in) provided by financing activities (337,248) 3,310
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (98,215) (28,413)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 193,128 206,278
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 94,913 $ 177,865
========= =========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 1999
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, 1999 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
June 30,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
BASIC EPS:
Numerator: Net Income $ 90,727 $ 58,847
--------- ---------
Denominator:
Weighted-average common shares outstanding 357,899 361,670
--------- ---------
Basic EPS $ 0.25 $ 0.16
========= =========
DILUTED EPS:
Numerator: Net Income $ 90,727 $ 58,847
--------- ---------
Denominator:
Weighted-average common shares outstanding 357,899 361,670
Dilutive effect of stock options 27,524 37,074
--------- ---------
Total shares 385,423 398,744
--------- ---------
Diluted EPS $ 0.24 $ 0.15
========= =========
</TABLE>
6
<PAGE> 7
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 1999
NOTE 3 - COMPREHENSIVE INCOME
Other comprehensive income includes foreign currency translation gains and
losses that have been excluded from net income and reflected instead in equity.
Total comprehensive income is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
June 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
Net income $ 90,727 $ 58,847
Foreign currency translation
adjustment, net of tax (60) (431)
-------- --------
Total comprehensive income $ 90,667 $ 58,416
======== ========
</TABLE>
NOTE 4 - ACQUISITIONS
In June 1999, the Company extended a cash tender offer to purchase all
outstanding shares of common stock of Data Processing Resources Corporation
("DPRC"), a professional services company, for approximately $501 million in
cash. This amount includes $115 million of DPRC subordinated debt. At the
expiration of the tender offer period, July 28, 1999, more than 93 percent of
the outstanding common shares of DPRC were tendered, exceeding the 91 percent
minimum tender condition. The Company and COMP Acquisition Co., its wholly-owned
subsidiary, will complete the acquisition of DPRC pursuant to the "short-form"
merger provisions of California law. The acquisition will be accounted for under
the purchase method of accounting, and accordingly, the operating results of
DPRC will be included in the Company's consolidated financial statements from
the date of acquisition. Excess purchase price over fair market value of the
underlying assets (goodwill) of approximately $404 million will be amortized
over 20 years.
7
<PAGE> 8
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 1999
The pro forma unaudited consolidated results of operations assume the
acquisition occurred as of the beginning of each of the periods presented (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Revenues $ 536,280 $ 409,047
Net income 87,684 54,999
Diluted earnings per share .23 .14
</TABLE>
The pro forma results include the amortization of the goodwill and interest
expense on debt assumed to finance the purchase. These amounts do not reflect
any benefit from the anticipated reduction in costs for certain corporate
functions from combined operations. The pro forma results are not necessarily
indicative of what actually would have occurred if the acquisition had been
completed as of the beginning of each of the fiscal periods presented, nor are
they necessarily indicative of future consolidated results.
In May 1999, the Company acquired Reliant Data Systems, a privately held
developer of data migration software, for approximately $10.4 million in cash.
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.
8
<PAGE> 9
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 1999
NOTE 5 - SEGMENTS
Compuware operates in two business segments in the software industry: products
and services. The Company provides software products and professional services
to the world's largest IT organizations that help information technology
professionals efficiently develop, implement and support the applications that
run their businesses.
Financial information for the Company's business segments is as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenue:
Products:
Mainframe $ 219,331 $ 169,316
Client/Server 39,361 34,008
Services 184,359 135,299
--------- ---------
Total revenues $ 443,051 $ 338,623
========= =========
Operating Expenses:
Products $ 133,966 $ 128,075
Services 158,480 112,726
Administrative and general 14,690 15,033
--------- ---------
Total operating expenses $ 307,136 $ 255,834
========= =========
Income from operations, before other income:
Products $ 124,726 $ 75,249
Services 25,879 22,573
Administrative and general (14,690) (15,033)
--------- ---------
Income from operations, before other income 135,915 82,789
Other income 5,846 5,836
--------- ---------
Income before income taxes $ 141,761 $ 88,625
========= =========
</TABLE>
Financial information regarding geographic operations are presented in the table
below (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Revenue:
United States $ 346,664 $ 247,711
European subsidiaries 73,355 62,660
Other international operations 23,032 28,252
--------- ---------
Total revenue $ 443,051 $ 338,623
========= =========
</TABLE>
The Company does not evaluate assets and capital expenditures on a segment
basis, and accordingly, such information is not provided. Less than 10 percent
of the Company's long-lived assets, other than financial instruments, are
located outside of the United States.
9
<PAGE> 10
COMPUWARE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 1999
NOTE 6 - SUBSEQUENT EVENTS
VIASOFT ACQUISITION
On July 15, 1999, the Company and Viasoft, Inc. announced they entered into an
agreement for Compuware to acquire Viasoft through a cash tender offer. A wholly
owned subsidiary of Compuware has offered to purchase any and all outstanding
shares of Viasoft's common stock for $9 per share, for total consideration of
$168 million. The acquisition will be accounted for under the purchase method of
accounting. It is expected that the purchase price will be funded by cash on
hand and borrowings under a credit facility that was finalized in August 1999.
On August 3, 1999, the U.S. Department of Justice requested additional
information in connection with its review of the proposed acquisition. The
Company is currently in the process of preparing a response to the Department.
CREDIT FACILITY
In August 1999, the Company entered into a four year unsecured credit agreement
with several major financial institutions for $900 million. Proceeds from the
credit facility will be used to finance the acquisition of DPRC and Viasoft. The
remaining amount under the credit facility will be used for future acquisitions
and working capital requirements. Interest may be determined on a Eurodollar or
prime rate basis at the Company's option. The credit agreement contains
restrictive covenants and requires commitment fees in accordance with standard
banking practice. As of August 10, 1999, the Company had $300 million
outstanding under the credit arrangement.
The Company's $30 million revolving bank credit facility was terminated
concurrently with the signing of the new credit facility.
10
<PAGE> 11
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion contains certain forward looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are identified by the use of
the words "believes", "expects", "anticipates", "will", "contemplates", "would"
and similar expressions that contemplate future events. Numerous important
factors, risks and uncertainties affect the Company's operating results,
including without limitation those contained in this report, and could cause the
Company's actual results to differ materially from the results implied by these
or any other forward looking statements made by, or on behalf of, the Company.
There can be no assurance that future results will meet expectations.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operational
data from the Company's consolidated statements of income 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 1998
June 30, to
------------------
1999 1998 1999
-------- -------- ---------
<S> <C> <C> <C>
Revenues:
Software license fees 36.3% 38.0% 25.1%
Maintenance fees 22.1 22.0 30.9
Professional services fees 41.6 40.0 36.3
-------- -------
Total revenues 100.0 100.0 30.8
-------- -------
Operating expenses:
Cost of software license fees 1.3 2.0 (10.2)
Cost of maintenance 2.4 2.8 11.9
Cost of professional services 35.8 33.3 40.6
Software product development 3.9 4.5 13.1
Sales and marketing 22.6 28.6 3.6
Administrative and general 3.3 4.4 (2.3)
-------- -------
Total operating expenses 69.3 75.6 20.1
-------- -------
Income from operations 30.7 24.4 64.2
Interest and investment income, net 1.3 1.8 0.2
-------- -------
Income before income taxes 32.0 26.2 60.0
Income tax provision 11.5 8.8 71.4
-------- -------
Net income 20.5% 17.4% 54.2%
======== =======
</TABLE>
11
<PAGE> 12
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company operates in two business segments in the software industry: products
and professional services.
PRODUCTS REVENUE
The Company's products are designed to support three key activities within the
application development process: building, testing and managing the application
to optimize performance in production. Products revenue consists of software
license fees and maintenance fees. Products revenue comprised 58.4% and 60.0% of
total Company revenue during the first quarter of fiscal years 2000 and 1999,
respectively. Mainframe product revenue increased $50.0 million or 29.5%, to
$219.3 million during the first quarter of fiscal year 2000 from $169.3 million
during the first quarter of fiscal year 1999. Client/server revenue increased
$5.4 million or 15.7%, to $39.4 million during the first quarter of fiscal year
2000 from $34.0 million during the first quarter of fiscal year 1999. These
increases were primarily a result of sales to customers who increased their CPU
size or MIPS operating capacity during the quarter.
PROFESSIONAL SERVICES REVENUE
The Company offers a broad range of data processing professional services,
including business systems analysis, design and programming, software conversion
and system planning and consulting. Professional services revenue comprised
41.6% and 40.0% of total Company revenue during the first quarter of fiscal
years 2000 and 1999, respectively. Revenue from professional services increased
$49.1 million, or 36.3%, to $184.4 million during the first quarter of fiscal
year 2000 from $135.3 million in the first quarter of fiscal year 1999. More
than 85% of the Company's total professional services revenue is generated in
the United States; however, these increases spanned all geographic regions. The
Company plans to continue this growth naturally and through acquisitions both in
the United States and internationally.
12
<PAGE> 13
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATING PROFIT
The Company evaluates the performance of its segments based primarily on
operating profit before corporate expenses, purchased research and development
expense, net interest income and income taxes.
Financial information for the Company's products segment is as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Revenue $ 258,692 $ 203,324
Operating expenses 133,966 128,075
------------- -------------
Products operating profit $ 124,726 $ 75,249
============= =============
</TABLE>
Products revenue by geographic location is presented in the table below (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
United States $ 182,879 $ 126,861
European subsidiaries 55,471 49,640
Other international operations 20,342 26,823
------------- -------------
Total products revenue $ 258,692 $ 203,324
============= =============
</TABLE>
The products segment generated operating margins of 48.2% and 37.0% during the
first quarter of fiscal year 2000 and 1999, respectively. Products expenses
include cost of software license fees, cost of maintenance, software product
development costs and sales and marketing expenses. The increase in the
operating margins quarter over quarter is primarily a result of economies
associated with larger sales volumes, more sales representatives in the field
with increased sales productivity, additional product offerings, and increased
market penetration of our client/server products.
Cost of software license fees includes amortization of capitalized software, the
cost of preparing and disseminating products to customers and the cost of author
royalties. Cost of software license fees decreased $0.7 million, or 10.2%, to
$5.9 million in the first quarter of 2000 from $6.6 million in the first quarter
of 1999. The decrease in these costs is due primarily to a decrease in
amortization of internally developed software products, decreased author
royalties and decreased packaging and distribution costs. As a percentage of
software license fees, these costs were 3.7% and 5.1% in the first quarter of
fiscal years 2000 and 1999, respectively.
Cost of maintenance consists of the cost of maintenance programmers and product
support personnel and the computing, facilities and benefits costs allocated to
such personnel. Cost of maintenance increased $1.1 million, or 11.9%, to $10.4
million in the first quarter of fiscal year 2000 from $9.3 million in the first
quarter of fiscal year 1999. 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. However, as a percentage of
maintenance fees, these costs were 10.6% and 12.4% for the first quarter of
fiscal years 2000 and 1999, respectively. The Company will continue to look for
ways to reduce this percentage while maintaining superior service levels and
high renewal rates.
13
<PAGE> 14
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Software product development costs consist of the cost of programming personnel,
the facilities, computing and benefits costs allocated to such personnel and the
costs of preparing user and installation guides for the Company's software
products, less the amount of software development costs capitalized during the
period. Software product development costs increased $2.0 million or 13.1%, to
$17.3 million in the first quarter of fiscal year 2000 from $15.3 million in the
first quarter of fiscal year 1999. The increase in these costs was due primarily
to an increase in software development staff needed to meet the demand for new
and enhanced products. While continuing to support and enhance its traditional
mainframe products, the Company has significantly increased the resources
allocated to developing and enhancing its client/server product lines. Before
the capitalization of internally developed software products, total research and
development expenditures for the first quarter of fiscal year 2000 increased
$2.3 million, or 12.9%, to $20.5 million from $18.2 million in first quarter of
fiscal year 1999. Capitalized research and development expenditures as a
percentage of total software product development costs decreased to 15.4% in the
first quarter of fiscal year 2000 from 15.6% in the first quarter of fiscal year
1999.
Sales and marketing costs consist of the sales and marketing expenses associated
with the Company's products business, which include costs of direct sales, sales
support and marketing staff, the facilities and benefits costs allocated to such
personnel and the costs of marketing and sales incentive programs. Sales and
marketing costs increased $3.4 million or 3.6%, to $100.3 million in the first
quarter of fiscal year 2000 from $96.9 million in the first quarter of fiscal
year 1999. As a percentage of license fees, these costs were 62.3% and 75.3% for
the first quarter of fiscal years 2000 and 1999, respectively. The increase in
sales and marketing costs was largely attributable to the expansion of the
worldwide sales force and increased travel related expenditures, offset by
reductions in commissions paid to third parties, reduced expenditures for the
corporate advertising campaign and currency gains on international accounts
receivable. The direct sales and sales support staff increased by 349 to 2,312
people at the end of the first quarter of fiscal year 2000, as compared to 1,963
at the end of the first quarter of fiscal year 1999.
Financial information for the Company's professional services segment is as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenue $ 184,359 $ 135,299
Operating expenses 158,480 112,726
------------ ------------
Professional services operating profit $ 25,879 $ 22,573
============ ============
</TABLE>
Professional services revenue by geographic location is presented in the table
below (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
United States $ 163,785 $ 120,850
European subsidiaries 17,884 13,020
Other international operations 2,690 1,429
------------ ------------
Total professional services revenue $ 184,359 $ 135,299
============ ============
</TABLE>
14
<PAGE> 15
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The professional services segment generated operating margins of 14.0% and 16.7%
during the first quarter of fiscal years 2000 and 1999, respectively. The
decrease in the professional services margin is primarily attributable to
increased allocations of costs of corporate systems and to additional billable
staff temporarily off assignment. Cost of professional services includes all
costs of the Company's professional services business, including the personnel
costs of the professional, management and administrative staff of the Company's
services business and the facilities and benefits costs allocated to such
personnel. Cost of professional services increased $45.8 million, or 40.6%, to
$158.5 million in the first quarter of fiscal year 2000 from $112.7 million in
the first quarter of fiscal year 1999. The increase in these expenses was due
primarily to an increase of 1,712 professional billable staff to 6,478 in the
first quarter of fiscal year 2000 from 4,766 people at the end of the first
quarter of fiscal year 1999, increase in sub-contractor costs, and to a lesser
extent, increases in employee training and development costs and an increase in
travel related expenditures.
Administrative and general expenses decreased $0.3 million, or 2.3%, to $14.7
million in the first quarter of fiscal year 2000 from $15.0 million in the first
quarter of fiscal year 1999. As a percentage of total revenue, these expenses
continue to decrease to 3.3% and 4.4% of total revenue during the first quarter
of fiscal years 2000 and 1999, respectively. These decreases are primarily a
result of increased revenues with no significant changes in corporate
expenditures.
The Company's provision for income taxes was $51.0 million in the first quarter
of fiscal year 2000, which represents an effective tax rate of 36.0%. This
compares to a tax provision of $29.8 million in the first quarter of fiscal year
1999, which represents an effective tax rate of 33.6%. The increase in the
effective tax rate was due primarily to the growth in pre-tax earnings, which
dilutes the effect of the tax credits on the effective tax rates and the
non-deductibility of goodwill amortization related to recent acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company had approximately $366.2 million in cash and
investments which resulted primarily from cash generated from operations. During
the first quarter of fiscal years 2000 and 1999, Compuware generated $63.4
million and $104.2 million, respectively, in operating cash flow. During these
periods, the Company had capital expenditures which included property and
equipment, capitalized research and software development and purchased software
of $8.7 million and $8.6 million, respectively.
In March 1999, the Company announced that its Board of Directors had approved a
stock repurchase program, pursuant to which the Company was authorized to
purchase up to $500 million of outstanding Company stock. The Company purchased
approximately 21.5 million shares representing the entire $500 million
authorized by the Board for this program. These shares were purchased ratably
from March through May 1999.
On June 24, 1999, Compuware announced it had entered into an agreement to
purchase all outstanding shares of common stock of Data Processing Resources
Corporation for an aggregate cash expenditure of $501 million. This amount
includes $115 million of DPRC subordinated debt. In August 1999, Compuware
entered into a four year unsecured credit
15
<PAGE> 16
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
agreement for $900 million with several major financial institutions. The
purchase of DPRC will be funded by cash on hand and borrowings under the credit
agreement (See Notes 4 and 6).
On July 15, 1999, the Company and Viasoft, Inc. announced they entered into an
agreement for Compuware to acquire Viasoft through a cash tender offer. A wholly
owned subsidiary of Compuware has offered to purchase any and all outstanding
shares of Viasoft's common stock for $9 per share, for total consideration of
$168 million. The acquisition will be accounted for under the purchase method of
accounting. It is expected that the purchase price will be funded by cash on
hand and borrowings under the credit facility. On August 3, 1999, the U.S.
Department of Justice requested additional information in connection with its
review of the proposed acquisition. The Company is currently in the process of
preparing a response to the Department.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes methods of accounting
for derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. In July 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133", which requires the
Company to adopt this statement with its fiscal year ending March 31, 2001. The
Company has not determined the effect, if any, that adoption will have on its
financial position or results of operations.
YEAR 2000
The Year 2000 problem is the result of the widespread practice of using only two
digits instead of four 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 as well as those products
the Company will continue to support are Year 2000 compliant.
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.
16
<PAGE> 17
COMPUWARE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Part of the site gives customers access to frequently asked Year 2000 questions.
The Company is committed to supporting its 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.
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, e-mail,
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 had 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 cannot predict, however, the
effects on the Company of Year 2000-related difficulties of its business
partners, vendors and customers.
The Company believes it 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 it is
approximately 95% complete with all remediation efforts as of June 30, 1999,
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.
17
<PAGE> 18
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.
Exhibit
Number Description of Document
------- -----------------------
27.0 Financial Data Schedule
(b) Reports on Form 8-K.
A Form 8-K was filed July 8, 1999 regarding the agreement and plan
of merger among Compuware, DPRC and COMP Acquisition Co. The
financial statements required to be filed with such Report will be
filed as an amendment to such form 8-K no later than 60 days after
the date of filing such Report. See Notes 4 and 6 to the Condensed
Consolidated Financial Statements.
18
<PAGE> 19
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: August 12, 1999 By: /s/ Joseph A. Nathan
--------------- --------------------
Joseph A. Nathan
President
Chief Operating Officer
Date: August 12, 1999 By: /s/ Laura L. Fournier
--------------- ----------------------
Laura L. Fournier
Senior Vice President
Chief Financial Officer
19
<PAGE> 20
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 94,913
<SECURITIES> 0
<RECEIVABLES> 518,075
<ALLOWANCES> 10,935
<INVENTORY> 0
<CURRENT-ASSETS> 778,091
<PP&E> 157,345
<DEPRECIATION> 61,634
<TOTAL-ASSETS> 1,409,120
<CURRENT-LIABILITIES> 476,267
<BONDS> 0
0
0
<COMMON> 3,557
<OTHER-SE> 851,875
<TOTAL-LIABILITY-AND-EQUITY> 1,409,120
<SALES> 443,051
<TOTAL-REVENUES> 443,051
<CGS> 307,136
<TOTAL-COSTS> 307,136
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 162
<INCOME-PRETAX> 141,761
<INCOME-TAX> 51,034
<INCOME-CONTINUING> 90,727
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 90,727
<EPS-BASIC> .25
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